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Exiting Apple

rglenn8 — Tue, 29 Dec 2009 21:13:00 +0000

I love Apple’s products, but that is no reason to fall in love with the stock. A couple of weeks ago I purchased a long term put spread for the portfolio (Jan ‘12, 250/200 1:2 ratio). I had intended to keep it for a while and let time decay work it’s magic in my favor, but when the stock broke the uptrend on the most recent pullback I decided to take my chips off the table on the next bounce. Well, the bounce arrived and it did not disappoint — up twenty points in just a handful of sessions! Despite this, I don’t like to own momentum stocks that show weakness, so out it goes. Here is the trade:

Sell 5 Jan ‘12 AAPL 250 put

Buy 10 Jan ‘12 AAPL 200 put

Net cost: – 7.70 per combo for a net debit of $3,850 total. The trade was put on for a $4,500 credit, so net profit was $650.

Betting on stagnation in 2010

rglenn8 — Tue, 22 Dec 2009 21:08:05 +0000

Looking at my crystal ball for 2010, I see a tug of war that exhausts the bulls and bears both and leaves the market near unchanged on the year. If that comes to pass, today’s trade will be golden. More importantly, however, if I am dead wrong this trade has a good chance of still being a winner, or at least not a total stinker. Remember, investing is a marathon not a sprint, and it’s defense that will make sure that you are one of the lucky ones who crosses the finish line in style (Hello Boca!).

Today’s trade is a calendar spread just a little in the money on the Dow index ETF. Implied volatility has come down over the past few months, making the time cheap to buy. Also, when you are buying options that far out in time interest rate assumptions have a HUGE impact on the value of the spread when the short leg expires (in our case, Jan 2011). If rates go up, the 2012 option you own will be worth more all else being equal, so this is also a bit of a stealth bet that interest rates will rise from their current holy-cow-are-you-really-going-to-just-give-your-money-to-the-treasury-for-ten-years levels.

On side note, it’s always a good idea to go find an online options calculator and just play with your assumptions (interest rates, dividends, implied volatility, etc.) to see how it effects the outcome. It can be a real eye opener. So, here is the trade:

Buy 20 DIA Jan ‘12 100 calls

Sell 20 DIA Jan ‘11 100 calls

Net cost: $2.93 per combo ($5,860 total)

End of the year Lotto ticket

rglenn8 — Mon, 21 Dec 2009 20:31:35 +0000

Sorry I have been away for a couple of weeks. My wife and I just had our first child, and we are getting settled in for a spell of blissful indentured servitude. Everyone is home, happy and healthy — if a bit sleep deprived — so it’s back to work for me!

Looking at some end of the year plays, I am struck by how cheap out of the money calls are on the DIA (Dow index). The options market seems to be calling a top here at about 105, but it’s been wrong before and right now it is very cheap to bet the other way. This is a pure speculative play, and not appropriate for “investment” funds. The idea here is to get in for not much — in this case, $.08 for a Jan 110 call — and sell it on any spike hoping for a double or triple. Also, note that what makes them cheap is not the .08 price tag, it’s the fact that it only has a 13.5% implied volatility at that price. If we don’t get a rally soon, however, these calls will quickly go to zero. It’s a coin toss, but one that I think gives you pretty good odds. Here’s the trade:

Buy DIA Jan ‘10 110 calls at $.08, and pray.

YOU MUST SELL THESE INTO ANY RALLY!

Happy Holidays.

November options expiration

rglenn8 — Fri, 20 Nov 2009 17:31:57 +0000

Things are pretty slow after a weak open on this expiration Friday. One trade that can work well here is to buy at the money straddles starting at around 11:00 AM, and hold them until 2 PM, or until they hit your profit target (don’t get too greedy on a one day trade!). I’m not putting these trades in the portfolio, because they are not investments, but calculated short term gambles. Here they are:

AAPL NOV 200 straddle (buy both the put and call) for $1.38

MA NOV 230 straddle for $1.55

DIA NOV 103 straddle for $.55

Because they expire so soon, there is usually a “plateau” in the loss of time value in the middle of the afternoon. This means that in a perfect world, if the stocks move away from their strikes we make money, and if they don’t we break even at about 2 pm and live to fight another day. It’s a nice “heads I win, tails we call it a draw” kind of situation. This ONLY works (sometimes) on expiration day. Once I buy the straddles, I put at least half of my position up for sale at a 70% – 90% profit, so if there is a move either way I can lock in some profit.

