Wednesday, November 30, 2011

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.

Monday, November 28, 2011

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.

Sunday, November 27, 2011

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

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.

Thursday, November 17, 2011

CRM Earnings Tonight

As originally documented here, CCI believes  (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.

Wednesday, November 16, 2011

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.

Tuesday, November 15, 2011

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.

* * *
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.

Monday, November 14, 2011

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.

Thursday, November 10, 2011

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.

Tuesday, November 8, 2011

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.

Monday, November 7, 2011

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.

Tuesday, November 1, 2011

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.