I decide to enter 3 new trades on Double Diagonals - MY VERSION
They are WMT, HSY and PFE. I have drop JNJ for the LEAPs put from my list as the extrinsic is too high.
The key to selection of candidates for these trades are:
1. Sound companies with good cash flow, world leaders, good product line and trade in a range. I am not worry if it break up or down occasionally. The trade structure will protect any fluctuations. If somethings extraordinary happens that the stock shoots up to the moon or drops like a stone, the trade will do fine. Actually, the trade should make money because of its volatility increase. But this is not the reason for the trade.
2. Stock must issue consistent good dividends above 2 % and has no risk of terminating it.
3. LEAP puts has extrinsic value that can be paid back by SP and SC in 2-3 months. Many stock with high dividends tend to have high extrinsic as the dividends are built into the put.
Execution of the Trade:
o Execute monthly front month SC and SP to collect premium
o Never allow the SC or SP to go ITM. If ITM, just roll up and out the shorts to get a credit. There are times when the trend is strong, you may want to wait to roll until it stabilize. In my previous trade on WMT, I allowed one of my shorts to go ITM and was called out just 2 days before expiration. I lost some money but not enough to upset the overall profit of the trade. I will be cautious this time. The one key risk in this trade is if one of your shorts go ITM and be called out, you will lose money.
o One trick is to go with the trends. Add the shorts only if it is stagnating or hitting support and resistance.
o More adventurous trader may want to trade calendar within the stock and LEAP puts. This is not normally what I will do.
WMT
BTO 1000 stock = 53.65
BTO 10 Jan 2012 80 Put = 27.55
STO Nov 55 SC = .43
STO Nov 52.5 SC = 0.55
Extrinsic value = 1.2.
Most probably the trade will be risk free in 2.0 months.
Assuming a collection of average $800 per month from the shorts, it will collect $8000 in another 10 months or a return of about 10%. With the addition of 2.24% dividend, the total annual return should be about 12.24%
PE: Continue to short put and calls to achieve target ROI.
SE: At any time, if the annual ROI exceeds 20%, get out
2. HSY
Buy 1000 stock = 51.57
Buy Jan 2012 Put = 25.35
STO Nov 55 SC = 0.55
STO Nov 48 SP = 0.45
Extrinsic = 1.52
ROI should be similar to what was calculated for WMT above
3. PFE
Buy 1000 stock 17.64
BTO 10 Jan 2012 30 P = 13.25
STO Nov 17 SP = .22
STO Nov 18 SP = .2
Extrinsic = 0.89
I expect to pay back the extrinsic in about 2.5 months. This stock has a dividend of around 4.09%. The company is doing well although some patents are expiring for its leading drugs.
If I can get $300 per month, I should be able to generate a profit of $$2710 in 12 months ( 300 x 12 - extrinsic ). This is 8.8 % annual ROI. Together with the dividends, it is reasonable to target a 12% annual ROI for an almost risk free trade.
PE and SE are similar to the first 2 trades.
Saturday, October 23, 2010
AEP - bear put calendar - II
I closed my AEP trade accidentally. This is my new trade.
BTO Feb 38 P = 2.7
STO Nov 36 SP = .46
Cost = 2.24 debit
I recorded my Net Position Delta this time. NPD = 0.3 ( good )
I am getting 17% short premium over the long put. Anything above 10% is reasonable.
The trade IV is relatively low now. A rise in IV should be beneficial for the trade.
Primary Exit:
- if the trade hits 20% ROI.
- I may decide to roll down the SP if the trend is really bearish or else I will just close the trade
Secondary Exit :
- If the trend goes bullish, roll up the SP or if very bearish, cut loss.
- If the trend goes very bearish, take out the SP and let the trade run. At some signs of support, add the SP.
BTO Feb 38 P = 2.7
STO Nov 36 SP = .46
Cost = 2.24 debit
I recorded my Net Position Delta this time. NPD = 0.3 ( good )
I am getting 17% short premium over the long put. Anything above 10% is reasonable.
The trade IV is relatively low now. A rise in IV should be beneficial for the trade.
Primary Exit:
- if the trade hits 20% ROI.
- I may decide to roll down the SP if the trend is really bearish or else I will just close the trade
Secondary Exit :
- If the trend goes bullish, roll up the SP or if very bearish, cut loss.
- If the trend goes very bearish, take out the SP and let the trade run. At some signs of support, add the SP.
Thursday, October 21, 2010
Portfolio analysis, review and plan
I made a mistake on Monday 10/18. Accidentally, I click on "close all positions" for 80% of my portfolio - talk about "fat" figures! This is an unique feature with Interactive Brokers.
It was not a bad mistake. Precious metal corrected over the next 2 days. More important, it allows me to re evaluate my positions and its strategies before I reestablish all my trades again. It gives me time to analyze, review and establish the plan.
For those who are following some of my trades, I had closed the following:
- XEC covered call for 12.09% return over 38 days
- WMT double diagonal for 9.71% over 203 days or 17.46% ROI annualized. This trade was closed prematurely and I have restarted a new position which I will put the trade on a new post later.
- AEP bear put diagonal closed with positions neutral. Also, reestablished a new bear put calendar which I will post later.
- JNJ double diagonal - after less than a month and was closed accidentally, I was on break even. Not bad! This is supposed to be at least a 12 months trade.
