US Downgrade Portfolio Closed with 3.35% Gain

Readers will recall that about the time S&P downgraded US debt in August, CCI put some dry-powder to work on the simple assumption of “buy when others were fearful”. The specifics of those trades and update status can be found at this google doc and are described below under the trade status heading. 

Overall, this basket of nine diverse stock and option positions gained 3.35 % since late August. Hence this portfolio was a successful example of “buying when others are fearful” or “strategic portfolio asset allocation re-balancing”. (Because we all know,”timing the market” is never a good thing...lol)

Yes, that's right cash came from the sideline, was put to work, and made about a gazillion more than it would have if it stayed in cash.  Before I pat myself on the back anymore, I must point out that this portfolio substantially underperformed the market over the same time period (S&P up over 7%). Further, with better stock picking and aggressive use of leverage an investor could have done far better. However, that ignores the very real human fear factor that exists at these times. In fact, most investors actually pull money out of the market when things are fearful, not put money to work. By using option based strategies an investor can put money to work with a greater margin of safety and/or hedge against continued downturns. Hopefully the comfort that buffer provides makes it more likely that an investor will step up to the plate when times are fearful and put some dry powder to work. CCI's capital from the downgrade portfolio is mostly back in cash, waiting for another time when things seem fearful to go back to work in a conservative, hedged manner.

A final summary of the transactions are contained below.

Final Trade Results

Four long positions and associated covered calls

Bank of New York (BK) lost 10.3%. The only loser in the portfolio. CCI was finally able to sell calls against this position in December. This call expired worthless reducing the loss per share by $.26 or over 1%. This week, with the stock trading back at $20, CCI closed the position. CCI felt this somewhat different banking stock might behave better than most other financial services stocks if the sector was once again hit by a wave of selling. Hopefully that will still be the case in the longer term, and we will keep this stock on the watch list for the future. (-12.2% Cap loss, .6% div gain, 1.3% option premium)

Ford (F) - Bought a lot of stock at $10.18. Sold and then subsequently covered a lot of $11 Sept calls against the position for a gain of $.35. Did the same thing again with November $11 calls for a gain of $.49, and the once again in December for a gain of $.22. Sold the stock in Dec. at $10.89. Overall that was a 17% gain. (7% cap gain, 10% option premium)

Ford remains attractively valued and a candidate for continuing this strategy in the future. .

Waste Management (WM) - Sold Aug $30 puts for $.70, and the stock was put to us at an effective purchase price of $29.30. Sold the stock at $31.44. Over the past months, sold calls against the position for a $.63 gain and collected a $.24 dividend twice. Overall this position made 12.8% (4.7%capital gain, 5.7% option premium, 2.2%dividend).

Utilities ETF (XLU) – Originally bought the etf at $31.72 and sold Jan $32 calls against it for $1.23.

The intent was for this conservative group of utility stock to stay stable through the end of the year and pocket both the option premium and two dividend cycles. This position was called away from me in mid December. Overall the position made 6% ( .8% cap gain, 4% option premium, 1.2 % dividend)

Having the position called away before the second dividend payment cost a small amount and was unfortunate. However, when this situation of early exercise occurs, I just try to rationalize it as the original decision was soooooo good that one of those big bad wall street types paid me the compliment of skimming away a little bit of my good idea.

Four short puts trades were made. All were closed with a profitable collection of option premium

• Japan ETF (EWJ) $9 put – closed for a profit of .9% in a little more than a week.
• Health Care Sector (XLV) Jan $29 puts – closed at $.39 for a gain of 4.6% in about 2 months
• Bank of America(BAC) – first the Sept $7 puts and then the $6 Oct. puts for a gain of 5.5% in about 2 months.
• Corning (GLW) – Initially sold Oct $13 puts for $.75 cents. Those expired worthless and put the same trade on for $13 puts in November for $41 cents. Covered that position after the earnings move at $.08 for a gain of $33. In total $1.08 (9.1%) gain in about 3 months.
  

Materials ETF (XLB) – As previously described. Initially the Dec $31 puts were sold and those proceeds were used to buy the Dec $34 calls. Zero out of pocket costs. When XLB was trading higher we were able to finance the covering of the short Dec $31 puts by selling the Dec $37 calls. Received a very small credit. In option language, that was starting with a risk reversal and converting it to a vertical call spread. In common sense language that was risking less ($31) to now have a can't lose shot at making $3 or about 10%.It is nice to be sitting in a place where we are now essentially playing with the houses money. XLB plunged in November and never recovered. The trade expired with a small profit from the option trades of .7%.

Apple Options - Iron Condor

In CCI's continuing attempt to have some positions that generate income via options, an iron condor in AAPL was established.

Iron Condor....that sure sounds "wild and crazy"  but basically it is a belief  that Apple will trade relatively flat (within a $55 or 13% range) over the next few weeks (or less).  

In general an iron condor is the combination of a put and call spread.  The specific transactions in this case are:
Sell Jan $375 Put     Sell Jan $430 Call
Buy Jan $370 Put     Buy  Jan $435 Call
Apple is trading around $405.
These options were sold for a credit of $164

If held to expiration (which is unlikely)

• Worse case the stock hits new highs over $435 or pulls back below $370 in the next two weeks.  In this case, the portfolio will lose $336 per contract.
• Best case the stock stays anywhere between $375 and $430, and the portfolio gains $164. CCI thinks this is probably because there are enough Apple bulls to prevent the stock from falling too far before Jan earnings. Conversely,  many competitors are now shooting at Apple, they have unfortunately lost their leader, and at some point the momentum money may stop moving towards Apple.
• Realistic Case - If Apple bounces around the $400 mark for a shorter period of time this trade will gain money daily and can be taken off for less gain but well before expiration.

If all that "option speak" is too much for you,  just think of it as a "bet" that Apple stays between $375 and $430 with 1:2 odds.   You can take either side of the position.  However, CCI is looking to hold some positions that make money if the market continues to go sideways.  This is situation where we believe that can happen.

End of Year Put Selling - Update

NEWS FLASH:   Nothing happened this week in the market. The S&P 500 closed almost flat for the week (and the year).  Common sense would seem to dictate little market moving news would occur in a holiday week,   and CCI acted on that belief to make a little money to pay for those holiday gifts via put selling.

Trade status below:


Walgreens (Wag) earnings last week were basically a non event  (especially related to their battle with Express Scripts) .  Subsequently the stock rallied, the volatility rushing out of the Jan options, and time decay worked in our favor.   CCI closed the $32 Jan put position for a gain of .68/share (2.1% in two weeks)

Us Steel (X) - Nothing happened with X this week.  The slightly out of the money $25 Dec 30 (weekly options) expired worthless and CCI pocketed $.32/share (1.2% in a week)

Emerging markets (EEM) fell a bit and closed just below the $38 Dec 30 strike CCI had aggressively selected.  Earlier today CCI was able to roll this option out to next weeks $38 Jan 30 strike.  The Dec 30 option made only $.23/share (.6% in a week), but we also know received a $.49share credit ( 1.3%) for next weeks options.  Obviously there is about at a 50/50 chance that CCI will get assigned that stock next week. CCI is very comfortable building a position in EEM and this option premium collected will have lowered the effective entry price to $37.28.  If the stock rebounds CCi will have pocketed $.72/share (1.9%) in two weeks.

Corning (GLW) - Corning closed trading at $12.98.  CCI still holds the Jan $12.50 puts.  At this time the position is up about $.12/share or 1%.   CCI let this option ride into next week as there is still $.25 (2%) left in the premium.


Seems like realized volatility in the final week of the year might be naturally suppressed, and the mostly mathematically based weekly option market pricing could have a hard time factoring in that dynamic.  Hence, CCI will likely be looking to aggressively sell weekly puts again next holiday season.

Starting a Position in Google

CCI bought a one lot of Google (Goog) at a price of $636.40.   Stay tuned for more posts on Google if/when CCI builds this position in 2012.   In the interim,  my thoughts on why to start buying now include:

• Google search engine continues to be a cash generation machine, and they have $131/share of cash on the books.
• Seems Google is now a real competitive threat to other players like Msoft and Apple, and more importantly seems to be the player that is arguably best situated to bring together all the "new" pieces of technology (search, cloud apps, social, mobile, etc).   CCI believes the trend to be a single provided of all these services will be a competitive advantage in the future.
• Momentum money may be moving in Google's direction in 2012 as illustrated by it breaking through long term chart resistance around $630. Perhaps some of the money that has been running towards Apple over the past few years may be moving to Google.

