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TranceAddict Investors Club @ Marketocracy (pg. 171)
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| Shakka |
| quote: | Originally posted by Comrade Stalin
How much time does he allow for expiration of those options? 3 months? |
I think he's making very short-term trades (maybe even just 1 month). I'm not sure exactly.
| quote: | | Do you set position limits? Like you won't put more than 10% of your portfolio into a certain stock or option. |
It depends how I'm using them, but generally I wouldn't take a position larger than 0.3% of my portfolio for each security. I use index options differently. Not saying my way is superior to anyone else's strategy, that's just how I do it.
| quote: | | Say I write a covered call option. If the buyer exercises that option, I have to buy 100 shares of that stock at the market price and sell it to the buyer for the strike? |
If your call is a covered call then by definition you already own the stock you'd need to deliver to him at exercise. You capped your upside in your original position at the strike price on the call you wrote, but hopefully you captured a little income as well.
Example: I own 100 shares of KO that I bought for $30 share. KO is trading around $53. I don't necessarily want to sell my KO, as I think (and hope) that it will move higher. That said, I'd gladly sell at $60 and take a 100% gain on my original investment. So I choose to write a call on KO for however long with a $60 strike (where I'd be willing to sell anyway). If the option matures and KO is still below $60, the option expires, I keep my original KO stock + any premium I collected from writing the option (August $60s are trading for a whopping $0.29 per contract according to my Bloomberg). So, in essence, if KO doesn't go to $60 by August, you pocket an extra $29. That's a pretty deep out-of-the-money call considering KO stock is a low beta name, so it's really cheap.
Now, if KO goes above $60 then the option gets exercised at maturity. You would be required to sell your stock to the option exercisor (who has called your stock away) at $60. If KO is at $65 when the option gets called, you still only realize gains up to $60 where your stock got called away, so you cap your upside in this scenario. You also get to keep your $29 from the option you wrote.
If you wrote a naked call, it would be much like going outright short in that your potential loss is theoretically unlimited. Since you don't own stock already to cover the sale if the option gets in the money you have to buy it in the open market where the price could go significantly higher due to whatever reason.
| quote: | | I write a covered put option, if the put option is exercised, I must buy 100 shares of the stock, at the strike? |
If memory serves it is very difficult to write a "covered" put option. I'm trying to think through this one. When you write a put, you're selling someone else the option to put stock on you at a certain price, meaning you have to buy stock back from them at a set price. I'm not sure how to write that as a covered position without doing some more complicated stuff. I think the way to hedge out that risk is to commensurately buy a put at the same time with a slightly lower strike price so that you limit your loss potential.
| quote: | | Can you give me a detailed example of a successful and unsuccessful options trade that you have done? |
Unsuccessful: Most of them usually fail. Either 99% loss or a partial loss that I managed to escape from without total loss.
Successful: I recently got lucky buying a bunch of market index puts to hedge out some long exposure. Timing was lucky, market sold off hard, was able to capture some quick profits.
Stock specific: Had plenty of put options on housing/credit/finance related stocks back in 2007 that paid off very handsomely. |
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| Comrade Stalin |
| I cut my losses. I'm going to put more money into my account and try this again. This time buying Dec 2010 $15 call options on TNDM. Wondering how I should hedge myself. Because if I buy a put option at the same strike, my break-evens are at...$10.60 and $19.40 which is too huge a move to be confident. |
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| Comrade Stalin |
| quote: | Originally posted by Shakka
It depends how I'm using them, but generally I wouldn't take a position larger than 0.3% of my portfolio for each security. I use index options differently. Not saying my way is superior to anyone else's strategy, that's just how I do it. |
0.3%? How many positions do you have? I would think you need more than 100 just to be 30% invested. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
0.3%? How many positions do you have? I would think you need more than 100 just to be 30% invested. |
Options are a very small piece of my portfolio, particularly in light of how fast they move, I'd prefer to keep them small. I don't think I've ever had more than 5-6% of my total portfolio invested in options. They're not a core piece of my strategy (for example, I believe Hussman uses them much more aggressively to hedge his long exposure since he explicitly says he does not sell short).
