Expect a not-so-good day for Facebook (FB) shares on November 14. The third and largest lock-up period will release up to 1.2 billion shares, including 60 million shares owned by Mark Zuckerberg. Although the founder claims he will not sell his shares for at least a year, we can not hold a man to such a proclamation when hundreds of millions of dollars can be pocketed.
The company has 2.7 billion shares outstanding, more than Apple (AAPL), Google (GOOG), and even International Business Machines (IBM). With as much as 44.4 per cent of the company's shares ready to be sold by insiders and employees on November 14, expect a very volatile day to the downside. Don't be surprised if the selling pressure triggers trading halts.
The shares last had a major lock-up period expiration on October 29. However, hurricane Sandy pushed the first trading day to October 31, which had the shares fall 5.28 per cent right at the open. The stock has continued to drop since and is 3.51 per cent lower since that opening minute.
The first lock-up period was August 16 and released 271 million shares. The shares fell 3.58 per cent right at the open and finished 6.27 per cent lower.
The final two lock-up periods will release a total of almost 200 million shares on December 14 and May 18, 2013. If history is any trend, these two days could send shares down about 3 per cent if the shares still have any value.
Stock compensation is also leading the company to report GAAP earnings in the red and will continue to do so for at least three more quarters. An article posted on MarketWatch claims the company's costs in stock compensation is $2.3 billion and ensures the company does not have a profitable quarter until mid-2013 if financial trends do not improve remarkably.
For current shareholders, dilution in such a situation is a double-edged sword. Stock compensation costs will only go down if the share price goes down, not a good thing of course. But, a rising stock will also trigger larger stock compensation costs, which effectively reduces the stake of each share in the company.
A great article was created, also on MarketWatch. Read it here.
Disclaimer: I am currently short Facebook shares.
Credit Spreads Explained with Netflix
Playing the Expiry: October 26, 2012
Technology companies are getting no love from traders so far this earnings season. Google (GOOG), Microsoft (MSFT), and Intel (INTC) finished the week on sour notes with gloomy reports and that hurt the NASDAQ substantially. And it might be another week of pain for investors as more tech stocks are starting to report.
Household names will be reporting this week, including Facebook (FB) and Netflix (NFLX) on Tuesday, and Apple (AAPL) and Amazon (AMZN) on Thursday. This week will definitely prove to be a turning point for the American markets.
Reporting earnings after hours on Tuesday, expect Netflix (NFLX) shares to make a big move. This stock has a very high beta and a 5 per cent move in an hour is not unheard of. That's why option premiums are so delicious for sellers. The last four earnings reports have moved shares at least 17 per cent, with the biggest move occurring last year on this date, falling about 35 per cent.
Trading Netflix is not for the faint of heart, and for those looking to get into options trading, I highly recommend due diligence. Credit spreads to maximize losses might be a wiser approach than simply writing a strangle, but of course this eats away at potential profits.
Before we begin to write the credit spread, we must examine the risks and rewards. Netflix at-the-money options are pricing in a 16 per cent move, but I would suggest protecting yourself from a 20 per cent move. With shares currently at $68.25, that gives us a range between $81.90 and $54.60. The nearest strike prices would be the 80 call and the 55 put. The premiums on the call and put are $0.99 and $0.70 respectively, yielding against the stock price, a return of 2.48 per cent, but more accurately, yielding a return of 6.21 per cent against margin. Because the options are so out of the money, the net margin required would be about $2,600 per pair of legs. But just remember that Netflix is a 50 per cent marginable stock.
The second step in a credit spread is buying further out-of-the-money options to maximize your loss. In this scenario, the exchange has only provided one choice. A trader would buy the 85 call for $0.44 and 50 put for $0.26 to provide a net credit to the account for $0.61 and $0.44. This limits the yield to 1.54 per cent against the stock price, but yield on margin rises to 26.7 per cent (margin required is the maximum loss [$500] minus premiums [$105] or $395). Yield on margin is a more accurate measure of returns, since that is the actual cash required to implement the trade.
Similar to the naked strangle (that is, the trader does not implement the buying of options), the profit range is still the same. If Netflix remains between $55 and $80 by Friday, full premiums are collected. The main difference is that the margin on the credit spread is reduced substantially, but has a tighter break-even range.
Technology companies are getting no love from traders so far this earnings season. Google (GOOG), Microsoft (MSFT), and Intel (INTC) finished the week on sour notes with gloomy reports and that hurt the NASDAQ substantially. And it might be another week of pain for investors as more tech stocks are starting to report.
Household names will be reporting this week, including Facebook (FB) and Netflix (NFLX) on Tuesday, and Apple (AAPL) and Amazon (AMZN) on Thursday. This week will definitely prove to be a turning point for the American markets.
Reporting earnings after hours on Tuesday, expect Netflix (NFLX) shares to make a big move. This stock has a very high beta and a 5 per cent move in an hour is not unheard of. That's why option premiums are so delicious for sellers. The last four earnings reports have moved shares at least 17 per cent, with the biggest move occurring last year on this date, falling about 35 per cent.
Trading Netflix is not for the faint of heart, and for those looking to get into options trading, I highly recommend due diligence. Credit spreads to maximize losses might be a wiser approach than simply writing a strangle, but of course this eats away at potential profits.
Before we begin to write the credit spread, we must examine the risks and rewards. Netflix at-the-money options are pricing in a 16 per cent move, but I would suggest protecting yourself from a 20 per cent move. With shares currently at $68.25, that gives us a range between $81.90 and $54.60. The nearest strike prices would be the 80 call and the 55 put. The premiums on the call and put are $0.99 and $0.70 respectively, yielding against the stock price, a return of 2.48 per cent, but more accurately, yielding a return of 6.21 per cent against margin. Because the options are so out of the money, the net margin required would be about $2,600 per pair of legs. But just remember that Netflix is a 50 per cent marginable stock.
The second step in a credit spread is buying further out-of-the-money options to maximize your loss. In this scenario, the exchange has only provided one choice. A trader would buy the 85 call for $0.44 and 50 put for $0.26 to provide a net credit to the account for $0.61 and $0.44. This limits the yield to 1.54 per cent against the stock price, but yield on margin rises to 26.7 per cent (margin required is the maximum loss [$500] minus premiums [$105] or $395). Yield on margin is a more accurate measure of returns, since that is the actual cash required to implement the trade.
Similar to the naked strangle (that is, the trader does not implement the buying of options), the profit range is still the same. If Netflix remains between $55 and $80 by Friday, full premiums are collected. The main difference is that the margin on the credit spread is reduced substantially, but has a tighter break-even range.
Intel, eBay, Microsoft Earnings Due This Week
Playing the Expiry: October 20, 2012.
The condition of the technology sector will be in focus this week as Intel (INTC), eBay (EBAY), and Microsoft (MSFT) will report third quarter earnings. Analyst predict that this quarter's earnings will be soft and may be lowered than expected. Last week, Advanced Micro Device's (AMD) management admitted that their third quarter earnings, due October 18, will be much lower than guided, knocking the stock to a 3-year low. And it could go lower when the official numbers are reported because management often puts a positive spin on things.
But we'll have to wait a few days for those reports. In the mean time, three bigger stocks with opportunities await, and here at this blog, we only care about the knee-jerk reaction by traders following earnings. Let's examine the three stocks that could make you some serious coin. Note, all three stocks report after-hours.
Intel - Tuesday
The shares fell in sympathy when AMD informed investors of a weak quarter. The sell-off means that a disappointing quarter has been partially priced in and there is a chance the shares will rise. Conversely, on the bullish side, the shares have been sliding for the past month and chart traders will note that the stock is trading at the bottom of the Bollinger Bands. There could be a short-term tug of war post-earnings with fundamentals wanting to sell and technicals suggesting a rebound. This means the stock could essentially trade very flat and option sellers may have a good pay day if this transpires.
Intel is a stock that often closes the gap retracing any drop and falling after a rebound, so taking assignment and waiting it out is an alternative to taking a loss or closing out any potential in-the-money position. We propose selling the 22.50 calls and 21.00 puts. Based on Monday's close, the premiums were $0.19 and $0.22 respectively with the stock at $21.73. That will earn you 7.36 per cent return on margin and a break even range of $22.91 to $20.59 or upside protection of 5.43 per cent and downside protection of 5.25 per cent.
eBay - Wednesday
This online retailer and auctioneer typically rises on earnings. In fact, the shares have risen all four times in the last year after earnings, which could indicate a trend. The rises have either been sharp or tame so upside protection will be very important here. It may even be wiser to ignore the call option altogether, but this could also limit your profitability.
The range of protection I see fit is 7.5 per cent and increased volatility has also increased option premiums. The shares closed at $47.40; selling the 50.00 call and 45.00 put will provide the protection needed. The premiums are $0.49 and $0.57 respectively. Total payout on margin is 9.35 per cent; break-even is $51.06 to $43.94 or +7.72% to -7.30%.
Microsoft - Thursday
Shares of Microsoft often remain within the trading range depicted by the Bollinger Bands. As a result, a trader could simply sell the call at the upper band price and the put at the lower band price. However, Microsoft has very poor premiums and this is the least promising trade. To earn at least 1 per cent return on market value means the trader has to sell the 30 call and 29 put for $0.21 and $0.23 respectively. The break even range is $30.44 to $28.56 or +3.15% to -3.22%. The return on margin is 5.45 per cent, which is still attractive, however, the low break-even range is a concern.
Good luck.
The condition of the technology sector will be in focus this week as Intel (INTC), eBay (EBAY), and Microsoft (MSFT) will report third quarter earnings. Analyst predict that this quarter's earnings will be soft and may be lowered than expected. Last week, Advanced Micro Device's (AMD) management admitted that their third quarter earnings, due October 18, will be much lower than guided, knocking the stock to a 3-year low. And it could go lower when the official numbers are reported because management often puts a positive spin on things.
But we'll have to wait a few days for those reports. In the mean time, three bigger stocks with opportunities await, and here at this blog, we only care about the knee-jerk reaction by traders following earnings. Let's examine the three stocks that could make you some serious coin. Note, all three stocks report after-hours.