Stay tuned for more in 2012.

Gold - Continuing to Use Options on GDX and GLD

As discussed in this article written over a year ago CCI described an approach to provide upside exposure to gold in a portfolio while minimizing the risk capital and out of pocket cash by selling put options in GDX and buying call options in GLD.

Over the past month, gold has fallen about 10%, and CCI closed out the latest version of this trade this month.  Earlier in the month the GDX Jan $65 puts were covered when gold was trading much higher for a $3.62/share gain. Today the GLD Jan $180 calls were covered for a loss of $5.29. A net loss of $1.67/share or 1.28%.  Not great, but not too bad considering the plunge in gold prices.

This type of trade was done three time in 2011.  Details of the trade for 1 lot can be found at this google doc. In total these three trades yielded 36.17%.  That compares to a gain of 24.94% if gold was held for the same time periods during the year, or about 9% if held from Jan 1 to now. 

For 2012 the concept of the portfolio having some exposure to gold to provided some "insurance" in the event of some macro level issue causes a discontinuity in the market remains appealing to CCI.  The option volatility and correlation between GLD and GDX remains similar as described in previous posts.   Hence CCI plans to continue to using this trade architecture.  Specifically today CCI

• Sold 2 Mar $50 puts in GDX for a net credit of $620
• Bought 1 Mar $155 call in GLD for a net debit of $532

A net credit of $88 or an insignificant 8.8 cents per share.   However, that means there is no out of pocket cost for getting exposure to gold in the portfolio, and reduced risk capital ($10k/lot) as compared to owning GLD.  CCI plans to sit on this position until some global macro event causes the gold bugs to push up the price at which time we will look to take profits.  If nothing drives the gold price upward by March it is probable the portfolio will be the proud new owner of gold miners shares at $50/share.  A position, that I'm comfortable taking on.

Cisco - its not the end, its the begining

CCI has been long CSCOCisco for the second half of the year. 
Earlier this week, CCI covered the Jan 12 $10 options we had acquired awhile ago.
Sold these options at $8.45.

This closed out the portfolio's holdings in Cisco. 

• This lot made $.37/share.
• The earlier lot lost $.56/share 

So overall this trade lost a little over 1%.  
Never good to lose.  However, the trade was established essentially at the market's peaks this year.  Hence buying many, many other stocks would have lost a lot more.  So this conservative play was at least successful in avoiding a big down draft in the market.  (How's that for rationalization....lol).



* * *
Going forward the situation at Cisco generally remains the same.  A huge cash stock pile (over $8/share), and a very low valuation. (p/e around 10).  I remain doubtful of the growth picture for the company, but think these valuations can create a nice floor for the stock price.  Hence, when the stock pulled back to the low $18s today, CCI bought the Jan 13 $10 options for  $8.35.   (in essence rolling the options out one year).  Note: there is almost no premium in these options ($10 options plus $8.35 cost, nearly equals stock price of $18.20).  Going forward

• If CSCO gain we plan to write shorter-term covered calls against these options to generate income
• If CSCO falls we plan to double down with the acquisition of a second lot of shares

End of Year Put Selling

With the creation of weekly options there are now many stocks that have options expiring this Friday Dec $30. The volatility in these options seems to be in-line with traditional market factors.  However, it seems like there is less of a probability of bad news coming out during this holiday week than in most weeks.  Hence, CCI is willing to risk some capital on selling out of the money puts to potentially generate some short-term cash.  As always when selling puts an investor needs to be prepared to take ownership of the stock if the market falls.


Here are two very short-term put sales CCI established

On Friday, Us Steel, (X) was trading just under $26.  The Dec 30 $25 puts were able to be sold at $.32.   I believe the volatility is so high, because of various M&A rumors and related arbitrage.  However it seems less likely that any breaking news in that area will occur in this slow, quiet, holiday week.  So CCI feel that there is a good probability that the stock stays over $25 this week and the portfolio can earn a 1.2% premium in a week.

On Tuesday, the emerging market ETF (EEM ) was trading around $38.2, it was possible to sell the Dec $38 puts for $.37.     This position essentially has a 50/50 likelihood of either yielding 1% or being put the ETF at a price of $37.67.    CCI is comfortable adding to our overall emerging market position so I am comfortable taking this risk.

HPQ - Lets try that option trade again

Hewlett Packard (HPQ) fell back near $25 today.  The fall today is mainly in sympathy with Oracle's earnings miss.  Given some similarity in business and customer bases that type of stock movement could be logical.  Conversely,  there are a few differences in the existing stock prices of these two companies (i.e.  different p/e, very different p/b, recent history in meeting earnings forecast, different market view of the management teams,  etc).   Hence it is conceivable that any issues Oracle recently encountered could already be priced into HPQ stock, and in general this pull back in HPQ could be viewed as more of a buying opportunity.

  Of course, CCI is already long the stock, so risk management limits might not allow the addition of too much more to this losing position.  However, even though the stock moved down, the 1x2 ration spread just added to the portfolio actually made money (due to volatility decreases).  Hence, CCI took off the option position just recently established.  The trade netted a very modest $.19/share, but a .7% gain when the stock goes the wrong way is a gift that should be taken.   On any further fall in the stock or implied volatility, CCI will be looking to leg back into a 1x2 call spread by first acquiring $25 or $26 calls.   Hopefully end of year low volumes, tax selling, and will provide a good opportunity to do that. Stay tuned.

Selling January Puts to Generate Income

With the market slumping into the holidays it seemed like another  potential opportunity to generate some income via selling some puts on stocks with higher implied volatility. This article at seeking alpha describes two potential trades in January options for Walgreens (WAG) and Corning (GLW).

HPQ - Continuing to Trade the Range

Hewlett Packard traded back towards $26 with this week's market pull back.
It looks extremely like the Dec $28 covered calls will expire tomorrow resulting in a $1.56/share profit which continues to take a bite out of the loss on this trade.

CCI continues to beleive HPQwill be stuck in a trading range for awhile.  Based on that belief, CCI reestablished a  ratio call spread.  Specifically bought one lots worth of Jan $26 calls and sold 2 lots of Jan $28 calls for a non-materiel, net credit.    Hopefully, CCI will be right and HPQ will drift back toward $28 and we can harvest option premium gains.....again.

CISCO - Closed Covered Calls

The market and tech stocks continued to get hammered today, and CSCO fell back under $18.  CCI used this "opportunity" to closed the Jan $19 CSCO covered calls.  Made a $.51 profit on this covered call trade.  The portfolio continues to be long the Jan12 $10 calls.  Will look to exit or roll these calls if/when CSCO rebounds.

2012 Sector Plan

The end of the year often provides the catalyst for investors to  adjust their portfolio via tax loss harvesting and general rebalancing. While performing these activities, one key consideration that drives  the performance of an equity portfolio of  is sector allocation.   A great  illustration of this point can be found at S&P's spdr website which states "Sector returns can vary widely – over the last 10+ years the average difference between the best performing and worst performing sectors has been more than 40% per year."

Clearly this gives a good indication of  how important it is for an investor to consider sector allocation. 
In that regard, CCI spent some time thinking about sector allocation for 2012 and documented those thought in the following more general opinion article
http://seekingalpha.com/article/313449-sector-weightings-what-is-the-right-benchmark-for-you

MMM - Rolling Calls Again

MMM pulled back towards $80 with the overall market today.  CCI took the opportunity to roll the Dec $77.50 calls out to January $77.50.  Net credit after commissions was $1.45 or 1.86%.  Nothing too exciting here, but we have been able to squeeze out modest gains via option premiums while the stock continues to go sideways.

Intel - About those Covered Calls.

What a difference three days makes. INTEL  was trading at $23.30 on Monday and near $25.00 today. Not sure that anything material has changed in the fortunes of the company, but if Mr. Market can change its mind so quickly, "rationally" and "efficiently" so can CCI....lol.
 
