Thursday, April 28, 2011
Full disclosure, I only glanced at their earnings release. I was was pleased to see no big negative surprises in the report, (From my experience, they have had some fairly large misses/swings in results in the past). I'm assuming the 1% drop is mostly just market noise.
The main reason calls were sold two weeks ago was to provide some protection against a big downside miss. Since there was no miss, I decided to take the opportunity of the stock trading down to take off this covered call position. The specific trade made a modest, non-material (.4%) gain.
The main point of the option position was to provide some down side protection in the event of an earnings catastrophe. Since the event catalyst has passed without major problems, I no longer wanted this option position to act as a cap on any further potential gains.
Long two lots...Still bullish. Stay tuned.
Tuesday, April 26, 2011
* * *
As previously documented, the portfolio is long several lots of Intel at an average price of $20. The stock has lingered there for a long time. Since earning the stock has gone mostly straight up 10% and today hit $22.50. While still bullish on the stock, it seems to have come real far, real fast. I sold one lot of June $22 calls against the position for $.84
1). Stock down - My main thought/plan/hope is the stock will retrace some of its big recent gains back towards chart support around $22. In this case, an opportunity to harvest some option gains to increase yield will present themselves.
2). Stock Up - The stock continuing to go hyperbolic is actually my "Worse Case" as one lot of a stock which I have a bullish long term view will be called away. Of course, that will be at a reasonable profit, and the other owned lots will have a better gain. As they say, "no one ever lost money taking profits". Also, it would seem very possible an opportunity to replace the lot will present itself at some point.
Monday, April 25, 2011
Last week May $72.50 puts we sold for $2.21. Today, I covered those option for $.96 including commissions. That is a $1.25 gain on risk capital or 1.7% gain in a week.
The option had achieved about 60% of the best case return. The remaining potential return did not seem worth the risk of holding into earnings on Wednesday.
Still bullish and holding two lots. However, it seems prudent to look for more insights from Wednesday's earning call before determining next steps.
Friday, April 22, 2011
FYI, the stock has traded between $51 to $61 over the last 6 weeks without any material change in the fortunes of the company.
Who really knows what has caused this latest bounce back. My guess is it is mostly due to either the Goldman downgrade of the sector causing an overreaction and/or that the dollar weakening is lifting all commodity stocks.
Setting the noise aside, I went back to review my original thesis for buying in this stock in Feb. That thesis was that ANR got overly punished by the market when it bid for Massey and could trade back over $60 before too long. I still think that is true. Further, with the shareholder votes on that deal scheduled for June 1, I'm thinking management will want to try to minimize any surprises or noise before then (including during the May 3 earnings announcement). Hopefully, that somewhat minimizes the short-term, company specific, downside risks.
The potential for less downside risk and the high implied volatility on the options, presented an opportunity to pursue a covered call strategy .....once again. Late Thursday, I sold one lot of June $60 covered calls for $1.91 (3+%) net of commissions. Implied volatility was about 39 at the time.
At the macro level that means
Downside - The current and past covered call premiums collected means the BEP (break even point) for this lot is down to about $51.40 or 10% downside protection from here.
Upside - If the stock ends up over the $60 strike (about 5% up from here) by June expiration, and profits from options and capital gains will be capped at around 15% in total
Or Sideways - things will continue to be volatile and more opportunities to harvest some option returns will present themselves.
Thursday, April 21, 2011
Like many investors, the vast majority of my early experience had been on the long side of investing. In the past, I like many people, would have my eyes glaze over, my mind go blank, and my hands start to sweat in fear if anyone even mentioned the word “short”. Over the past several years, I have spent a lot of time studying how the big boys in the financial service industry make their trading profits. I've come to believe a lot of their success comes from how they manage their risks via risk using short strategies. I hope CCI can help readers develop a similar perspective.
Over the past few years, I have continually expanded the use of the short game in my portfolio. It did help reduce, but certainly did not eliminate, my losses in the last trough. Through this experience, I have developed a few theories and opinions (shocking I know) about how to implement the short game in investing. From my perspective, there are several aspects to a good short game, but all of them are related to reducing the risk of the overall portfolio. It starts with relatively traditional risk management techniques such as how often and aggressively a portfolio is re-balanced, the use of options, etc. It extends to more aggressive approaches of shorting stocks, pairs trading, and even the use of the controversial double/triple short etfs.
