Wednesday, March 23, 2011

Gold Hits New High - Playing with the house's money now!

Gold hit a record high Thursday. Given that the last month has included: the US government operating from week to week, riots, dictators overthrown, war, earthquakes, tsunamis, and nuclear meltdowns it is kind of surprising gold has not moved more.

Still, this trade established six weeks ago is progressing well. As GDX neared $60 and the short options went under $2 we covered the GDX short put portion of the position. That means
1). Any risk related to a drop below $56 for GDX and being forced to buy it has been removed. No risk capital is now committed to this trade.
2). $800 per lot in cash was originally generating by putting on this short position. $400 was used at the time of the initial trade to buy GLD Jun $137 calls, and the other $400 was used to buy back the position today. i.e. No cash out of pocket has been spent so worse case...break even.
3). As of Friday morning the Jun $137 GLD call was worth $6.40. So the total trade could be cashed in for nearly a 6% gain now. However, given that it appears as if gold could be breaking out, international tensions remain high, and we are playing with the house's money we will leave this trade run for awhile.

ANR on fire...covered option

ANR continued its powerful upward move today. This coal stock is on fire!
(yes, that was a meager attempt at a pun).

Who knows how long this move can go on, but it was time to practice some prudent risk management today and cover the $50 short puts sold last week. Covered at $.25. Trading at $58, there was quite a large margin of safety to hold on to this option until expiration, but with only .5% return left over the next month I just covered the position to free up capital for other potential better uses. This lot of ANR returned 2.9% in just over a week! Of course that pales in comparison to the 10+% the stock has moved in the same time, but this return came with downside risk protection. That protection would have been helpful on the chance the call on this stock was wrong.

The other lot of the trade remains in play. At current prices it would seem like the 19% return somewhat "locked in" via the covered call play will come to pass, but there is a lot of time left in that trade. The plan is just to let this half of the trade run for awhile, but if the coal momentum trade reverses and the stock pulls back perhaps an opportunity to reinvest some of this gain in an upside option trade will present itself.

Xerox options play for earnings

As Xerox dipped back towards $10 today, I used options to control a third lot of Xerox shares. Specifically sold May $9 puts and bought May $11 calls for less than a penny per share out of pocket.

Earnings are scheduled for the April 18 so the May options will be impacted by this catalyst. I continue to believe (ok...hope) that they will confirm over $1 in earning per share for the year and this continues to be a value play, but here are the likely scenarios.

1). Worse case the stock looses 10% from here (below $9) over the next 2 months and falls below $9 in which case the portfolio will is committed to own a third lot. Per Yahoo finance book value is $8.59 so a $9 entry price seems like a prudent risk.

2). The stock stalls between $9 and $10 for two months in which case these options will expire with no impact on the portfolio.

3). The stock runs up. In theory if it spikes to its 52 week high of $12 that would be a $1 gain on the $9 in risk capital or 11% gain in 2 months. However, if earnings announcements are positive or market conditions improve there would be an opportunity to manage this position to reduce the risk by cover the short option and perhaps rolling the long option to keep the positive leverage in the trade.

Monday, March 21, 2011

Second Lot of Xerox position aquired

Options assigned this weekend so a second lot of Xerox acquired at a net cost of $10.56.

Still looking for XRX to achieve at least $1 in earnings and confirm this in mid April earnings announcement. At $1 in earnings just a modest multiple expansion could lead to a nice gain.

Will be looking to take a more leveraged position on a third lot of Xerox via an options play if the stock falls back near $10 prior to earnings.

Sunday, March 20, 2011

ANR - Initiated Covered Call

On Friday, ANR seemed to settle in (for now) around the $55 level.
Sold the January 2012 $57.50 calls against the lot owned for just over $8.

In its purist form, this covered call caps the profits on the first lot to 19% ($55 purchase price,plus $2.50 cap gain, plus $8 option gain) for the year, while lowering the break even point on the downside to $47. This also provides some hedge against the short put position for the other lot. So overall this lowers the risk on the position and if need be can stand on its own as a logical trade.

However, the real intent of the trade was to raise capital some of which can hopefully be used to acquire some shorter-term calls on the stock upon any pullback in price or volatility. If that can be done, the resulting portfolio will have a more leveraged, lower risk play on this volatile stock that I still think can be dragged up by an increase in the coal market.

Stay tuned.

Wednesday, March 16, 2011

Rolled ANR options forward

Rolled the $50 ANR put sold yesterday from March out to April first thing this morning on continued strength in ANR.

Combined that means we have collected $1.75 in cash per share. Of course the portfolio still has a commitment to buy the shares at $50.

Scenario 1: The stock stays above $50 over the next month (8% downside from here)and the portfolio gains 3.5%

Scenario 2: The stock falls below $50 and we are forced to buy a second lot at an effective price of $48.25.

Scenario 3: An opportunity will present itself in the next 5 weeks on a pull back where we can take some of these profits and possible re-invest them in an upside call to try to generate some leveraged, asymmetrical returns on the possibility of an ongoing strong coal market.