After buying back one  lots worth of $25 calls on Monday, sold one lots worth today.  CCI decided to go all the way out to February this time for a few reasons. 

• The premium of $1.25 ( 5%)  driven by an IV of 28 seemed significant enough to pursue.
• This date is after the next earnings announcement and x-dividend date both of which could shrink volatility.
• The overall portfolio already has several Jan option positions and wanted to start to create some date diversification.

Scenarios

• The stock rockets upward. One lot of the position will be called away at an effective price of $26.25 and the remainder of the lots owned will be up quite nicely.
• The stock retraces some of its recent gains or just stall out around this level, and there should be an opportunity to harvest some of this premium in the near term.

Boeing - Takes Off - Mid course Correction to Options

Boeing (BA) was up about 4% today and about 15% this week to over $70.  Possible "explanations"  include rumors of a new large airplane order, favorable union relationship developments, etc.

CCI has not special insight to these moves, but while remaining bullish in Boeing, it seemed prudent to try to take advantage of this rapid upward move in some way.  So, we decided to cover the $50 Jan 13 put sold in late September to reduce the capital requirements and downside risk of the position.  The September transaction was documented in the last Boeing post here.    The  summary of that transaction was the Jan 13 $50 puts were sold to finance the purchase of Jan 13 $65 puts.

Overall the timing of that transaction was great.  The trade was put on for a $.50credit/contract, the call is currently up nearly $6.00/contract and the puts are in the money by about $3.50/contract.  That is a total of $10 gain/contract.  The worse case risk capital required was $50 so that is a nice 20% gain.   

With today's move, we considered just taking the profit and waiting for a pull back to re-add a lot.  However, we decided to keep the $65 Jan 13 call as platform to sell some shorter term covered calls against to try to milk some more profit from the trade.  So today we covered the Jan 13 $50 put and sold the Feb $75 call.  This cost us $1.21/contract of the profit made to-date.   If the stock continues to rise we would have better off just closing the lot, but we are anticipating that some sort of consolidation will occur in the next weeks and there will be an opportunity to harvest some gains from this covered call.

ANR - Let's Try That Again

Alpha Natural Resources (ANR) was up a "modest" 14 % today to nearly $24.  Of course that is after an even larger percentage fall the weeks prior. Yet another example of "rationale/efficient" markets.

Readers will recall our last activity in this stock was to establish a Nov $23-$25 1 by 2 ratio call spread for no cost against one of the lots of stock held in the account.  If you need  a refresher on that activity it is documented here.   The stock had bounced back nicely towards my price target of $25-$26.  It looked like this strategy had worked perfectly.  However, the stock reversed right before expiration,  and the trade expired with no impact on the p/l.   Rats.

With today's gain and my calculations of adjusted, tangible book value still over $25, CCI put on the same trade for December options.  Specifically, bought 1 lot of Dec $23 calls and sold 2 lots of Dec $25 calls for a net debit of $.09 after commissions.   Obviously we need the stock to stay over $23 to make money and the best case is for it to climb over $25.    With the way this stock moves that can happen very quickly.

Stay tuned.

Intel - Bought Back Covered Calls

Intel (INTC) traded back around $23.30 today.   I read a few things that attempted to  tie the fall in price to some analyst concerns about the impact of flooding in Thailand on Intel.  Flooding may or may not be a short term impact, may or may not be a longer term impact, but CCI took it as an "opportunity" to close the previously established Dec $25 covered calls at $.16 including transaction costs.  Profits on these calls will boost returns on one lot of Intel by a modest 1%. 

Still bullish on Intel. Will look to  re-establish a covered call position if the stock moves back up to provide a smidgen of protection for the position.

Downgrade Portfolio - Thanksgiving Status

CCI has been busy with Thanksgiving holiday travels and hence only watched last week's market train wreck from afar. I thought that a good way to get back into the mood of the markets was to do an end of November review of the “downgrade portfolio” a few days early.

Readers will recall that about the time S&P downgraded US debt in early Aug, CCI put some dry-powder to work on the simple assumption of “buy when others were fearful”. The specifics of those trades and update status can be found at this google doc and are described below under the trade status heading. 

Overall, this basket of 9 diverse positions is essentially at break even.  Up .2% to be exact. With last weeks drop the S&P is also at basically break even over the same time frame. Certainly nothing too spectacular to report, but the mix of results may be illustrative for readers.

• 4 trades are closed at gains of 0.9%, 5.5%, 9.1%, and 4.6% respectively
• 4 trades are open with current gains of 3.9%, 7.7%, 4.5%, and 1.4% respectively
• 1 trade is open and currently down 22% percent. Down 8% last week while I was out..ouch
  
  

Frankly, this distribution of trades disappointingly represents classic problem with more active trading where big losers overwhelm modest size winners in a portfolio. Most observers would say that, CCI should have cut losses in the the loser earlier. Certainly true, and I do currently have “traders remorse” over not selling the position earlier. However, this also represents the only position of the nine that did not have an option oriented, hedge associated with it. So I really, really have a severe case of “hedgers

remorse”. There was plenty of opportunity to lower the cost basis in this stock via covered calls that were not taken. I will try not to let that happen again too often, and it is good lesson for readers to think about having hedges in places. (especially while taking time off and not watching positions)

Oh well, overall this portfolio is tracking the market so certainly not a terrible situation.

Trade Status

Bank of New York (BK) is down 22%. CCI felt this somewhat different banking stock might behave better than most other financial services stocks if the sector was once again hit by a wave of selling. Instead it is under-performing the poor performance of the financial sector. I will have to do a little digging to see what the rationale for that might be. While doing that fundamental research, hopefully $18 will hold as the chart support level. (Yes...hope can be a strategy...lol)

Three long positions and associated covered calls

Ford (F) - Bought a lot of stock at $10.18. Sold and then subsequently covered a lot of $11 Sept calls against the position for a gain of $.35. Did the same thing again with November $11 calls for a gain of $.49.

After last weeks sell off the stock is trading at 9.75. With option premiums collected to-date the break even on the position is $9.34. Still generally bullish on Ford at these prices. Willing to hold for awhile longer and re-establish yet another covered call position on any bounce.

Waste Management (WM) - Sold Aug $30 puts for $.70, and the stock was put to us at an effective purchase price of $29.30. Closed trading Friday at $30.31 for about a $1 capital gain. Over the past months, sold calls against the position for a $.63 gain and collected a $.34 dividend. Overall the position is up 7.7% and the stock goes x-dividend for another $.34 (1.1%) this week.

Will likely look to establish another round of covered calls on a bounce.

Utilities ETF (XLU) – Originally bought the etf at $31.72 and sold Jan $32 calls against it for $1.23.

The intent was for this conservative group of utility stock to stay stable through the end of the year and pocket both the option premium and two dividend cycles. The etf close trading today at $34.85. The original plan remains in place. We plan to hold through the dividend cycle and assuming it is still trading above $32 will likely exit the trade at near a 7% gain.

Four short puts trades were made. All were closed for a profit..

• Japan ETF (EWJ) $9 put – closed for a profit of .9% in a little more than a week.
• Health Care Sector (XLV) Jan $29 puts – closed at $.39 for a gain of 4.6% in about 2 months
• Bank of America(BAC) – first the Sept $7 puts and then the $6 Oct. puts for a gain of 5.5% in about 2 months.
• Corning (GLW) – Initially sold Oct $13 puts for $.75 cents. Those expired worthless and put the same trade on for $13 puts in November for $41 cents. Covered that position after the earnings move at $.08 for a gain of $33. In total $1.08 (9.1%) gain in about 3 months.
  

Materials ETF (XLB) – As previously described. Initially the Dec $31 puts were sold and those proceeds were used to buy the Dec $34 calls. Zero out of pocket costs. When XLB was trading higher we were able to finance the covering of the short Dec $31 puts by selling the Dec $37 calls. Received a very small credit. In option language, that was starting with a risk reversal and converting it to a vertical call spread. In common sense language that was risking less ($31) to now have a can't lose shot at making $3 or about 10%.It is nice to be sitting in a place where we are now essentially playing with the houses money.

