A Speculative Earnings Play on GMCR

CCI does not usually "play" earnings, but decided to take a speculative flyer today....uh....I meant to say made a highly uncorrelated options trade.

Green Mountain Coffee Roasters (GMCR) is a much discussed and often traded provider of specialty coffee and coffee makers.  Earnings were planned for release after the bell today.  Traders had driven the implied volatility on weekly options (expiring in three days) well over 200%.   CCI was tempted to sell some premium at those levels, but instead decided to sell premium in the Dec options.  The implied volatility in these options was still significant (around 100%), and it seemed that the extra duration might provide a better chance for the stock to settle into a wide range.

With GMCR trading around $29 this afternoon.   CCI sold both the Dec. $20 put and Dec $36 call. This  straddle was sold for a combined credit of just under $1. That is the max return for the trade.  This also  means the trade does not start loosing unless the stock is below $19 or over $37 at expiration.  (about 35% down and 28% up).   Beynd those levels, the position loses dollar for dollar with the stock move. Of course, those are the results if held until expiration.  After the earnings announcement, this high implied volatility also means there is a high probability that the trade will be tested on one boundary or the other.  As the stock gyrates around after earnings,  CCI will be looking for opportunities to either harvest a profit or spread off some of the risk of the trade.  Obviously this is a speculative, risky, and "uncorrelated to anything" trade.   CCI did this trade in very small quantity.  That means the outcome of this trade will not materially move the needle on the overall portfolio.  However, It might represent a good opportunity for readers to monitor how a high implied volatility type of options play might be used as an alternative way to generate income.

* * * Results  ** *

FYI, GMCR reported  earnings after the bell.  The headlines appear to be positive and the stock has moved up near the $36 leveling after hours trading.  Hence, as expected it certainly appears this position will be tested on the top end tomorrow.  We will have to monitor the situation closely and potentially adjust the position.

Cisco Covered Calls Launched... Yet Again

Long time readers will recall that CCI has been selling calls against $10 LEAPs in Cisco (CSCO) for awhile. The last post on these trades (click here) was in September when Oct $19 calls were sold.   Somehow it appears that CCI forgot to post the trade when that position was covered in October (my bad).  Overall that trade netted $.20/contract.  This  resulted in a 2.5% gain in a few weeks based on the leverage from the LEAP position.  Overall 6% in premium has been collected since Sept.

With Cisco rising back to $19 today, CCI sold the Dec $19 calls against the position for a credit of $.30/contract today.  CCI is expecting CSCO to pause/pull back after its recent run up, and would intend for this option premium to be harvested in the short term...yet again.   However, if the stock continues to rise  it might be time to exit both legs of the trade for a very impressive, leveraged profit. 

Stay tuned.

Weekly Sale of EEM Calls

The Index Covered Call Trading Plan  (aka: ICC) is CCI's approach for managing a position of index ETFs and related covered calls.  The most recent trade against this plan is described below.  A reader can find details about the rational and management of the trades at the ICC trading plan tab on CCI's home page.

UNDERLYING ETF: EEM    

DESCRIPTION: iShares Emerging Market Shares  

TRANSACTION TYPE: Covered Calls Against Equity Holding

TRANSACTION DATE: Mon. 11/19/12

Action: Sell to Open

Exp. Date: Nov. 23, 2012 (weekly)

Strike: $41.00

Price: $.28

Keeping Some Portfolio Insurance in Place

CCI has continually been keeping a short put spread on the S&P500 (SPY) in the portfolio as a bit of insurance for a down move.  When last discussed here CCI had rolled the put spread to July.   Through the summer, CCI has been keeping this position in play.  During the market upswing of July, September and October these puts spreads were losers. (i.e. the cost of insurance).  With the expiration of November options last week, the put spread paid out reasonable nicely last month.  The portfolio is still overall down on these trades for the year. This should be expected in a year when the market is up.   CCI continues to hold this type of position in the portfolio to try to buffer any potential downturn.   Specifically, currently the portfolio has established the Dec $138- $131 put spread as a small hedge for any potential down draft in the coming weeks. 

Rolling IWM Covered Calls

CCI recently posted a portfolio trading plan for writing covered calls against an index etf.  CCI cleverly calls this the Index Covered Calls or ICC for short. The trading plan for ICC   describes the rational for these trades and contains many detail on which specific options will be sold and how they will be managed.

This is the second post on the blog describing a executed against this trading plan.   There should be more posts about activity against this trading plan in the future.  These posts will focus on the execution aspects of a trade.  If a reader has greater interest in the rationale for the trade they should read the trading plan.