Another Butterfly for the collection

rglenn8 — Fri, 13 Nov 2009 21:25:07 +0000

Today’s trade is another long term butterfly spread. It shares the same characteristics as the trade from yesterday, except that the underlying stock is not nearly as volatile. This is more of a directional play, as I am expecting the money management business to remain strong absent another complete market meltdown. The spread is on Franklin Resources (BEN). We already have a BEN ratio put spread in the portfolio that is doing quite well, so this is adding a bit to our bullish bet. Here’s the trade:

Buy 10 BEN Jan ‘11 120 calls

Sell 20 BEN Jan ‘11 135 calls

Buy 10 BEN Jan ‘11 150 calls

Net cost: $1.60 per combo ($1,600)

What’s to like?

Nice leverage — almost 10:1 max payout at $135

Fixed risk — we can only lose what we put down

Low time decay — this is a long term play that suffers very little from day to day time decay

What could go wrong?

As with all butterflies, if the stock moves rapidly away from the strike zone ($120 – $150) the spread will lose value.

Casting a wide net with FAS butterflies

rglenn8 — Wed, 11 Nov 2009 21:28:32 +0000

I have been mostly sitting on my hands for the past couple of weeks as the market levitates on low volume, but that does not mean you should not go fishing. Today I caught a nice butterfly spread on the triple leveraged financial ETF (FAS). A butterfly call spread is where you buy one call, sell two calls at a higher strike, and buy one more call at an even higher strike. The strikes are the same distance apart, and all of the expirations are the same. In general, I like butterfly spreads because they have a defined risk — you can’t lose more than you pay for the spread– they offer a nice amount of leverage, and they don’t suffer all that much from time decay (unlike, say, just buying puts or calls to get leverage and defined risk). On the downside, you have to buy four contracts for every spread, so the commissions can add up very quickly. Partly for that reason, I am partial to long dated butterflies. They can be a kind of “set it and forget it” investment — at least as far as options are ever are. In this case we are going way out to Jan 2012, so I hope that this position will be in the portfolio for a good long while, slowly rising in value each week. Here’s the trade:

Buy 20 FAS Jan ‘12 80 calls

Sell 40 FAS Jan ‘12 100 calls

Buy 20 FAS Jan ‘12 120 calls

Total cost: $1.10 per combo ($2,200)

What’s to like?

Nice leverage (20:1 max payout, if you get REALLY lucky — of course, here at Rick’soptionpicks we take gains long before expiration but if all goes well I would still expect a 300% payout.

Defined risk — we can only lose what we put up

Very slow time decay (low theta, and if FAS goes up a bit this will even turn positive for us)

What could go wrong?

FAS is crazy volatile, being a 3x leveraged ETF. If it quickly runs away from the strike zone ($80 – $120) the combo will get hurt.

What to do with a low volume rally

rglenn8 — Mon, 09 Nov 2009 21:24:32 +0000

Today was another glorious 200 point rally for the Dow. Happy days are here again? Given the very low volume I’m not convinced, but I have no interest in fighting the market either. Instead I used today to try and pare down my positions. Anything that gave me heartburn two fridays ago when the market plunged 250 points I made sure to get rid of. Days like today can be great for clearing the slate for a fresh start. If this rally is for real, we will have plenty of time to find new positions.