XLB has fallen off the cliff this week. Down to $31.40. At this time, it certainly looks like this shot at a larger gain is going to expire worthless, but who knows. With these option strikes now 10% out of the money, will be looking for ways to re-position the strikes or exit the trade.

CRM Earnings Tonight

As originally documented here, CCI believes Salesforce.com  (CRM) is a bubble waiting to pop. 

CRM report earnings tonight after the bell, and CCI felt it was time to "put some money behind my mouth". With CRM trading around $135 yesterday, CCI bought the Nov $130 puts and sold the Nov $120 puts yesterday at the cost of $2.66.  (A put spread).  This could be rationalized as a portfolio hedge or simply a re-investment of past profits made from shorting CRM.  However, with only 2 days until expiration, this was far more of speculative trade on CRM disappointing later today.  In essence this trade is simply a bet with  almost 4:1 odds of a miss. (i.e. lose $266/contract if they meet expectations or make $1000/contract if they disappoint). 

Today, prior to earnings, CRM fell aggressively.  I guess that fall was because of some other tech stock misses, speculators running away from CRM before earnings, some info leaking somewhere, or who knows.    That pre-earnings drop was kind of surprising to me,  so I decided to take the trade off early with only a $128 gain/contract.    I guess some might call that a 48% gain on capital,but the risk of loss was quite high, so that is not really fair to say.

Was I too quick on the sell trigger on a winning position?  Probably yes.
We will know later today, ......but.... s they say " bulls make money, bears make money, pigs get slaughtered".  So I'll watch the earning results with great interest..... while counting my winnings.

HPQ - Closed Nov Option Position

With HPQ trading back near $28, option expiration on Friday, and earnings on Monday,  CCI unwound the November option position.  To remind readers of the specifics, that meant selling one lot's worth of the $24-$28 call spread and rolling one lot's worth of the $28 covered calls from Nov to Dec.  After commissions those trades resulted in a gain of $3.08/share.  A very nice gain, that proactively puts a little bit of a dent in the overall loss on the HP trade.

Earnings are Monday.  In a perfect world, a new CEO (Meg W.) would like to report in-line quarterly results (i.e. things are under control) and manage down expectations for the future (i.e. it will take me a little while to repair the damage of the past.)   I think it unlikely that a new CEO in their first quarter on the job will increase expectations.  Hence, I'll keep betting HPQ will continue to range bound in the high $20s for awhile.  The lot of Dec $28 calls are in the portfolio to try to make some shorter term profits from that scenario. 

After the earnings report, the x-date, etc we will reevaluate the next steps with this trade.

Deja Vu - All Over Again

This morning's financial "news" included concerns about European debt.  Spain this time.
Sound familiar?  Do you think it was possible some big money was creating "news" to help their positions?  I've seen this movie before, and was willing to play along.
Bought the double short financial ETF (SKF) for $64.10 and was able to sell it for $65.10.
Good/lucky timing.  1.4% in a few hours.  14-0-6 using the double shorts this year.

Could Buffet be reading CCI ?????

Monday's news including this bit of info.

"Warren Buffett has broken the habit of a lifetime and disclosed that Berkshire Hathaway (BRK.A) has not only bought a 5.5% stake in IBM (IBM), it has also acquired 9.3M shares in Intel (INTC)" .

It is probably just one of those nasty Internet rumors,  but I'm "unbiasedly" willing to highlight that it seems like more than a coincidence that these are two of  CCI's  major positions as documented here and here.
Hmm...

* * *
More seriously,  hopefully this news may drive some short-term demand for these stocks which would be great for our positions.  It is also probably somewhat of a

• validation of the attractive valuation of these stocks
• a recommendation for the role the business models of these two companies play in the infrastructure of the cloud.

This news also reminded me that I had not provided any q3 earnings update for IBM. Perhaps that was  because it was just another ho hum, make the number, and add to the recurring revenue backlog via long-term services contracts and software.  Their stated goal of $20/eps by 2015 seem to be more obtainable and even conservative.  A conservative multiple of 12 provides a  stock price of $240 and an aggressive multiple of 15 provides a stock price of $300.  Something like an 8-15% annual return over the next few years.   CCI will just do the good old fashion, buy-and hold on the IBM position unless it has a major breakout in which case some profit taking may be prudent.

MMM - Rolled Covered Calls

I was right before I was wrong.
No that is not the latest words from a politician, but rather this describes CCI's trading position on MMM. 

Readers will recall CCI was corrected in anticipating that MMM would manage down expectations during the last earnings cycle and correctly used covered calls to make a modest profit from this event.  However, CCI's confidence was shaken when MMM also missed q3 earnings, causing CCI to too act a little too hastily in re-establishing a covered call position all the way back down at $75.  A little more patience a belief in the original thesis would have allowed the covered calls to re-established at a higher price and substantially better return. 

But that is yesterday's lesson.  With expiration only 4 days away and MMM trading around $81.70, CCI did what seems like a prudent thing and rolled the Nov $75 covered calls out and up to the Dec $77.5 covered calls.   There are several scenarios in play over the next five weeks, but in the situation where MMM continuesly trades over $80 for the next 5 weeks this lot of stock and related options will have returned a modest 4+% gain. Not fantastic, but not bad for having risk capital tied up in a "relatively safe"  blue chip stock that may haved not moved anywhere during the holding period.

Cisco - Earnings - Rolled Options

Cisco reported earnings Wednesday after the bell and the results generally seemed to please the street.  The stock rallied to $18.60 today.  

Readers recall that CCI has owned the Jan 12 $10 calls as  leveraged play in this stock for quite a while.  Unfortunately we also owned Nov. $16 covered calls which in this case has just stunted any gains in the position.
We rolled the Nov$16 calls out to Jan $19 covered calls today.  So after several iterations of options plays the portfolio is now essentially long the Jan $10-$19 call spread.  As of today, this lot is cumulatively showing a small gain, but a reasonable upside opportunity was missed because the covered calls limited growth.

With this earning catalyst behind us, we will be looking  for the right opportunity to close out of this position.

Hedging Financials Today

After getting beat down on Wednesday the financial stocks bounced this morning.  I thought there was a chance that this bounce would not last, so CCI bought the double short financials ETF (skf) today as a hedge against more bad banking news.  There was really not too much movement during the day and the position was closed in the afternoon for a "huge" gain of $3.84 after commissions.    

So this attempt ends in a tie.   13-0-6 trading double short ETFs this year.

Using options to increase returns if gold were to move up

Readers will recall that CCI has maintained a small overall exposure to gold in the portfolio.   At present, this exposure is represented by a  position in the gold miners etf (GDX).  This was last discussed  here.
Also in the past CCI has successfully found ways to take advantage of the high correlation, but different implied volatility in option prices between the gold miners etf (gdx) and gold etf  (gld) to improve returns.   A good example of this concept was initially described in this article


With European news continuing to swirl, the US debt committee coming towards their due date, mideast uncertainty continuing, and gold prices seemingly consolidated CCI wanted to increase exposure to the gold market.  As in the past, CCI has deployed an options strategy to try to increase returns in gold rises without taking on much more risk if the price of gold were to fall.  This strategy can a get a little bit complicated,  but is described in detail at this new article. 

In summary, the strategy is to sell $65 Jan covered calls against one lot of the gdx shares owned and use these proceeds to buy one lot of $180 Jan calls in the gld etf.   As discussed in the article this strategy will provide increased leverage and hence returns without increasing the risk of the portfolio.

Rolled Intel Covered Calls Out and Up

Frequent readers know that CCI is bullish on Intel.  (recent article here).   Readers will also recall that back in October CCI had sold one lot of Nov $24 calls to provide a modest amount of downside protection through the earnings season.  With Intel trading below $24 this morning we bought this call back.  The trade had an immaterial gain, but I prefer to think of it as some small amount of insurance against an earning miss was held for no-cost.

When Intel bounced back towards $20.20 this afternoon, CCI re-established the covered call on one lot of stock via the $25 Dec calls for $.43 after commission.  This allows my bullish thesis a little more room to run but re-establishes  a little income/protection if by some "slim chance" my bullish thesis in Intel is wrong.

