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.
Tuesday, November 1, 2011
Monday, October 31, 2011
Downgrade Portfolio - End of October Status
Overview
Readers will recall that about the time S&P downgraded US debt, CCI put some dry-powder to work on the simple assumption of “buy when others were fearful”. As October comes to an end, it seems like a logical time to report on the status of those trades.The specifics of those trades and update status can be found at this google doc and are described below.
Overall this basket of nine diverse positions is up just over 5%. Of course the S&P500 is up about 11% in that same time frame. So the reader can judge for themselves if the glass is
- half-empty – it would have been much better to just “buy the market” or buy with some leverage
- half-full – the timing of the call to put more capital to work was very good. While the positions taken did not match the market performance, they did go up. Further, almost all were hedged in such a way that they would not have lost as much if the market had not cooperated.
CCI “unbiased” opinion is that the glass is half full. It is not all that easy to overcome the fear of the moment that existed at the downgrade time to put money to work. The easy course of action would have been to do nothing and make nothing, or worse panic sell and miss the opportunity. While the option based hedged positions put in place damped the gains, they not only reduced risk, but helped make it psychologically easier to invest at a time of fear.
Trade Status
Let's start with the worst position. Bank of New York (BK) is down 7% along with the overall financial sector. The stock and sector had bounced some based on last weeks alleged positive European news, but that faded away likely in sympathy with the noise related to MF Financial bankruptcy today. CCI continues to believe this is somewhat a unique play in the financial services industry and read the charts to say it can get back over $23. So we continue to hold and may sell some calls against this position on a bounce.
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. Established another $11 covered call position in November for a credit of $.79. The stock closed today at $11.68. If the stock stays above $11 through November options expiration the position will close with a gain of 19%. Conversely, with all the premiums taken in the stock would have to fall to $9.04 before loosing money. Still generally bullish on Ford so it if does pull back we would likely skim the profits from the option position and hold for better days to re-establish yet another covered call position.
Waste Management (WM) - Sold Aug $30 puts for $.70, and the stock was put to us at an effective price of $29.30. Closed today at $32.90. Over the past months we sold calls against the position for a $.63 gain and collected a $.23 dividend. Overall the position is up 16.5%. I would plan to exit the stock if it nears $35 but in the interim, I am Ok owning this for the dividend and possibly another round of covered calls on a bounce.
Waste Management (WM) - Sold Aug $30 puts for $.70, and the stock was put to us at an effective price of $29.30. Closed today at $32.90. Over the past months we sold calls against the position for a $.63 gain and collected a $.23 dividend. Overall the position is up 16.5%. I would plan to exit the stock if it nears $35 but in the interim, I am Ok owning this for the dividend and possibly 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. Three are closed for a profit, and one is still open and showing a gain.
- 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 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. The stock is currently trading at $14.20 and the options at $.18. Looking to harvest a little more of the premium before closing the trade.
The final trade was on the materials ETF (XLB) – Initially we sold the Dec $31 puts and used those proceeds 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 ended the day at $34.45 so the spread is barely in the money. However, as stated we just need for this volatile etf to bounce back toward $37 anytime between now and December expiration and the position will turn nicely positive with nothing at risk now.
Thursday, October 27, 2011
Time to Shorten Portfolio
Markets surged today apparently on what appears to be good news on the financial situation in Europe.
CCI looked at this up move not so much as an opportunity to take profits, but more as an opportunity to look to add some short positions to the portfolio. One hedging action take today was to short Lululemon (LULU). They manufacture and sell high-end athletic apparral often associated with yoga. (No, CCI does not own any yoga clothes.) They are "the hot" retail concept opening some 140 retail outlets. The main driver to shorting this stock is their forward p/e of 39 and trailing p/e of 54 which means the stock is kind of priced for perfection. Shorting this stock is not an original idea as short interest was shown as 18.5%. The stock moved up over 7% today and I'd assume some of that move was caused by a short squeeze to those already short. CCI wanted to get some short exposure for the overall portfolio so we shorted just below $57. It is always risky being short as irrationality can continue longer than my patience, but we are hoping either
a). this stock backs down to retrace the large gap in the chart and towards it s moving averages in the short term and we can scalp a few dollars off the trade possible to re-invest in a bearish option strategy on the stock.
b). Holiday sales for this high-end product may not meat expectations causing weakness in the stock be early next year.