Intel - Tuesday
The shares fell in sympathy when AMD informed investors of a weak quarter. The sell-off means that a disappointing quarter has been partially priced in and there is a chance the shares will rise. Conversely, on the bullish side, the shares have been sliding for the past month and chart traders will note that the stock is trading at the bottom of the Bollinger Bands. There could be a short-term tug of war post-earnings with fundamentals wanting to sell and technicals suggesting a rebound. This means the stock could essentially trade very flat and option sellers may have a good pay day if this transpires.
Intel is a stock that often closes the gap retracing any drop and falling after a rebound, so taking assignment and waiting it out is an alternative to taking a loss or closing out any potential in-the-money position. We propose selling the 22.50 calls and 21.00 puts. Based on Monday's close, the premiums were $0.19 and $0.22 respectively with the stock at $21.73. That will earn you 7.36 per cent return on margin and a break even range of $22.91 to $20.59 or upside protection of 5.43 per cent and downside protection of 5.25 per cent.
eBay - Wednesday
This online retailer and auctioneer typically rises on earnings. In fact, the shares have risen all four times in the last year after earnings, which could indicate a trend. The rises have either been sharp or tame so upside protection will be very important here. It may even be wiser to ignore the call option altogether, but this could also limit your profitability.
The range of protection I see fit is 7.5 per cent and increased volatility has also increased option premiums. The shares closed at $47.40; selling the 50.00 call and 45.00 put will provide the protection needed. The premiums are $0.49 and $0.57 respectively. Total payout on margin is 9.35 per cent; break-even is $51.06 to $43.94 or +7.72% to -7.30%.
Microsoft - Thursday
Shares of Microsoft often remain within the trading range depicted by the Bollinger Bands. As a result, a trader could simply sell the call at the upper band price and the put at the lower band price. However, Microsoft has very poor premiums and this is the least promising trade. To earn at least 1 per cent return on market value means the trader has to sell the 30 call and 29 put for $0.21 and $0.23 respectively. The break even range is $30.44 to $28.56 or +3.15% to -3.22%. The return on margin is 5.45 per cent, which is still attractive, however, the low break-even range is a concern.
Good luck.
Third Quarter Earnings Options Logbook 2012
Third-quarter earnings unofficially kicked off with the usual Alcoa (AA) reporting on Tuesday October 9, 2012. Over the next several weeks, companies will release earnings that will provide us a glimpse of the strength or weakness of global economic strength. Other issues include JPMorgan's "London Whale," if Apple can maintain market share with Samsung biting at its heels, and if the PC is dead, a recurring theme in the second quarter.
Total earnings for the season: $1,035.03.
Total earnings for the season: $1,035.03.
| JPMorgan & Chase (JPM) | |
| Trade Date: October 11, 2012 | Reporting Date: October 12, 2012 BMO |
| Closing Price Pre-Earnings: $42.10 | Closing Price Post-Earnings: $41.62 |
| Sold 5 42.50 calls at $0.40; expiring October 12, 2012 | |
| JPM finishes week at $41.62 | |
| Margin required: $5,966 | |
| Net profit of $183.75 or 3.08% | |
| Intel (INTC) | |
| Trade Date: October 16, 2012 | Reporting Date: October 16, 2012 AMC |
| Closing Price Pre-Earnings: $22.35 | Closing Price Post-Earnings: $21.79 |
| Sold 10 22.50 calls at $0.33, sold 10 21.50 puts at $0.19; expiring October 20, 2012 | |
| INTC finishes week at $21.26 | |
| Margin required: $5,970 | |
| Net profit of $330.02 or 5.53% | |
| Note: Options closed early to free up margin | |
| eBay (EBAY) | |
| Trade Date: October 17, 2012 | Reporting Date: October 17, 2012 AMC |
| Closing Price Pre-Earnings: $48.20 | Closing Price Post-Earnings: $50.83 |
| Sold 5 50.00 calls at $0.56, sold 5 46.00 puts at $0.59; expiring October 20, 2012 | |
| EBAY finishes week at $49.97 | |
| Margin required: $5,900 | |
| Net profit of $521.26 or 8.83% | |
| Note: Call option closed at $0.01 on Friday near market close | |
| Netflix (NFLX) | |
| Trade Date: October 23, 2012 | Reporting Date: October 23, 2012 AMC |
| Closing Price Pre-Earnings: $68.22 | Closing Price Post-Earnings: |
| Sold 4 80.00 calls at $1.05 and bought 4 85.00 calls at $0.44, sold 4 55.00 puts at $0.70 and bought 4 50.00 puts at $0.26; expiring October 26, 2012 | |
| NFLX finishes week at $49.97 | |
| Margin required: $1,640 | |
| Expected net profit of $360.00 or 21.95% | |
How to Buy Stocks Without Spending Cash
Education goes a long way in business and investors with knowledge will always have the upper hand. That is why more and more traders have abandoned the "buy and hold" strategy and are replacing it with a less commonly discussed strategy known as a synthetic long.
The strategy mimics a long equity position through the use of options. Two bullish trades are executed that require significantly less capital yet carries the same risks and reward.
The first part of the strategy requires the purchase of a call option, known as the long call. If the trader is correct, the long call will rise as the stock rises. The second part requires the sale of a put option, known as the short put. If the trader is correct, the short put will decrease in value as the stock rises. Shorting (or writing) a put option may require upgrades to your margin account so verify with your brokerage.
Since we are replicating a long-term purchase, it is prudent to use LEAPS (Long-term Equity Anticipation Security). LEAPS are long-term options and typically expire in January of a future year. In fact, LEAPS are already available for expiration on January 17, 2015.
Shares of Apple [AAPL:NSD] closed October 2, 2012 at $661.31. The purchase of a board lot (100 shares) would require an initial investment of $66,131, but not all investors have the capital nor the income to pay interest on borrowed money for such a purchase. As a result, Apple is a good candidate for the synthetic long.
Long Equity
An investor looking to buy the shares would require the $66,131 up-front or could borrow on margin with a minimum deposit of $19,840 (30% margin requirement) but would pay interest on $46,291. Total margin required is a minimum of $19,840.
Synthetic Long
Another investor looking to create a synthetic long would require a deposit equal to the margin required to purchase the call option and the margin required to sell a put option. Using a strike price of 660 for both options, we find the call option is asking $102.50 and the put option is bidding $106.60. Now that we have this information, let us examine the steps and margin requirements.
Step One: Long Call
The Jan 2015 660 call option would be purchased for $10,250 to mimic 100 shares of Apple. A hefty price, but a fraction of the stock holder's initial payment. Total margin required is $10,250.
Step Two: Short Put
The Jan 2015 660 put option would be sold for $10,660 to mimic 100 shares of Apple. The estimated margin required is $13,095 (to view the formula, click here under short uncovered puts or click here for the online calculator).
The margin required for a synthetic long is $23,755 and is equal to the minimum initial deposit. Another thing to note is that the synthetic long automatically generates $410. This investor would actually have $24,165 in the account while the long-term stock holder has paid at least $66,131 for Apple.
The reason that the option trader earns money today is because they forfeit their right to receive future dividends. The call option would discount the value of the dividends in its price calculating the value of time and interest, which is why the put option costs more than the call, even though the call is in-the-money. If you didn't get that, don't worry about it!
Two things can happen to a stock in 15 months. It can rise or it can fall.
If Apple rises, the long-term holder profits the difference in share price at sale and dividends received. The option trader would see the call option rise and be able to sell it; the put option would decrease in value and eventually be worthless. The option trader's profit is the gain (if any) in the value of the call option plus the entire value of the original sale of the put option.
For example, if Apple rises to $800 on January 16, 2015, the stock holder profits $13,869 and earns $331.25 in five dividends. This totals $14,200.25. Meanwhile, the option trader earns $3,750 on the call option plus $10,660 on the put option. This totals $14,410. As we see, the option trader will generate more income after dividends by $210 assuming the stock holder has not borrowed any money.
But what if Apple drops to $550? The stock holder loses $11,131 on the stock but earns $331.25 in dividends. This totals ($10,799.75). Meanwhile, the option trader loses $10,250 on the call option purchase and closes the put option at $110. The put option loses only $340. This totals ($10,590). As we see, the option trader loses less money in the same situation.
In the above example with Apple rising, both traders essentially earned the same amount of money, however, the option trader yielded nearly three times as much. The stock holder earned a handsome 21 per cent in 15 months, but the option trader earned more than 60 per cent in the same time period.
For new investors, the simple idea of an option is overly complicated, but for sophisticated investors, the strategy above is not so. We see that it is more efficient and yields better results, which is why we're seeing a small shift in options trading versus long-term strategies.
The strategy mimics a long equity position through the use of options. Two bullish trades are executed that require significantly less capital yet carries the same risks and reward.
The first part of the strategy requires the purchase of a call option, known as the long call. If the trader is correct, the long call will rise as the stock rises. The second part requires the sale of a put option, known as the short put. If the trader is correct, the short put will decrease in value as the stock rises. Shorting (or writing) a put option may require upgrades to your margin account so verify with your brokerage.
Since we are replicating a long-term purchase, it is prudent to use LEAPS (Long-term Equity Anticipation Security). LEAPS are long-term options and typically expire in January of a future year. In fact, LEAPS are already available for expiration on January 17, 2015.
Shares of Apple [AAPL:NSD] closed October 2, 2012 at $661.31. The purchase of a board lot (100 shares) would require an initial investment of $66,131, but not all investors have the capital nor the income to pay interest on borrowed money for such a purchase. As a result, Apple is a good candidate for the synthetic long.
Long Equity
An investor looking to buy the shares would require the $66,131 up-front or could borrow on margin with a minimum deposit of $19,840 (30% margin requirement) but would pay interest on $46,291. Total margin required is a minimum of $19,840.
Synthetic Long
Another investor looking to create a synthetic long would require a deposit equal to the margin required to purchase the call option and the margin required to sell a put option. Using a strike price of 660 for both options, we find the call option is asking $102.50 and the put option is bidding $106.60. Now that we have this information, let us examine the steps and margin requirements.