That 0.3% is also just a starting point. If my wager is correct, the position can grow very quickly. |
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| Comrade Stalin |
TNDM has excellent fundamentals and is under valued by the market. Based on the last 5 quarters, I have set a target price of $19, with the current price at $14. With this in mind (because you said you don't know about the stock), would you think buying the December 2010 $15 call option is a good idea?
I can't write call options because I don't fulfill the margin requirements. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
TNDM has excellent fundamentals and is under valued by the market. Based on the last 5 quarters, I have set a target price of $19, with the current price at $14. With this in mind (because you said you don't know about the stock), would you think buying the December 2010 $15 call option is a good idea?
I can't write call options because I don't fulfill the margin requirements. |
Going just on what you've told me...stock got killed today on weaker than expected earnings, a downgrade and a crappy tape. That said, if you are confident in your analysis and think that $19 is a reasonable target based on your own modeling, here is what I would say regarding the calls:
December $15s (now out of the money with the stock at $14) are going for around $1.85. That tells me that in order to break-even at expiration, TNDM equity needs to trade at or above $16.85 at which point the beauty of leverage will kick in. So, if TNDM stock trades higher than $16.85 before December, then by all means it would make for a sensible investment decision as far as I'm concerned. If TNDM were to trade at $19 at expiration (for argument's sake), your options would be worth $4 on a cost basis of <$2 for a 100%+ return.
fwiw, here is some of the investment commentary on the name following their earnings release:
From William Blair (I don't think too highly of them, but can't speak to the specific analyst)
| quote: |
We are downgrading the stock to Market Perform, based on our belief that Neutral Tandem could continue to face pricing and margin headwinds from competition until its Ethernet eXchange opportunity fully ramps up.
Neutral Tandem, Inc. reported first-quarter results below our and consensus expectations. The company reported pro forma earnings per share of $0.25, which fell $0.05 shy of our and consensus estimates, and on revenue of $44.8 million, which also fell slightly shy of consensus expectations. Average revenue per minute for the quarter dropped sequentially to 0.00181, mainly attributed to renegotiation of contracts amid further pricing pressure from competition. In terms of guidance, the company now expects to come in at the low end of its prior full-year guidance.
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From Morgan Stanley
| quote: |
Synopsis:
1Q10 Results: Neutral Tandem reported adjusted EBITDA of $20.6M, representing a Q/Q decrease of 7.6% and missing consensus of $21.5M, although slightly beating our $20.0M estimate. Similar to 4Q, revenues were nearly flat Q/Q at $44.8M.
Minutes of use (MOUs) came in at 24.7B, missing our 25.0B estimate and implying average revenue per minute of $0.00181, or a Q/Q drop of 3.4%, just slightly better than our estimated 4.2% decline. Nevertheless, our calculated FCF (EBITDA less Capex less Net Interest Expense) came in at $18.2M (beating our $15.9M estimate), on the back of lower than expected capex of $2.6M versus our $4.5M and consensus of $5.1M. The EPS miss ($0.25 vs. our $0.27 and consensus of $0.31) was due to a higher than expected effective tax rate of 40.8% versus our 35.7%.
Trends and 2010 Outlook: Management guided to the low end of the previously announced guidance range for 2010 due to competitive pressures and the impact of “general business conditions” on the customer base. Management said that it will remain focused on diversifying the revenue stream with the Carrier Ethernet Exchange product for customers already colocated near Neutral Tandem’s switches. The company said that it had completed 38.2% of the $25M previously announced buyback, with no further announcement of return of capital to shareholders.
What we liked:
(1) FCF of $18.2M beat our $15.9M estimate on better than expected capex and slightly better than expected cost control. Although gross margins missed (at 68.0% versus our 69.6%), EBITDA margins beat our estimates due to lower than expected SG&A.