Of course, it is also possible that we could just be wrong and become the next victim of the next move up. However, the overall long bias of the portfolio will probably perform very well if the market continues to move straight up, so this trade can be rationalized as an overall hedge. Stay tuned.
CCI looked at this up move not so much as an opportunity to take profits, but more as an opportunity to look to add some short positions to the portfolio. One hedging action take today was to short Lululemon (LULU). They manufacture and sell high-end athletic apparral often associated with yoga. (No, CCI does not own any yoga clothes.) They are "the hot" retail concept opening some 140 retail outlets. The main driver to shorting this stock is their forward p/e of 39 and trailing p/e of 54 which means the stock is kind of priced for perfection. Shorting this stock is not an original idea as short interest was shown as 18.5%. The stock moved up over 7% today and I'd assume some of that move was caused by a short squeeze to those already short. CCI wanted to get some short exposure for the overall portfolio so we shorted just below $57. It is always risky being short as irrationality can continue longer than my patience, but we are hoping either
a). this stock backs down to retrace the large gap in the chart and towards it s moving averages in the short term and we can scalp a few dollars off the trade possible to re-invest in a bearish option strategy on the stock.
b). Holiday sales for this high-end product may not meat expectations causing weakness in the stock be early next year.
Of course, it is also possible that we could just be wrong and become the next victim of the next move up. However, the overall long bias of the portfolio will probably perform very well if the market continues to move straight up, so this trade can be rationalized as an overall hedge. Stay tuned.
Wednesday, October 26, 2011
Generating Income via Put Selling of November Options
With volatility in options still very high by historic standards, CCI continues to believe it makes sense to pursue the generate of income via put selling. The past two months CCI has picked 2 option plays for the next month's expiration. A recap of those trade and this months selections are discussed in this article at seekingalpha.com.
One of these trades is the next step in managing the Alpha Natural (ANR) position previously established by CCI. The other is another round of selling of Corning (GLW) $13 puts.
FYI, since that article was written earlier in the week, GLW reported positive earnings and moved up a few percent. This already makes the GLW put sale profitable. If those gains in price hold, and the reduction of perceived risk by the passing of the earnings release drops option volatility, CCI will likely cover this position and look to deploy the capital on another put sale in stock with more option premium.
One of these trades is the next step in managing the Alpha Natural (ANR) position previously established by CCI. The other is another round of selling of Corning (GLW) $13 puts.
FYI, since that article was written earlier in the week, GLW reported positive earnings and moved up a few percent. This already makes the GLW put sale profitable. If those gains in price hold, and the reduction of perceived risk by the passing of the earnings release drops option volatility, CCI will likely cover this position and look to deploy the capital on another put sale in stock with more option premium.
Xerox - Q3 Earnings
Xerox (XRX) reported earnings on Tuesday beating q3 estimates by a penny and confirming full year estimates of $1.08 to $1.11. Nothing spectacular, but steady. The main thing I liked about their earnings was the consistency. This is at least the 4th quarter in a row they beat estmitates by just $.01 which I interrupt as they have a solid handle on their business and are able to mange it to expectations now. Their announcements says that 83% of their revenue is annuity business, and over half is now services revenue. I suspect that number might have some positive spin associated with it, but never the less it does indicates a potential high degree of predictability in the future business. I'm not aware that the company has set expectations for 2012, but average analyst estimates are $1.19. With the stock trading just over $8 that is a forward pe of just 7.
At Oct. option expiration date, CCI was assigned a fourth lot at a cost of $9. We now have a full position of shares at an average cost of around $10. Still thinking the market will pin a more normal multiple on this company as it becomes more comfortable with its transition to a services business. Hence CCI still has a "price target" in the low teens and will hold for awhile longer. However, if the stock does not move by year end we will consider selling some shares to harvest tax losses.
