Shorting Financials.....Again

Late last week, with the news of a meeting between the leaders of Germany, France, and Greece to discuss EU finance, CCI  bought a lot of the double short financials (SKF).  It seems when political based meetings are scheduled, market expectations are rarely met and the market falls.  CCI figured a meeting of three countries politicians represented a great likelihood of disappointment.  Surpise, surprise...CCI was wrong. That meeting and the following financial news from Europe was well received and this position took a big hit. 

In fact, CCI was starting to draft a post about our first loss using double shorts, but then realized that both President Obama's speech on how to pay for the jobs bill and Ben Bernakes potential "twist" announcement were scheduled for early this week. (if you don't know what "the twist" is...don't ask...lol).  Hence, I thought one (or both) of these events was likely to disappoint the market and drop financial stocks so I held onto the short position.   Surprise, surprise ....disappointment has generally reigned on both these events and Moodys piled on with some bank downgrades.   SKF went wild at the end of the day (up 9.5%)

CCI closed the position for "just" a net gain of 1.25% today.  Frankly, this is not a great win, as the position was held too long for this investment vehicle, and hence was quite risky.  But.... at the end of the day a win, is a win, is a win. 

11-0-5 hedging via double shorts this year.

HPQ - the noise continues

Today's HP "rumor" was that they might change CEOs......again.   Who knows if this "rumor" is just another leak from the apparently dysfunctional HP board, someone creating market volatility in the stock price or  something else.  In any event,  the stock jumped about 13% to $25 on the rumor and option volatility also spiked. CCI used the opportunity to close the Oct $26 calls in the portfolio.  Readers will remember that this was one leg of a $26-$28, 1 by 2, call spread.   That combined position was entered at essentially no cost and exited with a modest gain that could be touted as something like a 500% return.  However, more practically,  the profits on this trade really just reduce the loss in HPQ shares by about 1%.   Not that glamorous. Conversely, longer term investors just sitting on the shares for the last few weeks have done nothing but loose a few more percent.   Every little bit helps when trying to minimize losses.

Bigger picture, CCI still thinks there will be lots more noise to come around HPQ, and it  will be a long time before HPQ gets back towards $30.  I continue to look for ways to exit the position in the high $20s.  The stock pulled back into the close, but if it resumes its rally on this rumor, CCI will be looking to either re-establish option positions as a mechanism to exit the position. Possible trades could be the same $26 - $28 call spread and/or just selling $27 calls

Trying to "Thread the Needle" on ANR again.

Last Friday, two previously discussed option positions on Alpha Natural Resources ANR ($26 short puts and $34 covered calls) expired worthless.  That means CCI successfully "threaded the needle" between these two strike prices.  OK... so maybe "threading the needle" is a bit of an exaggeration given those positions represented a $8 (approx. 26%)  wide gap.  However,  high volatility on this stock's options meant that those two mutually exclusive trades both were positive, yielded 4% and 3% respectively. 

Of course, CCI still sits on lot of shares of the stock, with a  cost basis just under $40, that is deep underwater.   Hopefully, there is still  some base under the stock.  Additionally,  implied volatility/price of options is still quite high.  Hence CCI is  thinking of trying to "thread the needle" again with two similar option plays in October.  As a first step in that process,  one lots worth of Oct $26 puts were sold late Monday for $1.35 (5.2% premium).  Rationale for this trade (and another similar option trade on BAC) is contained at this article  at seeking alpha.   If ANR were to rebound, CCI would look to reestablish a covered call position against the already owned lot of shares.

Teva Time - Take Three

This weekend Teva $37.50 puts expired and the portfolio pocketed $1.37/share (3.6%).

The portfolio is still long and wrong two lots of Teva.   The initial article describing the rational for investment in Teva  here  focused on their long term plan to earn $7+/share by 2015.   I'm not aware of any updates from Teva to that plan, but it is possible some recent set backs in their pipeline could make that goal more difficult to achieve.  Conversely, that long term plan called for earnings of about $5 this year and that estimate is still supported by the analyst community.  Further I suspect Teva management will not give up on this plan easily or without a fight, and even earnings of $6/share would make the current price attractive.   With no reason not to believe the longer term plan will generate more earnings and the attractive short term valuations (i.e. forward pe 6.6) CCI continued to look toadd a  third lot of Teva to the portfolio. 

With the options play mentioned above not resulting in the stock being acquired, CCI simply bought a third lot of shares today.   Price net of commissions was at $37.75.  Conceptually adjusting for the premium received above this lot was in essence acquired at $36.38.   Hopefully the stock will hold the chart support in the low $37 and bounce back going into earnings.   Also, acquiring this lot of stock sets up the portfolio to consider tax loss selling of the first lot of shares bought earlier this year at some point in the future.

Cisco - Covered Calls - Possible Exit

Per the last post on Cisco, CCI has decide to exit the Cisco trade (Long Jan $10 calls) and have been looking for an opportunity to do that.

With Cisco rising after their analyst day (closed at $16.67), CCI sold $Oct $16 calls for about $1.00 against the long option position.  If Cisco continues to rise, this lot will be sold for around $17 which is consistent with the objective of exiting this trade to redeploy capital.   If Cisco pauses and/or pulls back there should be an opportunity to some harvest premium from this covered call.

