My FFIV Jan. 18th 2014 short calls (part of the covered call) are expiring in a few days. It’s deep ITM now. I see 2 ways to roll this up.
1. Credit spread of $80 (1/18/14) to $85 (7/19/14): net credit of >$1/sh. 24.7% x 2 = 49%/yr.
2. Credit spread of $80 (1/18/14) to $90 (1/19/15): net credit of >$2/sh. ROI: 49%/yr.
The ROI is very similar, however, the 1st choice is much safer (with a deeper ITM call).
My CRM (now at $57.17) short call of $43.75 (part of the covered call) contracts are due to expire this Friday. CRM’s 200 day MA is ~$47. Since 43.5 is too deep ITM, I want to raise the strike price to produce more time value but still within safe limits (below $47, the 200 day MA, in this case). So I bought back 43.75 call (Jan. 18th, 2014) and sold equal number of Jan. 17th, 2015 $46.25 for -.78/sh. If CRM stays above $46.25/sh by Jan. 17th, 2015, my gain is 25%/yr for my investment. This trade is also quite safe (see chart below).
Note: after the initial 2 years of bull market, I have accumulated a nice portfolio. Since 2011, I began to change my approach to a safer and more steady growth rather than taking high risks aiming for high gains. Due to this change, my account performance tends to outperform S&P in years when the market is down or moderately up. I expect my account to slightly underperform S&P when market is strong like in 2013. interesting enough, I found my result may be similar to Warren Buffett’s. Warren Buffet’s performance is 18.2% in 2013. Mr. Buffett said “Berkshire’s book value and intrinsic value will outperform the S&P in years when the market is down or moderately up. We expect to fall short, though, in years when the market is strong – as we did in 2013,” USA Today). In a strong market, while my long stock positions go up in value, so are my short call positions (the former goes up more than the latter), therefore, my performance won’t be as high as a pure long stock account. However, the increase in both stock prices and the call option prices make my covered calls deeper in the money, which increases the safety level of my account. In the future years when the market becomes weak, the deep in the money call positions will gradually become less deep in the money, and yielding higher returns in the years to come.
Source: SP500 performance (http://en.wikipedia.org/wiki/S%26P_500).
The above chart shows the change of my portfolio in relationship to SP500 and VIX between 1/1/09 and 8/31/11.
The total return of my two trading accounts is up 33.87% so far this year, even after the awful gut-wrenching August! What did I do during the August crash? First of all, I didn’t sell any stocks. In fact, I even bought more stocks (wrote more covered calls). As a result, many of my stocks recovered and went above my call strike prices (such as bidu, pcln, mcp, slw, and lvs). Two of my stock holdings, crm and ffiv, have gone below my strike price. But CRM is now close to the strike price (strike is $130, and the stock is in 120s).
All in all, I didn’t lose much real value in my stock holdings. What’s lost is mostly the out of the money portion which doesn’t really hurt me anyways. Since January 2009, we have gone through several cycles of market downturns (“correction” or “flash crash” or whatever you call it). My results, once again, provide further evidence to support that my approach is a sound, money making strategy.
-updated 9/3/11.
My accounts is up by 15.7% (including the time values of the option positions that I have. For stocks like FFIV and CRM, I have options that are out of the money. These options show up on my accounts as negative. But they are out of money, therefore, these are definitely my money). I can say up to this point that my strategy has been weathering this market downturn pretty well. Remember, we are in August only. There are still many months that I can sell more options. But with more and more of my stocks out of money or at the money (PCLN), my protection is becoming smaller and smaller. I hope, as all the bulls out there, that the markets have seen the worst days this year. Good luck, bulls.
Updated 8/20/11
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My account is up by 25.8% this year until Aug. 5th (even after the 10% loss in SP500). This again shows the benefits of being disciplined and following your logic and reasoning, not knee jerk reactions.
