"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)

What to do with shares in HP?

As previously documented here at the blog, CCI had taken a position in Hewlett Packard (HPQ).
The good news the position was entered via options so the purchase price was at a slight discount. The bad news the stock  plunged badly on the news of their potential sale of the PC unit, acquisition of Autonomy and reduced earnings expectations.

Now that the dust is settling, it is time to figure out what to do with these shares. 

After some analysis, I documented my go forward strategy with HPQ in this article at seeking alpha.com.

We will track progress of this position here at the blog.

MMM - Skimming Some Gains

The last 3M post discussed trying to skimming a little profit by selling $80 puts just a few days before expiration.  That post also "warned" that this trade meant that an investor had to be willing to "risk" being put the stock if it fell quickly.   Well it did fall,  and CCI is the proud owner of one lot  of MMM at a price around $79.50.

With MMM bouncing back toward $82 today, CCI sold one lot of Sept $82.50 covered calls against these shares today for $1.65 after commissions

• If the stock continues to rise, we will get called away at $82.50.  We will take our 5+% monthly profit and go home. ($3 in capital appreciation,  $1.65 in option premium).
• If the stock pulls back this option premium will lower the Break Even Point to under $78, and we will sit and wait to see what comes next.

Trying to generate income by selling puts in Corning and BAC

With cash paying near zero, and fixed income yields low and facing the risks of rising interest rates eventually, it is a challenging time to generate income from a portfolio.  (or is that fixed, non-income...lol).  Dividend paying stocks are certainly one alternative to generating income.  However, along with this approach comes all the risks associated with equity investing.  A way to reduce the risk of holding equities while actually generating more income than can be received from dividends is to sell naked puts for stocks that seem to have hit some floor level.

CCI made two trades at the end of last week and documented the rational and benefits of this type of trade in this article at seeking alpha.com.  It describes how selling puts in Corning and Bank of America at strikes well below both their current price and their book value can yield 4-5% in 1-2 months.  These position also offer a significant buffer of safety if the stocks were to resume falling in price.

After making the trades last week, it took some time to write and publish the article.  Both stocks moved up aggressively over that period of time.  The good news: that puts these trades solidly in the money and already ripe for potential harvesting.  The bad news: CCI readers may no longer have the opportunity to take similar position unless their is a pull back in price or they are willing to accept substantially less reward (and risk).

I'll add these two trades to the downgrade portfolio thread because they were initiated somewhat in conjunction with the market levels after the S&P downgrade of the US.

Is That a Popping Sound I Hear?

Gold took about a 5 % hit today.

Due to exceptionally brilliant, insightful, analytical skills (or maybe just dumb luck), CCI took off the gold trade a few days  ago.  Mostly because of a concern that the big money could leave quickly.

Piling on to this thought, CCI felt the momentum was clearly down on gold today,  so decided to day trade the double short gold etf (GLL).  Started trading a little late in the day today, and hence purposely had very tight stop-loss limits on the trade.  That led to getting stopped out of the trade with only a very modest  .6% gain.... in an hour.  Wonder what that would be on an annualized basis?...lol.   A little more seriously, that is more than double the yield on a 2 year treasury.

While only a modest gain, we will still call this a victory.
That pushes the YTD record on double short hedging  to 10-0-4. 

ANR - What next?

CCI had success trading Alpha Natural Resources in the past, and about a month ago re-entered the trade via selling one lot of $41 Aug puts.   Unfortunately, since then ANR has gotten clobbered really, really hard.  Some of the reasons include; the general market decline, perceived global slowdown and hence less demand for coal, and most importantly a poor earnings report.  The stock declined to a recent low of $26 and one lot of shares was put to CCI at options expiration for a cost just under $40.  Ouch.

When things fall this much, obviously the original thesis was not right.  However,  instead of just panic selling (although that is always an urge just to get rid of the pain), I looked into some fundamentals. The first thing that popped out at me was Yahoo Finance showed ANR book value at $37.  In theory that means ANR is trading well under book value.   That seemed to be too good to be true, so I looked a little deeper at the balance sheet. A lot of the book value is associated with good will from the Masse acquisition and other intangibles.  However, by my math, just tangible assets represent a value of  $26/share.  This strikes me as a  good support level for the stock.  The market might agree with that because it appears to be where the stock bottomed in recent trading and the option volume around that strike is slightly elevated. 

Last night, ANR announced a stock repurchase program.   I'm not sure if that is really a long-term bullish sign, but at minimum it does seem like a good attempt to stop the slide of the stock. 

Given the above information, CCI sold a lot of $26 Sept puts this morning for $1.08.  That option premium will yield 4% if the stock stays above my adjusted book value over the next month.

By mid morning, the stock was up near $31 up 9% on the day.  (Did I ever mention how much I love those rational markets).  CCI figured this can't go on forever, so we sold a lot of Sept $34 covered calls against the shares owned for $1.01.  That is about a 3% option premium.

* * *

Entering a position at $40 in ANR certainly seems like a really bad decision..  In these situations the urge to panic sell or wildly double down exist.  Hopefully these options trades represent a good balance between those two extreme choices. CCI is hoping the stock settles in somewhere between $26 and $34 and we can collect both premiums as a way of recouping some of the losses on this bad call. 

Stay tuned.

Taking Profits in Gold

CCI decided today was the day to take profits in the gold options trade that was in play.

To refresh the reader's memory, CCI sold Sept $57 puts in the gold miners etf (GDX) and bought Sept $148 gold options (GLD) in mid April  for a small net credit.  Unwound both positions for a net gain of 29.1% on risk capital.  Obviously this worked very well as a hedge against the rest of the stock portfolio.  This small amount of leverage, and large move in the price means that this option play (essentially a risk reversal) actually outperformed a more simple purchase of GLD, which was up  27.9% during the same period.   (google doc of transaction data can be found here) More importantly, this option trade would have likely lost less if our timing was bad and gold had dropped over this period. 



It is never easy to fight the greedy desire to keep this trade running.  That seems particularly challenging with gold which really has no fundamental metrics (i.e. earnings, revenue, etc) upon which to determine a fair value, and hence decisions seem even more emotional. No one really knows where gold will go from here, but CCI decided now was the time to take profits for several reasons including:

• Gold seems like its momentum is never ending.  Using the "law of round numbers"  (lol) $2000/oz could be in the cards.  That is well less than 10% up from here.   However, the move has been so parabolic it just seems like if the big money exits this trade it could loose a lot more than 10% very quickly.
• These options expired in Sept. While that is still 4 weeks away, some action would have to be taken soon.  So why not now. To me that is one of the advantages of options...it forces an investor to make proactive decisions  vs. falling into passivity. 
• Option volatility is high and hence now is an advantageous time to sell.
• This rapid move in gold does not seem healthy, and hence some "entity" might want to slow the momentum down.  For example: Some government deciding to sell a lot of its gold, or more likely exchanges raising margin requirements. 
• Alternative uses for this capital in the stock market is more compelling than it was a month ago.

So, we are out of this trade, but still hold some shares in the gold miners(etf) to represent gold in the overall portfolio.  If gold does pull back, we will likely reestablish a position in gold , possibly via options.