Over time, my plans are to have CCI have a specific section and focus on The Short Game. One component The Short Game is to have a small portfolio of short stock positions. The common sense reason for this simplistic short portfolio is that out of the thousands of stocks and etfs in the market it seems like there has to be at least a few that are overvalued.
* * * * *
The first edition of The Short Game focuses on a short position in Saleforce.com. (CRM)
This high flying stock is one of the most shorted in the market. That means many people have already shorted and lost. The article below discusses why I think now is the time to short the stock.
The portfolio is short one lot of the stock at $140.38, and the trade will be tracked on this site.
Additionally, it is important to point out that this trade really does not stand alone. Readers of this blog know that the portfolio is overweight stocks like Intel, IBM, and Oracle. There are lots of reasons I like those stocks, but one of them is their role in cloud computing, They are the cloud. Conversely, while CRM is often referred to as a cloud computing play, it is really just an application floating in the cloud. In my perfect world, Intel, IBM and Oracle will be up while CRM will be down (golfers...pay careful attention......short game...IBM up, CRM down...get it...lol). However, it is possible that may not be the case. For example a market correction, tech sector stall, or bursting of the cloud bubble (get it...cloud burst...lol) could bring all these stock down. In that case, it is my belief that CRM will fall more than the mainline players. Of course, the worse case scenario is CRM decides to go parabolic, while the mainline players fall. That would be bad, but I think/hope the chances of that are small.
In summary, now is the time to short CRM in general, but it also should be viewed as a “pairs trade” with the other pieces of the portfolio.
Monday, April 18, 2011
More seriously, it feels good to have the financial press get behind one of your picks, but the real question is "would this publicity create an opportunity to manage/improve this position ". I woke up this morning thinking the stock would be up a few percent on the usual "Barron's bounce". (yes, its true, the stock featured in a Barron's cover story almost always bounces up on that Monday). I thought perhaps a big bounce might provide an opportunity to establish covered call for some income generation and hedging going into earnings.
Surprisingly the stock went down this morning along with the market (something about the always "thorough, timely, and independent" credit rating agencies coming to the realization that the US government is not exactly fiscally prudent or well run.....shocking news to us all...I'm sure.....but I digress). With the stock down, I changed tactics and decided it was time to take a flier towards acquiring the third lot of the position described in the original article.
Sold one lot worth's of the May $72.50 puts for $2.21. (3%) Possible outcomes
1. The stock tanks and/or stays just below $72.50 over the next month. This would very likely happen if earning disappoint next week and/or the general market turns south. In this case, the stock will be put to the portfolio and this third lot will be added around at a net cost of $70.20. For all the reasons in the articles above I think that is a good entry price. Time will tell, but given my conviction about the stock this scenario does not seem overly risky for a worse case outcome.
2. The stock will trade up slightly or more over the next month. In this case we will cover this option for a 2-3% gain while enjoying the profits gained by the already owned two lots.
FYI, the stock did end up .26% to $72.79 on the day... in a down market.
The $52.5o April put, sold last Tuesday, expired Friday meaning the portfolio used the volatility to successful scalp a "huge" .6% return in three days on this lot.
Friday, April 15, 2011
With gold bumping along near its all time high, and time decay starting to more rapidly erode the value of the portfolio's option position.... the original position was closed. Further, the initial trade concept was rolled out and up to the September time frame. Details below:
Specifics of the trade can be tracked at the spreadsheet below. In summary
- The GLD June $137 call was closed at $7.71. The first full cycle of this position generated a 7.3% return in about 2 1/2 months.
- Sold two Sept $56 GDX puts and bought 1 GLD $148 call for a net credit of $1.20.
In Wall Street complex terminology, this trade would be called some sort of a risk reversal, pairs trade. The more common sense explanation behind this trade can be found in the original post at
The new trade follows the same logic in that article just rolled out to September.
* * * * * *
It is also worthwhile to document specific benchmark objectives for this position. Since I view gold as largely an insurance policy/hedge against instability it does not make sense to compare this to a basic benchmark like the S&P 500. Instead, I would define the performance objectives as follows:
- The primary objective of this trade is to make large gains if some power hungry dictator, wild eyed terrorist, bumbling politician, or greedy banker create some black swan event that adversely impacts financial markets. In these cases, I assume gold would increase substantially, and the goal of this trade is to meet or beat the performance of gold. So somewhat arbitrarily if gold increase by more than 10% the goal of this trade is to outperform gold. Let's hope this doesn't happen. If it does there will probably mean bad news in a lot of other ways.