Step One: Long Call
The Jan 2015 660 call option would be purchased for $10,250 to mimic 100 shares of Apple. A hefty price, but a fraction of the stock holder's initial payment. Total margin required is $10,250.
Step Two: Short Put
The Jan 2015 660 put option would be sold for $10,660 to mimic 100 shares of Apple. The estimated margin required is $13,095 (to view the formula, click here under short uncovered puts or click here for the online calculator).
The margin required for a synthetic long is $23,755 and is equal to the minimum initial deposit. Another thing to note is that the synthetic long automatically generates $410. This investor would actually have $24,165 in the account while the long-term stock holder has paid at least $66,131 for Apple.
The reason that the option trader earns money today is because they forfeit their right to receive future dividends. The call option would discount the value of the dividends in its price calculating the value of time and interest, which is why the put option costs more than the call, even though the call is in-the-money. If you didn't get that, don't worry about it!
Two things can happen to a stock in 15 months. It can rise or it can fall.
If Apple rises, the long-term holder profits the difference in share price at sale and dividends received. The option trader would see the call option rise and be able to sell it; the put option would decrease in value and eventually be worthless. The option trader's profit is the gain (if any) in the value of the call option plus the entire value of the original sale of the put option.
For example, if Apple rises to $800 on January 16, 2015, the stock holder profits $13,869 and earns $331.25 in five dividends. This totals $14,200.25. Meanwhile, the option trader earns $3,750 on the call option plus $10,660 on the put option. This totals $14,410. As we see, the option trader will generate more income after dividends by $210 assuming the stock holder has not borrowed any money.
But what if Apple drops to $550? The stock holder loses $11,131 on the stock but earns $331.25 in dividends. This totals ($10,799.75). Meanwhile, the option trader loses $10,250 on the call option purchase and closes the put option at $110. The put option loses only $340. This totals ($10,590). As we see, the option trader loses less money in the same situation.
In the above example with Apple rising, both traders essentially earned the same amount of money, however, the option trader yielded nearly three times as much. The stock holder earned a handsome 21 per cent in 15 months, but the option trader earned more than 60 per cent in the same time period.
For new investors, the simple idea of an option is overly complicated, but for sophisticated investors, the strategy above is not so. We see that it is more efficient and yields better results, which is why we're seeing a small shift in options trading versus long-term strategies.
Retirees Must Add Risk Back
Traditional investment methods teach investors to make a transition from growth to capital preservation strategies as they approach retirement. This allows investors to focus on preserving wealth and preventing losses and generating income. It has been used by millions of Canadians for decades and will continue to be used, but this strategy still advised by professionals is becoming outdated because of today's low interest rate economy.
Low interest rates will remain a part of the global economic plan until growth in confidence is restored and for most governments, including Canada, elevated interest rates won't be available until at least 2015. For retirees with capital preservation strategies, their savings will be diminished at an alarming rate, especially to the millions that have wealth locked up in RRSP accounts.
Needless to say, low interest rates will reduce returns, especially for those invested heavily in bonds. A 10-year government of Canada bond is yielding 1.62 per cent (view Bank of Canada yields here). That is less than the target rate of inflation of 2 to 3 per cent. If returns can not keep pace with inflation, it forces retired investors to sell more than they expected, reducing their overall wealth and the lifespan of their nest egg.
For those that have most of their savings in RRSP's, they will notice that mandatory withdrawal amounts exceed returns. Although this is already a common downside with RRIF accounts, low yields will continue to force investors to sell more of their bonds. It is this reason why retirees must consider adding risk back into their portfolios.
CPP and OAS (if qualified) will cover basic expenses but is it enough? Choosing to re-balance back into riskier assets like stocks is a tough decision especially having gone through three recessions in the last ten years and stock market volatility will never cease to exist. But great deals can be found in Canada that allows investors to save a little wiser.
Canadian investors looking to stay north of the border will find billion-dollar companies with generous and growing dividends. Although the risks of the stock market will always be in play, dividends will remain consistent in our economically better country. Yields above 4 per cent can be found in 16 of Canada's 60 biggest companies as of September 25, 2012. Click here to view an updated-daily list of the TSX 60's yields. These 16 stocks include major banks, competing telecom providers, and energy and resource companies creating a fairly diversified portfolio.
An added benefit to holding equity over bonds is that one can sell just a few shares of a stock to cover, while bond holders would have to sell one unit which in this day in age would be near $1,000, even if the investor required just $200.
The capital preservation techniques devised years ago are not applicable in today's economy. It assumed yields near 4 per cent (that is what we used in college), but that is not realistic for the foreseeable future. Investors must shift more focus back into risk if they plan on living off their life savings. It isn't right that so many millions of Canadians will blindly follow the advice of an advisor simply following the traditional investing methods. Investors must think outside the box and come to the realization that their savings are being hurt by fiscal policy meant to bolster economic activity. Otherwise, individuals in retirement would have to go back to work just to make ends meet.
A Fan's Plea at the 10th Hour
No matter how many times the NHL will abuse this fan, like a low-esteemed boyfriend, I will always come crawling back to you. That is how much I love this sport. I grew up watching and playing hockey and I intend to watch and play it for another 60 years. But if what we're hearing from the NHL and NHLPA discussions are true, the NHL will probably cease to exist. The only benefit is that the Canucks will never reign as Stanley Cup Champions, but I digress.
Please reach a deal, compromise, and move forward. There is no need to hinder the growth of the sport by fighting for personal rights which can be negotiated off the ice while players show case hockey and generate revenue on the ice. A lockout is a last resort tactic that Bettman will reluctantly impose, and I firmly believe Bettman does not want this, considering he had a very emotional tone of voice when speaking about it last night. But nobody wins in a lockout, not the players, not the owners, not the employees, not the fans, not the bookies, not the bars and restaurants, not merchandise retailers, not a single entity stands to gain when a lockout occurs. So why force a lockout and accept to be locked out? It is a lose-lose-lose-lose-lose situation.
Bettman has to stop the tactic of using lockouts to string the NHLPA into agreeing with its proposed terms. It has damaged the sport and this third lockout will undoubtedly do more damage than ever. Even I am hesitant on supporting the league right now, when a short-term solution can be found that keeps the game on the ice and allows owners and union members to work on a better deal.
Conversely, I believe that Fehr and his lackeys at the NHLPA must acknowledge how good their employees have it. Their rights are more equitable than the rights of other professions. Unions were designed to give a voice to the front-line staff who were not paid enough to make ends meet, did not earn overtime, and worked in unsafe conditions. Instead, we have a union fighting for every penny when members don't necessarily need it.
I understand that the NHL and NHLPA want to battle for what's right and fair and I believe they should, but both parties must also accept that their biggest stakeholder is the fan, which happens to be their consumer. We represent a fraction of the revenue, but without any fan, there would be no revenue at all. We buy tickets, but businesses pay to advertise along the boards, to televise and broadcast the games, to sell hats and shirts and flags and cups all to us. Consumers and fans do not have a voice. Instead, we are heard through consumption and trends and businesses know that. This is why it is so critical that a deal is worked out because the NHL stands to lose too much over a few million dollars in a billion dollar industry.
I am not asking for the NHL and NHLPA to bow down to our every wish because the fans deserve it. No, I want both parties to create a perfect CBA agreement that simply can be renewed without work stoppages or disruptions for a very long time - a pipe dream perhaps. All parties want the same end result so listen to the fans that want to cheer for every great moment that your sport delivers, listen to the players that wish nothing more than to play for a shot at the holy grail, and listen to the owners that need to operate a business.
Please Mr. Bettman and Mr. Fehr, for the enhancement of the game, to respect the wishes of the fans, players, and owners, please find a way to come to terms to prevent a lockout. I can barely stand summer, you think I can survive another year?
An Ode To Ben Bernanke
Ben Bernanke is an American hero. He has never been given any credit in his role. He has exposed nearly every century-old financial theory as wrong. He has shown resilience, perseverance, and leadership exemplifying the adage, "If at first you don't succeed, try, try again," with his actions as Chairman of the Federal Reserve. It is the start of a new macroeconomic system that governments have started to employ in their arsenal, all thanks to Ben. He is a king among men and it should be known.
Ben challenged the current economic system by proving that the books were inaccurate. What we learned in university was simply a ruse, a brainwashed methodology that ensured the middle class followed the rules, paid our tuition, watched our investments like sheep, and thought supply and demand existed. How we were wrong. Ben brought to light the misleading information that was clearly developed by a secret society to control fiat currency, to control the world's government, and keep the middle class at bay.
Ben made it clear that hyperinflation was just a scare tactic developed by this secret society, at least in first world countries. When the Fed started printing money in 2008 and 2010, economists all over believed that the value of the American dollar would decrease, that this devaluation would eventually lead to major inflation. People were outraged at the possibility that their money would not buy as many goods and that the country was putting itself in major debt. But Bernanke ignored the fears and acted like a leader, doing what he thought was right, not popular. To the economists that cried the sky was falling, where are they now? Too busy buying goods that cost virtually the same as they did years ago I assume.
My boy Ben unknowingly showed that the stock market is not a leading indicator of the strength of a national economy, a traditional school of thought we blindly followed. The US stock market today is higher than it was in 2007, which formerly would have indicated that the US economy is as strong as it was five years ago. Clearly, with unemployment near 9 per cent and GDP growth tepid, Ben has proven that the stock market acts with free will with no correlation to the despair in America.
And Ben, what resilience you have; all the better to lead us with my dear. The first round of quantitative easing failed and did nothing to help the common folks, so he tried again in what is known as QE2. It failed too, so today he announced a round of bond purchases that will occur every month until the labour market strengthens.
If it were any one else, I would have questioned how buying bonds and keeping interest rates near zero helps create jobs, but because it is Ben, the man that has shown our economic models are wrong, he deserves the benefit of a doubt. In fact, since quantitative easing, unemployment has dropped from above 10 per cent to around 9 per cent today. And in another three years, he predicts it will fall to 7.5 per cent. In 20 years, you will have enough citizens that can afford to purchase a home as you maintain record low interest rates.