My recent trade for BYD is intact. It is both positive for the stock and the SC now.
1. Analysis
"A great trader who has made tens of millions of dollars from the stock and commodities markets told me the one individual universal reason for failure is the inability to take a loss. This has become my motto, as the true path to riches lies not with the wins, but managing the losses in a prudent, confrontational manner," says Cook.
The performance below are extracted from my broker statements. Individual trades are derived from my personal trading journals. It should be sufficiently accurate though not perfect.
Performance - 2009
ROI = 33.87%
Performance - 2010 YTD
ROI for 9 months = 4.98%
It was a difficult year. I did not do well with the drop in Jan and May.I am still targeting to reach 8% ROI this year.
Analysis of trades
I did a total of around 106 trades for the last 18 months. Some of them were trades before I started using options. I started using options seriously only in September last year.
I have 21 losers out of 106 trades. The winning percentage is >80%. The biggest percentage gain is 44.3%. The biggest loss is -18.3%.
Directionally in terms of timing, I estimate I am right about 60% at the time of entering the trade.
Winners - percent gains vs no. of trades
Losers - percent gains vs no. of trades.
Trades and number of days held
Strategic Plan
Overview
This is the strategic plan going forward to 2011. My trading strategies are as posted on the blog. It includes choosing stocks using fundamentals, timing for entries and exits using my own technical system and the use of options for hedging. More than 80% will be using dynamic collars and double diagonals for safe returns and the remaining percent will be allocated to more speculative strategies like Calendars, Strangles and some small caps.
The average holding period is 2-3 months.
Portfolio can go long or short depending on the market. Most of time there will be some bearish trades even in a bullish environment.
Objectives
o Annual return of >10% ROI
o Risk management is a key part of the strategies. The execution will follow strict rules listed on this blog.
Competitive Advantages
o Based on many years of business experience including co-founder of a number of new start-ups, I believe I have sound understanding of what drives a company to perform and the ability to identify winners in the market in various environment.
o A proven technical system that has been used for >10 years with percentage wins more than 70%.
o A hedging strategy that :
- allow recovery of >50% of directionally wrong trade to turn from losers to winners and limit the loss.
- allow winners to ride the trend and maximize profits.
- allow trades to make money when market is stagnant, slightly bearish or slightly bullish.
Portfolio Allocation:
This is a key component of the strategy. The portfolio is divided into various category with allocated percent of the portfolio to trade.
1. Trading Income - 20%
These are short term trades of 1-2 months main for income. Trades are conservatives and will make about 1-5% per month.
Typical trades are ITM / NTM covered calls, collars and high probability bull puts.
Companies are usually aligned with the fundamental and technical directions but many of them are too big to ride longer term for double digits gains.
2. Growth Portfolio - 55%
This is a selection of stocks with objectives of 50% ROI over longer term. This is the bulk of the portfolio. While the risk and volatility are higher but it is believed that if you know how to control the risk, it is safe trading these stocks.
The holding period varies from 2 months to 2 years.
Positions will be hedged most of the time. From experience even if the stock drops 50%, the position may lose <10%. It will allow time to double the position and ride up once the uptrend resume. This is only done only if the fundamentals remain intact for the stock
At any time, no position will suffer more than 20% loss. If it close to 20% loss, the trade will be closed. Red alert will be activated if the stock loses >10%. Company fundamentals and trend will be seriously evaluated.
If the trend is stagnant, the trade will continue to make money
If trend is up, strategy will allow the position to ride on the trend and make good gains.
i. Growth Stocks - 15%
These are size companies with high growth in the right segment and has the potential to double its price in 2-3 years. Examples are stocks in the internet, alternative energy and technology ( electric cars etc ).
ii. Precious metals - Gold and Silver
I am very bullish on gold and silver for at least the next 2 years. It is my belief that these metals will go through a parabolic maniac phase as a matter of time. If it happens, strategies are in place to ride on this trends
Portfolio will consist of gold and sliver mining stocks and ETFs.
A small portfion will be allocated to speculative juniors that can return few 100%
iii. Commodities - oil, agriculture, palladium, rare metal etc
Also bullish on these commodities over the next 2 years.
Natural gas is the only commodity that is not as bullish. But once there is sign of turning around, it can yield handsomely.
3. Shorts - 10%
Most of the time there are some shorts in my portfolio. My experience is that in a bullish market, there will be still companies for shorts. I have made money consistently on these trades.
Trade strategies used are covered puts, synthetic puts and reversed collars
5. Safe, Pure Income trades for stocks with High Dividends - 15%
These are world denominators that pay out good dividends, good cash position, huge market capital and normally trade in a range. But year after year, they buy back shares and increase their dividends.
I use my proprietary "double diagonal" to trade. The trick is to find stocks with high dividend and with a low extrinsic value for the long term put.
The trade normally becomes risk free within 2-3 months. Premium are collected from short calls and short puts. With some management, it will be collected pure monthly income.
I will implement my trading according to the above strategies. From time to time I will change my allocation. For example, if the market goes bearish, I may increase my allocation for shorts.
Business environment is dynamic and thus the plan will be modified when necessary. For the time being, I do not anticipate major changes.
It was not a bad mistake. Precious metal corrected over the next 2 days. More important, it allows me to re evaluate my positions and its strategies before I reestablish all my trades again. It gives me time to analyze, review and establish the plan.