At Oct. option expiration date, CCI was assigned a fourth lot at a cost of $9. We now have a full position of shares at an average cost of around $10. Still thinking the market will pin a more normal multiple on this company as it becomes more comfortable with its transition to a services business. Hence CCI still has a "price target" in the low teens and will hold for awhile longer. However, if the stock does not move by year end we will consider selling some shares to harvest tax losses.
Tuesday, October 25, 2011
3m (MMM) - Earnings
MMM reported earnings today.
Not to say I told you so...but they guided down for q4.
However, CCI was surprised that they also missed q3 numbers. The stock pulled back to $77.
From a trading perspective, the weekly $80 calls plunged on this news. Hence the $80 weekly calls sold a few days ago plunged towards zero making that a profitable hedge.
As mentioned above, CCI was not surprised to see MMM lower expectations (they seem to do that a lot) but the q3 miss was surprising and concerning to me. I looked at just closing the position, but decided that the volatility was probably not out of this stock yet, and even lower expectations of $6 EPS this year should provide some floor for the stock.
So we rolled the profitable weekly option position out and down. Specifically we covered the Oct $28 call and sold the Nov $75 call for $3.30. Scenarios if held to expiration are
- Stock falls below $75 and CCI remains long one lot of shares. Those shares were purchased at $80 but we will have collected nearly $7.00 in option premium so the effective break even is down to $73.
- Stock stays over $75. The stock will be called away at $75, but having collected $7.00 in premiums the portfolio would have made $2/share on the trade.
However, as the market digests these results, there is potential additional volatility in the stock so CCI may trade out of this position before expiration.
Not to say I told you so...but they guided down for q4.
However, CCI was surprised that they also missed q3 numbers. The stock pulled back to $77.
From a trading perspective, the weekly $80 calls plunged on this news. Hence the $80 weekly calls sold a few days ago plunged towards zero making that a profitable hedge.
As mentioned above, CCI was not surprised to see MMM lower expectations (they seem to do that a lot) but the q3 miss was surprising and concerning to me. I looked at just closing the position, but decided that the volatility was probably not out of this stock yet, and even lower expectations of $6 EPS this year should provide some floor for the stock.
So we rolled the profitable weekly option position out and down. Specifically we covered the Oct $28 call and sold the Nov $75 call for $3.30. Scenarios if held to expiration are
- Stock falls below $75 and CCI remains long one lot of shares. Those shares were purchased at $80 but we will have collected nearly $7.00 in option premium so the effective break even is down to $73.
- Stock stays over $75. The stock will be called away at $75, but having collected $7.00 in premiums the portfolio would have made $2/share on the trade.
However, as the market digests these results, there is potential additional volatility in the stock so CCI may trade out of this position before expiration.
Friday, October 21, 2011
3M (MMM) - Covered Calls
MMM crossed back over $80 today. CCI continues to believe this is blue chip company. Not sure that means it will soar, but do think that may limit its downside. However, earnings are next week and CCI believes it is likely MMM will continue in its tradition of performing OK, talking down expectations, and the stock price falls back. With option volatility still historically high, CCI sold the $80 OCT 28 (weekly) calls today for about $1.50. Nearly 2% for 1 week holding.
(As an aside.....yes, there are now weekly options. Hard to see how weekly options are absolutely critically important to the success of the world, but it sure does seems like yet another trading vehicle created by our friends on Wall Street to encourage speculation. Isn't that what we have come to expect from Wall Street......so......if that is the world we live-in....we might as well play the game!)
Scenarios:
- If I'm right about MMM pulling back next week, I'll pocket this premium and that will drop the break even point on this lot to below $77. We can then consider November option plays against the position.
- If I'm wrong and MMM rises from here, the lot will be called away capping gains at a modest, low risk, 4.4% over 2 months.