Tuesday, March 15, 2011

Today's "Efficient" Market

Today's market once again illustrated it "efficiency" and "lack of emotion". (yes, I'm being sarcastic.) This seemed to provide what seemed like a few opportunities.

* * *

The portfolio has been long one lot of ANR. The stock was purchased a short time ago at $55 based on two factors: I assumed the republican victories in Washington last November would continue to make coal a key fuel for the US for a long time despite rhetoric from the administration and it seemed that the perhaps the stock was overly punished by it purchase of Massey. The current nuclear noise seems like it will only re-enforce the importance of coal and the emotion around it.

With today's low opening and ANR option volatility over 50%, I sold a $50 March puts for $.51. That provides a 5% cushion to make 1% in 4 days. Worse case, the stock goes below $50 and the portfolio will has a second lot at a cost of $49.50.

By the afternoon, the option was down to $.28, so a good start to the 1% return, but volatility in this name seems high so will be looking for ways to try to continue to capitalize on this volatility. Perhaps rolling this put forward and/or sell calls against position in the near future.

* * *

Also in today's "efficient" market, GE opened way down...allegedly on concerns about their liability over the reactors they sold to Japan utilities 40 years ago. Common sense seemed to indicate that liability will not easily (if ever) flow back to the manufacturer vs the operator, etc. If I were cynical, I might even think that some big player might want to accumulate GE stock for their wind/infrastructure business and was broadcasting a concern about the smaller nuclear business to be able to buy a little cheaper.....What a surprise...GE bounced back about 4% from its open. I was only able to capture a little over 1% of the bounce....but 1% return in a few hours...never sucks.

Monday, March 14, 2011

If China sneezes, don't let your emerging market portfolio catch a cold.

There is an old saying in the world of global investing: "When the U.S. sneezes, the world catches a cold." Today, the U.S. is still recovering from a cold and U.S. consumer does not appear to be the engine of growth they once were. On the other hand, the huge population in China that is moving towards the middle class is a key driver of global demand. Hence, it seems that "When China sneezes, the world catches a cold” may be the more relevant saying today.

With today's news cycle focuses on issues in the middle east, news about China seems to be pushed to the background. However, it is possible that China may be facing some headwinds that would adversely impact an investor's portfolio and emerging market positions.

Read more about an approach to maintain exposure to the trend of an emerging middle class across the world while minimizing exposure to China at

This approach may be just what the doctor ordered to keep your investments in emerging markets from catching a cold if China sneezes.

Friday, March 11, 2011

Unitrin - Day Trade

Absolutely terrifying and horrible news from Japan today. Obviously, we all hope and pray for the least possible human impacts as is possible.

However, these type of unfortunate situations always seem to create market dislocations and trading opportunities. In looking for that type of opportunity this morning, I fell back to a day trade on Unitrin. The stock was down this morning. I could not find any stock specific news, and assumed it was down in sympathy with P&C insurers who might be adversely impacted by the disaster. From past research, I did not recall that Unitrin had any Japanese exposure and not even very much west coast US exposure.

So I was able to re-invest the lot sold earlier in the week at $29.23 and sell later in the day at $29.66 (prices net of commissions). That's a 1.47% gain in 4 hours...just another example of inefficient markets.

Wednesday, March 9, 2011

Acquired second lot of Bunge

As discussed in previous posts, I was looking for a pull back in Bunge to acquire a second lot. Got that chance today and acquired the second lot at $70.31.

That makes the average price for the whole position to be around $69. That also happens to be near the 50 dma. So if the price falls to this level, I will have to consider calling off this trade at no gain.

However, technically the stock bounced off of $70 nicely today. It is still has forward pe around 10, but the confusing balance sheet shows it trading under book value but with lots of debt. Not surprisingly the analyst estimates remain all over the map, and the implied volatility on BG options remain high. So if the stock advances short term, I will likely try to capitalize on this uncertainty an sell a upside call to hedge the trade.

Tuesday, March 8, 2011

Sold Half of the Unitrin Position

A long standing order to sell one lot (half position) of Unitrin executed today as Unitrin went over $30 . This lot returned a very nice 24% since being acquired on 10/19/10. (22.3% cap gain plus another 1.8% dividend). In comparison the S&P was up about 13% during that same period.

Unitrin still has attractive fundamentals trading at a nice discount to book value ($34), a p/e around 11 and a 3.2% dividend yield. I was tempted to let this run ...but as they say...."pigs get slaughtered". So I took these profits, and will leave the other lot in place for awhile to see if momentum can run it up to at least to the 52 week high of $31 and maybe up near book value of $34.

Monday, March 7, 2011

Closed Intel Covered Call Position

Intel dropped this morning in a down market. I guess mostly because of some analyst blabber about the semi industry, but no real Intel specific news.

On the drop, I brought back the May $23 calls sold on 2/18. This covered call trade yielded about a 1 % gain in 2 weeks for this lot. This was Scenario 3 from the post describing the trade.

Hopefully there will be a chance to reestablish this covered call position on an Intel rebound.