For those who are following some of my trades, I had closed the following:
- XEC covered call for 12.09% return over 38 days
- WMT double diagonal for 9.71% over 203 days or 17.46% ROI annualized. This trade was closed prematurely and I have restarted a new position which I will put the trade on a new post later.
- AEP bear put diagonal closed with positions neutral. Also, reestablished a new bear put calendar which I will post later.
- JNJ double diagonal - after less than a month and was closed accidentally, I was on break even. Not bad! This is supposed to be at least a 12 months trade.
My recent trade for BYD is intact. It is both positive for the stock and the SC now.
1. Analysis
"A great trader who has made tens of millions of dollars from the stock and commodities markets told me the one individual universal reason for failure is the inability to take a loss. This has become my motto, as the true path to riches lies not with the wins, but managing the losses in a prudent, confrontational manner," says Cook.
The performance below are extracted from my broker statements. Individual trades are derived from my personal trading journals. It should be sufficiently accurate though not perfect.
Performance - 2009
ROI = 33.87%
Performance - 2010 YTD
ROI for 9 months = 4.98%
It was a difficult year. I did not do well with the drop in Jan and May.I am still targeting to reach 8% ROI this year.
Analysis of trades
I did a total of around 106 trades for the last 18 months. Some of them were trades before I started using options. I started using options seriously only in September last year.
I have 21 losers out of 106 trades. The winning percentage is >80%. The biggest percentage gain is 44.3%. The biggest loss is -18.3%.
Directionally in terms of timing, I estimate I am right about 60% at the time of entering the trade.
Winners - percent gains vs no. of trades
Losers - percent gains vs no. of trades.
Trades and number of days held
Strategic Plan
Overview
This is the strategic plan going forward to 2011. My trading strategies are as posted on the blog. It includes choosing stocks using fundamentals, timing for entries and exits using my own technical system and the use of options for hedging. More than 80% will be using dynamic collars and double diagonals for safe returns and the remaining percent will be allocated to more speculative strategies like Calendars, Strangles and some small caps.
The average holding period is 2-3 months.
Portfolio can go long or short depending on the market. Most of time there will be some bearish trades even in a bullish environment.
Objectives
o Annual return of >10% ROI
o Risk management is a key part of the strategies. The execution will follow strict rules listed on this blog.
Competitive Advantages
o Based on many years of business experience including co-founder of a number of new start-ups, I believe I have sound understanding of what drives a company to perform and the ability to identify winners in the market in various environment.
o A proven technical system that has been used for >10 years with percentage wins more than 70%.
o A hedging strategy that :
- allow recovery of >50% of directionally wrong trade to turn from losers to winners and limit the loss.
- allow winners to ride the trend and maximize profits.
- allow trades to make money when market is stagnant, slightly bearish or slightly bullish.
Portfolio Allocation:
This is a key component of the strategy. The portfolio is divided into various category with allocated percent of the portfolio to trade.
1. Trading Income - 20%
These are short term trades of 1-2 months main for income. Trades are conservatives and will make about 1-5% per month.
Typical trades are ITM / NTM covered calls, collars and high probability bull puts.
Companies are usually aligned with the fundamental and technical directions but many of them are too big to ride longer term for double digits gains.
2. Growth Portfolio - 55%
This is a selection of stocks with objectives of 50% ROI over longer term. This is the bulk of the portfolio. While the risk and volatility are higher but it is believed that if you know how to control the risk, it is safe trading these stocks.
The holding period varies from 2 months to 2 years.
Positions will be hedged most of the time. From experience even if the stock drops 50%, the position may lose <10%. It will allow time to double the position and ride up once the uptrend resume. This is only done only if the fundamentals remain intact for the stock
At any time, no position will suffer more than 20% loss. If it close to 20% loss, the trade will be closed. Red alert will be activated if the stock loses >10%. Company fundamentals and trend will be seriously evaluated.
If the trend is stagnant, the trade will continue to make money
If trend is up, strategy will allow the position to ride on the trend and make good gains.
i. Growth Stocks - 15%
These are size companies with high growth in the right segment and has the potential to double its price in 2-3 years. Examples are stocks in the internet, alternative energy and technology ( electric cars etc ).
ii. Precious metals - Gold and Silver
I am very bullish on gold and silver for at least the next 2 years. It is my belief that these metals will go through a parabolic maniac phase as a matter of time. If it happens, strategies are in place to ride on this trends
Portfolio will consist of gold and sliver mining stocks and ETFs.
A small portfion will be allocated to speculative juniors that can return few 100%
iii. Commodities - oil, agriculture, palladium, rare metal etc
Also bullish on these commodities over the next 2 years.
Natural gas is the only commodity that is not as bullish. But once there is sign of turning around, it can yield handsomely.
3. Shorts - 10%
Most of the time there are some shorts in my portfolio. My experience is that in a bullish market, there will be still companies for shorts. I have made money consistently on these trades.
Trade strategies used are covered puts, synthetic puts and reversed collars
5. Safe, Pure Income trades for stocks with High Dividends - 15%
These are world denominators that pay out good dividends, good cash position, huge market capital and normally trade in a range. But year after year, they buy back shares and increase their dividends.
I use my proprietary "double diagonal" to trade. The trick is to find stocks with high dividend and with a low extrinsic value for the long term put.
The trade normally becomes risk free within 2-3 months. Premium are collected from short calls and short puts. With some management, it will be collected pure monthly income.
