Naked Puts - a tool for the value investor or for those seeking interest like returns?

Reading an article this morning reminded me of an investment technique
which in some cases might be intriguing to the value investor.

http://www.futuresmag.com/Issues/2010/May-2010/Pages/Naked-put-vs-covered-call-Whats-riskier.aspx

This may be a meaningful concept to the value investor to sell naked puts on the stock you want to hold at the right price.

Lets say you have determined WAG is a value stock, you want to hold, but you would prefer to buy it at 33 rather than the present price of 35.20 and your analysis of the chart indicates a reasonable probability that you might have that opportunity in the not too distant future.

Instead of putting in a limit buy order to buy the stock at 33, sell a naked put. For this example sell a July 10 Put with 33 strike for $.83. For each contract you sell, you will collect $83 minus commissions. At some brokers, this could be as little as $1 or $2.

If WAG rises instead of dropping, you might consider buying your put back when it is considerably cheaper. The value will also drop as it gets closer to expiration.

At or anytime before expiration, if the stock should drop below $33 the stock can be assigned to your contract and you will own the stock at $33, but actually you will own it at $33-$.83

Of course you must consider commissions and assignment charges at the broker.

Also whether you are willing to have the capital to purchase the stock tied up without having the potential for upside.

If the stock never drops to you strike price in this example assuming $80 after commissions you will pocket 2.48% for tying up $3300-$83 for 59 days'

What is the downside risk? The market severely drops and the stock follows. Or the stock has very bad news and you really have a wrong estimation of value.

In that case you could end up with a stock at a price, at a price you are no longer happy with.

The other uncomfortable and possibly very uncomfortable area is if the stock drops to say $25. The purchaser of your put has no requirement to assign the put to you. Therefore, if you want out prior to expiration you will be faced with a very expensive put to buy back.

If today the stock dropped to $25 the put would be trading closer to $33-$25 or $8 plus possibly some minimal time value.

Meanwhile, you are locked in till stock is assigned to your put or expiration.

In either case, if the stock is below $33 when this event occurs you will be buying at $33. At some brokers this strategy can even be undertaken in an IRA with the proper permissions. Interactive Brokers is one of those. Please do not construe this blog as investment advice! It isn't! You are responsible for your own investments, research, and decision process leading to such. Best of Luck! Micro

Ouch .... Thinking I was very wrong on the QQQQ, QID

I am thinking I was very wrong on the QQQQ, QID idea. I think technology is overriding the weakness in the financial's.

Technology may even turn those around.

I am closing QID position, but then possibly sitting on my hands, till I get a better feel.

Crude oil, comments on blogs, market, Obama, Hillary Clinton, healthcare, Technical Analysis

I am somewhat distracted from the market at the moment, due to a short trip and some other matters. I hope it is not the ostrich effect and I have my head in the sand because I don't want to see what is happening.

If you read this, a comment would be appreciated. I note on my stat counter, I have some folks end up here. If you agree or disagree, that would be great to know. Or you can send me an email at themicrokid@gmail.com.

I have been buying a bit of QID. I wouldn't be surprised to see the market drop, not sure the reason. Possibly the acceptance of almost 100% possibility of Obama as a presidential candidate. He raises the uncertainty level. I think everyone is certain what Hillary would have done in the Whitehouse in any situation. I think they would have been surprised. But Obama has stated a lot of things and the idea of higher taxes is scary. Corporate America may be pretty warm to universal healthcare though. Healthcare today is a major tax on businesses of every size. But there are so many other questions.

Looking at some charts and some quick observations.
The US dollar, may face some resistance here.
$WTIC (on stockcharts), crude oil has been in a well defined channel upwards for about 3 to 4 months. Right now, it is at the bottom of the channel. A touch of DUG might be in order, if it breaks down.
Gold and Silver (GLD and SLV) both seem to have a small inverse H&S bottom possibility forming. Dollar weakness would help this to happen.
I was reading somewhere, small caps led the rally, maybe they are a better short on Inverse equity than the QQQQ's then. QQQQ's appear to have made a double top. But there is some support right below at 48. Sideways channel time?

I was surprised the other day by crude oil going up and DUG going up at the same time. Please understand, these leveraged ETF's are all artificial products. They mostly obey the market, but not always.