Its all Greek to me.....or is it?

The Greek soap opera continued today.  The potential for a Greek referendum on the bailout/austerity program seemed to drive the market down today.  From a common sense perspective, it seems hard to believe that whatever happens to the small Greek economy matters that much to the global market.  However, what is not hard to believe is that it does matter to the financial services firms. They seem to be in the same position as they were related to US mortgage debt. 

The next exhibit in financial services mismanagement is MF Global.  CCI has no real knowledge of the behind the scenes story at MF Global, but it is not too hard to believe the reports that

• they were leveraged 40:1 (sounds familiar)
• made big bets on government backed instruments (sounds familiar)
• perhaps were caught by the EU calling Greek 50% haircuts  "voluntary" vs. credit defaults and hence not triggering CDS insurance, (CDS at the core of the problem...sounds familiar.
• However, MF  may have even reached new heights by intermixing client money with their proprietary trades.   

Too bad this just can't be blamed on a rouge trader this time!

If you can't beat"em...join em.
CCI skimmed almost one percent off the double short etf today (SKF)

13-0-5 trading double shorts this year. 

Covered Lulu Short

In today's market plunge, CCI covered the short position in (Lulu)  realizing a 4.8% gain.

Frankly, a lot more profit could have been made shorting several other vehicles (i.e. financials) over the last few days. However, any gain in a sea of red is still a profitable hedge.   Lulu remains on my watch list to potentially short again. Perhaps by reinvesting this gain in a short option strategy.

Downgrade Portfolio - End of October Status

Overview

Readers will recall that about the time S&P downgraded US debt, CCI put some dry-powder to work on the simple assumption of “buy when others were fearful”. As October comes to an end, it seems like a logical time to report on the status of those trades.The specifics of those trades and update status can be found at this google doc and are described below. 

Overall this basket of nine diverse positions is up just over 5%. Of course the S&P500 is up about 11% in that same time frame. So the reader can judge for themselves if the glass is

• half-empty – it would have been much better to just “buy the market” or buy with some leverage
• half-full – the timing of the call to put more capital to work was very good. While the positions taken did not match the market performance,  they did go up.  Further,  almost all were hedged in such a way that they would not have lost as much if the market had not cooperated.

CCI “unbiased” opinion is that the glass is half full. It is not all that easy to overcome the fear of the moment that existed at the downgrade time to put money to work. The easy course of action would have been to do nothing and make nothing, or worse panic sell and miss the opportunity. While the option based hedged positions put in place damped the gains, they not only reduced risk, but helped make it psychologically easier to invest at a time of fear.

Trade Status

Let's start with the worst position. Bank of New York (BK) is down 7% along with the overall financial sector. The stock and sector had bounced some based on last weeks alleged positive European news, but that faded away likely in sympathy with the noise related to MF Financial bankruptcy today. CCI continues to believe this is somewhat a unique play in the financial services industry and read the charts to say it can get back over $23.  So we continue to hold and may sell some calls against this position on a bounce.

Three long positions and associated covered calls

Ford (F) - Bought a lot of stock at $10.18. Sold and then subsequently covered a lot of $11 Sept calls against the position for a gain of $.35. Established another $11 covered call position in November for a credit of $.79. The stock closed today at $11.68. If the stock stays above $11 through November options expiration the position will close with a gain of 19%. Conversely, with all the premiums taken in the stock would have to fall to $9.04 before loosing money. Still generally bullish on Ford so it if does pull back we would likely skim the profits from the option position and hold for better days to re-establish yet another covered call position.

Waste Management (WM) - Sold Aug $30 puts for $.70, and the stock was put to us at an effective price of $29.30. Closed today at $32.90. Over the past months we sold calls against the position for a $.63 gain and collected a $.23 dividend. Overall the position is up 16.5%. I would plan to exit the stock if it nears $35 but in the interim, I am Ok owning this for the dividend and possibly another round of covered calls on a bounce.

Utilities ETF (XLU) – Originally bought the etf at $31.72 and sold Jan $32 calls against it for $1.23.

The intent was for this conservative group of utility stock to stay stable through the end of the year and pocket both the option premium and two dividend cycles. The etf close trading today at $34.85. The original plan remains in place. We plan to hold through the dividend cycle and assuming it is still trading above $32 will likely exit the trade at near a 7% gain.

Four short puts trades were made. Three are closed for a profit, and one is still open and showing a gain.

• Japan ETF (EWJ) $9 put – closed for a profit of .9% in a little more than a week.
• Health Care Sector (XLV) Jan $29 puts – closed at $.39 for a gain of 4.6% in about 2 months
• Bank of America(BAC) – first the Sept $7 puts and then the $6 puts for a gain of 5.5% in about 2 months.
• Corning (GLW) – Initially sold Oct $13 puts for $.75 cents. Those expired worthless and put the same trade on for $13 puts in November for $41 cents. The stock is currently trading at $14.20 and the options at $.18. Looking to harvest a little more of the premium before closing the trade.

The final trade was on the materials ETF (XLB) – Initially we sold the Dec $31 puts and used those proceeds to buy the Dec $34 calls. Zero out of pocket costs. When XLB was trading higher we were able to finance the covering of the short Dec $31 puts by selling the Dec $37 calls. Received a very small credit. In option language, that was starting with a risk reversal and converting it to a vertical call spread. In common sense language that was risking less ($31) to now have a can't lose shot at making $3 or about 10%.It is nice to be sitting in a place where we are now essentially playing with the houses money. XLB ended the day at $34.45 so the spread is barely in the money. However, as stated we just need for this volatile etf to bounce back toward $37 anytime between now and December expiration and the position will turn nicely positive with nothing at risk now.

Time to Shorten Portfolio

Markets surged today apparently on what appears to be good news on the financial situation in Europe.

CCI looked at this up move not so much as an opportunity to take profits, but more as an opportunity to look to add some short positions to the portfolio.   One hedging action take today was to short Lululemon (LULU).   They manufacture and sell high-end athletic apparral often associated with yoga.  (No, CCI does not own any yoga clothes.)  They are "the hot" retail concept opening some 140 retail outlets.   The main driver to shorting this stock is their forward p/e of 39 and trailing p/e of 54 which means the stock is kind of priced for perfection.  Shorting this stock  is not an original idea as short interest was shown as 18.5%.  The stock moved up over 7% today and I'd assume some of that move was caused by a short squeeze to those already short.  CCI wanted to get some short exposure for the overall portfolio so we shorted just below $57.  It is always risky being short as irrationality can continue longer than my patience, but we are hoping either

a). this stock backs down to retrace the large gap in the chart and towards it s moving averages  in the short term and we can scalp a few dollars off the trade possible to re-invest in a bearish option strategy on the stock.
b).  Holiday sales for this high-end product may not meat expectations causing weakness in the stock be early next year.

Of course, it is also possible that we could just be wrong and become the next victim of the next move up.  However,  the overall long bias of the portfolio will probably perform very well if the market continues to move straight up, so this trade can be rationalized as an overall hedge.   Stay tuned.

Generating Income via Put Selling of November Options

With volatility in options still very high by historic standards, CCI continues to believe it makes sense to pursue the generate of income via put selling.  The past two months CCI has picked 2 option plays for the next month's expiration.  A recap of those trade and this months selections are discussed in this article at seekingalpha.com.

One of these trades is the next step in managing the Alpha Natural (ANR) position previously established by CCI.  The other is another round of selling of Corning (GLW) $13 puts.  

FYI, since that article was written earlier in the week, GLW reported positive earnings and moved up a few percent.  This already makes the GLW put sale profitable.  If those gains in price hold, and the reduction of perceived risk by the passing of the earnings release drops option volatility, CCI will likely cover this position and look to deploy the capital on another put sale in  stock with more option premium.  

Xerox - Q3 Earnings

Xerox (XRX) reported earnings on Tuesday beating q3 estimates by a penny and confirming full year estimates of $1.08 to $1.11. Nothing spectacular, but steady.  The main thing I liked about their earnings was the consistency. This is at least the 4th quarter in a row they beat estmitates by just $.01  which I interrupt as they have a solid handle on their business and are able to mange it to expectations now.  Their announcements says that 83% of their revenue is annuity business, and over half is now services revenue.  I suspect that number might have some positive spin associated with it, but never the less it does indicates a potential high degree of predictability in the future business.  I'm not aware that the company has set expectations for 2012, but average analyst estimates are $1.19.  With the stock trading just over $8 that is a forward pe of just 7.

