Hedged PriceWatch Alert Details, Tips For Use, and FAQ

Hedged PriceWatch Alerts news stories provide breaking market news on a wide range of stocks followed by our analysts. These stories are released before the market opens  and are presented in quick paragraphs with only the most essential elements so you can read them quickly and decide if they are of value to you. Each report contains essential timely stock information and technical indicators along with a hedged equity option trade idea and analytics. Reports are time and date stamped so you know exactly when the report was posted.

The following Questions and Answers should help you get the most from these reports:

What are the Investors Observer Hedged PriceWatch Alerts?
The Investors Observer Hedged PriceWatch Alerts are stock options reports that uses research information from various sources to produce equity stock option trading ideas.

Are these reports available on all stocks?
No, these reports focus on the most widely traded optionable stocks covered by Investors Observer Analysts.

What do the reports mean?
These reports target option trading ideas that help investors find covered call and hedged calendar spread option trades on the stocks.

What are stock options?
Stock options are a specialized way to invest in stocks that allow investors to control risk. A stock option gives the investors the right, but not the obligation to buy or sell a stock at a certain price within a set time frame. Click Here for some education resources about options.

What is a call?
A call option is the right to buy a stock at a set price (called a strike) by a specified period of time (expiration). A call option gives the owner the right but not the obligation to buy the stock a set price. The call seller is obligated to sell the stock at the strike price if the buyer chooses to exercise his option.

What is an "assignment"?
When an option holder exercises their option to buy a stock, the stock in a covered call is “called away" at the assignment. If you have sold the option with the expectation of assignment this means you get your full calculated return.

What happens if the stock falls on my covered call?
When you sell a covered call you are still responsible for the losses in value of the stock. Since you have received premium, your losses will be less than if you simply owned the stock.

I don't like this particular trade – are there others out there?
Yes, there is a variety of options available. A typical $50 stock can have 4-10 strikes available on each of 6 different expiration months. This quickly adds up to 24-60 different options and many different combinations. Speak with your broker or financial advisor if you more help.

Why should I sell a covered call?
Selling a covered call on a stock is a way to make money on the stock even if it stays flat. If buying a stock is like buying a house, then selling a covered call is like renting out the house when you are not there. Covered call investing is a way to pull in extra cash on flat stocks while they are in your account.

Are options right for everybody?
No. Options trading is not for all investors. All investors should be sure to read the complete Characteristics and Risks of Standardized Options available at: http://www.cboe.com/Resources/Intro.aspx

Can I lose money? Is this guaranteed?
Yes, as with all investing you can lose money.  We cannot guarantee that you will make money.

What if big news is expected?
These reports are designed to help investors pull additional money out of holdings under normal circumstances. If there is big news or price movements expected like an earnings report, a buyout, a large lawsuit or an FDA drug approval, these may not be the optimal strategies for that stock at that time. 

What does a report look like?
A complete report looks like this:

Symbol: AAPL
Headline: Apple Inc. (NasdaqNM: AAPL) Hedged Price Watch Alert
Alt-Headline: Hedged Price Watch Alert For Apple Inc. (NasdaqNM: AAPL)
Body: Apple Inc. (NasdaqNM: AAPL) closed yesterday at $185.19. So far the stock has hit a 52-week low of $111.62 and 52-week high of $202.96. Apple stock has been showing support around 181.31 and resistance in the 189.03 range. Technical indicators for the stock are Bullish and S&P gives AAPL a neutral 3 STAR (out of 5) hold rating. AAPL appears on the Investors Observer Analysts Favorites list. For a hedged play on this stock, look at an Oct '08 195 covered call (APV JS) for a net debit in the $168.84 area. That is also the break even stock price for this trade. This covered call has a 135 day duration, provides 8.83% downside protection and a 15.49% assigned return rate for a 41.89% annualized return rate (comparison purposes only). A lower cost hedged play for this stock would use a longer term call option in place of the covered call stock purchase. To use this strategy look at going long the AAPL Jan '09 140 Call (APV AH) and selling the Oct '08 195 call (APV JS) for a $38.85 debit. The trade has a 135 day life and would provide 3.42% downside protection and a 41.57% assigned return rate for an 112.00% annualized return rate (for comparison purposes only). Apple does not pay dividends at this time. [For more information on these strategies along with more details on possible risks go to www.iotogo.com/HPWAinfo]

Can you please break down that report for me?
Sure.

Story: Apple Inc. (NasdaqNM: AAPL) closed yesterday at $185.19. So far the stock has hit a 52-week low of $111.62 and 52-week high of $202.96.

The report opens with the name, exchange and symbol. We give the recent closing price of the stock as well as the 52 week high and low. This is good to give the big picture in the stock history over the last year.

Apple stock has been showing support around 181.31 and resistance in the 189.03 range.
Most stocks have a support and resistance levels that indicate the range where they have been trading recently. This is a purely technical (computer generated) number based on past history. Moves back and forth within this range are very common. Support and resistance numbers represent these ranges and where stocks are likely to trade. Some technicians like to watch these ranges closely and consider it a bullish sign if the stock is able to move above resistance.