The simple plan Ben developed could outlive his tenure as Chairman as well. It allows future Chairmen to follow in his footsteps by lowering America's unemployment rate 1 per cent every three years just by spending $40 billion a month on bonds.
Nobody will give you credit Ben. People will argue that it was the private sector, that you hold no power over unemployment, but look at the proof. You initiated strategies that have existed while unemployment lowered and stock and bond markets rose. Countries adopted your strategies. You are a leader and have enlightened and frustrated the best economic thinkers with your rebellious ways. You stood above when the crowd said "No." You want everyone to own a house by creating super low mortgage rates for the next 20 years. You created a debt so large that you exposed the Chinese as frauds with their "elite" math skills. You inspired millions to start saving and stop spending because it was necessary. Don't listen to the critics. Ben, it was all you.
Canadian Banks A Must Buy
Ironically, the best place to put your money is in the banks. It just so happens it's in the bank stock and not your bank account.
Canada's big five released record earnings amid a difficult macroeconomic environment proving that Canada's financial system is deserving of its number one rank in the world. With Europe still in turmoil and American banks fighting for one last pulse, cough Citigroup (C), cough Bank of America (BAC), it is a great to see our banks create massive profits in a heavily regulated system. Management has been pleased and has shown confidence in the system and all five banks raised dividends, which should please investors too.
The fundamentals for Canadian banks have always been strong even through the credit crisis. I remember buying shares of Bank of Montreal (BMO) below $30 in 2009. My regret was selling it a year later, but I digress. The strength of the banks should be a strong reason to buy any one of these companies, since competition in Canada is limited to just a few. And as fees re-enter the banking world in Canada and interest rates remain low, expect profits and margins to be maintained at these levels.
This should lead to rising share prices too. I consider them to be undervalued by at least 15 per cent based on current growth projections and current prices. Two of the five banks have a P/E below 10 and no bank is trading above 12. Dividend yields are more enticing than a 10-year bond. Four banks are yielding more than 4 per cent. For investors looking to generate income, we may start to see capital flow into Canadian banks and away from bonds. This will lead to demand in stock and an increase in price.
The numbers in short:
| Name (Symbol) | Price | P/E | Dividend (Yield) |
| Bank of Montreal (BMO) | $57.62 | 9.72 | 2.88 (5.00) |
| Bank of Nova Scotia (BNS) | $52.90 | 10.39 | 2.28 (4.31) |
| CIBC (CM) | $77.48 | 10.15 | 3.76 (4.85) |
| Royal Bank (RY) | $55.96 | 11.35 | 2.40 (4.29) |
| Toronto-Dominion (TD) | $81.74 | 11.76 | 3.08 (3.77) |
Personally, I believe the banks should be priced closer to a P/E of 13 or even 14. They have managed to grow at double-digit rates for a lengthy period of time. Dividends are rising almost annually it seems. They have made acquisitions in key areas of America and overseas which will bolster profits when the world's economy stabilizes. It appears that Canada's bank stocks are positioned finely to climb over the next decade and shareholders should feel that too.
Disclaimer: My household is currently long Bank of Nova Scotia and Bank of Montreal. I do not plan to initiate any transactions in any of the above stocks mentioned in the next 72 hours with the exception of a possible covered call. Image used does not constitute a purchase.
Second Quarter Earnings Options Logbook 2012
Second-quarter earnings unofficially kicked off with the usual Alcoa (AA) reporting on Monday July 9, 2012. Over the next six weeks, the remaining large cap stocks will report their own earnings reports. And as promised in the last quarter, I will keep a record of all the trades I implement with respects to an anticipated earnings report.
Total earnings for the season: -$550.18.
As we have discussed, most option traders would much rather sell an option going into an earnings call since the premiums are significantly higher. Historically, selling out-of-the-money options yields better results than going long an option because the time value disappears as earnings are reported.
The trades above do not include roll ups and roll downs executed after the earnings report. These rolled trades would impact the profits positively but have been removed from the above trades. An assigned option closed after the report would be included.
Total earnings for the season: -$550.18.
| Wynn Resorts (WYNN) | |
| Trade Date: July 17, 2012 | Reporting Date: July 17, 2012 AMC |
| Closing Price Pre-Earnings: $97.36 | Closing Price Post-Earnings: $96.25 |
| Sold 2 105.00 calls at $0.53, sold 2 90.00 puts at $0.58; expiring July 21, 2012 | |
| WYNN finishes week at $97.31 | |
| Net profit of $180.51 on $4,900 margin or 4.02% return | |
| Note: Options closed early to free margin for other trades | |
| Qualcomm (QCOM) | |
| Trade Date: July 18, 2012 | Reporting Date: July 18, 2012 AMC |
| Closing Price Pre-Earnings: $56.05 | Closing Price Post-Earnings: $58.44 |
| Sold 5 60.00 calls at $0.23, sold 5 50.00 puts at $0.20; expiring July 21, 2012 | |
| QCOM finishes week at $57.68 | |
| Net profit of $182.50 on $7,000 margin or 2.61% return | |
| Netflix (NFLX) | |
| Trade Date: July 24, 2012 | Reporting Date: July 24, 2012 AMC |
| Closing Price Pre-Earnings: $80.39 | Closing Price Post-Earnings: $60.28 |
| Sold 2 100.00 calls at $0.92, sold 2 65.00 puts at $1.10; expiring July 27, 2012 | |
| NFLX finishes week at $58.90 | |
| Net loss of $1,233.49 on $5,578 margin or 22.11% loss, excludes roll down on call option | |
| Note: NFLX put closed at $8.00 on Thursday to free margin | |
| Las Vegas Sands (LVS) | |
| Trade Date: July 25, 2012 | Reporting Date: July 25, 2012 AMC |
| Closing Price Pre-Earnings: $37.51 | Closing Price Post-Earnings: $36.41 |
| Sold 5 41.00 calls at $0.26; expiring July 27, 2012 | |
| LVS finishes week at $36.79 | |
| Net profit of $113.76 on $4,291 margin or 2.65% return | |
| Amazon (AMZN) | |
| Trade Date: July 26, 2012 | Reporting Date: July 26, 2012 AMC |
| Closing Price Pre-Earnings: $219.20 | Closing Price Post-Earnings: $237.32 |
| Sold 2 250.00 calls at $0.71, sold 2 180.00 puts at $0.58; expiring July 27, 2012 | |
| AMZN finishes week at $237.32 | |
| Net profit of $223.00 on $8,767 margin or 2.66% return | |
| Mastercard (MA) | |
| Trade Date: July 31, 2012 | Reporting Date: August 1, 2012 BMO |
| Closing Price Pre-Earnings: $436.57 | Closing Price Post-Earnings: $427.20 |
| Sold 1 460.00 call at $2.50, sold 1 405.00 put at $1.36; expiring August 3, 2012 | |
| MA finishes week at $424.13 | |
| Net profit of $309.02 on $10,346 margin or 2.99% return | |
| Note: We closed the above positions and tightened the strangle to $420 to $435 more than doubling our profit, but this was a post-earnings trade. | |
| Dell (DELL) | |
| Trade Date: August 21, 2012 | Reporting Date: August 21, 2012 AMC |
| Closing Price Pre-Earnings: $12.34 | Closing Price Post-Earnings: $11.68 |
| Sold 10 13.00 calls at $0.30, sold 10 12.00 puts at $0.35; expiring August 24, 2012 | |
| DELL finishes week at $11.26 | |
| Net loss of $177.49 on $3,390 margin or 5.24% loss | |
| Hewlett-Packard (HPQ) | |
| Trade Date: August 22, 2012 | Reporting Date: August 22, 2012 AMC |
| Closing Price Pre-Earnings: $19.20 | Closing Price Post-Earnings: $17.64 |
| Sold 10 20.00 calls at $0.26, sold 10 18.00 puts at $0.16; expiring August 24, 2012 | |
| HPQ finishes week at $17.58 | |
| Net loss of $37.49 on $4,825 margin or 0.78% loss | |
As we have discussed, most option traders would much rather sell an option going into an earnings call since the premiums are significantly higher. Historically, selling out-of-the-money options yields better results than going long an option because the time value disappears as earnings are reported.
The trades above do not include roll ups and roll downs executed after the earnings report. These rolled trades would impact the profits positively but have been removed from the above trades. An assigned option closed after the report would be included.
High-Beta Netflix and Amazon
Playing the Expiry: July 13, 2012
7-Eleven Day (July 11) brings free Slurpees to everyone around the world. And today, it brings free options suggestions.
A strangle on Netflix [NFLX:NSD] is back in play. After rising 20 per cent in three days at the start of July, the stock has flagged and traded sideways. The flag pattern may break out before the week, but that shouldn't stop risk-takers from making that bet.
The stock is $82.50, trading right smack in the middle of the spread. The 80 put is slightly under valued at $0.73 compared to the call at $0.84. The maximum return for this strategy would be $157 per pair. Total margin required is approximately $4,000. The maximum return is 3.93 per cent. The break-even range is $78.43 to $86.57 or downside and upside protection of 4.93 per cent.
Amazon [AMZN:NSD] continues to rise and fall in the low $200-range. Starting the week above $224, it has fallen with the market and recently touched $217. However, if the market is truly sideways as claimed, Amazon should move above $220 after hitting support in the current range. The 215 put is about $1.20. Total margin is about $6,250. Maximum return is 1.92 per cent. The strategy protects a fall of 1.47 per cent post-3 per cent decline from Amazon this week. That suggests Amazon has a low probability of falling further in the shorter term.
Disclaimer: I have implemented the above strategies. I am also short Amazon. Writing naked options is not for everyone. Always consult a professional before making uninformed decisions.
7-Eleven Day (July 11) brings free Slurpees to everyone around the world. And today, it brings free options suggestions.
A strangle on Netflix [NFLX:NSD] is back in play. After rising 20 per cent in three days at the start of July, the stock has flagged and traded sideways. The flag pattern may break out before the week, but that shouldn't stop risk-takers from making that bet.