I will implement my trading according to the above strategies. From time to time I will change my allocation. For example, if the market goes bearish, I may increase my allocation for shorts.
Business environment is dynamic and thus the plan will be modified when necessary. For the time being, I do not anticipate major changes.
Monday, October 11, 2010
JNJ - an interesting variation of Double Diagonals
I have an interesting trade. It is a variation of a double diagonal.
Normally, for a double diagonal, you buy 2 deep ITM LEAPs for call and put. Then you sell, every month, short calls and short puts to recover the extrinsic value when you bought the LEAPS.
I did a trade on March 22nd on WMT.. I recovered all the extrinsic by May and am collecting income every month currently. I expect I will end the trade with around 15-18% return on an annual basis.
I decided to make an improvement on the trade for JNJ. This company has an annual dividends of 3.4%. If I strictly do a DD, I will not benefit from the dividend payout.
So instead of buying a LEAP call, I bought just the stock and a LEAP put. By buying the stock, I did not incur any extrinsic value as it was not an option. The mechanics of trading is the same. I will sell short call and short puts month to month for income. I expect this trade to be risk free in about 3 months.
Fundamentals.
JNJ is one of those big caps stock that is selling at a bargain now. The recovery is uncertain. But if it does recover, the stock should see nice gains from its current level. If it does not recover, this strategy is going to protect the stock from any downside because of the long term deep ITM LEAP put. As the stock declines, the put will gain in value roughly equal to the stock because it is deep ITM.
Like many other value stocks, it has gone nowhere. The stock today is about the same price as it was 11 years ago but the company has grown substantially. If you measure growth by book value, JNJ is 70% cheaper today than it was in 1999. Back then, the stock traded 10 times book value and today it trades 3 times book value.
Johnson & Johnson is a no-debt business. (With $18 billion in cash, it has more cash than debt.) It has an incredible collection of brands, which should insulate it, somewhat, from economic downturns.
At some point, these stocks will break up. It is almost impossible to predict the time. It may go down if there is another market crisis but if the recovery is intact, then the stock is almost certain to break up.
JNJ dipped below 4 X book value in early 1994, the shares soared 150% within 2 years.
JNJ is trading at 13 X PE now. J&J fell to 11.9 times earnings in March 1980. The stock doubled in less than three years. In June '84, it traded down to 10.9 times earnings. The stock nearly tripled over the next three years. Its next big valuation low was April 1994, at a P/E of 13.8. The stock tripled in three years.
The stock is cheap today. Most of the risks are priced into the stock.
But I am not going to be presumptuous. The trade below will cater for the downside but will ride on the upside.
Trade:
Buy 1000 stock at 63.15
BTO Jan 2012 P for 19.7. This gives an extrinsic value of 2.85
STO Nov 60 SP for .29
STO Nov 65 SC for .48.
Manage the trade on a month to month basis by selling front months call and puts.
Never all the SC or SP to go ITM. If it is close to ITM, you can always roll it up to the next month. You have 14 months to roll the shorts - plenty of time. If the shorts are ITM, there is also a risk of getting assigned and it will mess up the whole trade.
If the stock suddenly gaps up or down ( unlikely ), the trade will make money because of volatility spike. This is in theory a strangle trade.
At some point, if the stock spikes up on a clear up-trend, I may close the LP and decide to play a bullish direction.
If it goes down, the stock is always protected by the put for 14 months.
The immediate objective is to sell enough shorts to pay back the extrinsic value of 2.85 for the put. Once it is paid, the trade is a risk-free trade. It becomes a pure income trade with minimum risk if you manage it every month.
From the options premium, it will take about 3 months for the trade to repay the extrinsic.
A target of about 15% is achievable. Together with the 3.4% dividend, the objective is make a return of 20% annual. If the stock breaks up and we adjust the trade bullishly, we can make 50-100%. Downside risk is almost zero.
This trade can be applicable to any solid big caps with good dividends like COP, WMT, MSFT, etc. Once I have proven successful, I will probably add 1-2 two more similar trades to my portfolio.
Normally, for a double diagonal, you buy 2 deep ITM LEAPs for call and put. Then you sell, every month, short calls and short puts to recover the extrinsic value when you bought the LEAPS.
I did a trade on March 22nd on WMT.. I recovered all the extrinsic by May and am collecting income every month currently. I expect I will end the trade with around 15-18% return on an annual basis.
I decided to make an improvement on the trade for JNJ. This company has an annual dividends of 3.4%. If I strictly do a DD, I will not benefit from the dividend payout.
So instead of buying a LEAP call, I bought just the stock and a LEAP put. By buying the stock, I did not incur any extrinsic value as it was not an option. The mechanics of trading is the same. I will sell short call and short puts month to month for income. I expect this trade to be risk free in about 3 months.
Fundamentals.
JNJ is one of those big caps stock that is selling at a bargain now. The recovery is uncertain. But if it does recover, the stock should see nice gains from its current level. If it does not recover, this strategy is going to protect the stock from any downside because of the long term deep ITM LEAP put. As the stock declines, the put will gain in value roughly equal to the stock because it is deep ITM.
Like many other value stocks, it has gone nowhere. The stock today is about the same price as it was 11 years ago but the company has grown substantially. If you measure growth by book value, JNJ is 70% cheaper today than it was in 1999. Back then, the stock traded 10 times book value and today it trades 3 times book value.