How was I able to avoid the recent major crash with minimal damage? There is no trick to it. I have been holding these stocks for a very long time and the options (my hedge) of my covered call are deep in the money. I learned my lesson in the past: NOT to roll up the option strike prices too fast and too high, because markets will crash from time to time (actually it happens several times a year). I currently have BIDU (strike 105), CRM (strike 130), FFIV (strike 100), PCLN (strike 450), MCP (strike 50 and 55), LVS (strike 40), AND SLW (strike 33). All except FFIV are in the money, even after the recent big losses. It is very interesting to note that I rolled up PCLN’s strike very cautiously from 425 to 450 on 4/15/11, when PCLN was `$520/sh. Even with this deep in the money call, I was still able to sell an annualized time value about 45%. Now you see the reason I am so cautious and still make good money.
Updated: Aug 7th at 12 noon.
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I calculated the performance of my portfolio and adjusted it for deposits and withdrawals. Here is a brief summary.
2009: up by 247.13%
2010: up by 91.41%
2011: up by 11.6%
2012: up by 13.6%
Between Jan ’09 and July ’11: up by 810%.
I will draw some charts based on these numbers and I will update this performance regularly.
Updated on Aug. 4th, 2011
Some of you know that I have been very interested in investments, esp. stock markets. I have also developed a system. Using this system, my portfolio went up by ~700% in 2009 and ~100% in 2010. 2009 and 2010 were 2 bull market years. As the saying goes, even a monkey can make money in a bull market. I had been wondering how my system would fare in a bear market. Well, be careful for what you wish for, you may actually get it. Not that I really want to test my theory, but 2011 has been a very choppy year with many features of a bear market. So how has my portfolio been doing? The following comparison gives me the confidence that my system appears to be a solid one. I have also done some preliminary research to show that my approach would fare better than S&P 500 index (The investment goal for most, if not all, fund managers is to “beat the market”), if you use to directly trade SP500 ETF. (I will publish this research later, when it’s completed.)
How are the market indexes, stock-fund managers and my portfolio doing so far this year? Let’s look at some numbers (Range spans from 1st trading day of 2011 until 12/9/2011).
One concern for the investor is when the investment runs out, there is no more income. Any assets remaining in the trust will be sold off and the trust dissolved. Important for the investor to know is how long the trust will remain, or will the income producer remain or run out? One particular trust I have written on in the past is Great Northern Ore(GNI).
GNI will terminate with the final payment in April 2015. When the trust terminates, the investors get their last check and the shares are worthless. The details are in the article, but knowing when to get out is important to a good investor.
With many commodities, another question is what are the effects on the price of goods, and how will the market affect them? Does the price go up or down? What are the many factors in the market? A simple example could be a hurricane effect on the oil producing Gulf Coast. Multiple storms through one season could drive the price way up, or damage wells belonging to the trust and cost millions in repairs. All of these are unknown future effects.
With many investments, trusts are evaluated daily in the market and bought and sold based on the perceived value. A trust with a higher rate of return may be signaling that the investment has some issues. In my opinion, a 10% return on your investment per year is good. Those that provide a higher rate sometimes indicate risk. Buyers would bid the price up if it were a great buy. The higher rates are not bad, but most should be seen for what type of investment they really are. Many trusts are smaller entities, with little to no ability to react and adjust their business operations because of the requirements written into the trust.
I have selected several trusts to highlight in this article and will write follow up articles as available. Trusts included here are WHX, WHZ, andCHKR, with SDT, PER, ECT, NYMT, MVO, NDRO AND ROYT displayed in the chart as other trusts with interests. In the chart I cover some basic information investors want to know.