I was talking to a nuclear power industry executive the other night. He is long term bullish on more nuke plants. One of the topics we were discussing was hte parts supply for present plants and the need to get safety permissions on every small change in the process of the safety critical parts. This is one reason, hopefully the future will bring very standardized systems to reduce the life cost.

We found it ironic, one of the parts they were sourcing was being made by an Areva plant located in anti-nuclear Germany.

And of course Obama has made antinuclear noises.

I have rambled enough, now I must go face the realities of the day.



Some of my positions: Long QID, DUG, GDX (gold mining ETF), various Uranium plays.

Please don't construe anything I write as advice. You are responsible for your own investments.

Best of Fortunes

Should you sell COVERED CALLS?

My Covered Call Rules

My rules for writing covered calls: 1) I am willing to hold the stock for the long term. 2) I am willing to risk loosing the stock, if there is blowout news or the long term market uptrend continues. 3) I am not putting myself in a position to take a loss, I am not willing to take.

Should you sell COVERED CALLS?

The issue with buying options is time is working against you. The safest money in options is probably selling covered calls on stocks you are willing to hold for the long term. This makes time work in your favor.

I typically will only do this, it the call plus the premium is such I will be left with an acceptable profit, if the call ends in the money and the stock is called away. My goal in doing this is to establish the strike price, so it is likely not to be hit by expiration.

The advantage of not having it called away, is then I can turn around and sell a call again for a future expiration. I can view from an accounting (NOT TAX ACCOUNTING) each premium collected as reducing my cost of the underlying equity. If you do this on a stock that has a potential for a rapid price increment, you may be disappointed because you will have lost out on the big gain.

HISTORICAL and ONGOING EXAMPLE

Let me work through an example: EBAY closed at 30.87 of Friday, if I owned EBAY, on Friday I could have sold a 32.50 April call for $.62. Lets assume I bought EBAY with a cost of $30.75 and was willing own EBAY irrespective of its earnings coming up next week. If EBAY rises in the next week and my call is exercised, I will make 1.75 (32.50 -30.75) and the $.62 premium. A return of 7.7% for owning EBAY for a week. Of course, I have ignored commissions in this.

And, if EBAY turns in only okay earnings, my call won't be exercised and I can view my cost of owning EBAY as $30.13. Then a week from Monday, I can start looking at the potential for selling a May or later call on EBAY. Last trade on a May 30 was $2.29 and a $32.50 was $1.03

Where's the downside? EBAY has bad earnings and guidance. The price drops. I have to decide, if I stay a long term investor in EBAY or if I buy my discounted call back and sell the stock. EBAY has great guidance and the stock soars, I get my 7.7% for my ownership.

I sold the call, EBAY closed at less than $32.50, and since I did this in an IRA where there is no tax implication, I can view the cost of my EBAY as the $30.75 purchase price minus the $.62 premium I pocketed.

Then on April 18, I sold a July 35 call for $1.00. Now I can view my cost at $30.75 - $.62 - $1.00 or $29.13.

EBAY has been weak, I could buy my July 35 call back for $.42. Raising my cost to $29.75. Then I would have some alternatives: 1) Sell the stock and end up with only about $.50 profit. 2) Keep the stock and wait for the price to go up before selling a future call. 3) Sell a call right now.

Lets explore #3:

A) Sell July 32.50 call for .95, lowering my cost to $28.80. It does increase the chance I could be called away.

B) Sell July 30 call for $1.95, lowering my cost to $26.85. Unless I expect really a weak future for the next 55 days for EBAY, this says I have decided to bail on EBAY most likely. But I want to walk away with a profit $3.15 per share before commissions. And if by chance it is below $30, I have the ability to continue selling calls.

C) Sell June 30 call for $1.20, lowering my cost to $27.60. If I see short term weakness in EBAY and/or the market this is tempting, because it gets my stock free sooner to sell another call, but it runs a high chance of being called away leaving me with a profit before commissions of $2.40 per share. This gets me my money a month sooner than choice B.

Choice C actually, in some cases may be an attractive way to sell a stock, if you are not in a hurry to sell and you would rather be paid to sell it, rather than paying to sell it.

ANOTHER EXAMPLE

Supergen has an approved cancer drug they are licensing to a Japanese company. The stock has been beaten down on speculation that an ongoing study will show it may be inferior in extending life to a competitor. The competitor and Supergen roughly split the US market. If the study turns out positive, then J&J will file to sell Supergen’s drug in Europe. Therefore investing in Supergen, I am investing in a company with cash in the bank, near cash flow neutral, a pipeline of drugs. Supergen has about $1.40 cash per share and is trading at $2.50.