MMM - Bought back Sept puts

With MMM trading just above the strike price of the lot of Sept. $77.50 puts sold a few weeks ago, CCI closed out this position this morning for a very modest .3% gain.

At the time of this transaction, it was basically 50/50 as to how this option will end-up on Friday.  While there was still 1+% of premium value in this option, there did not see to be much of a  margin of safety if this stock or the market fell into the weekend.  Additionally, the Sept $82.50 covered call on the other side of this trade is highly probable to expire worthless on Friday.  So overall the portfolio will have only scratched out a small .3% gain on this "put side" of the trade and 2% with the "covered call side" of the trade.  Winning the full amounts on both sides of the trade would be ideal, but grinding out this type of small gain is consistent with the objective of this conservative position, and now there is less risk on the table.

More generally, fundamentally nothing really seems to have changed about the company.  However, my view of the MMM chart shows a the pennant/wedge signaling some sort of break up or down is coming.  With solid support around $77, my guess would be for it break up.  Hence we will continue to hold the one lot of long shares currently in the portfolio and see what move Mr. Market gives us next.  

"Hedging" via Financial Sector Today

With more discussion about the European and bank situation this weekend, CCI felt the financial stocks might be really pressured today.  Hence we tried "playing" the double short financial (SKF) today (wait...I mean employing sophisticated, short term, leveraged, hedging tactics).   This double short had nearly a 6 % trading range today.....what new!

Took a position after the morning gap somewhat backfilled, and then saw it go down, up, down, up, down, etc. After awhile,  got stopped-out at break-even, before the market rebounded aggressively at the close.

In summary,  had some protection if the market had tanked today, and was very fortunate to get out even.
10-0-5 for the year on the double shorts. 

Bought back Hewlett Packard Calls

HPQ traded under $23 this morning and testing its prior low, CCI bought back the $28 covered calls.
Rational for this move is documented at the comments at the original article about HPQ at Seeking Alpha.

What-can-you-do-with-hewlett-packard-shares :trade-the-range

Downgrade Portfolio Status

Readers will recall that CCI established nine, relatively similar sized positions as the market was falling in conjunction with the S&P downgrade of the US. These trades were an attempt to “buy when others were fearful”. However, to be conservative, these positions were mostly done with options to provide some level of hedging and a different risk/reward than just buying stocks at that time.

The specifics of those trades and update status can be found at this Google doc

Highlights include:

• Let's start with the worst position which is dragging overall performance down. Bank of New York (BK) is down 12% as financial stocks have continued to perform poorly. This week the current CEO stepped down “due to differences in approach in managing the company”. Barron's this weekend re-iterated their buy on the stock, with target prices over $30. Of course they are more underwater on the trade than CCI. Never the less, this change can be a catalyst for the longer term.   CCI is sticking this one for awhile longer, but may have to cut losses at some point in time.

• Four of the positions have options with expiration dates in September (9 trading days away). At the present time, Ford and Waste Management stocks are trading up slightly from purchase, but not high enough to trigger the covered calls on them. So if the options decay further this week, CCI will likely harvest those premium profits and perhaps re-establish other calls. (As a side note, CCI also collected the dividend on WM this week for a 1+% gain on the lot) Similar to the covered calls, the naked put in Corning is well in the money and may be harvested this week. Lastly, Bank of America is trading back to $7.25 after the Buffet bounce. Anything could happen to this stock in the next two weeks and even more so with the $7 put CCI sold. Stay tuned.

• Three end of year option plays around ETFs (xlb, xlu, xlv) are all in the money by a few percent at this point. Current thinking is
• XLB (materials)– look to harvest gains if/when volatility creates a market bounce
• XLU (utilities) - this very conservative covered call position will pay its 1+% dividend in late September. Sighting tight at least until then.
• XLV (health care) – The position is up by 3% of its maximum 6% gain, or “only” 3% possible gain left in this trade this year. If an opportunity to harvest a little more gain presents itself, it maybe time to redeploy elsewhere.

• Aug EWJ (Japan) $9 put – closed for a profit of .9% in a little more than a week.

MMM - Adding a Second Lot?

MMM fell back below $80 in the end of week slump.
CCI is still thinking this blue chip is a "safe" play and a candidate in which  to try to grind out some small profits.  Sold a lot of Sept $77.50 puts for $1.15 after commissions on Friday 

Picked that price level because CCI is  "hoping"  that it will hold above its low of last month of $77.
If that scenario comes to pass, we will pocket a 1.5% gain in 9 trading days, otherwise we own a second lot at under $76.50.   Avid readers of the blog will recall that CCI still has a lot of Sept covered calls at $82.50 which are now nicely in the money. So we have two premiums in-play that represent mutually exclusive events, so one or the other is "right".  Ideally the stock will stay in the range ($77.50 - $82.50), both trades are "right"  and we can pocket both premiums and still own one lot of stock to make a similar play again.

(Wait...I just realized.....hope is not a strategy.....so I meant to say...with this weeks price drop not confirmed by high-volume,  CCI sees MMM forming a nice reverse head-and-shoulders pattern with good support around $77....that's much better....lol)