(click to enlarge)
Whiting USA Trust I (WHX) was formed in October 2007, by Whiting Petroleum Corporation. Whiting Petroleum Corporation’s wholly-owned subsidiaries, Whiting Oil and Gas Corporation and Equity Oil Company, conveyed a term net profits interest to the trust that represented the right to receive 90% of the net proceeds from Whiting’s interests in certain existing oil and natural gas producing properties. The net profits interest entitled the trust to receive 90% of the net proceeds from the sale of production of 9.11 million barrels of oil equivalent (MMBOE), which is equivalent to 8.20 MMBOE attributable to the net profits interest, after which the trust will terminate. In the company quarterly report, as of September 30, 2013 on a cumulative accrual basis, 6.86 MMBOE (84%) of the Trust’s total 8.20 MMBOE have been produced and sold (of which proceeds from the sale of 260 MBOE, which is 90% of 288 MBOE, will be distributed to unitholders in the Trust’s forthcoming November 2013 distribution) and a cumulative reserve quantity of 0.02 MMBOE have been divested. The remaining reserve quantities are projected to be produced by June 30, 2015, based on the reserve report for the underlying properties as of December 31, 2012.
At the currently estimated end date of Jun 2015, the trust will pay 7 more dividends. The last dividend was $0.534, making the estimated total payout of $3.73 until the termination of the trust. With the stock price at $6.30 today during midday trading, I would look to this stock as overpriced and stay clear of this investment. The price should decrease every quarter until June 2015, when it should reach zero. To buy in, the price would need to be $3.00 or below to get my initial capital back with a 10% return.
AGNC pays 13.31% dividend. What’s more interesting is this is also a weekly option stock with high liquidity.
I wrote a covered call of AGNC with a net debit of 23.58 for a call strike of 24 (exp. Sept 27th). With 8 days to expire, its annualized return is ~80% [(.42/23.58 x 100% / 8 (days) x 365 (days) = 81.2%]. The actual annualized return is more like 270%, since the margin requirement is only 30% for AGNC.
I plan to keep this stock for longer term (to receive dividend). So I’ll do a credit spread when the option expiration nears.
9/26/13
Most (70%) of my agnc options were exercised today (obviously the call buyer wanted to received dividend, since today is the ex-dividend day), including the calls that expire in Oct which still has a sizable time value. Not surprisingly, AGNC went down about $0.80 at the open today b/c AGNC goes ex-dividend today.
CYS is a high dividend paying stock ($0.34/sh with a dividend yield of 16.77%). It’s ex-dividend date for this quarter is Sept. 20th. I wrote a covered call for CYS today, with the option to expire on Sept 21st. The strike is 7. Current stock price is 8.09. The stock may fall 0.34 at the open on the ex-dividend day which is why I chose $7 as the strike. The concept is to capture the $0.34/sh dividend, while limiting the downside risk.
This is a test of my short term, high dividend and optionable stock strategy. The dividend is paid on Oct. 16th.
When a dividend paying stock also has options, one way to cash in on both the dividend and the option premium is to write an ITM covered call right before the ex-dividend day.
Take WHX. WHX’s Sept. 13 calls for 2.5 strike was 2.65 and for 5 strike was o.2. If one writes a covered call for strike 2.5 before the ex-dividend day (Aug. 15th), buy 10000 shares WHX at 5.11, sell 100 contracts of Sept. 13 call at strike 2.5 for 2.65. Net debit: $2.46 x 10,000 (1 contract = 100 shares) = $24600. Dividend payment is $0.53/share x 10000 = $5300. By Sept. 13, if WHX price is above $2.5, the shares are called away (at $2.5/share), the net result is: $25000 – $24600 + $5300 = $5700. 5700/24600 = 23%. The margin requirement is about 30%, so the net return is 23% x 3 = 70% in one month.
The call strike should be greater than the sum of (the current stock price – dividend). The Stock price may drop by the amount of the dividend on the ex-dividend day, but if the stock price is still above the call strike, one can allow the stock shares to be called away while keeping the option premium and the dividend.
Note: one thing to watch with this strategy, however, is the call away of stocks before ex-dividend date. Most of the high dividend stocks don’t have much option time value. Only stocks with high dividend and high option time value are good candidates for this strategy.
Dividend Calendar: http://www.thestreet.com/dividends/index.html
Bought 50 ANR May 3 2013 7.5 Put @ 0.45.