- If gold is in some sort of bubble and it pops during the time frame of this trade, the intent of the options spread is to loose less money than holding gold. So again somewhat arbitrarily if gold decrease by 10% or more during this trade the objective is to loose less than a position in gold would have lost.
- If gold trades sideways, arbitrarily less than plus or minus10%, the goal is to manage the options trades to break even. Obviously that would be easier if gold is up a few percent than down a few percent. However, the key point is that unlike other potential option plays to capture an upside in gold, the objective of this structure is to be zero cost if nothing significant happens.
Thursday, April 14, 2011
In summary, this article highlights an academic study that shows sentiment on Seeking Alpha is a better predictor of stock market performance than traditional outlets. I've also seen some recent press summarizing analysis of how sentiment on Twitter is a good market indicator.
Obviously, Seeking Alpha (and CCI) are promoting this material because it supports our point of view that the mass intelligence of the investor class could actually be more objective and provide better results than traditional sources of investment advice. After all "crowdsourcing" of information for product reviews, recommendations for service providers, and reviews of movies/restaurants/travel are increasingly the source of information used by many. Shouldn't this main street level information be just as valuable for investments?
This article can/should be considered as "just" an academic study. Of course efficient market theory is also "just" academic theory. "Coincidentally" it happens to support Wall Street's objectives .....wonder why it gets more press? ...hmmm
Lastly, the research behind this article was done by individuals at the Krannert School of Management at Purdue ....where my daughter matriculates.......so "of course" it must be "right"
Wednesday, April 13, 2011
Cisco stock pulled back to $17.25 today. So....it is deja vu all over again.
Bought the Jan $10 call and sold the May $18 call against it for net cost of $7.01. That essentially makes the portfolio long one lot at essentially $17.01. Still thinking that is a good entry price for the stock. Time will tell.
Tuesday, April 12, 2011
It appears the main reason for the fall is a Goldman report that said it was time to get out of the energy/commodity trade. I am really " deeply concerned" that Goldman and their associates might have got caught in this down draft cause by their "independent, objective, and confidential" change in sentiment.......but......somehow I expect they were "lucky" enough to have hedged their way out of this unforeseen development...but enough about wall street.
Fortunately, common sense dictated that the highly volatile nature of ANR suggested a hedge be in place. The portfolio had previously sold a covered call. The rapid drop in price back to around $54 meant it was time to remove the hedge. Specifically, the Jan 12 $57.5o call was covered at $6.48 net of commissions. That specific option trade returned $1.57 or just less than 3% of invested capital in a little over 3 weeks. As importantly, it successfully provided some protection for this lot of stock. At this point, lot one of ANR consists simply of the stock held at about cost, and we will let that ride.
At the same time as the call was covered, we decided to totally reverse the sentiment of the trade position with the belief that the market is overreacting. One lot of April $52.50 puts were sold for $.32. Only three days until expiration.
Scenario 1 - The stock stops its slide before/near the chart support at $52.50 (another 3% down) and the portfolio makes .6% in 3 days on this lot (well over 30% annualized). To me this seems more likely to occur than the roughly 20% odds of the stock going below that level that was mathematically priced into the option at the time of sale and hence a good risk to take.
Scenario 2 - The potential for 30% annualized rerun does not come without risk. In this case the risk is the stock/sector continues to fall throughout the week and the portfolio is forced to buy a second lot of the stock at about $52.20. As discussed in previous posts, I feel that is an attractive price and hence not too risky. If the stock is put to me, I would likely write a deep in the money cover call against that stock for next month to try to unwind that lot for a profit.
Monday, April 11, 2011
With earnings season starting, (FYI - BG earnings 4/28) it seemed appropriate to put some hedge on this trade. A few scenario's
Up and away - Hopefully BG breaks out past $75 in the next few weeks. In that case this lot would get called away at essentially $76.7o. This would cap the gain on this lot at around 12%, and the other lot in the portfolio will have a good gain and momentum.
Down - Of course, my bullish opinion of this stock could be wrong (hard to believe I know...lol). One concern is that the current chart could be viewed as starting to show a "double-top" just under $75. If the stock does fall, the premium from this option would hedge the downside by about 2% on the lot or 1% on the full trade. That hedge seems appropriate to me, and was the key catalyst for selling these calls.