The stock is $82.50, trading right smack in the middle of the spread. The 80 put is slightly under valued at $0.73 compared to the call at $0.84. The maximum return for this strategy would be $157 per pair. Total margin required is approximately $4,000. The maximum return is 3.93 per cent. The break-even range is $78.43 to $86.57 or downside and upside protection of 4.93 per cent.
Amazon [AMZN:NSD] continues to rise and fall in the low $200-range. Starting the week above $224, it has fallen with the market and recently touched $217. However, if the market is truly sideways as claimed, Amazon should move above $220 after hitting support in the current range. The 215 put is about $1.20. Total margin is about $6,250. Maximum return is 1.92 per cent. The strategy protects a fall of 1.47 per cent post-3 per cent decline from Amazon this week. That suggests Amazon has a low probability of falling further in the shorter term.
Disclaimer: I have implemented the above strategies. I am also short Amazon. Writing naked options is not for everyone. Always consult a professional before making uninformed decisions.
A Prayer to a Lost Soul
I rarely discuss topics unrelated to money on this blog, but friends laugh with you, create memories with you, and endure with you. I decided to write about my thoughts on friendship because I've started to see a friend of mine, one I thought I really cared about, drift away from me and into a life that I don't much respect. What's worse is that I've been able to do nothing as she changed and it made me question who I am. I try to meddle as little as possible and let people learn from their own mistakes. It is how people grow, but it's hard and frustrating having to witness someone you really care about lead down the wrong moral path.
Most of us are afraid to confront our friends because we lack the courage to face the issue head on and we lack the knowledge to tackle the problem. The reality is that confronting your friend often results in conflict and the end of a friendship, but I pose myself the question, "What friendship is left when the transformation is complete?" A non-existent relationship and the wasted life of an awesome person that made my world brighter.
People will tell you that they mean a lot to you and when you lent all those ears and let them lean on all your shoulders, you learn that it was all for naught, all in vain if you will, as their life unfolds and withers away into what it potentially will or has become. We are all given an equal chance to make our lives positive and to be role models to others, but people are greedy and selfish and they crave money, power, drugs, and lust. Why can't we all crave respect, humility, love, and dignity?
Dear friend: just five months ago, we talked about your future; we talked about fun things like boys, movies, and places to visit. And remember when we used to hate those that do the things you do now? Because I sure do. Honestly, I can't say for sure if my suspicions are accurate, but from the words of others, those that I trust and respect, it appears they are true. I won't say names because this applies to so many others, but I want you back. I want you to change to the girl who saw the world as a stage and wanted to be an interior designer, a girl who started a tradition of gelato every month with me, a girl who punched me when something really cute happened beside us.
Most of you won't have made it to this paragraph, but I needed to use this as a catharsis, as a way to figure out what's going on in my head. It is a shame to see a life possibly wasted yet again and to see that the people she surrounds herself finds no inspiration to be better people. I want her to change back to who she used to be, but people are often set in their own decisions.
The girl I knew two years ago is long gone and the body that remains is just an empty vessel to me. I care enough to get you back on track but I feel I was too late in recognizing who you have become. I feel that I've come to the same solution that I've always resorted to and that is if you choose to ask for my help, kid, I'll be there before the sun peaks above the horizon, but if you decide that the path you have taken is best, and you feel that I shouldn't have known about it from the start, then the respect and admiration for my wisdom you have shown me was devoid of any maturity that I once thought existed in you.
I surround myself with people who will inspire me and be inspired by me. I surround myself with people who have identified their goals and wishes, things that they are passionate about, people who love to be alive and make every minute count because they know it is limited, and people whose legacy will survive because I will tell others of their wonderful soul. But the person you may become is not someone I would admire and someone I would never surround myself with. Are you ready to lose me and the people that are on this side of the track who have laughed, created, and endured with you?
I would much rather find out I'm entirely wrong and you are offended by my misleading information and intuition. I would love to know you stayed true to yourself, that your strength in character was underestimated, and you are same person I appreciate having in my life. Honestly, I really would.
Unique Tactic on Las Vegas Sands
Las Vegas Sands [LVS:NYSE] is the world's largest casino company by market cap. It operates hotels worldwide, including the Venetian in Las Vegas, USA, the Marina Bay Sands in Singapore, and the Venetian Macao in Macao, China. Next week on Monday June 18, 2012, the company will go ex-dividend and pay shareholders $0.25 per share.
This dividend occurs after an options expiry and provides a unique opportunity for traders. But first, let's examine the entire situation here to get a full understanding of the scenario and settlement dates. If you understand settlement, skip down three paragraphs.
Normally, if one wished to receive the dividend, an investor must purchase the stock before the ex-dividend date. In this case, the investor must buy it on Friday June 15 at the latest to receive the dividend. He or she can sell the shares on the 18th and maintain their rights to the dividend as well. By purchasing the stock on the 15th, the shares would settle three business days after, which is Wednesday June 20.
Settlement for an option is significantly different. Regular buys and sells settle in just one day. Assignment is two business days. Example, if I purchased a call option on Monday, it would settle on Tuesday. However, if I decided to exercise the option on Wednesday, it would settle on Friday. I could also wish to exercise the option on Tuesday and have it settle on Thursday, just like if I purchased the stock on Monday instead of the option. This is very important to know because the following strategy could get very confusing.
Now, the most important date in this entire scenario is not the ex-dividend date, but the record date or date of record. Las Vegas Sands would deem the record date for its dividend Wednesday June 20. This means that the shares must be in the account and have settled on this day for an investor to receive a dividend. With all that information provided, and hopefully it makes sense, how can one attempt to receive two payments from the LVS options?
If a trader wrote a put, they would receive a premium. Now, if the stock fell below the strike price on Friday, there is a chance the buyer of the put exercises their option and sells the stock to you at the strike price. The assignment would settle on June 20, which means you would be entitled to the $0.25 dividend as well.
The stock is currently trading at $45.21 and the June puts are priced as follows:
| Strike Price | * Last Bid |
| 46.00 | $1.07 |
| 45.00 | $0.52 |
| 44.00 | $0.22 |
What you choose to write is your choice, but it is very rare for an opportunity with a silver lining like this to arise, that is, an unwanted assignment would provide income as well. Unlike most weeks, we must consider that the in-the-money put may not be assigned in the account of the writer, since the owner of the put, who may have bought it as insurance if the stock falls, may wish to receive the dividend instead. The stock has also shown good support at $45 and the stock could rally shortly after wards like it did in March after the dividend payment.
As with all trades, there is always a risk of losing your entire investment. The market is currently in a bit of turmoil and there is a chance these shares could fall well below your strike price. Take into consideration your financial strategy, needs, and tolerance.
Range Bound Stocks to Capitalize On
Playing the Expiry: June 8, 2012
I will make this short and simple. Amazon [AMZN:NSD] has been trading in a range between $205 and $220 since it fell below $220 support on May 18, 2012; the support was the initial low price after earnings. With the market looking to recover from a near correction, the market could start heading sideways before traders and investors build confidence in the world's economy and market.
Taking a look at the Amazon June 8 weekly options, the 220 calls are selling for $1.00 and the 215 puts are selling for over $1.50. The stock is trading in and around $217 at the moment, so a credit spread looks promising. Total premiums received per contract would be at minimum $250 with margin required at no more than $6,300. Total earnings potential is at least 3.97 per cent with a break even range of $212.50 to $222.50. This provides downside protection of 2.07 per cent and a rise of 2.53 per cent.
In the event either options are in-the-money on Friday, consider rolling out the option or taking assignment, as it appears the stock will be brought back into the range determined above.
Another range-bound stock has been Baidu [BIDU:NSD]. The shares have had trouble rising above $120 while giving good support around $115. The weekly options are not as juicy as Amazon's, but a trader with less margin could consider Baidu instead. The 120 call is trading around $0.82 while the far out-of-the-money puts are only $0.34. This would provide income of $116 per pair for the next two days. Note that Baidu is most likely at 50% margin, so margin required is about $6,000. This would earn about 1.93 per cent return if both options expire worthless. The break even range is $113.84 to 121.16 or a drop of 4.33 per cent to a rise of 1.82 per cent.
I will make this short and simple. Amazon [AMZN:NSD] has been trading in a range between $205 and $220 since it fell below $220 support on May 18, 2012; the support was the initial low price after earnings. With the market looking to recover from a near correction, the market could start heading sideways before traders and investors build confidence in the world's economy and market.
Taking a look at the Amazon June 8 weekly options, the 220 calls are selling for $1.00 and the 215 puts are selling for over $1.50. The stock is trading in and around $217 at the moment, so a credit spread looks promising. Total premiums received per contract would be at minimum $250 with margin required at no more than $6,300. Total earnings potential is at least 3.97 per cent with a break even range of $212.50 to $222.50. This provides downside protection of 2.07 per cent and a rise of 2.53 per cent.
In the event either options are in-the-money on Friday, consider rolling out the option or taking assignment, as it appears the stock will be brought back into the range determined above.
Another range-bound stock has been Baidu [BIDU:NSD]. The shares have had trouble rising above $120 while giving good support around $115. The weekly options are not as juicy as Amazon's, but a trader with less margin could consider Baidu instead. The 120 call is trading around $0.82 while the far out-of-the-money puts are only $0.34. This would provide income of $116 per pair for the next two days. Note that Baidu is most likely at 50% margin, so margin required is about $6,000. This would earn about 1.93 per cent return if both options expire worthless. The break even range is $113.84 to 121.16 or a drop of 4.33 per cent to a rise of 1.82 per cent.
First Quarter Earnings Options Logbook 2012
It was a few hours before Apple's [AAPL:NSD] first quarter earnings report for 2012 and I wrote on my Facebook status suggesting option traders consider writing a 495 put and 630 call on the weekly option; it was the April 27, 2012 expiration at the time. The stock was trading around $560 pre-earnings report and the trade implied the stock would move less than 11.5 per cent at the most in any direction by Friday. My colleagues and friends recognized the risk of the trade which prompted a short debate.
