Of GNC, and GLD...

First, prayers and well wishes go out to all of those affected by the tragedy in Boston.

One of the most interesting ways to enter a long stock position is by selling a put for the underlying security which you desire. There is significant risk in this strategy, and it also requires margin, or cash put up to your broker to cover losses if there is any. Often called a cash secured, naked put.

There's good news and bad news with put selling, so I'll start with the bad news first. Then, I'll show a variation of put selling that can result in great gains vs. capital outlay if the stock moves your way. I have examples of both in my portfolio right now.

Bad news: INTC

Opened on 5 September 2012 for a net credit of $75 after commissions.

Put 100 shares at October expiration, and here's how they sit today:

My entry to those 100 shares is about $22.50 a share. I've been getting that 4% annualized yield, but I'm still not in positive territory.

Enter the variation. The Risk Reversal is a way to get long an option by selling the opposing option when the trade is opened. It requires the same margin/cash and has a little more risk than selling the naked put. This trade should never be entered on any stock that you would not be happy with owning the shares at the put strike, or significantly lower. One other caveat: I don't ever sell a call to finance a put. When you are short the call, and the stock appreciates in the money before expiration, you owe the call writer those 100 shares and you keep nothing. So, here's the good news.

Good News: GNC

The best trade by far that I have in my portfolio right now is the GNC Sep 21 '13 $32.50 Risk Reversal. The Risk Reversal is initiated by selling a put, and using the proceeds to finance the purchase of a call in the same security at the same strike. Most brokers will allow this to be placed as a spread to save on commissions instead of buying each option separately. Here's what mine looked like:

So, for $75 after commissions, here is what it looks like after yesterday's close:

The spread has a current value of $925.00, and does not expire until September. The trend on the chart looks good. Valuation is not extreme as the earnings continue to grow. And I am planning to stay in the trade until GNC's share price is $47.50, or $37.50, whichever comes first. I also plan to close the put side of the risk reversal at the soonest available opportunity, so if there is a decline, the double whammy of increased implied volatility in the put as the share price comes down does not work against me.

Gold. GLD. Wow.

It looks like I have the increase in gold volatility that I was hoping for.

As I type, the futures in gold have stabilized, though they are rolling over the $1375 level and passing down through $1365. If we continue to have downward momentum towards yesterday's lows at 1330, I will be placing a trade called the Iron Condor that lives for Volatility spikes like this. If GVIX is above 20, and the market is stable, the trade will look like this, though the numbers will be different when the market opens up today.

I am looking for a net credit of about $225. My total net credit will be about 450, but I plan to close the spread as soon as I can get my $225. My total risk is $1550 if I get blown out, but to make $225 on $2000 of risk in 1 or 2 days justifies this for me. If this sounds crazy to you... It is. Don't do it in your own account just because I'm greedy.

Seriously though. This trade makes it's money on the fact that the implied volatility in the short options that you sold will collapse, allowing you to buy the spread back very soon. For example sooner than the market can move to either one of your short strikes. As outlined, I intend to close the trade ASAP after I put it on.

Also, GLD is back on for Weekly Reverse Iron Condors for me.

Questions and Comments are welcome. Follow me on twitter @B50cal1978. Be careful in your execution. Market Volatility looks to be picking up. Monitor your positions sizes, and preserve your capital to fight another day.

STT