Sideways - It is possible the next few weeks could be uneventful, and BG keeps trading in the low $70s. In this case, a decrease in volatility (IV around 27 at the time of the trade) that usually comes after the earnings catalyst passes, and time decay would likely allow these calls to be covered for a 1+% profit.
Thursday, April 7, 2011
Today's "efficient" market lesson....if CEO writes email then stock goes up 5 %...lol
* * *
I was expecting the earning announcement to be the catalyst to cause a bump in the stock price. However, it looks like Chamber's email has become that catalyst. I still expect the earning's announcement to be constructive. However, it seems like this email has somehow raised the short-term expectations. These higher expectations increase the downsize risk to the stock price, and the higher stock price lowers the upside reward
So.... I took the trade described in the original article off today. It made a 5.6% gain, but since it was just an initial, leveraged position not very much in absolute terms.
I suspect this rapid bump in price is temporary at it will pull back towards $17. Tempted to try a quick short trade but the fundamentals are too strong. I'll sit tight for now, but will be looking for the opportunity to put a trade on again at a lower level.
Wednesday, April 6, 2011
So to summarize the status of Xerox lot 3
- the commitment to buy another lot at $9 is now gone.
- the lot is now essentially long a May $11 - $12 call spread. At this moment that spread is worth about $.18 cents (or a 2% gain of the original $9 risk amount). We will let that amount ride with the belief that after earnings the stock will continue to rally and that will generate more pure profit. Maximum gain of $1 (or 11%) if the stock goes to $12 by expiration.
PS: Portfolio is still also long two lots of Xerox.
The stock now seems more fairly valued. The portfolio no longer holds any Unitrin.
Both lots of this trade performed well as the the total trade gained approximately 30% and easily outperformed the S&P over the holding period
Tuesday, April 5, 2011
The following article contains reasons why the risk/reward for Cisco may have finally become favorable, and describes an options strategy to initiate a trading position in the stock.
Coincidentally, today's news contains info of an internal email from CEO John Chambers to Cisco employees. The above article was written prior to the release of that email. Chamber's email seems to emphasize the need to restore credibility with investors, sharpen the focus of the business, and to expect changes throughout the year. That email can be interpreted in many ways, but to me it just reinforces that this is a good time to take a position for a trade in Cisco.
Sunday, April 3, 2011
Detailed information on the objective, approach, and returns of this fund can be found at
In summary, the objectives of this fund are
- absolute quarterly returns of 2+% in quarters when the stock market is up and 0% when the stock market is down.
- to be less volatile than the stock market.
This objective is to be accomplished via trading in and out of 15-20 utility stocks around their dividend x-date to capture about a 1% return from the dividend and relying on market ineffeciency to be able to loose less than that amount via capital gains.
For the seventh quarter in a row this fund achieved its objective.
- The fund returned 2.6% in total this quarter
- The return was comprised of 5.9% in dividends and a loss of 3.3% in capital gains
- 17 trades were made. 13 or 76.5% of them were winning trades
- daily standard deviation of the fund was .44, which was about 25% less than the XLU etf.
- Averaged 3.5% in returns
- Never had a loosing quarter!
- Had 94 of 127 winning trades for a 74% win rate.
- Low daily volatility. A SD of .61% which is 33% less volatile than the XLU etf.
- Low quarterly volatility. A SD of 4.21% which is 47% less volatile than the S&P.
In summary this portfolio is a mix of Canadian, Swiss, Brazil and Korean ETFS whose objective is to be a better, more global diversification alternative to the S&P 500 without the risk of very popular emerging market funds such as VWO.
In the first quarter of operation the portfolio's performance generally met its objectives. Specifically GSPY
- Returned 3.6% which was better than the return for VWO (1.6%). The fund did under perform the S&P 500s return of 5.9%
- Had volatility as measured by monthly standard deviation of 2.4 % which was significantly less than VWO's monthly standard deviation of 4.5%, but more than the S&P 500's 1.7%.
- Provided excellent diversification with a -.50 correlation with the S&P 500 while having a .94 correlation with VWO.
In summary the objective of this portfolio is to outperform an emerging market ETF such as VWO by holding several ETFs that focus on the emerging middle class while having less exposure to China.
These positions were just established so performance data is not significant, but performance for the month of March was
- eem2 - 7.4%
- vwo - 5.5%
- fxi - 7.9%