It was pointed out that writing naked calls as an investment strategy will not always work in your favour. That person is correct, but no investment strategy will either. Buy-and-hold strategies have failed for many investors and 95 per cent of day traders don't make money either. Mutual funds have been ripping people off for decades and other instruments are yielding a return less than inflation. So, I thought it was unfair to single out naked options as an unfavourable investment style. Fortunately for me, the Apple options expired worthless and I was able to reap the monetary reward and some bragging rights.
Following Apple's earnings, I decided to disclose all trades dealing directly with earnings and post them here. The point is to show that writing options with proper risk management can and will always work in your favour 9 times out of 10. It's not for everyone and if you miscalculate your break-evens and ranges, you could easily lose the shirt off your back, along with the rest of the closet. Statistically speaking, 93 per cent of options expire worthless, according to the Chicago Board of Options Exchange (CBOE); those are very good odds in the writer's favour. Below are the trades in chronological order starting on April 10, 2012 (Alcoa earnings typically kicks off earnings seasons) and ending May 25, 2012 (six weeks later). Green indicates a profit at expiration and red indicates a loss at expiration. I will in this instance use my real dollar figures to provide better insight on cash flow.
In summary, the net income generated on the nine closed and profitable trades equated to $997.03 over five weeks. That profit is after commissions and SEC Fees, but before taxes.Only one trade generated a loss, a substantial loss of nearly $2,100 in fact, which would have created a loss of roughly $1,100. Fortunately, I had enough margin to take assignment and short the shares. The stock is now in a profitable position of over $400, plus the net option premiums received was $257.00, and I had also written covered puts to hedge the trade. I may consider disclosing future earnings plays to provide a detailed history and log of the potential profits and losses that occur. If this were to happen, it will be available in a future link in the top navigation bar.
Disclaimer: As always, writing naked options is considered a higher risk trading strategy and should not be available to all investors. Please discuss this with a financial professional as it can pose serious financial losses if not managed properly.
It was pointed out that writing naked calls as an investment strategy will not always work in your favour. That person is correct, but no investment strategy will either. Buy-and-hold strategies have failed for many investors and 95 per cent of day traders don't make money either. Mutual funds have been ripping people off for decades and other instruments are yielding a return less than inflation. So, I thought it was unfair to single out naked options as an unfavourable investment style. Fortunately for me, the Apple options expired worthless and I was able to reap the monetary reward and some bragging rights.
Following Apple's earnings, I decided to disclose all trades dealing directly with earnings and post them here. The point is to show that writing options with proper risk management can and will always work in your favour 9 times out of 10. It's not for everyone and if you miscalculate your break-evens and ranges, you could easily lose the shirt off your back, along with the rest of the closet. Statistically speaking, 93 per cent of options expire worthless, according to the Chicago Board of Options Exchange (CBOE); those are very good odds in the writer's favour. Below are the trades in chronological order starting on April 10, 2012 (Alcoa earnings typically kicks off earnings seasons) and ending May 25, 2012 (six weeks later). Green indicates a profit at expiration and red indicates a loss at expiration. I will in this instance use my real dollar figures to provide better insight on cash flow.
| JPMorgan & Chase (JPM) | |
| Trade Date: April 10, 2012 | Reporting Date: April 13, 2012 BMO |
| Closing Price Pre-Earnings: $44.84 | Closing Price Post-Earnings: $43.21 |
| Sold 5 45.00 calls at $0.25, sold 5 40.00 puts at $0.11; expiring April 13, 2012 | |
| JPM finishes week at $43.21 | |
| Net profit of $147.50 on $6,670 margin or 2.21% return | |
| Intel (INTC) | |
| Trade Date: April 16, 2012 | Reporting Date: April 17, 2012 AMC |
| Closing Price Pre-Earnings: $28.47 | Closing Price Post-Earnings: $27.95 |
| Sold 10 30.00 calls at $0.29, sold 10 27.00 puts at $0.12; expiring April 21, 2012 | |
| INTC finishes week at $27.60 | |
| Net profit of $365.00 on $6,630 margin or 5.51% return | |
| Qualcomm (QCOM) | |
| Trade Date: April 18, 2012 | Reporting Date: April 18, 2012 AMC |
| Closing Price Pre-Earnings: $66.99 | Closing Price Post-Earnings: $62.57 |
| Sold 5 70.00 calls at $0.38, sold 5 62.50 puts at $0.19; expiring April 21, 2012 | |
| QCOM finishes week at $62.25 | |
| Net profit of $111.26 on $8,995 margin or 1.24% return* | |
| *Note: In-the-money put closed on April 21 at $0.25 | |
| Apple (AAPL) | |
| Trade Date: April 24, 2012 | Reporting Date: April 24, 2012 AMC |
| Closing Price Pre-Earnings: $560.28 | Closing Price Post-Earnings: $610.00 |
| Sold 1 630.00 calls at $1.14, sold 1 495.00 put at $1.25; expiring April 27, 2012 | |
| AAPL finishes week at $603.00 | |
| Net profit of $112.26 on $10,280 margin or 1.09% return* | |
| *Note: Closed call on April 25 at $0.83 to free margin for other trades, profit would have been $216.50 or 2.11% | |
| Las Vegas Sands (LVS) | |
| Trade Date: April 25, 2012 | Reporting Date: April 25, 2012 AMC |
| Closing Price Pre-Earnings: $58.78 | Closing Price Post-Earnings: $56.97 |
| Sold 3 62.50 calls at $0.35, sold 3 55.00 puts at $0.55; expiring April 27, 2012 | |
| LVS finishes week at $55.87 | |
| Net profit of $242.50 on $3,816 margin or 6.35% return | |
| Amazon (AMZN) | |
| Trade Date: April 26, 2012 | Reporting Date: April 26, 2012 AMC |
| Closing Price Pre-Earnings: $195.99 | Closing Price Post-Earnings: $226.85 |
| Sold 2 215.00 calls at $0.60, sold 2 175.00 puts at $0.80; expiring April 27, 2012 | |
| AMZN finishes week at $226.85 | |
| Net profit of $1,534.05 on $9,098 margin or 16.86% return* | |
| *Note: I took assignment and shorted the stock and closed it several weeks later. | |
| Visa (V) | |
| Trade Date: May 2, 2012 | Reporting Date: May 2, 2012 AMC |
| Closing Price Pre-Earnings: $122.19 | Closing Price Post-Earnings: $116.41 |
| Sold 2 125.00 calls at $1.16, sold 2 120.00 puts at $1.25; expiring May 4, 2012 | |
| V finishes week at $117.79 | |
| Net profit of 18.51$ on $6,938 margin or 0.27% return | |
| Note: In-the-money put was closed at $2.10 prior to expiration | |
In summary, the net income generated on the nine closed and profitable trades equated to $997.03 over five weeks. That profit is after commissions and SEC Fees, but before taxes.
Disclaimer: As always, writing naked options is considered a higher risk trading strategy and should not be available to all investors. Please discuss this with a financial professional as it can pose serious financial losses if not managed properly.
Don't Be a Sucker Bro, Stay Away From Zucker's IPO
This is the final warning to my friends and all investors lining up to buy a piece of Facebook [FB:NSD] - don't. Here's where I get blunt, which I rarely ever do here. Buying Facebook is the worst thing you can do. Not only will it prove your lack of reasoning and investment judgment, you will lose thousands of dollars too. It does not make enough money to justify its valuation and it most certainly will not make enough in the coming quarters either. And you would be naive to assume current shareholders are not waiting to sell their shares come May 18 when it hits the frenzy of the stock market. I want to save you from losing your hard-earned money by making you understand that Facebook as an investment is a poor decision. The hype surrounding Facebook is resounding and its prospect as a multi-billion dollar business is valid, but I believe this is another case of overvaluation. If you frequent my blog, you know that valuations are a key topic of mine, so you will know exactly where I'm going with this. You would be crazy to think FB would be a good investment at these prices and here's a few rreasons why.
My personal opinion is just that, an opinion, but fundamentals never lie. Based on current IPO valuations, Zuckerberg's company is worth a staggering $100 billion. This makes Facebook worth as much as McDonald's [MCD:NYSE], twice as much as Starbucks [SBUX:NSD], and four times as much as Dell [DELL:NSD]. McDonald's generated $27 billion in sales in 2011, trumping Facebook's $3.7 billion. And Dell, well it sold $62 billion worth of computers last year alone, and some how the company is worth just a fraction of Facebook.
Of course, Facebook isn't just some company. It's the world's largest social media site with 901 million active users. That's 12.8 per cent of the world's population and some expect this number to reach 3 billion. Strong growing numbers in users and revenue generation makes it a bull case for many, but they are sadly mistaken. With valuations over $100 billion, people have already priced in perfection. No company is perfect.
The first concern would be their inability to make real money. Last night, General Motors [GM:NYSE] cut ties with Facebook citing that advertising on FB was unsuccessful. Don't be surprised if more big businesses make the same decision. Recent polls suggest only 23 per cent of users click on advertising on Facebook. In fact, on advertising, Facebook earns just $3.75 per user. One could argue there's a lot of room to grow here too, but who really clicks on ads? Maybe future share holders trying to prop up the price. The company does not monetize from mobile and tablet users either and this must change as more and more of its users make the transition away from computers.
Secondly, the company's growth is decelerating. At December-end, its profit fell 12 per cent and revenue grew at 45 per cent, down from 55 per cent. Falling revenue and rising costs (strangely it doubled its marketing costs, but I've never seen an ad ever for the site) points to a falling stock in the future. This is evidence that margins are peaking or have peaked in the last 12 months. And its decreasing user count in North America is not a good sign either. Its global user growth rate has stalled to a trickling 1.5 per cent. There are only so many people in the world, and the laws of big businesses are starting to set in.
Thirdly, the CEO shows very little Wall Street prowess. Yes, he built a $100 billion company, but pleasing millions of shareholders is an entirely new realm of business Zuckerberg has yet to endure. His recent actions indicate he still acts like the boss and not the CEO of a publicly traded company, but that may change with time. Why does that matter? Because when you're a public company, shareholders with 100 shares or 100,000 shares care mainly about the stock price.