Technical indicators for the stock are Bullish and S&P gives AAPL a neutral 3 STAR (out of 5) hold rating.
This line refers to the recent movement of the stock and the “technical indicators” which represent that movement. The Standard & Poor’s ranking for the stock may be show. This is a good indicator of the fundamental strength of the company. A 5 STAR ranking is a strong buy while a 1 STAR ranking is a strong sell.

AAPL appears on the Investors Observer Analysts Favorites list.
Shows which of our anlysts lists this stock appears on.

For a hedged play on this stock, look at an Oct '08 195 covered call (APV JS) for a net debit in the $168.84 area.
This is the covered call trade on the stock. For this trade we are going to buy the stock and then sell the right to buy our stock at a set price for a given time. In this case, Oct ‘08 represents the expiration month. 195.00 is the sold call expiration price. APV JS is the call option symbol and 168.84 is the net debit. We are going to buy the stock and sell the call in one transaction. We will pay money for the stock but receive money (premium) for the call. The difference between the paid stock price and the received call premium is the net debit.

That is also the break even stock price for this trade.
If the stock stays above the net debit shown in the previous line of the report you make money. If the stock price drops below that net debit then you start losing money.

This covered call has a 135 day duration, provides 8.83% downside protection and a 15.49% assigned return rate for a 41.89% annualized return rate (comparison purposes only).
This covered call trade has a medium term time frame (135 days in this example), and selling the call gives us some downside protection which allows for the stock price to fall without costing us money. In this case, the stock can fall 8.83% before we lose money. Hopefully the stock is above the strike price at expiration ($195 in October). In that case the sold call option will be exercised and the stock will be called away. If that happens this trade will have a  15.49% return. Because this 15.49% return is only over 135 days it cannot be easily compared to other investments. For that reason the rate of return is annualized to make comparison easier to other investments such as bonds or mutual funds.

A lower cost hedged play for this stock would use a longer term call option in place of the covered call stock purchase. To use this strategy look at going long the AAPL Jan '09 140 Call (APV AH) and selling the Oct '08 195 call (APV JS) for a $38.85 debit. The trade has a 135 day life and would provide 3.42% downside protection and a 41.57% assigned return rate for an 112.00% annualized return rate (for comparison purposes only).
Stock options allow multiple ways to trade stocks and this is a separate option trade on the stock. Covered call trading is popular, but can get expensive as one must buy the stock in order to sell the covered call. As an alternative, if one buys a long term LEAP option instead of the stock, they can then still sell a call option. This type of trade is called a calendar spread or a vertical calendar spread. The trade suggested here is purchasing a January '09 LEAP option with a strike price of 140 while at the same time selling a October ‘08 195 call. This trade requires an investment of $38.85, which is far less than the $168.84 the coved call trade requires. The trade will last for 135 days and has a 41.57% assigned return rate. This return is annualized to compare it with other returns and is higher than the return on the covered call. Calendar spread trades are riskier than covered call trades. In this trade, the stock can fall 3.42% before we lose money.

Apple does not pay dividends at this time.
We also include the dividend rate for the underlying stock. This may be important when you compare a covered call with a calendar spread since you will not receive the dividend unless you purchase the stock as with w covered call. For this example, AAP does not pay a dividend.  

Where can I go for in-depth help if I’m just getting started in options trading?
The Options Industry Council is supported by the exchanges to help investors with option problems. They are unbiased experts who seem to always have the answers. They can be reached at www.888options.comor at 1-888-OPTIONS.  

How can I contact you if I have questions about your reports?
Please feel free to send questions or comments to support@investorsobserver.com.

Email your thoughts, observations, hot tips, bright investment ideas, and restaurant recommendations to Support@InvestorsObserver.com.


All stocks and options shown are examples only. These are not recommendations to buy or sell any security. Any pricing or potential profitability shown does not take into account your trade size, brokerage commissions or taxes which will affect actual investment returns. Stocks and options involve risk and are not suitable for all investors and investing in options carries substantial risk. Prior to buying or selling options, a person must receive a copy of Characteristics and Risks of Standardized Options available at: http://www.cboe.com/Resources/Intro.asp. Stock recommendations and comments presented are solely those of the analysts, experts, or information source quoted. They do not represent the opinions of Investors Observer or InvestorsKeyhole on whether to buy, sell or hold shares of a particular stock or option. Investors should be cautious about any and all stock or option recommendations and should consider the source of any advice on stock or option selection. Various factors, including personal or corporate ownership, may influence or factor into an expert's stock analysis or opinion. All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock or option performance is no guarantee of future price appreciation or depreciation. Those involved with the preparation and distribution of this report may have had in the past, currently hold, or may purchase in the future stock and/or options in companies discussed in this report. It is expected that the limited distribution of this report to a relatively small number of investor will not materially affect the price of this widely held stock.