Stay tuned
(As an aside.....yes, there are now weekly options. Hard to see how weekly options are absolutely critically important to the success of the world, but it sure does seems like yet another trading vehicle created by our friends on Wall Street to encourage speculation. Isn't that what we have come to expect from Wall Street......so......if that is the world we live-in....we might as well play the game!)
Scenarios:
- If I'm right about MMM pulling back next week, I'll pocket this premium and that will drop the break even point on this lot to below $77. We can then consider November option plays against the position.
- If I'm wrong and MMM rises from here, the lot will be called away capping gains at a modest, low risk, 4.4% over 2 months.
Stay tuned
Cisco - Rolled Covered Calls to Nov.
Cisco (CSCO) has continued moving up.
CCI rolled the Oct. $16 covered calls forward to Nov. for a $.24 /share credit. Earnings are Nov. 9. That should create some volatility in the stock and may present the opportunity to trade around these option positions still with the intent of closing this trade.
CCI rolled the Oct. $16 covered calls forward to Nov. for a $.24 /share credit. Earnings are Nov. 9. That should create some volatility in the stock and may present the opportunity to trade around these option positions still with the intent of closing this trade.
Friday, October 14, 2011
3M (MMM) - Covered the Short Puts
With MMM trading over $79 this morning, CCI covered the lot of puts sold 2 weeks ago.
This lot returned 2.5 % in just over 2 weeks. There was only about .015% left in premium and it did not seem worthwhile to take the risk of holding the position for another week until expiration for such a small remaining return.
Obviously catching the stock near its short-term bottom is a good/lucky thing, and in this case just buying the stock 2 weeks ago would have returned more. However, the premium received, and lower strike price for this option, meant this trade had about a 5 % downside protection if the market had not moved in our direction.
Going forward, MMM reports earning on 10/25. Part of CCI's trading thesis on MMM is they are the master of UPOD. (under promise and over deliver). Hence if the stock runs up over $80 before earning, CCI will consider selling covered calls against the remaining lot in the portfolio. This is in anticipation that their earnings will be fine, but they will talk down expectations, and the stock will stall for a short while. In that event, that trade would generate more income and also set up to put the short put trade back on.
This lot returned 2.5 % in just over 2 weeks. There was only about .015% left in premium and it did not seem worthwhile to take the risk of holding the position for another week until expiration for such a small remaining return.
Obviously catching the stock near its short-term bottom is a good/lucky thing, and in this case just buying the stock 2 weeks ago would have returned more. However, the premium received, and lower strike price for this option, meant this trade had about a 5 % downside protection if the market had not moved in our direction.
Going forward, MMM reports earning on 10/25. Part of CCI's trading thesis on MMM is they are the master of UPOD. (under promise and over deliver). Hence if the stock runs up over $80 before earning, CCI will consider selling covered calls against the remaining lot in the portfolio. This is in anticipation that their earnings will be fine, but they will talk down expectations, and the stock will stall for a short while. In that event, that trade would generate more income and also set up to put the short put trade back on.
Wednesday, October 12, 2011
Intel - Over $23. Covered Calls Sold
About a year ago in this article CCI provided rationale for a position in Intel. The article concluded by suggesting buying Intel if/when it was near $20. CCI has built a full position in Intel with an average cost just over $20.
As INTC went over $23 today, CCI sold one lots worth of Nov $24 calls against the position for $.45.
In Intel reverses in the short term of after it reports earnings (it has rallied into earnings only to fall back after earnings several times in the past) CCI will try to harvest some/most of this 2% option premium. If Intel breaks out over $24, one lot will be called away at an effective price of $24.45. That would be a 22% gain plus a 3+% dividend for a total of a 25% gain on this lot.
As INTC went over $23 today, CCI sold one lots worth of Nov $24 calls against the position for $.45.
In Intel reverses in the short term of after it reports earnings (it has rallied into earnings only to fall back after earnings several times in the past) CCI will try to harvest some/most of this 2% option premium. If Intel breaks out over $24, one lot will be called away at an effective price of $24.45. That would be a 22% gain plus a 3+% dividend for a total of a 25% gain on this lot.
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