Johnson & Johnson is a no-debt business. (With $18 billion in cash, it has more cash than debt.) It has an incredible collection of brands, which should insulate it, somewhat, from economic downturns.
At some point, these stocks will break up. It is almost impossible to predict the time. It may go down if there is another market crisis but if the recovery is intact, then the stock is almost certain to break up.
JNJ dipped below 4 X book value in early 1994, the shares soared 150% within 2 years.
JNJ is trading at 13 X PE now. J&J fell to 11.9 times earnings in March 1980. The stock doubled in less than three years. In June '84, it traded down to 10.9 times earnings. The stock nearly tripled over the next three years. Its next big valuation low was April 1994, at a P/E of 13.8. The stock tripled in three years.
The stock is cheap today. Most of the risks are priced into the stock.
But I am not going to be presumptuous. The trade below will cater for the downside but will ride on the upside.
Trade:
Buy 1000 stock at 63.15
BTO Jan 2012 P for 19.7. This gives an extrinsic value of 2.85
STO Nov 60 SP for .29
STO Nov 65 SC for .48.
Manage the trade on a month to month basis by selling front months call and puts.
Never all the SC or SP to go ITM. If it is close to ITM, you can always roll it up to the next month. You have 14 months to roll the shorts - plenty of time. If the shorts are ITM, there is also a risk of getting assigned and it will mess up the whole trade.
If the stock suddenly gaps up or down ( unlikely ), the trade will make money because of volatility spike. This is in theory a strangle trade.
At some point, if the stock spikes up on a clear up-trend, I may close the LP and decide to play a bullish direction.
If it goes down, the stock is always protected by the put for 14 months.
The immediate objective is to sell enough shorts to pay back the extrinsic value of 2.85 for the put. Once it is paid, the trade is a risk-free trade. It becomes a pure income trade with minimum risk if you manage it every month.
From the options premium, it will take about 3 months for the trade to repay the extrinsic.
A target of about 15% is achievable. Together with the 3.4% dividend, the objective is make a return of 20% annual. If the stock breaks up and we adjust the trade bullishly, we can make 50-100%. Downside risk is almost zero.
This trade can be applicable to any solid big caps with good dividends like COP, WMT, MSFT, etc. Once I have proven successful, I will probably add 1-2 two more similar trades to my portfolio.
Sunday, October 10, 2010
AEP - bear put calendar
There was a request by a blog reader for me to do a pure option trade.
To do this, I am putting a bear put calendar trade on AEP
Fundamentals
AEP is a mainly coal-fired power producer in the United States.
In 2009, AEP incurred a huge loss on a cash basis. After earning $2.4 b in cash from operations, it spent $2.8 b on capital investments / plant maintenance. It has lost money on a cash basis since 2006 but it continues to increase its dividends payments from $663 to $761 m. This accounts for why the stock is so popular. Investors are buying for the dividends.
The key question is, how has the company been getting the cash to pay the dividends. It borrowed more than $10 b since 2005. Recently, it stopped borrowing but instead, decided to sell stocks to finance the dividends! This sounds alarmingly like a ponzi scheme. AEP actually sold new shares worth about $1.7 billion. It has to constantly raise capital simply to stay in business and pay its dividends. This is not sustainable. It is now drowning in debt.
The other factor against AEP is that coal price is going up, with all other commodities. Seventy-eight percent of China's power production is coal based. The demand from China is so huge that this will drive up coal price. Soon, many coal-fired power stations will get more expensive operationally. There is not much room to raise the price of electricity to consumers as it had already been up enormously since 2007. Yes, I will be looking to buy some coal stocks, but not in the context of this discussion. Additionally, there has been all kinds of expensive regulations that makes running more expensive while the company is not allowed to raise price for the repair. A huge increase in coal price will literally bankrupt the company.
Technical
I have been waiting for the right timing to short AEP. Because of the high dividends, if I am wrong about the timing, I will not only lose money on my shorts and I have to pay the dividends too.
The stock has been climbing despite the weak fundamentals. A lot of people are looking for high-dividend stocks. Apparently, it looks like a growth stock if you ignore the debt and capital expenditure.
The best trade for me now is to do a bear put.
It has recently reached new highs and is coming down. It is consolidating at 36.2. I expect it to break down from here.
Trade
A bear put is better that shorting the stock. I do not have to worry about the dividends.
Below is my trade.
BTO May 37 2011 PUT = 3.3
STO Nov 36 PUT = .95
Net Debit = 2.35
Delta difference = .64-.48 =.16 ( acceptable )
% of SP / LP = .95/3.3 = 28.8% ( good )
The risk profile is displayed below:
At option expiry, I will not be losing money if the stock stays below 37.4
If volatility increases, my break-even point will be better.
PE: Continue to roll the SP from 36 to 35 once the downtrend is confirmed within the next 1 to 2 weeks when it goes slightly ITM.
If it continues to be bearish and cannot hold 35, roll it down to 34 which is a major support.
My objective is that it will hit 34 in 1-2 months if the the trend is on my side.
SE: If AEP reverses together with positive technical signal and hits > 37, roll the SP up to 37 or close the trade for a slight loss.
To do this, I am putting a bear put calendar trade on AEP
Fundamentals
AEP is a mainly coal-fired power producer in the United States.