Let’s work through one potential example with actual commissions.

Buy 1200 shares of SUPG @ $2.50 = -$3009.95

Sell 12 July 2.50 calls at $.45 = $ 521.01 After $9.95 +$.75 per contract

Assuming exercise @$2.50 = $2980.01 After $19.99 assignment fee

Profit = $ 491.07 or 16.3% for tying up money for 55 days.

Some Possibilities:

1) The data turns out great and the stock soars, I have lost out on anymore profit. Maybe I should take the $491.07 and buy 200 more shares with no calls sold.

2) The data is terrible and the stock goes down, I am not in the red until the stock drops below $2.07 per share. The $1.40 in cash per share seems to provide some floor.

3) The data is delayed and the stock trades below $2.50 at options exercise. I dance and sing because I can set up another options sale.

Another example:

Buy 1200 shares of SUPG @ $2.50 = -$3009.95

Sell 12 Jan 2009 2.50 at $.85 = $ 981.02 After $9.95 +$.75 per contract

Assuming exercise @$2.50 = $2980.01 After $19.99 assignment fee

Profit = $ 951.08 or 31.6% for tying up money for 237 days.

The Jan 09 5 calls at .35 is another interesting call to consider selling. This provides the potential for doubling the money on a positive outcome.

SUMMARY

Covered calls may be used as a profit machine.

Covered calls will limit your upside gain.

Covered calls will provide some limited downside protection.

The risks are limited to the share price minus the premium obtained for the call sold.

Disclosure: Long EBAY, SUPG, UNG, DUG stock and Short EBAY, SUPG, UNG, and DUG calls.

Covered Calls aren't for everyone. This is not investment advice, it is educational in nature only. You and only you are responsible for your investment decisions.

Best of fortunes in your investment decisions.

Micro

themicrokid@yahoo.com

I was reading a post on seekingalpha http://seekingalpha.com/article/78032-leveraged-etfs-buy-and-holders-beware-these-are-for-active-traders on leveraged ETFs and the issues with using them in a Buy and Hold strategy. It was tossing a lot of percentages about and I get dizzy when people talk about what happens when you drop 40% and have to gain xx% to get back to where you were.

I always like to do some simple math to see, if the thesis and methodology is correct. My analysis by taking the historical adjusted for splits and dividends showed it was directionally accurate. I didn't worry about absolute accuracy.

I am not so sure, financials are dead. They seem to have a way to keep making money, probably because everybody has to use them. I am less certain, if a bottom is in. There seems to be a water torture way to try to find a new set of problems.

I did a quick study on QQQQ, QLD, and QID to see some real cases.

I picked 5/19/2008 as the closing date and assumed purchases on three dates of an equal dollar amount. The first two dates were picked without paying attention to the market. The third was picked to assure the QQQQ's were high, to see, the effect of the QID's.

One issue with this study is leveraged ETF's are a new phenomena. I could have performed this with Rydex mutual funds and went back much farther.

Purchase 8/1/2006 a few weeks after the launch of QLD.
Gain 5/19/2008 QQQQ 37%, QLD 59%, QID -46%

If you were long QLD, you are much happier than long QQQQ. If you were long QID, you were out to lunch.

Purchase 7/31/2007 a year later.
Gain 5/19/2008 QQQQ 5%, QLD 1%, QID -16%

Spinning wheels, unless you were in the bearish QID.

Purchase 10/26/2007 chosen to have a fairly high QQQQ
Gain 5/19/2008 QQQQ -8%, QLD -20%, QID 9%

Only QID would have you happy and you would be much happier, if you had bailed from it on March 10, 2008. Gain 5/19/2008 QQQQ -23%, QLD -44%, QID 65%

This suggests, if you can play horseshoes with tops and bottoms, you can make yourself very happy with leveraged ETF's.

All these percentages are adjusted for dividend payouts. Yes, even leveraged ETF's may pay out dividends at times.


********** Switching Gears********

Leveraged funds have a couple of other characteristics. 1) They are
not an investment in equities, but in futures and other derivatives. Therefore, they do not always meet their 2x objective, even while in a trend and occasionally beat it. 2) On some of them the spreads and the intraday hysteria may make them significantly off their tracking index.