At Oct. option expiration date, CCI was assigned a fourth lot at a cost of $9.  We now have a full position of shares at an average cost of around $10.   Still thinking the market will pin a more normal multiple on this company as it becomes more comfortable with its transition to a services business.  Hence CCI still has a  "price target" in the low teens and will hold for awhile longer.  However, if the stock does not move by year end we will consider selling some shares to harvest tax losses.

3m (MMM) - Earnings

MMM reported earnings today.
Not to say I told you so...but they guided down for q4.
However, CCI was surprised that they also missed q3 numbers.  The stock pulled back to $77.

From a trading perspective, the weekly $80 calls plunged on this news.  Hence the $80 weekly calls sold a few days ago plunged towards zero making that a profitable hedge. 

As mentioned above, CCI was not surprised to see MMM lower expectations (they seem to do that a lot) but the q3 miss was surprising and concerning to me.  I looked at just closing the position, but decided that the volatility was probably not out of this stock yet, and even lower expectations of $6 EPS this year should provide some floor for the  stock.

So we rolled the profitable weekly option position out and down.  Specifically we covered the Oct $28 call and sold the Nov $75 call for $3.30.   Scenarios if held to expiration are
- Stock falls below $75 and CCI remains long one lot of shares.  Those shares were purchased at $80 but we will have collected nearly $7.00 in option premium so the effective break even is down to $73.
- Stock stays over $75.  The stock will be called away at $75, but having collected $7.00 in premiums the portfolio would have made $2/share on the trade.

However, as the market digests these results, there is potential additional volatility in the stock so CCI may trade out of this position before expiration.

3M (MMM) - Covered Calls

MMM crossed back over $80 today.  CCI continues to believe this is blue chip company.  Not sure that means it will soar, but do think that may limit its downside.  However, earnings are next week and CCI believes it is likely MMM will continue in its tradition of  performing OK, talking down expectations, and the stock price falls back.  With option volatility still historically high,  CCI sold the $80 OCT 28 (weekly) calls today for about $1.50. Nearly 2% for 1 week holding.

(As an aside.....yes, there are now weekly options.  Hard to see how weekly options are absolutely critically important  to the success of the world,  but it sure does seems like yet another trading vehicle created by our friends on Wall Street to encourage speculation.  Isn't that what we have come to expect from Wall Street......so......if that is the world we live-in....we might as well play the game!)

Scenarios:
- If I'm right about MMM pulling back next week, I'll pocket this premium and that will drop the break even point on this lot to  below $77.  We can then consider November option plays against the position.
- If I'm wrong and MMM rises from here, the lot will be called away capping gains at a modest, low risk, 4.4% over 2 months.
 
Stay tuned

Cisco - Rolled Covered Calls to Nov.

Cisco  (CSCO) has continued moving up. 

CCI rolled the Oct. $16 covered calls forward to Nov.  for a $.24 /share credit.  Earnings are Nov. 9.  That should create some volatility in the stock and may present the opportunity to trade around these option positions still with the intent of closing this trade.

3M (MMM) - Covered the Short Puts

With MMM trading over $79 this morning,  CCI covered the lot of puts sold 2 weeks ago. 
This lot returned 2.5 % in just over 2 weeks.   There was only about  .015% left in premium and it did not seem worthwhile to take the risk of holding the position for another week until expiration for such a small remaining return.

Obviously catching the stock near its short-term bottom is a good/lucky thing, and in this case just buying the stock 2 weeks ago would have returned more.  However, the premium received, and lower strike price for this option,  meant this trade had about a 5 % downside protection if the market had not moved in our direction.  

Going forward, MMM reports earning on 10/25.   Part of CCI's trading thesis on MMM is they are the master of UPOD. (under promise and over deliver).  Hence if the stock runs up over $80 before earning, CCI will consider selling covered calls against the remaining lot in the portfolio. This is in anticipation that their earnings will be fine, but they will talk down expectations, and the stock will stall for a short while.   In that event, that trade would generate more income and also set up to put the short put trade back on.  

Intel - Over $23. Covered Calls Sold

About a year ago in  this article CCI  provided rationale for a position in Intel.  The article concluded by suggesting buying Intel if/when it was near $20.  CCI has built a full position in Intel with an average cost just over $20. 

As INTC went over $23 today, CCI sold one lots worth of Nov $24 calls against the position for $.45.

 In Intel reverses in the short term of after it reports earnings  (it has rallied into earnings only to fall back after earnings several times in the past) CCI will try to harvest some/most of this 2% option premium. If Intel  breaks out over $24, one lot will be called away at an effective price of $24.45.  That would be a 22% gain plus a 3+% dividend for a total of a 25% gain on this lot.  

UDC Portfolio Q3 Results

At the end of this turbulent third quarter, CCI must report that the Utility Dividend Capture fund (description here) lost 2.0% this quarter. This is the first loosing quarter in the funds 9 quarters of existence, and hence the first time the fund has failed to meet its absolute return objective of 0% per quarter in down markets and 3% in up markets. 

The fund once again generated significant dividend income (6.85%), as planned. Unfortunately, this is the first quarter that the anticipated capital loses were not able to be kept less than the dividend income (-8.89%).

Of course the S&P 500 was down about 13.9% (fter dividends) over the same period, so the draw down was much less than that traditional benchmark. However, the utility sector ETF (XLU) still managed to eek out a 1.4% gain this quarter. Hence that would have been a better, simpler way to go this quarter.

While the fund failed to meet its idealistic, arbitrary quarterly objective (maybe I should change the objective to -2% in down quarters, ...lol) it still obviously avoided a big down draft which is perhaps the most critical element to achieving good long-term performance. Additionally, UDC is the least volatile of these three funds. (as measured by SD).

CCI plans to continue with this approach both for its return profile and to illustrate how disciplined approach might work. Below is a lot of performance data so the reader can judge for themselves the merit of this approach.

RETURNS	UDC DIV.	UDC CG	UDC TOTAL	XLU	S&P500 (DSPIX)
2009 q3	7.73%	-2.86%	4.87%	6.26%	11.43%
2009 q4	8.22%	-4.29%	3.93%	7.02%	6.02%
2010 q1	8.10%	-5.93%	2.17%	-4.38%	5.36%
2010 q2	7.98%	-7.89%	0.09%	-3.68%	-11.39%
2010 q3	5.53%	1.08%	6.61%	12.16%	11.24%
2010 q4	5.62%	-3.25%	2.37%	1.05%	14.80%
2011 q1	5.95%	-3.34%	2.61%	2.69%	5.90%
2011 q2	5.96%	-0.39%	5.57%	6.10%	-2.10%
2011 q3	6.85%	-8.89%	-2.04%	1.44%	-13.89%
Compound Return			29.09%	31.24%	25.74%
Standard Dev			4.4%	4.9	9.1

Correlations between these three funds are shown below.

• udc/xlu .74
• udc/spy .67
• xlu/spy .43

TRADE STATS	Trades	Wins	Loses	Win %
2011 q3	20	13	7	65.00%
Total	165	122	43	74.00%

"When the facts change, I change my mind. What do you do?"

Bespoke Investment Group provides a large amount of interesting, thought provoking market data.  On Wednesday 10/5 they had a post about recent market volatility.  You can read their whole post and better see their conclusion graphically at their website here . However, the key bit of info CCI found interesting was the following:

"Up 8.31%. Down 7.34%.  Up 5.34%.  Down 5.68%.  Up 7.38%.  Down 8.70%.  Up 7.34%.  Down 10.14%.  Up 6.65%. Those are the swings the S&P 500 has seen over the last thirty trading days."

That nets to a little over a 1% loss. Of course that was published before Thursday's 1.8% gain in the market. WOW. That is an exciting way to achieve .........nothing. 