Closed on May 3rd at 11 for a loss of $920.76.
Typically a stock is considered a good value if it is trading near its 52-week low. However, make sure the stock is on a rebound if it is near the low, because it could always drop farther and create a new low. Don’t get caught in the assumption that a stock can’t possibly go any lower. A stock can always go in either direction, no matter how much the price has fallen. On the other hand, if a stock is trading near its 52-week high, it should probably be avoided because it will likely hit a resistance level and shoot downward.
Volume is the number of stocks bought and sold in a single day of trading. Make sure the average volume of the stock is over 50,000 or so. If the volume is low, then liquidity is low. This means it is hard to buy and sell because there aren’t many buyers and sellers and the stock moves in a very choppy fashion. This creates a lot of unnecessary volatility, which most traders generally avoid. This is the unfortunate scenario often involved with trading penny stocks.
The PE ratio is a critical number in evaluating stocks. The formula for finding the PE ratio is a simple one: Price per share/Earnings per share. So if the price of the stock is $2 and the EPS is $1, then the PE would be stated as 2.0x. It is unnecessary to remember this formula since the PE ratio is always listed on the “quote page” of a stock. The reason for the formula was to show the relationship between the numbers, and also give an idea of how to tell if a stock is over or undervalued. Think of undervalued as underpriced and overvalued as overpriced. This means if the PE is very high, then the price per share of the stock must be much more than its earnings per share, which means the stock is overvalued, or overpriced. The opposite is true if the PE is low. So basically, it is beneficial to look for companies with low PE ratios between the range of 1.0x and 10.0x. When the market is performing better, the preferable range would be increased to around 10.0x and 20.0x. Also if the company has a negative earnings per share, then the PE will not be listed.
EPS is determined by the following formula: Net Income – Dividends on Preferred Stock/Average Number of Shares Outstanding. It breaks down the profit, or earnings of a company in terms of individual shares. Investors should look for positive earnings as well as consecutive growth over each quarter. If a company fails to meet the earnings expectations of analysts, it instantly decreases the stock price when the actual earnings are announced. EPS has one fatal flaw. A company’s accounting department can easily manipulate it. However, it should still carry some weight in choosing a stock nonetheless. A similar measure that has grown increasingly popular is cash flow per share or CPS. Accounting may be able to hinder earnings to look more favorable, but cash is impossible to manipulate. CPS gives a true account of how much cash a company really has on hand, and how effective its operations are. This is a crucial statistic in itself to determine if there is enough cash to pay off debt and engage in future endeavors that contribute to stock price increases. Look for a company that has both positive EPS and CPS.
Market cap is determined by the following formula: Number of Shares Outstanding x Price per share. Remember that owning a stock is actually a partial ownership in the company. If someone were to buy the entire company, they would have to buy all of the stock. The market cap could be thought of as the overall price to buy out a company. The market cap is used to classify the size of the company into one of the following categories: nano, micro, small, mid, large, and mega caps. The large and mega caps are worth billions of dollars, while the micro and small caps my only be worth several million dollars. Basically, the larger the company is, usually the more stable and safe it is. There are exceptions such as GM and Enron, of course. Think of the sizes and the stability of stocks as trees. The nano cap could be compared to a small maple tree that is violently blown around in storms (market crashes) and could be easily uprooted (bankruptcy). The large caps are like mighty oaks that can withstand many violent storms with little damage. However, the small maple tree can grow several feet over a few years, while the large oak has matured and fosters little potential for extreme growth. Basically, when investing, look at the market cap or size classification to find something that matches your risk tolerance. The smaller the company the more potential growth, and the more possible risk. The opposite is true of large companies.