***************************************************************************************
All the usual disclosures apply, this is for education and not advice to trade or invest on. You are responsible for your own decisions.

Results form Market Timing Question on Linkedin

Thank you for answering the question on market timing. I learned some things from the answers and identified a couple of good references. I decided to write a summary and send it to those who answered the question. I also will post it on a blog.

I think the educational material one respondent suggested at Morningstar is very good. http://www.morningstar.com/Cover/classroom.html

The CAPS concept is interesting. http://caps.fool.com/

Analyzing the responses, I concluded 27% of the aswers from fairly pure market timers, 20% from those who consider the time element important, 33% from those who take the oppoortunity to buy more aggresively at a minimum when stocks are undervalued, and 20% who avoid timing completely. In other words, 53% would claim they were not market timers. Of course this in not a scientific survey.

Interestingly, two people suggested Warren Buffet as their guru and reason not to time the market. While Warren's favorite holding period may be forever, he has a record of selling stocks. I would guess, because he thinks those stocks are overvalued and therefore likely to fall or not do as well as the market in general.

I do enjoy this quote from Warren Buffet, "I think we’ve got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous. I mean, you don’t want a capital market that functions perfectly if you’re in my business,"

This getting screwed up every so often is what every market timer wants!

When it game to influencers/gurus, Philip Fisher received one mention, while Buffett, Modern Portfolio Theory, Random Walk, Peter Lynch, and trend following all received two mentions.

I seriously doubt anyone will convince anyone to move from one investing style to another.

I do pay considerable attention to one market time, Robert Drach, who has demonstrated he can beat the market, since 1995 in a public forum and since 1995 in a private forum. You can find his public trades I referred to at: http://www.pbs.org/nbr/site/research/investors/drach/drach/

Two people suggested their websites, which were very focused on the concept of market timing.
http://futuristicinvesting.blogspot.com/
http://www.savingsandloans.co.nz/occasional_papers.htm

Again, much thanks.

Best Fortunes in your investing,
Micro

Ouch - Can we really trust S&P anymore?

Can we really trust S&P anymore?

The idea Bear Sterns could be destroyed before they alerted us is troubling. A couple years ago, they missed it on Doral.

Clearly, BSC is not going to the target I mentioned earlier.

Best of Fortune in your investing.
Micro

micro (out) look 02/26/2008

I think, backed up by the logic of the only Guru I listen to, we are soon to see a period of rising stock prices.

The guru has a record of having over 95% profitable positions, since 1977. I have been following, though not investing according to his advice for about a decade. His advice is based strictly on a statistical model.

His current recommendation is to be 125% invested in very high quality stocks: financial's, home builders, insurance, retail, industrial. Of course there is no way AVII would make his list.

One of the things I have done for the past few years is to track the market using charts of indexes and some of the derivative information about those indexes. My charts show that we are in a pattern, that is very typical of bottoms. And likely a bottom is in. I will not be surprised by a retest of the bottom. My chart give no indication of whether a rally will last for 1 month or 1 year. And what the bottom will look like after that rally.

I would guess a rally may follow of 2-4 months and then a bottom, close to the recent bottom. If this happens we could see a longer rally.

If my guru is correct and we match his historical record we will see things like: AIG 76, BSC 160, C 34, DHI 25, HOG 41, COF 83, KIM 38, LOW 35!

Switching to commodities .... If you read Jim Rogers book, "Hot Commodities" which was published in 2004, he makes the point that commodity cycles last for about 15 years, if I recall correctly. The reason for this, is it takes time to build the infrastructure to increase the supply of the commodity.

IMO, this may not apply to commodities increases built almost strictly on speculation. Because in those cases you don't have to wait for more supply. You just have to wait for the speculators to zig when they should have zagged. An example of this is the Hunt Brothers and their attempt to manipulate the silver market.

Therefore, it is quite possible we will have rising commodity prices as long as the Federal Reserve has to ease to counteract their poisoning of the economy.

Also we have two of the most massive population centers on the earth raising their standard of livings. They will both require commodities.

Blend this with the concept of peak oil and generally commodities will be in a long term up trend. This doesn't mean there won't be corrections along the way.

**** These are my comments. Please do not construe them as investment advice. I may change my mind 1 microsecond later. And I have no obligation to notify anybody of such a change. I have been wrong sometimes and right sometimes. Other times just pain irrelevant. You are solely responsible for your own decisions. Best of luck. ****