UNDERLYING ETF: IWM

DESCRIPTION:  iShares Russell 2000 Index

TRANSACTION TYPE: Rolling Covered Calls Against Equity Holding

  Drop in IWM Price Causing the Existing Option Delta to Fall Below 10

TRANSACTION DATE: Thurs 11/15/12

Action: Buy to Close

Date: Dec. 22, 2012 (weekly)

Strike: $83

Price: $0.17 

Action: Sell to Open

Date: Dec. 22, 2012 (weekly)

Strike: $79

Price: $1.03

Net Credit: $0.86

Adding Exposure to Gold

As recently discussed here  CCI has decided to take the overall portfolio's position in gold from what most experts would consider underweight to neutral. Further, long time readers will know that CCI likes to gain portfolio exposure to gold via options.  Specifically, selling puts in the gold miners (GDX) and buying calls in the gold etf (GLD).  The objective of this approach is to gain exposure to any potential spike in gold while reducing the amount of capital consumed.

Along those lines, last week CCI was able to

• Sell to Open - Three March $45 GDX puts for $574.69
• Buy to Open - One March $170 GLD calls for $478.73

Summarizing recent activity the portfolio contains the following positions that were established for zero out of pocket costs.

• Short 3 March $45 GDX puts
• Short 3 January $47 GDX puts

• Long 1 March $170 GLD call
• Long 1 January $175 GLD call
• Long 1 December $165 GLD call

As of this morning GDX was trading around $49,  and GLD was trading around $167.

• In the unlikely event that these entities continue to trade near these levels the portfolio for the next few months will break even 
• If the gold minders fall 5-10% ( i.e. below $47 or $45) the portfolio will start to lose money on the GDX options.
• If gold increases at all from here the portfolio will start to register gains on the gld options.  If that does start to occur, CCI will look to take off the risk related to the GDX options and harvest gains in the GLD options.

EEM Covered Calls

CCI recently posted a portfolio trading plan for writing covered calls against an index etf.  CCI cleverly calls this the Index Covered Calls or ICC for short. The trading plan for ICC   describes the rational for these trades and contains many detail on which specific options will be sold and how they will be managed.  This is the first post on the blog describing a executed against this trading plan.   There should be more posts about activity against this trading plan in the future.  These posts will focus on the execution aspects of a trade.  If a reader has greater interest in the rationale for the trade they should read the trading plan.

UNDERLYING ETF: EEM    

DESCRIPTION: iShares Emerging Market Shares

TRANSACTION TYPE: Covered Calls Against Equity Holding

TRANSACTION DATE: Mon. 11/12/12

Action: Sell to Open

Date: Nov. 17, 2012 (weekly)

Strike: $41.50

Price: $.25

Taking a Ride on Trinity

The portfolio added to its position in Trinity this week. Overall, the position provides the portfolio some exposure to the transportation space. More specific rational for investing in this stock can be found in the article below.

http://seekingalpha.com/article/269542-time-to-take-trinity-for-a-ride

The above article focuses on the "facts and numbers" about the stock. Another key part of investing/trading is the psychological aspects of the investor. Learning to successfully managing the feelings of fear and greed are critical to investing success. With my new found blogging activity, it seemed this would make a good case study in not only in stock analysis but human nature's impact on investing.

So...I decided to augment this analysis with my wild ride with the stock.......(in other words, please indulge me a short catharsis).

• When driving across the midwest the past few summers I saw an increasing amount of windmills. I thought this might be an investment opportunity. I did some research and came across Trinity as a supplier of wind mills.....although they have other larger businesses.
• I did some research and when the stock pulled back from its high around $45, I bought some Trinity stock at $32.14. Of course that was September of 2008. Yes, that is right, immediately before the financial panic. The stock proceeded to sink like a rock, going well below $10 in the spring of 2009. What an idiot!
• It fairly quickly bounced off of those lows, only to be seemingly stuck in the teens. Like many investors, I seemed to be too stunned to act.
• After sitting on this loosing position for 3 quarters, I did evaluate the position to see if it was a good candidate to harvest as a short-term tax loss. (FYI, that is my standard process. If a position has not performed as anticipated after 2-3 quarters, I force myself to try to do a fresh analysis and most likely harvest loses.) In this case, after some analysis, I decided not to use this position for tax loss harvesting and hung on to it. It was trading under book value.
• Holding on was "the right" choice because the stock continued to rebound. In fact, Trinity recently zoomed past the “critical, all important” (not really) break even point in my portfolio. Human nature tugged at me to sell, and breath a sigh of relief. After all it is up about 400% from the bottom!
• Before giving into this urge and selling, I decided to wait for another quarter's earnings results and refresh my research. That research went into the article referenced above. Based on that research, instead of selling I decided to double down as the analysis indicates a good possibility of the stock going back to $45.

Who knows how this will work out.... Hopefully it will be an example of controlling emotions leading to a profit. .....or not.

In any event, I thought augmenting the factual analysis with some psychological perspectives might be worthwhile......or not.