I think this type of data should make an investor question their theory on equity investing.  Modern (circa 1952) portfolio  theory is based on many assumptions including that equity performance will be something like an annualized 8% gain with a standard deviation of 15.  I wonder what the SD for this zero return of the last 30 days might be? Perhaps this volatility is just unique past 30 days.  However, I'd guess ( not audited) that over the past 12 years the S&P has had something like an average return of zero with a standard deviation of 20.  So perhaps this is not really that unusual any more.

So why do so many investors blindly believe the advice from the financial services industry that says:  traditional passive portfolio theory is "good" and more active trading is "bad".  

Paraphrasing the famous quote from the title of this post:

When the underlying assumptions change this dramatically,  I change my approach to investing. 
What do you do?

HPQ - using options to trade the range

CCI is long and wrong two lots of Hewlett Packard.  CCI developed a strategy to manage this loosing position in this article.  One of the main premises of that article is that HPQ's valuation is providing some base for the stock, but it will meet strong selling resistance in the high $20s for a long while.  In an attempt to repair some of the damage from this trade and exit the position,  the article describe an initial option trade. The trade is built around the assumption that the stock would  bounce around a lot in a range between the low and high $20s. CCI has had one round trip using this strategy.


Recent volatility saw HPQ trading below $22 earlier in the week and $25 today.  (Once again an example of those "efficient and rational" markets ...lol). CCI was able to buy a lot of $24 Nov options late last week and this week sell 2 lots of Nov. $28 calls. This basically mimics the original trade described in the article.   With the high implied volatility of the options and the 2:1 ratio, the trade was established for a net credit of $.22/share.  

In "option speak" this would be considered a 1x2 ratio spread which can also be viewed as the combination of a $24-$28 vertical call spread and $28 cov calls.  From a more common sense perspective the following scenarios are in play.

- Pullback - HPQ falls back below $24 - CCI keeps the $.22 (just under 1%) to lower the losses of the position and will still own two lots of shares that are deep underwater.
- Sideways - HPQ moves mostly sideways over the next weeks ending at $26.  CCI will make $2 on the call spread and keep the option premium from the covered call and still have two lots of shares that are less underwater. .

- Rises over $28 - CCI makes $4 on the call spread, keeps the premium from the covered call, and one lot of shares is called away at $28. (My target price)
- Volatility continues and CCI will be able to leg out of  (and maybe even back in) to these option positions

Stay tuned.

Cisco - Coverd Calls......Again

CSCO hit $16.50 this afternoon. Yes, that is right. In less than 24 hours Cisco went from $15 to $16.50.  Gee...I wonder if the "value" of the company change by 10% in the last 24 hours? 
You really have to love those efficient markets that factor in all available information to identify a "true" price. ...lol
.
In any event, CCI sold the  Oct $16 calls for $.78 this afternoon against our long Jan 12 option position.
Yes, that is the same trade that we just closed  on Monday.  If it worked once, why not again!

CCI still thinks Cisco is a "value" stock, but now that the overall market has moved down,  there are a lot of "value" stocks to choose from.  Some of them likely have greater growth potential than Cisco.  So we are content to have this last lot called away at Oct expiration for an effective price of $16.78, and redeploy  the capital to another trade.  Conversely, if the stock decides to retrace some of its 10% recent pop, we will also be content to skim some short-term premium off this trade......again.

Q3 Results for EEM2

Near the beginning of the year, CCI was looking for ways to more globally diversify the portfolio.  I described a portfolio of three ETFs that I felt would diversify away from the US markets but have less risk than choosing a popular emerging market ETF such as  VWO or EEM .   A portfolio of 3 small cap, international ETFS all of which focus on the emerging consumer while trying to be less dependent on China than standard emerging market etfs was developed.  The portfolio, called EEM2, is described in the article here.   It consists of a wide ranging emerging consumer etf econ and small cap etfs for Brazil brf and India scin .

Diversifying away from the US to emerging markets around the beginning of the year was a bad idea.  The emerging market etf VWO is down 25.6% this year.   Far worse than the US market.  The Chinees ETF fxi is down more, about 27.3% including dividends.  EEM2 performance was similar, but better. Down 24%. 
The performance of the Brazil and India etfs were both large drags on performance, both down well over 30%. Econ performed better (less bad) and CCI still likes the make-up of the fund.  It seems to put a focus on companies that might serve the emerging middle class in a wide variety of countries.   CCI plans to stick with this portfolio for now.  However, it is possible that we may add to the ECON position and close the Brazil and India portions for tax losses in q4.

Q3 Results for GSPY

Near the beginning of the year, CCI was looking for ways to more globally diversify the portfolio.  I described a portfolio of four ETFs that I felt would diversify away from the US markets but have less risk than choosing an emerging market ETF such as  VWO .   The portfolio consisted of country etfs from Brazil ewz, Canada ewc, South Korea ewy, and Switzerland ewl.  I called that portfolio globalized SPY (S&P500) or GSPY and rationale for those specific countries and how they might work together is described at the original article here.

Let's start with the bad news...ok really bad news.   Diversifying away from the US markets to almost anywhere else in the world as of the beginning of the year was a bad idea.   Seems like the US is viewed as a safe-haven...imagine that.

The following data includes dividends. While the S&P 500 is down around  8.7% for the first three quarters, the emerging market etf VWO is down about 25.6% .  OUCH.   The "good" news is that GSPY is down only 21.2%.  OK that's not really good news.  However,  if the objective was to move away from the US and perform better than the emerging markets then the portfolio has met its goal .  Additionally the monthly standard deviation for GSPY is 6.3 vs. 7.3 for VWO (still volatile, but less volatile). Correlation of GSPY with VWO is .98. (real high).

GSPY performance was hurt badly by its acknowledge overweight in the materials sectors of the market, and the pegging of the Swiss Franc by the Swiss government.  CCI is sticking with the portfolio for now, but will be considering adjustments and/or  tax loss selling in the fourth quarter.  

Cisco - Covered Calls Removed

With CSCO trading back down around $15.30 along with the market, CCI bought the Oct $16 calls for about $.33 after commissions to close the option position.   These calls were sold for a little over $1 about two weeks ago. The portfolio made about $.67 or 4+% on this transaction.  There was "only" about 2% left on this trade.
A small bit of green in a sea of red in the portfolio the past month.


CCI would still like to exit the CSCO position, but I think/hope there might get a chance to exit closer to the top  of Cisco's trading range.  Hence, a similar  covered call position might be reestabslished if the stock moves back up in this volatile market.

3m - adding a second lot....again.

MMM has been getting beat up the last few days.   With MMM trading down near $74, CCI stepped into the onslaught and sold one lot Oct $72.50 puts for $2.09.   A few scenarios:


Worse case  - the pummeling continues.  The stock fall below the chart support around $72.50 in the next three weeks, and CCI is the "proud" owner of a second lot of MMM shares at an effective price around $70.50.  Frequent readers will recall, we are already long one lot of MMM at $79.50.  Hence, overall we will be in the trade at an average price around $75.   MMM estimated earnings are $6.20/share this year, for a reasonable p/e of 12.1.   Analyst estimates for 2013 are currently closer to $7.  Those are probably optimistic, but at some point in time, I'm willing to bet that MMM will ultimately grind its earnings upward towards $7 per share in earnings, and/or get some multiple expansion.  If the stock is put to me, I'm comfortable with a cost basis of $75.  Perhaps q3 earnings in late October can provide a short-term catalyst, but I'm prepared to just sit on the trade, collect the 3% dividend and wait for better days for this blue chip stock. 

Best Case - The stock holds $72.50 support and/or bounces back after the quarter end.  Then CCI can pocket some or all of the nearly 3% option premium over 3 weeks.   With this volatile market, it is even possible that MMM trades back towards $80 in the short term, in which case we will consider taking the other side of this trade and selling calls against the first lot.

"Reverse Hedging" via Gold

Gold is suppose to be the uncorrelated, hedge against just about anything; including a stock market fall.  Unfortunately for anyone hedging equities via gold for the past week, that hedge has not worked.  The price of gold has fallen generally in lock step with the market this week.  It always seems challenging to determine what is driving the price of gold. Usually some government policy decision du jour is the rational for the change of price.  However, it see right now it seems like in the short term the price is either being driven by some big players selling to raise cash (meet margin/redemptions) and/or the technicians driving the price to fill the gap on the charts.  