In 2009, AEP incurred a huge loss on a cash basis. After earning $2.4 b in cash from operations, it spent $2.8 b on capital investments / plant maintenance. It has lost money on a cash basis since 2006 but it continues to increase its dividends payments from $663 to $761 m. This accounts for why the stock is so popular. Investors are buying for the dividends.
The key question is, how has the company been getting the cash to pay the dividends. It borrowed more than $10 b since 2005. Recently, it stopped borrowing but instead, decided to sell stocks to finance the dividends! This sounds alarmingly like a ponzi scheme. AEP actually sold new shares worth about $1.7 billion. It has to constantly raise capital simply to stay in business and pay its dividends. This is not sustainable. It is now drowning in debt.
The other factor against AEP is that coal price is going up, with all other commodities. Seventy-eight percent of China's power production is coal based. The demand from China is so huge that this will drive up coal price. Soon, many coal-fired power stations will get more expensive operationally. There is not much room to raise the price of electricity to consumers as it had already been up enormously since 2007. Yes, I will be looking to buy some coal stocks, but not in the context of this discussion. Additionally, there has been all kinds of expensive regulations that makes running more expensive while the company is not allowed to raise price for the repair. A huge increase in coal price will literally bankrupt the company.
Technical
I have been waiting for the right timing to short AEP. Because of the high dividends, if I am wrong about the timing, I will not only lose money on my shorts and I have to pay the dividends too.
The stock has been climbing despite the weak fundamentals. A lot of people are looking for high-dividend stocks. Apparently, it looks like a growth stock if you ignore the debt and capital expenditure.
The best trade for me now is to do a bear put.
It has recently reached new highs and is coming down. It is consolidating at 36.2. I expect it to break down from here.
Trade
A bear put is better that shorting the stock. I do not have to worry about the dividends.
Below is my trade.
BTO May 37 2011 PUT = 3.3
STO Nov 36 PUT = .95
Net Debit = 2.35
Delta difference = .64-.48 =.16 ( acceptable )
% of SP / LP = .95/3.3 = 28.8% ( good )
The risk profile is displayed below:
At option expiry, I will not be losing money if the stock stays below 37.4
If volatility increases, my break-even point will be better.
PE: Continue to roll the SP from 36 to 35 once the downtrend is confirmed within the next 1 to 2 weeks when it goes slightly ITM.
If it continues to be bearish and cannot hold 35, roll it down to 34 which is a major support.
My objective is that it will hit 34 in 1-2 months if the the trend is on my side.
SE: If AEP reverses together with positive technical signal and hits > 37, roll the SP up to 37 or close the trade for a slight loss.
XEC - Updates
I first started the trade on August 16th 2010 with a covered call.
All the fundamentals were listed clearly. It is a solid stock.
But it was the wrong timing. There were the Hindeburg Omen, S&P falling on the verge to break down its reversed Head and Shoulder and the sentiments were very negative. I decided to hold off the trade, and took a small profit.
All the negative sentiments were proven wrong. XEC began to climb again. I decided to get back on the trade on Sept 7.
I bought the stock for 66.95 and sold at Oct, 65 SC for 2.55.
I was still negative on the market but I like the stock. I did a ITM covered call.
Cost position: 64.45
On Sept 9th, I confirmed the bullish move on the stock after RIG announced that it had limited the liability on the BP's oil spill. It was bullish for all drillers. The market also looked positive.
I roll the Oct 65 SC to Oct 70 SC
I bought back the Oct 65 SC for 1.65 for a profit of .9 and sold another Sct 70 SC for 2.55.
My new cost basis is now: 64.45+1.65-2.55 = 63.55
On Oct 5th, the stock continued its bullish trend and was breaking up. Since I am keeping the stock, I decided to roll the SC up from Oct 70 to Nov 75SC.
I bought back the Oct 70 SC for 2.2. There was a profit of .3. I sold the Nov 75 SC for 1.85.
My new cost basis is now 63.55 + 2.2 - 1.85 = 63.9.
The stock as of Oct 8th closed at 75.65. I am now holding to a paper profit of 16.8 percent.
I do not intend to let the stock go ITM. If the trend is still positive, I may still roll the SC up. However, I have enough time till Nov expiry to decide.
If the stock breaks down, I may need to roll the call down.
Bottom-line, I am holding onto this stock until the fundamentals changes to negative.
I will continue to update my blog on this trade.
All the fundamentals were listed clearly. It is a solid stock.
But it was the wrong timing. There were the Hindeburg Omen, S&P falling on the verge to break down its reversed Head and Shoulder and the sentiments were very negative. I decided to hold off the trade, and took a small profit.
All the negative sentiments were proven wrong. XEC began to climb again. I decided to get back on the trade on Sept 7.
I bought the stock for 66.95 and sold at Oct, 65 SC for 2.55.
I was still negative on the market but I like the stock. I did a ITM covered call.
Cost position: 64.45
On Sept 9th, I confirmed the bullish move on the stock after RIG announced that it had limited the liability on the BP's oil spill. It was bullish for all drillers. The market also looked positive.
I roll the Oct 65 SC to Oct 70 SC
I bought back the Oct 65 SC for 1.65 for a profit of .9 and sold another Sct 70 SC for 2.55.
My new cost basis is now: 64.45+1.65-2.55 = 63.55
On Oct 5th, the stock continued its bullish trend and was breaking up. Since I am keeping the stock, I decided to roll the SC up from Oct 70 to Nov 75SC.