Some will argue that Facebook is the next Google [GOOG:NSD] and Amazon [AMZN:NSD] and truthfully, I agree in many senses. The company has already grown and become a big part of our lives and culture that it can not escape any aspect of our society. Businesses love it, people love it, politicians, well they're learning to love it. But therein lies its own demise. Its size is immense, and as such, it has little room to grow. Its expectations as a company are so ridiculously high that any hiccup could send these shares tumbling. Some believe that Facebook or Apple will be the first company to be worth $1 trillion. To those investors buying on Friday that believe that the shares will grow much like Google's and Amazon's, it appears your wishful thinking is misplaced and your numbers miscalculated.
When Google went public in 2004, it was valued at $30 billion. And Amazon was worth just $500 million. Today, they are worth about $200 billion and $100 billion respectively in market capitalization. Facebook might be the next Amazon in more ways than one, but I must stress that going public and already being worth $100 billion is not the same as going public at $500 million and growing to $100 billion. Facebook is at its pinnacle, its peak, its zenith if you will. Unless the company makes radical changes to its business model, the prospect that these shares will make you millions is slim. You are better off betting $10,000 on black. At least you won't have to pay a commission at the casino.
Understanding a Rights Offering
I received an email from one of my good friends moments after Ivanhoe Mines [IVN:TSE] released news that a rights offering was made to all shareholders. The company announced a US$1.8 billion rights offer allowing shareholders to subscribe to new shares at C$8.34, a discount of 26 per cent from the previous day's price. As would be the case, my friend had many questions and wanted to know if he should exercise his rights. I told him that a financial theory suggests an investor exercising their rights will not profit or lose. Here's why.
Ivanhoe Mines issued a rights offer at $8.34 to raise funds for a mining project. Prior to the news, the stock closed at around C$11.50 on the Toronto Stock Exchange. It seems like a great arbitrage deal for an investor, therefore, a profit must occur, but that is not true. Let us examine the reason with a very basic example.
If Mr. Jones bought 100 shares of Company ABC at $20 and exercises his rights, thus purchasing another 100 at $16, he would have spent $2000 + $1600 on 200 shares, bringing his average cost base down to $18/share. The market would also push the shares down to $18 as well because of market efficiency. Nobody would be willing to overpay for the stock if it is fairly valued at $18.
Now, Company ABC is trading at $20 with 1,000,000 shares outstanding; that means ABC is worth $20 million. The company issues a rights offer at 1:1 with a subscription price of $16 per share. If all share holders exercised their rights, the company would now have 2,000,000 shares and its new market capitalization would be the sum of the old market capitalization ($20 m) and the new cash received ($16m), which equates to $36 million. But that $36 million is divided evenly amongst 2 million shares, creating a share price of $18.
Assuming no change in company valuation, Mr. Jones would see his shares slowly fall to $18 creating no loss or gain following the completion of the issue.
So, with that basic lesson done, how do we understand Ivanhoe's second rights offer in under two years? The first important thing is determining the amount of rights an investor will receive. Although we are uncertain, it appears that an investor will receive about 20 to 22 rights for every board lot owned, determined by dividing $1.8 billion into the value of the company of $8.52 billion at the time of the news. The rights will not be trading on a secondary market, so holders will only have a few days to exercise their rights. Now, finding the fair market value of Ivanhoe will take a little more work. The company is looking to raise about $1.8 billion by offering shares at $8.34. That creates up to 215 million shares. The company's new market value would be $10.32 billion with 956,348,000 outstanding shares equaling a fair market value of $10.79. And where is that stock today? $10.88.
On the day of April 18, I told my friend if he did NOT plan to exercise his rights but wants to continue owning Ivanhoe, he should sell them immediately and repurchase them after share dilution. Normally, the rights would be available to sell in an open market, allowing him to capture the "loss" on his share's reduction in value. There was no financial gain in holding them for the next few weeks since the stock did not pay dividends and he did not sell covered calls. He would also partake in the dilution of his shares. I didn't ask what his decision was; that's just rude, but the shares actually rose to $13.50 on other news on the same day, which would have given an investor a good price to sell out.
Ivanhoe Mines issued a rights offer at $8.34 to raise funds for a mining project. Prior to the news, the stock closed at around C$11.50 on the Toronto Stock Exchange. It seems like a great arbitrage deal for an investor, therefore, a profit must occur, but that is not true. Let us examine the reason with a very basic example.
If Mr. Jones bought 100 shares of Company ABC at $20 and exercises his rights, thus purchasing another 100 at $16, he would have spent $2000 + $1600 on 200 shares, bringing his average cost base down to $18/share. The market would also push the shares down to $18 as well because of market efficiency. Nobody would be willing to overpay for the stock if it is fairly valued at $18.
Now, Company ABC is trading at $20 with 1,000,000 shares outstanding; that means ABC is worth $20 million. The company issues a rights offer at 1:1 with a subscription price of $16 per share. If all share holders exercised their rights, the company would now have 2,000,000 shares and its new market capitalization would be the sum of the old market capitalization ($20 m) and the new cash received ($16m), which equates to $36 million. But that $36 million is divided evenly amongst 2 million shares, creating a share price of $18.
Assuming no change in company valuation, Mr. Jones would see his shares slowly fall to $18 creating no loss or gain following the completion of the issue.
So, with that basic lesson done, how do we understand Ivanhoe's second rights offer in under two years? The first important thing is determining the amount of rights an investor will receive. Although we are uncertain, it appears that an investor will receive about 20 to 22 rights for every board lot owned, determined by dividing $1.8 billion into the value of the company of $8.52 billion at the time of the news. The rights will not be trading on a secondary market, so holders will only have a few days to exercise their rights. Now, finding the fair market value of Ivanhoe will take a little more work. The company is looking to raise about $1.8 billion by offering shares at $8.34. That creates up to 215 million shares. The company's new market value would be $10.32 billion with 956,348,000 outstanding shares equaling a fair market value of $10.79. And where is that stock today? $10.88.
On the day of April 18, I told my friend if he did NOT plan to exercise his rights but wants to continue owning Ivanhoe, he should sell them immediately and repurchase them after share dilution. Normally, the rights would be available to sell in an open market, allowing him to capture the "loss" on his share's reduction in value. There was no financial gain in holding them for the next few weeks since the stock did not pay dividends and he did not sell covered calls. He would also partake in the dilution of his shares. I didn't ask what his decision was; that's just rude, but the shares actually rose to $13.50 on other news on the same day, which would have given an investor a good price to sell out.
Be an Amazon Consumer, Not an Investor
Amazon [AMZN:NSD] shareholders may want to sell this week because the good times probably won't last. The world's largest online retailer surged about 15 per cent to over $230 after first-quarter earnings, but carrying that momentum for the remainder of the year will be a tough act with so many storm clouds hovering over the company. And with short sellers licking their fingers at this company, who's left to buy?
For some irrational reason, many analysts upgraded the company, even though the shares are trading at 185 times earnings. Any sane investor would glance at that P/E and know Amazon is extremely over valued. At these valuations, the company would have to be nearly perfect, no wait, better than perfect, to grow their shares. However, this is not the case. Declining profits, declining margins, declining guidance: these are not triggers to buy an expensive stock. No, these are cases to sell a company that appears to be the next Netflix [NFLX:NSD], Research in Motion [RIM:TSE, RIMM:NSD], or Netscape. If this company went private tonight, the new owners would have to wait 185 years to break-even, and that excludes the declining value of money.
Case in point: 2012 Q1 earnings indicated a profit margin of 0.99 per cent. That is, for every $100 I spend on Amazon.com, the company profits 99 cents. With so little room for error and a cut-throat industry that leaves losers in the dust, Amazon has to execute on a very high level. Take a look at the numbers. Revenue rose to $13.18 billion last quarter, a huge increase of 34 per cent but net profit was just $130 million, down 35 per cent by slashing prices to entice buyers. Its strategy of growing revenue may have worked, but it sacrificed its margins too much. Looking forward, the company's second quarter guidance was reduced to a net loss of $240 million. That's right folks. A company that sells more than $10 billion in products every three months will lose $240 million. If that doesn't scream sell, I don't know what else does.
It also doesn't help that the Kindle, their e-reader, is being sold at a loss. It was a strategy Microsoft [MSFT:NSD] and Sony [SNY:NYSE] employed with their video game consoles. The hopes for these two brands was that sales of video games, memberships, accessories, and down-loadable content would cover the losses on the consoles and it has worked. The major difference between Microsoft and Amazon - video games are $60, books are $6.
Add the expected sales tax collection which will eventually be law all across the United States, starting with California and Texas, and you have diminished price-advantage. For the last 18 years or so, with exception of five states, US Amazon customers never paid state sales taxes for purchases online, but this is about to change in 2013, as some customer's will now have to pay taxes like they do at brick-and-mortar shops. In Canada, it would be like never paying GST/HST/PST on Amazon.ca and then finding out that you have to start paying it next year. It will change consumer's behaviour and Amazon could see large-ticket items being left in stock for significantly longer.
What's ultimately problematic for me is the motive of upgrades by 9 analysts the day after earnings. Most traders ignore the noise from analysts. Their estimations and predictions are as educated as sophisticated investors, but their motives are often questionable. Paulo Santos of seekingalpha.com pointed out that Citigroup analyst Mark Mahaney upgraded his price target from $190 to $300 in a single day. But back in 2010, Mahaney predicted the company would earn over $5.32 a share by 2012. Amazon's real EPS: $1.27 (Full article here). How do so many companies change their perception of the company with one report, especially when the report showed that their margins are declining? There has been no significant change in the company's direction and profitability. Are they pumping the shares so they can dump them?
The company's total profit is less than it was at the end of 2008, but the shares are up 150 per cent in that time span. Revenue has risen significantly, but what's the point of selling more when you end up with less? It is energy well-wasted. It does not feel like Amazon's management wants to thrive as a business, but rather survive. Are they now fearful of Microsoft, Google [GOOG:NSD], and Apple [AAPL:NSD]? Amazon hasn't even considered paying a dividend. That's a sign that management knows their cash flow is not stable enough to pay out long-term holders. 70 per cent of its shares are owned by institutions, so one sell button by one firm could knock the shares back to normality.