(2) The Q/Q average revenue per minute decline came in slightly better than expected at 3.4% versus our 4.2% drop. The company’s new product set (terminating switched access, origination) likely is continuing to see solid trends; while pressure on price continues in local transit, MOU share shift was likely an issue as well. |
p.s. You say you can't write call options, but I assume you mean you simply can't trade options due to margin requirements. Just some quick option lingo to clear up some confusion:
When investing in options there is an opening transaction and a closing transaction. (Not unlike buying and selling to complete the purchase and sale of stocks). However, when you write an option, that is an opening transaction that you are selling to someone else. So when you say writing a call, technically that means you would be selling a call to someone else when in reality you are talking about buying the call for yourself in the TNDM example.
Buy to open: You buy the option from someone else and are under no obligation to take further action unless you exercise the option, sell to close, or let it expire worthless.
Buy to close: You sold/wrote an option initially and must now buy it back in the market in order to close your open position (like going short in a sense).
Sell to open: You write the option and sell it in the market and have an open position on your books until you buy it back, have it exercised against you, or it expires worthless.
Sell to close: You sell options that you have previously purchased and recognize the gain or loss and close your position.
Not sure if I explained that well or not, but in any event, you are talking about buying calls, not writing them to be precise.;) |
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| Comrade Stalin |
| quote: | Originally posted by Shakka
Going just on what you've told me...stock got killed today on weaker than expected earnings, a downgrade and a crappy tape. That said, if you are confident in your analysis and think that $19 is a reasonable target based on your own modeling, here is what I would say regarding the calls:
December $15s (now out of the money with the stock at $14) are going for around $1.85. That tells me that in order to break-even at expiration, TNDM equity needs to trade at or above $16.85 at which point the beauty of leverage will kick in. So, if TNDM stock trades higher than $16.85 before December, then by all means it would make for a sensible investment decision as far as I'm concerned. If TNDM were to trade at $19 at expiration (for argument's sake), your options would be worth $4 on a cost basis of <$2 for a 100%+ return. |
I'm thinking about buying the September $10 call for $4.30 which means I need TNDM to be $14.30 to break even, right? Also a little strategy I found.
Strike + Option Price - Stock Price = Premium
A stock with a premium of $1.00 or less is considered to be a good buy. So with this option...
$10 + 4.30 - 14.09 = .21 = good buy
So I make a GTC order to buy the September $10 call and also a GTC order to sell the September $10 call at $5.30 to lock in any profits I make. What do you think about this strategy knowing what you know about TNDM?
| quote: | p.s. You say you can't write call options, but I assume you mean you simply can't trade options due to margin requirements. Just some quick option lingo to clear up some confusion:
When investing in options there is an opening transaction and a closing transaction. (Not unlike buying and selling to complete the purchase and sale of stocks). However, when you write an option, that is an opening transaction that you are selling to someone else. So when you say writing a call, technically that means you would be selling a call to someone else when in reality you are talking about buying the call for yourself in the TNDM example.
Buy to open: You buy the option from someone else and are under no obligation to take further action unless you exercise the option, sell to close, or let it expire worthless.
Buy to close: You sold/wrote an option initially and must now buy it back in the market in order to close your open position (like going short in a sense).
Sell to open: You write the option and sell it in the market and have an open position on your books until you buy it back, have it exercised against you, or it expires worthless.
Sell to close: You sell options that you have previously purchased and recognize the gain or loss and close your position.
Not sure if I explained that well or not, but in any event, you are talking about buying calls, not writing them to be precise.;) |
Well, I am buying to open. I can't sell to open because the broker has margin requirements. Buying call options requires no margin for me so that's what I do. |
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| Shakka |
| quote: | Originally posted by Comrade Stalin
I'm thinking about buying the September $10 call for $4.30 which means I need TNDM to be $14.30 to break even, right? Also a little strategy I found. |
Correct. While it's a lower risk strategy, you end up giving up leverage in the option (i.e. you paid $4.30 for it instead of $1.85, so once it gets in the money your return on your original investment will increase more slowly--but still moreso than the actual stock price so you be the judge of the tradeoff. Logically, what you give up in risk you get back in potential reward and vice versa.)
| quote: | A stock with a premium of $1.00 or less is considered to be a good buy. So with this option...