I bought back the Oct 70 SC for 2.2. There was a profit of .3. I sold the Nov 75 SC for 1.85.
My new cost basis is now 63.55 + 2.2 - 1.85 = 63.9.
The stock as of Oct 8th closed at 75.65. I am now holding to a paper profit of 16.8 percent.
I do not intend to let the stock go ITM. If the trend is still positive, I may still roll the SC up. However, I have enough time till Nov expiry to decide.
If the stock breaks down, I may need to roll the call down.
Bottom-line, I am holding onto this stock until the fundamentals changes to negative.
I will continue to update my blog on this trade.
BYD
I try to identify clear winners at an early the stage in the market – the next GOOG, AAPL, AMZN or MSFT. It is like investing in a venture fund. The business has not yet caught the mainstream media and big hedge fund managers’ attention.
BYD is a potential candidate.
Fundamentals:
It is a play on the electric car market.
In general, there are still plenty of skepticism about electric cars but they are quickly breaking into the main stream market. They are probably here to stay.
The concept of battery-powered cars has been around for decades. Concerns about rising oil prices and climate change, as well as tougher fuel efficiency standards, government subsidies and venture funds, have propelled these concepts into reality.
Pike Research expects electric vehicles to grow 106% per year or 3.2 m vehicles for the next 5 years. European researcher Glass’s Information Services is predicting that market share for electric vehicles in the UK, Italy, France, and Germany will be more than 20% each. Electric vehicles will become 25% of the US market.
China will be the largest market for electric vehicles, ultimately capturing 27% of worldwide electric vehicle sales. The reason for the hot market is that its government wants it to be so. The Ministry of Industry and Information Technology is committed to developing up to 5 Chinese companies into competitive makers of all-electric cars or plug-in hybrids by 2020, and allocated as much as 100 billion Yuan ( $15 b US) to this end. In China, what the government wants, the government gets.
BYD is the largest auto manufacturer in China. I like BYD because:
1. The technology of electric cars is not something fraught with challenges. It is actually less complex than regular combustion engines. The key competitive advantage needed is low cost. China has the low-cost structure needed. By 2000, BYD had become one of the world’s largest manufacturers of cell phone batteries. By 2008, BYD F3 became the no. 1 selling car in China, beating Volkswagen and Toyota. BYD has 10,000 good engineers at salaries of <$1000 per month.
2. BYD has the access to the biggest growth market in the world, which is China. BYD is on the way to becoming the biggest auto manufacturer in the world!
3. Having done quite a bit of business in China, I know that the Chinese government will protect their own manufacturers over foreign companies and joint ventures. BYD will be the biggest, for sure.
4. Warren Buffet likes the stock. BRK bought 10% of BYD for $230m in 2008. After a recent visit, there are rumors that he is increasing his share of the company. If Warren Buffet sees value, I believe I do not need to dig deeper into the company. It has probably the business moat we are looking for. It can easily defend against all competitors.
5. BYD has a very sound management team. The CEO is a visionary - highly energetic and smart. Charles Munger of Berkshire commented “ Thus guy, Wang ChuanFu ( the founder ) is a combination of Thomas Edison and Jack Welch – something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.” Wang is now one of the richest men in China. However, he has not let his success change his lifestyle and is still a very humble man. He pays himself a modest $265,000 and lives in a BYD-owned apartment complex with other engineers. His only indulgences are a Mercedes and a Lexus, and they have a practical purpose. He takes apart their engines to see how they work. Wang owns roughly 28% of the shares of the company that is worth about US$2b. He has proven ability to execute as he has brought BYD to its present stage with only $300K capital borrowed from friends and relatives.
6. BYD is not just a car company. It is the biggest battery manufacturer. It supplies to the biggest phone manufacturers like Nokia and APPLE iPhone. Its new generation of lithium-ion ferrous phosphate batteries costs 50% less than standard lithium-ion batteries, and lasts longer. BYD batters are 100% recyclable and non-toxic. The battery is a critical component of the electric car. It is a core competence that leads to a distinctive competitive advantage.
For a review of this company, you can watch interview with Mr Wang on CNN or watch the youtube videos below.
Technical
BYD stocks took a 19% decline after they revised their forecast sales target from 800,000 to 600,000. Also, they have had to revise their claim that the e6 has a range of 249 miles per charge and goes from zero to 60 in 8 seconds and has a top speed of 100 mph, and recharges for 50% of capacity in just 10 minutes. These are jaw-dropping claims in the electric car business. Unfortunately BYD has had to adjust some of these claims downward. Zero-to,-60 mph is now 14s, range is 180 miles and top speed is 85 mph.
The stock has fallen and now broken up and reaching at support. As soon as BYD works out these performance bugs, it will rebound to its previous high point.
BYD certainly has the characteristics of the kind of 10 baggers growth stocks that I am looking for.
Trades
This is a stock listed in Hong Kong. It is NOT the same BYD listed in USA. Fortunately using Interactive Brokers, I can buy HK stocks online. I just need to pay slightly higher commissions and a monthly fee of about $15 for real-time data from the Hong Kong Stock Exchange.
The Hong Kong market is not open yet. Also, for the short-term, the stock seems to be under some selling pressure because of some concerns by analysts on growth and valuation. But this is long-term buy.
