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.