$10 + 4.30 - 14.09 begin_of_the_skype_highlighting______________+ 4.30 - 14.09______end_of_the_skype_highlighting = .21 = good buy |
I don't know if that's the best way to look at it or not--depends on the price of the underlying security as well. I am always thinking in percentages. I buy GOOG calls that have prices of $15-20 sometimes. I've had mixed success with them, but I don't think price determines risk so much as percentage as a quantifiable variable.
| quote: | So I make a GTC order to buy the September $10 call and also a GTC order to sell the September $10 call at $5.30 to lock in any profits I make. What do you think about this strategy knowing what you know about TNDM?
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I didn't really read any of that research on TNDM so I don't think I'm qualified to make a fundamental judgment. As far as the options strategy. If you're buying and selling a call of the same strike price I guess you're basically locking in any difference in premium between the two. If TNDM goes to $9, both options expire worthless and you keep the difference. If TNDM goes to $11, both options are in the money--you buy at $10 and subsequently get called away at $10 so again, you just keep the difference in premium. If I'm thinking this through correctly, who cares what the underlying stock is? You're just taking advantage of an arbitrage opportunity that I am not sure even exists. If you buy the call, you'd have to pay closer to the asking price and if you sold one you'd probably have to sell closer to the bid price so I don't think you make any money doing this(which makes complete sense). The strategy you are probably trying to get to is one where you buy and sell an option with either a different strike price or a different maturity date (there are names for these strategies--i.e. straddles, butterfly spreads, married puts, etc.) |
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| Comrade Stalin |
| quote: | Originally posted by Shakka
Correct. While it's a lower risk strategy, you end up giving up leverage in the option (i.e. you paid $4.30 for it instead of $1.85, so once it gets in the money your return on your original investment will increase more slowly--but still moreso than the actual stock price so you be the judge of the tradeoff. Logically, what you give up in risk you get back in potential reward and vice versa.)
I don't know if that's the best way to look at it or not--depends on the price of the underlying security as well. I am always thinking in percentages. I buy GOOG calls that have prices of $15-20 sometimes. I've had mixed success with them, but I don't think price determines risk so much as percentage as a quantifiable variable.
I didn't really read any of that research on TNDM so I don't think I'm qualified to make a fundamental judgment. As far as the options strategy. If you're buying and selling a call of the same strike price I guess you're basically locking in any difference in premium between the two. If TNDM goes to $9, both options expire worthless and you keep the difference. If TNDM goes to $11, both options are in the money--you buy at $10 and subsequently get called away at $10 so again, you just keep the difference in premium. If I'm thinking this through correctly, who cares what the underlying stock is? You're just taking advantage of an arbitrage opportunity that I am not sure even exists. If you buy the call, you'd have to pay closer to the asking price and if you sold one you'd probably have to sell closer to the bid price so I don't think you make any money doing this(which makes complete sense). The strategy you are probably trying to get to is one where you buy and sell an option with either a different strike price or a different maturity date (there are names for these strategies--i.e. straddles, butterfly spreads, married puts, etc.) |
The best thing I should have done is an option straddle. Oh well. My strategy isn't to buy an option and sell an option at the same time. It's to buy the option and then put in a limit order that if that option rises by $1, it will automatically sell. |
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| Capitalizt |
Well boys..what do ya think? Is the apocalypse at hand?
At the very least I think people with the welfare state mentality are getting a huge wakeup call. The entire planet has been on the same trajectory towards more and more government..relying on pure faith that future generations will "somehow" be able to keep things rolling. Greece is the first example that it aint gonna happen. |
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| Shakka |
| Fun times. Word going around the trading desks is that some dude at Citigroup put in an S&P futures order for 1.6Billion instead of 1.6Million. Just what you need on a day like today. You're fired. |
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