Trade:
Buy stock at 56
STO Nov 60 SC for 2.4
Cost: 53.6
PE:SC expires and roll out SC next month. Since this is a long term bullish trade, I will not allow the SC to go ITM
SE: If stock goes below 53.6, consider rolling SC down to 50 or add a put to make it a collar if the downtrend is fast. Continue to manage this stock as posted in Dyanmic Collar and use of put in this blog.
The liquidity for options in the HK stock market is very low. Thus it is important to place limit order and wait for it to be filled.
BYD is a potential candidate.
Fundamentals:
It is a play on the electric car market.
In general, there are still plenty of skepticism about electric cars but they are quickly breaking into the main stream market. They are probably here to stay.
The concept of battery-powered cars has been around for decades. Concerns about rising oil prices and climate change, as well as tougher fuel efficiency standards, government subsidies and venture funds, have propelled these concepts into reality.
Pike Research expects electric vehicles to grow 106% per year or 3.2 m vehicles for the next 5 years. European researcher Glass’s Information Services is predicting that market share for electric vehicles in the UK, Italy, France, and Germany will be more than 20% each. Electric vehicles will become 25% of the US market.
China will be the largest market for electric vehicles, ultimately capturing 27% of worldwide electric vehicle sales. The reason for the hot market is that its government wants it to be so. The Ministry of Industry and Information Technology is committed to developing up to 5 Chinese companies into competitive makers of all-electric cars or plug-in hybrids by 2020, and allocated as much as 100 billion Yuan ( $15 b US) to this end. In China, what the government wants, the government gets.
BYD is the largest auto manufacturer in China. I like BYD because:
1. The technology of electric cars is not something fraught with challenges. It is actually less complex than regular combustion engines. The key competitive advantage needed is low cost. China has the low-cost structure needed. By 2000, BYD had become one of the world’s largest manufacturers of cell phone batteries. By 2008, BYD F3 became the no. 1 selling car in China, beating Volkswagen and Toyota. BYD has 10,000 good engineers at salaries of <$1000 per month.
2. BYD has the access to the biggest growth market in the world, which is China. BYD is on the way to becoming the biggest auto manufacturer in the world!
3. Having done quite a bit of business in China, I know that the Chinese government will protect their own manufacturers over foreign companies and joint ventures. BYD will be the biggest, for sure.
4. Warren Buffet likes the stock. BRK bought 10% of BYD for $230m in 2008. After a recent visit, there are rumors that he is increasing his share of the company. If Warren Buffet sees value, I believe I do not need to dig deeper into the company. It has probably the business moat we are looking for. It can easily defend against all competitors.
5. BYD has a very sound management team. The CEO is a visionary - highly energetic and smart. Charles Munger of Berkshire commented “ Thus guy, Wang ChuanFu ( the founder ) is a combination of Thomas Edison and Jack Welch – something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.” Wang is now one of the richest men in China. However, he has not let his success change his lifestyle and is still a very humble man. He pays himself a modest $265,000 and lives in a BYD-owned apartment complex with other engineers. His only indulgences are a Mercedes and a Lexus, and they have a practical purpose. He takes apart their engines to see how they work. Wang owns roughly 28% of the shares of the company that is worth about US$2b. He has proven ability to execute as he has brought BYD to its present stage with only $300K capital borrowed from friends and relatives.
6. BYD is not just a car company. It is the biggest battery manufacturer. It supplies to the biggest phone manufacturers like Nokia and APPLE iPhone. Its new generation of lithium-ion ferrous phosphate batteries costs 50% less than standard lithium-ion batteries, and lasts longer. BYD batters are 100% recyclable and non-toxic. The battery is a critical component of the electric car. It is a core competence that leads to a distinctive competitive advantage.
For a review of this company, you can watch interview with Mr Wang on CNN or watch the youtube videos below.
Technical
BYD stocks took a 19% decline after they revised their forecast sales target from 800,000 to 600,000. Also, they have had to revise their claim that the e6 has a range of 249 miles per charge and goes from zero to 60 in 8 seconds and has a top speed of 100 mph, and recharges for 50% of capacity in just 10 minutes. These are jaw-dropping claims in the electric car business. Unfortunately BYD has had to adjust some of these claims downward. Zero-to,-60 mph is now 14s, range is 180 miles and top speed is 85 mph.
The stock has fallen and now broken up and reaching at support. As soon as BYD works out these performance bugs, it will rebound to its previous high point.
BYD certainly has the characteristics of the kind of 10 baggers growth stocks that I am looking for.
Trades
This is a stock listed in Hong Kong. It is NOT the same BYD listed in USA. Fortunately using Interactive Brokers, I can buy HK stocks online. I just need to pay slightly higher commissions and a monthly fee of about $15 for real-time data from the Hong Kong Stock Exchange.
The Hong Kong market is not open yet. Also, for the short-term, the stock seems to be under some selling pressure because of some concerns by analysts on growth and valuation. But this is long-term buy.
Trade:
Buy stock at 56
STO Nov 60 SC for 2.4
Cost: 53.6
PE:SC expires and roll out SC next month. Since this is a long term bullish trade, I will not allow the SC to go ITM
SE: If stock goes below 53.6, consider rolling SC down to 50 or add a put to make it a collar if the downtrend is fast. Continue to manage this stock as posted in Dyanmic Collar and use of put in this blog.
The liquidity for options in the HK stock market is very low. Thus it is important to place limit order and wait for it to be filled.
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