Whatever the reason, the momentum in gold has been down and CCI just decided to try to go with the flow.  Successfully traded the double short gold fund (GLL) for a 2+% gain.   12-0-5 on trading double shorts this year.  

"reverse hedging".....yes..... I just made up that oxymoron.   Hmmm.. perhaps I should trademark it before someone on wall street decides to create an etf that does it.....lol

Boeing - Crash Landing or Just Some Turbulence?

Always nice to see those "rational" markets plunge straight down in the past 24 hours.
Are we having fun yet???

* * *

Boeing (BA) stock came crashing down about 5 % to $58  with the rest of the market today.   I assume largely because of concerns that if Asia slows, the demand for aircraft will slow down.   Or possible competition for new plane orders from Airbus is of concern.  Or.....who knows?  Conversely, Asian carriers and their governments likely see improving their air travel as a cornerstone of advancement and probably won't rush to cancel orders, and Boeing remains a very unique company in the world (i.e. not many plane makers left),

With the market hitting its alleged support at S&P 1120, I took the "bold" move of stepping into the blood bath by added my fourth and final lot of Boeing.  I decided to add this lot via a little option leverage.  Sold the Jan 13, $50 puts and bought the Jan 13 $65 calls to create a synthetic long  for nearly a $.50 credit.

Some scenarios
- In the most unlikely scenario,  the stock stays between $50 and $65 AND CCI just sits on this position for 15 months we will make 1% (a rate far better than cash)

- 15 months from now, Boeing has crashed down another 15% (below $50) and we will start loosing money.
- 15 months from now the current market action will have just been turbulence.  Boeing will be fulfilling their backlog for new planes, still be a company with one-of a kind abilities and trading well over $65.  In this case, since the portfolio only has $50 at risk,  profits will start to grow in a leveraged manner. 

Shorting Financials.....Again

Late last week, with the news of a meeting between the leaders of Germany, France, and Greece to discuss EU finance, CCI  bought a lot of the double short financials (SKF).  It seems when political based meetings are scheduled, market expectations are rarely met and the market falls.  CCI figured a meeting of three countries politicians represented a great likelihood of disappointment.  Surpise, surprise...CCI was wrong. That meeting and the following financial news from Europe was well received and this position took a big hit. 

In fact, CCI was starting to draft a post about our first loss using double shorts, but then realized that both President Obama's speech on how to pay for the jobs bill and Ben Bernakes potential "twist" announcement were scheduled for early this week. (if you don't know what "the twist" is...don't ask...lol).  Hence, I thought one (or both) of these events was likely to disappoint the market and drop financial stocks so I held onto the short position.   Surprise, surprise ....disappointment has generally reigned on both these events and Moodys piled on with some bank downgrades.   SKF went wild at the end of the day (up 9.5%)

CCI closed the position for "just" a net gain of 1.25% today.  Frankly, this is not a great win, as the position was held too long for this investment vehicle, and hence was quite risky.  But.... at the end of the day a win, is a win, is a win. 

11-0-5 hedging via double shorts this year.

HPQ - the noise continues

Today's HP "rumor" was that they might change CEOs......again.   Who knows if this "rumor" is just another leak from the apparently dysfunctional HP board, someone creating market volatility in the stock price or  something else.  In any event,  the stock jumped about 13% to $25 on the rumor and option volatility also spiked. CCI used the opportunity to close the Oct $26 calls in the portfolio.  Readers will remember that this was one leg of a $26-$28, 1 by 2, call spread.   That combined position was entered at essentially no cost and exited with a modest gain that could be touted as something like a 500% return.  However, more practically,  the profits on this trade really just reduce the loss in HPQ shares by about 1%.   Not that glamorous. Conversely, longer term investors just sitting on the shares for the last few weeks have done nothing but loose a few more percent.   Every little bit helps when trying to minimize losses.

Bigger picture, CCI still thinks there will be lots more noise to come around HPQ, and it  will be a long time before HPQ gets back towards $30.  I continue to look for ways to exit the position in the high $20s.  The stock pulled back into the close, but if it resumes its rally on this rumor, CCI will be looking to either re-establish option positions as a mechanism to exit the position. Possible trades could be the same $26 - $28 call spread and/or just selling $27 calls

Trying to "Thread the Needle" on ANR again.

Last Friday, two previously discussed option positions on Alpha Natural Resources ANR ($26 short puts and $34 covered calls) expired worthless.  That means CCI successfully "threaded the needle" between these two strike prices.  OK... so maybe "threading the needle" is a bit of an exaggeration given those positions represented a $8 (approx. 26%)  wide gap.  However,  high volatility on this stock's options meant that those two mutually exclusive trades both were positive, yielded 4% and 3% respectively. 

Of course, CCI still sits on lot of shares of the stock, with a  cost basis just under $40, that is deep underwater.   Hopefully, there is still  some base under the stock.  Additionally,  implied volatility/price of options is still quite high.  Hence CCI is  thinking of trying to "thread the needle" again with two similar option plays in October.  As a first step in that process,  one lots worth of Oct $26 puts were sold late Monday for $1.35 (5.2% premium).  Rationale for this trade (and another similar option trade on BAC) is contained at this article  at seeking alpha.   If ANR were to rebound, CCI would look to reestablish a covered call position against the already owned lot of shares.

Teva Time - Take Three

This weekend Teva $37.50 puts expired and the portfolio pocketed $1.37/share (3.6%).

The portfolio is still long and wrong two lots of Teva.   The initial article describing the rational for investment in Teva  here  focused on their long term plan to earn $7+/share by 2015.   I'm not aware of any updates from Teva to that plan, but it is possible some recent set backs in their pipeline could make that goal more difficult to achieve.  Conversely, that long term plan called for earnings of about $5 this year and that estimate is still supported by the analyst community.  Further I suspect Teva management will not give up on this plan easily or without a fight, and even earnings of $6/share would make the current price attractive.   With no reason not to believe the longer term plan will generate more earnings and the attractive short term valuations (i.e. forward pe 6.6) CCI continued to look toadd a  third lot of Teva to the portfolio. 

With the options play mentioned above not resulting in the stock being acquired, CCI simply bought a third lot of shares today.   Price net of commissions was at $37.75.  Conceptually adjusting for the premium received above this lot was in essence acquired at $36.38.   Hopefully the stock will hold the chart support in the low $37 and bounce back going into earnings.   Also, acquiring this lot of stock sets up the portfolio to consider tax loss selling of the first lot of shares bought earlier this year at some point in the future.

Cisco - Covered Calls - Possible Exit

Per the last post on Cisco, CCI has decide to exit the Cisco trade (Long Jan $10 calls) and have been looking for an opportunity to do that.

With Cisco rising after their analyst day (closed at $16.67), CCI sold $Oct $16 calls for about $1.00 against the long option position.  If Cisco continues to rise, this lot will be sold for around $17 which is consistent with the objective of exiting this trade to redeploy capital.   If Cisco pauses and/or pulls back there should be an opportunity to some harvest premium from this covered call.

MMM - Bought back Sept puts

With MMM trading just above the strike price of the lot of Sept. $77.50 puts sold a few weeks ago, CCI closed out this position this morning for a very modest .3% gain.

At the time of this transaction, it was basically 50/50 as to how this option will end-up on Friday.  While there was still 1+% of premium value in this option, there did not see to be much of a  margin of safety if this stock or the market fell into the weekend.  Additionally, the Sept $82.50 covered call on the other side of this trade is highly probable to expire worthless on Friday.  So overall the portfolio will have only scratched out a small .3% gain on this "put side" of the trade and 2% with the "covered call side" of the trade.  Winning the full amounts on both sides of the trade would be ideal, but grinding out this type of small gain is consistent with the objective of this conservative position, and now there is less risk on the table.

More generally, fundamentally nothing really seems to have changed about the company.  However, my view of the MMM chart shows a the pennant/wedge signaling some sort of break up or down is coming.  With solid support around $77, my guess would be for it break up.  Hence we will continue to hold the one lot of long shares currently in the portfolio and see what move Mr. Market gives us next.