Honestly, I believe Amazon will be the number one online retailer for decades and quite possibly for the entire 21st century, but being at the top only pushes competition to be better. And being number one doesn't mean your shares should be outrageously overpriced either. Realistically, for a company that is nearly two decades old and as established as this, the shares should be trading at a generous 15 times earnings, much like the rest of the market. That puts the shares at $20 not $230.
Disclaimer: I am short Amazon shares post-earnings.
Top 25 Dividend Yielding Stocks in Canada
Finding yield in a low-interest world can be a tough task. It's no longer the 1980's where saving your money at the bank was actually a wise thing. Today, savers will be lucky to earn 1.5% (the current yield on a one-year GIC). Take into consideration that last year's Canadian inflation rate was just under 3 per cent, savers will actually lose nearly 1.5 per cent on purchasing power. As a result, many investors have turned to the equities market over the last ten years. Since the low of 2002, the market has doubled in Canada, and dividends have grown by just as much.
If you've made contributions to your RRSP's this year, but haven't made a purchase yet, consider buying large reputable stocks with a long history of dividends. If your investment strategy consists of living off investment income and not capital gains or wealth, you could consider buying one of the 25 stocks below, whose dividend yields are north of 5 per cent and are valued at more than $1 billion in market capitalization.
All table information is based on the near closing prices on Thursday March 15, 2012. The information discounts previous and future dividend history, focusing only on current yields, prices, and company value and does not constitute a direction to purchase the stock. Please speak to an investment advisor before making any decision.
The benefit to buying equities is also its drawback. The value of a company over time can rise or fall, but if a person has consistent dividends and the outlook for the company is stable or profitable, then one only has to focus on the cash flow. Imagine the additional expenses one could subsidize by simply looking at high dividend-yielding stocks. On an investment of $10,000, you would earn $543 to $929 per year or $45.25 to $77.41 per month from the above stocks. If the investment is made in a regular investment account, that covers your phone or cable bill, maybe your child's bus pass, or a bank for a future small vacation.
If you've made contributions to your RRSP's this year, but haven't made a purchase yet, consider buying large reputable stocks with a long history of dividends. If your investment strategy consists of living off investment income and not capital gains or wealth, you could consider buying one of the 25 stocks below, whose dividend yields are north of 5 per cent and are valued at more than $1 billion in market capitalization.
| (Symbol) Company Name | Yield | Price | P/E | |
| (ERF) Enerplus | 9.29 | $23.24 | 38.1 | |
| (PGF) Pengrowth Energy | 8.52 | $9.86 | 39.4 | |
| (ATP) Atlantic Power | 8.30 | $13.86 | 0.0 | |
| (FRU) Freehold Royalties | 8.19 | $20.52 | 23.9 | |
| (NAE) NAL Energy | 7.75 | $7.74 | 51.6 | |
| (AGF.B) AGF Management | 7.09 | $15.24 | 12.8 | |
| (DH) Davis + Henderson | 7.09 | $18.29 | 11.7 | |
| (CLC) CML Healthcare | 7.05 | $10.66 | 533.5 | |
| (BNP) Bonavista Energy | 7.03 | $19.92 | 19.3 | |
| (BA) Bell Aliant | 6.87 | $27.64 | 19.5 | |
| (AX.UN) Artist Real Estate | 6.78 | $16.50 | 5.5 | |
| (SLF) Sun Life Financial | 6.26 | $23.00 | 0.0 | |
| (CRR.UN) Crombie Real Estate | 6.20 | $14.35 | 32.6 | |
| (NPI) Northland Power | 6.17 | $17.50 | 0.0 | |
| (CPG) Crescent Point Energy | 6.08 | $45.43 | 54.7 | |
| (TA) Transalta | 6.02 | $19.27 | 14.7 | |
| (CUF.UN) Cominar Real Estate | 5.99 | $24.03 | 8.8 | |
| (D.UN) Dundee Real Estate | 5.91 | $37.17 | 53.1 | |
| (CSH.UN) Chartwell Seniors Housing | 5.89 | $9.17 | 0.0 | |
| (BNE) Bonterra Energy | 5.84 | $53.38 | 20.9 | |
| (PBN) Petrobakken Energy | 5.78 | $27.85 | 12.1 | |
| (COS) Canadian Oil Sands | 5.57 | $21.54 | 9.1 | |
| (CWT.UN) Calloway Real Estate | 5.56 | $27.85 | 253.5 | |
| (PPL) Pembina Pipeline | 5.53 | $28.21 | 28.5 | |
| (PMZ.UN) Primaris Retail Real Estate | 5.43 | $22.45 | 22.8 |
All table information is based on the near closing prices on Thursday March 15, 2012. The information discounts previous and future dividend history, focusing only on current yields, prices, and company value and does not constitute a direction to purchase the stock. Please speak to an investment advisor before making any decision.
The benefit to buying equities is also its drawback. The value of a company over time can rise or fall, but if a person has consistent dividends and the outlook for the company is stable or profitable, then one only has to focus on the cash flow. Imagine the additional expenses one could subsidize by simply looking at high dividend-yielding stocks. On an investment of $10,000, you would earn $543 to $929 per year or $45.25 to $77.41 per month from the above stocks. If the investment is made in a regular investment account, that covers your phone or cable bill, maybe your child's bus pass, or a bank for a future small vacation.
Options Play on Yahoo!
Playing the Expiry: February 18, 2012
Shares of Yahoo! [YHOO:NSD] slipped more than seven per cent at one point today giving way to a massive rise in the $15 puts for February (monthly contracts). The options were asking merely $0.02 on Monday, but were trading as high as $0.36 earlier today. As of right now, if you wrote the puts, you could get a fill of $0.20 or more. That protects you in the evenet the shares fall an additional 1.32 per cent. Total margin required is only $450 per contract. This provides a return of 4.44 per cent against margin used. This trade is a bullish to neutral speculation suggesting the trader believes the shares will not trade below $15 on Friday.
A person could also write the 15 calls and earn an over $0.30 creating a minimum trading range by Friday of $14.50 to $15.50.
Shares of Yahoo! [YHOO:NSD] slipped more than seven per cent at one point today giving way to a massive rise in the $15 puts for February (monthly contracts). The options were asking merely $0.02 on Monday, but were trading as high as $0.36 earlier today. As of right now, if you wrote the puts, you could get a fill of $0.20 or more. That protects you in the evenet the shares fall an additional 1.32 per cent. Total margin required is only $450 per contract. This provides a return of 4.44 per cent against margin used. This trade is a bullish to neutral speculation suggesting the trader believes the shares will not trade below $15 on Friday.
A person could also write the 15 calls and earn an over $0.30 creating a minimum trading range by Friday of $14.50 to $15.50.
Post-Earnings Netflix Play
Playing the Expiry: January 27, 2012
If you had the guts to buy or sell Netflix [NFLX:NSD] options prior to their earnings last night, then I applaud you for your risk-taking, hopefully it went well. But now that their earnings have passed, option traders are still pricing in a heavy swing for one day!
The shares should remain at the current $117 level for quite some time, now that traders have found a nice "flat" range to settle on. The $120 level acted as previous support and is now current resistance. Earlier in the day, the weekly 120 call options were selling for as high as $2.34, but have come down to $0.65. The puts at 110 still have some value left as well, a surprising $0.30. If you've read PTE before, you know where I'm going.
Total premium on a short strangle at 120 and 110 would net you $0.95 right now. Each pair of legs will require just north of $3,000 margin (may vary with broker). You profit if the shares close on Friday between $120.95 and $109.05. That gives you a $11.90 range. Based on the current price of about $117, that provides downside protection of 7.29 per cent and upside protection of 3.37 per cent. Considering that the shares are now starting to downtrend on the day, the closer out-of-the-money calls may be worth the risk.
The total return on this trade is approximately 3 per cent for one day and two hours. Prepare yourself though, as the shares still possesses volatility, but as many traders will know, shares are often less volatile the day after earnings because all uncertain news has been removed.
If you want to go for broke, or think the shares will stabilize for one day at around $117, then you could also consider writing the 115 put for January 27. With a current bid of $1.22, you would return over $187 per pair, or over 5.6 per cent return. Personally, I would stay away from the 115 puts only because I think we will see some profit-taking tomorrow.
Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. Reminder that all Playing the Expiry posts are considered and executed transactions for my account and should not be taken as professional advice.
If you had the guts to buy or sell Netflix [NFLX:NSD] options prior to their earnings last night, then I applaud you for your risk-taking, hopefully it went well. But now that their earnings have passed, option traders are still pricing in a heavy swing for one day!
The shares should remain at the current $117 level for quite some time, now that traders have found a nice "flat" range to settle on. The $120 level acted as previous support and is now current resistance. Earlier in the day, the weekly 120 call options were selling for as high as $2.34, but have come down to $0.65. The puts at 110 still have some value left as well, a surprising $0.30. If you've read PTE before, you know where I'm going.
Total premium on a short strangle at 120 and 110 would net you $0.95 right now. Each pair of legs will require just north of $3,000 margin (may vary with broker). You profit if the shares close on Friday between $120.95 and $109.05. That gives you a $11.90 range. Based on the current price of about $117, that provides downside protection of 7.29 per cent and upside protection of 3.37 per cent. Considering that the shares are now starting to downtrend on the day, the closer out-of-the-money calls may be worth the risk.
The total return on this trade is approximately 3 per cent for one day and two hours. Prepare yourself though, as the shares still possesses volatility, but as many traders will know, shares are often less volatile the day after earnings because all uncertain news has been removed.
If you want to go for broke, or think the shares will stabilize for one day at around $117, then you could also consider writing the 115 put for January 27. With a current bid of $1.22, you would return over $187 per pair, or over 5.6 per cent return. Personally, I would stay away from the 115 puts only because I think we will see some profit-taking tomorrow.
Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. Reminder that all Playing the Expiry posts are considered and executed transactions for my account and should not be taken as professional advice.
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