Why Buffett really bought Burlington

rglenn8 — Fri, 06 Nov 2009 23:39:10 +0000

With Warren Buffett plunking down 44 billion to buy Burlington Northern, many folks are examining the tea leaves and looking for the hidden meaning of the Oracle’s latest move. Economic cheerleaders (mostly in the MSM) were quick to call this a big vote of confidence in the economic recovery. They are wrong.
On the other hand, the gloom-and-doomers see a Buffett that is desperate to buy hard assets before a tidal wave of inflation wipes out the value of his cash hoard. I doubt it.
With a little back of the envelope number crunching, I think it’s quite clear that this latest purchase by Buffett (and the largest of his career) is just another example of buying boring, productive assets at pennies on the dollar of their replacement cost. While it is true that economic recovery will help his return on investment, as long as the economy as we know it does not come to an end he will do just fine.
Let’s see, for 44 billion Buffett just bought 32,000 miles of rail. That comes to just 1.375 million dollars a mile. How much would it cost to replace these assets? Well, China just announced that they plan to build a bunch of new rail lines at a cost of over 20 million dollars a mile. And that’s in China — you can bet the cost would be quite a bit higher here.
Picking up assets far below the cost of replacement wouldn’t mean anything if they didn’t have any pricing power (real estate in Detroit, anyone?), but with rails that is not much of a worry. As long as we need to move large amounts of goods, rails will continue to be by far the cheapest way to do it. Even if oil went to $20 a barrel tomorrow, no one is going to start shipping grains or coal by truck.
The bottom line is Buffett saw the chance to buy irreplaceable productive assets at five cents on the dollar, and he pounced. End of story.
Disclosure: no positions, but I am salivating over the prospect of finally having options on Berkshire stock after the 50:1 split.

Dealing with a manic depressive market

rglenn8 — Fri, 30 Oct 2009 22:11:22 +0000

Today’s 249 point decline in the Dow, coming on the heels of yesterday’s 200 point rally, should leave many folks scratching their heads. What’s a trader to do? The short answer is: Pack up your marbles and go home. This is not a rational market, and the cross currents make it difficult to do anything more than gamble.

One of the HUGE advantages that individual investors have over funds is that they can sit out the game if they don’t like how it’s being played. The average mutual fund manager would lose their job in a heartbeat if they tried to go to cash. I’m not advocating liquidating your entire account, but now is the time to take a very hard look at each and every position in your portfolio. Does it still look like a winner? Would you buy it again today? If not, get rid of it.

Big sell offs like the one we had today — particularly because it saw a huge spike in the VIX (implied volitility) — is a great gut check for your portfolio. Any position that is making you feel a little sick needs to go now. While I would not be rushing out to add positions at this point, It’s also good to keep in mind that times of great fear and uncertainty offer the greatest opportunity. I am keeping my eye out for any fantastic deals that the market may throw my way, but because of the danger they are going to have to be much better than average in order to tempt me to part with my cold hard cash.

Bye bye Blackstone…

rglenn8 — Thu, 29 Oct 2009 15:17:02 +0000

The Blackstone covered call in the portfolio had been working quite nicely for us, but no more. Yesterday, on news that it was seeking to buy back debt on one of it’s properties the stock plunged 10%. Now, I think that this was an overreaction and I would guess that all that was happening is that Blackstone was trying to take advantage of the fragile credit markets to lower their debt burden. Can you imagine if the mortgage on your house was traded individually so that when the market gets scared you got the chance to buy back what you borrowed at seventy cents on the dollar? Too bad the average Joe can’t get in on that action!

While I think yesterday’s news was much ado about nothing, I try to make it a practice not to argue with Mr. Market too much. In particular, I try to follow this rule: NEVER LET A PROFIT TURN INTO A LOSS.

I don’t follow it blindly, but if you do have a position that was profitable, and now it’s not that should be a big wake up call. In this case, and with the market bouncing nicely (and Blackstone with it) I am going to close the position and walk away. Walking away is really quite undervalued in the investment community, and it can be surprisingly hard to do. It’s easy to fall in love with a position, especially one that was profitable, so this is also good practice at staying disciplined. Here’s the trade:

Sell 500 shares BX

Buy 5 BX Nov 14 calls

Net proceeds: $12.80 per combo ($6,400). Net profit = $6,375 – $6,400 = $25

Those of you who are following along at home may have noticed that this position was up almost $1,000 just a few days ago. Another example of how fickle the markets can be, and why you should always be looking to bank at least part of your profits when you can.