Beta is an indicator of a stock’s standard deviation, or volatility. It is somewhat difficult to calculate, but is provided on many websites. The calculation involves taking the standard deviations of the monthly returns of the particular stock along with the S&P 500’s monthly returns for five years within the same time horizon and inserting the two standard deviations separately into an overall variance formula and dividing by the population variance. Actually, using beta is much less complicated than its calculation. If a stock has beta of 1.0 it moves in congruence with the market. This means if the S&P 500 goes up 1% in a day, the stock should go up 1% in a day. The opposite is true if the market goes down. If the beta is 2.0, and the market increases by 3%, then typically the stock will go up 6%. Sounds great until the market drops 3% and the stock falls 6%. If the beta is negative then it moves inversely, or opposite of the market. Very few stocks have negative betas. Typically, large blue chip companies will have the lowest betas. Microsoft is normally around a 0.9 or 1.0, moving with the market. Pfizer is usually a 0.8 beta; meaning if the market goes up 1% it will only increase 0.8%. Casinos usually have the highest betas. The Las Vegas Sands is currently a 4.7. Beta is really a double-edged sword. Theoretically, an investor could make the quickest, and most significant gains with a high beta stock, but could lose the most as well if the market underperformed. If you like to watch your money move like crazy from day to day, I would recommend a high beta. If you like to play it safe and preserve your money, I would recommend searching for a low beta that has little volatility.
Dividends are cash paid per share by companies to reward their shareholders for holding their stock. They are comparable to coupons on bonds, except they are not as much. When investing in a company, check to see if they are currently paying a dividend. If a company has money to hand out, then they are usually doing well. The companies that pay the highest dividends often have steady growth also.
Many stocks offer options contracts for buying and selling in the future. An investor doesn’t have to understand options to take advantage of this following tip. When researching a stock on a financial website, there is typically a link for options chains. These are simply the options available for the stock. They are often listed in “T” shaped boxes with call options (the right to buy the stock) on the left and put options (the right to sell the stock) on the right. The strike prices are listed down the center of the “T”. These prices give a range in which the stock is expected to move. Both the call and put sides have open interest columns; this is the key. The people in the open interest column on the left are bullish; they think the stock price is going up. The people in the column on the right are bearish; they think the price is going down. There is a different amount of open interest for each expected price. Basically, look for stocks that have more open interest on the call side than the put side. This shows that more people want to buy the stock in the future than sell it. It is worth getting a second opinion, or in this case, thousands of opinions when purchasing a stock.
Take note of what is happening inside of the company itself. If the CEO just dumped 50,000 shares, it may be time to get out. The insiders know the company better than any analyst. If the number of shares bought by individuals inside the company has been increasing, it may be a good time to buy.
News affects the expectations and decisions of the investing public and expectations determine stock prices. Popular glamour stocks such as Yahoo or Apple are always in the news, and the prices are sometimes inflated by the hype of the press. Try to choose stocks that are not the victim of newspaper publicity and television headlines, and there’ll be much smoother sailing.
1. Make sure the stock is trading closer to the 52-week low than the high and also has upward momentum.
2. Average volume should be around 50,000.
3. The PE ratio should be somewhere between 1.0x and 10.0x.
4. Earnings and cash flow per share should both be positive with positive growth over each quarter.
5. There is no specific market cap to look for, just be aware of the risk/reward trade off of each size and their stability as well. (Personally, all of my highest returns have come from mid caps.)
6. Beta is much like the market cap, in that there is no specific beta to look for. It just depends on risk tolerance. However, if you have a longer time horizon to invest, I would recommend a higher beta and vice versa.
7. Look for stocks that offer dividends. Dividends are usually, but not always, a sign of good financial health.
8. Look at the open interest on options chains for a specific stock to see how many people are planning on buying and selling and at what price. This basically serves as an opinion poll on the stock’s expected performance.
9. Always consider the amount of shares CEOs and other executives are buying and selling, to get an accurate picture of what is happening on the inside.
10. It may be a good idea to avoid stocks that are constantly in the news. Stock prices will often reflect the investors’ perception of the stock, which is usually not an accurate evaluation of the underlying company. The dot com bubble in the 90’s is a perfect example.
