Option Mondays: AAPL decisions, decisions.

Over the last month I have been actively trading AAPL options. I have been moderately successful (I think I have cleared over $3,500.00). On Friday I bought 10 0ct 290 Calls at 9.80 and 5 Oct 300 calls at 4.50. IT was early in Fridays session and the volatility was still high- simply put I paid 30-40 per contract too much. AAPL traded sideways for the remainder of the day and I took a small loss.

Monday was no better. A weekend of time decay and a .40 loss coupled by low volatility pushed my loss into the $1,600.00 range. I chose to hold tight, figuring we have 2-3 more days until the end of quarter and some money managers might push AAPl to 300.

Then, there was today…. We were up nearly $2 premarket, and then on market open the floor fell out from under us. I watched the stock drop almost immediately into the $275 range. I had no clue what was going on. My first thought was maybe Steve Jobs died at exactly 9:30 am, I quickly found out that wasn’t true. I took in the possibility of profit taking- but it couldn’t be to this scale. The Cook to HPQ rumors were ridiculous and HPQ’s stock wasn’t rallying so there was a disconnect there. The RIMM pad is cool- but Research in Motion was down 5% as well so that wasn’t it. I chalked it up to a HFT raid on AAPL. Cook rumors, RIMMs pad, they smelled blood and they turned on the computer early- bombarded the stock with sell orders, took out stop orders, and dropped AAPL by 20 points. I watched my AAPL options plummet 6-7000 in the matter of seconds.

These scenarios flashed in my mind in a matter of seconds. I decided the best course of action was to double down. I pushed in on margin and doubled my position in Oct 290 calls at a 4.80 price per contract. This dollar cost averaged my position down to roughly $7.00. SO as it stands now I am long 20 AAPL Oct 290 Calls at 7.02 per. There were points in the day that I could have banged out for a modest loss, but I chose to stick with the position. The fundamentals are there, its trading at 14X cash adjusted earning heading forward. It is exploding in foreign markets and it reports on Oct 18^th.

The charts are starting to worry me.

Gordon Gekko "Greed is Good"

I tend to agree with the majority of this statement. Although, we could argue semantics on the term 'greed', I think the premise is correct.

We all have to stay hungry and take advantage of the options given to us.

9/23/10 Update: AAPL, NLY and Family

What I’ve been up to this week:

I initiated a small position (110 shares) of Annaly Capital Management (NLY) for myself. I don’t look at this as a long term investment (5-10 years) but as long as interests rates remain subdued- and I think they will for the next couple of years- NLY should be able to maintain its RIDICULOUS 15% Dividend Yield. Its Ex-Div date is rapidly approaching; this might be a good place to park some short term cash.  I’m looking to DRIP these dividends moving forward until I cash the position out.

On the Option front, I was monitoring APPL for the last few months waiting for a break out to my $300 price target. I believe it was mostly being held down by the 1130 resistance level. Once we spiked above the 1130 level, I bought 10 Oct 280 calls which I cashed out later in the day for a gain of $1,250. Once the move above 1130 was confirmed, I bought 10 AAPL 290 Calls at $5.05 per contract. I still hold this position and am currently up considerably. The momentum is still there, so I am going to ride this horse as hard as I can.

Additionally, I was asked by my mother (in law) to help put some of her savings to work for her. She is retired, and living on a fixed income. She knows I am not a financial advisor, but I’m always willing to help a family member. Plus, by viewing what she was PAYING someone to do for her- she is going to be better off taking some advice from me. So when you see some Bond Funds and ETF’s in my portfolio, you will know why. Overall, I think my mother’s portion should yield about 6.5% in very stable investments. Furthermore, I am maintaining 20% cash for her in a money market account to hedge my bets.

We are holding the 1130 level on the S&P, this is crucial if we are going to make another leg up.

It’s also been a very busy week at my real job, at home and with school. Burning the candle at both ends.

All the best,

CM

The Gods of War

Only three things are guaranteed in life: Death, Taxes, and Warfare. No matter how barbaric, no matter how illogical, no matter what party is in office, America is perpetually at war. For the last century, there has not been even one decade where we were not involved in a major conflict, building up for a major conflict, or engaging in covert warfare. This is not meant to be a political article. It is not meant to open a debate if war is right or wrong. I am simply stating the facts. War is an extension of policy that America is willing to utilize. Take a look at the American Defense Spending for the last 20 years:

If this was a stock chart any investor would be chomping at the bit to buy into this company. Yet with Obama in office, the Iraq war winding down and the Afghanistan war filled with uncertainty, the Aerospace and Defense sector has been pummeled. Couple this with an unsustainable budget deficit and threats of austerity, high quality defense names are hemorrhaging market cap.

I believe these fears are overdone and the long term outlook for Lockheed Martin (LMT), Raytheon (RTN) and Northrop Grumman Corporation (NOC) remain strong. These are strong companies, with a wide moat due to a high barrier to entry, whose stock prices have been unfairly punished.

A few reasons the defense sector is being pummeled.

We are pulling out of Iraq: Allow me to channel Nostradamus ‘There will be conflict in the Middle East’. Be it Iran, Israel, Pakistan, Iraq, Afghanistan, Turkey, Lebanon, Egypt, etc…. there is going to be another major conflict and these companies will benefit from the destruction.

The Changing Face of Warfare: Warfare has changed from tanks and fighter jets to IED’s and terrorism. For the most part, this does not fall into LMT, RTN or NOC sweet spot. However, it would be foolish for America to abandon investment in conventional warfare. As sure as the sun rises, there will be another great conflict that is fought between opposing forces rather than insurgencies.

The Democratic Revolution: When the Dems swept the House, the Senate and eventually the Presidency, the defense sector almost immediately sold off. This is a knee jerk reaction that we see in all election cycles. But let’s be honest, this is shaping up to be a very short term revolution for the Democrats. A swing in the House and Senate will add back to the irrational sell off from the previous election cycle.

Option Update: AAPL a small profit for a big idiot.

Wednesday afternoon I took a small profit on my Sept 270 AAPL calls. With AAPL trading just above the 270 strike, I cashed out my position for a $250 profit.

The next day the stock ran to $277. I missed a profit of nearly $5,000.00. This type of error is infuriating to me.

I took my money off the table for a couple of reasons:

1.      I was worried about weekly jobless claims coming in higher than expected, and the weeks prior being revised higher due to the ‘guestamation’ that was factored in for labor day.  Obviously, the numbers were inline and market shrugged them off.

2.      Next, I assumed the stock would be pinned around the 270 mark heading into Sept expiration. It did dance with the $272.50 price for a few hours but then exploded to the upside on heavy volume.

I figured at max I had an upside of about 1-2 points and at worse I was risking the entire position. I took the profit, and drank myself to sleep last night.

What do you guys think? Did I panic or was my reasoning sound? Obviously hindsight is 20/20.

Please feel free to comment.

Best,

CM

Going Long: PGF and the Wu Tang

I hate Bonds. Well, I guess hate is too strong a word. I just don’t like them for younger investors. I understand their importance in a long term portfolio, diversification, stability, income, etc. But with bond yields at such pitiful levels and talk of a dreaded ‘bubble’, I just don’t find the thought of sinking 20%-30% of my portfolio into this mundane asset class appealing. The risk reward is just not there, especially when the DJIA is yielding roughly 3%. Personally, I have more faith in the management of Proctor and Gamble (PG) than the US Government.

But when the WU speaks, you must listen:

Nonetheless, I will concede the importance of the diversification of assets. I’m just not comfortable getting long bonds or bonds funds. I prefer to take the middle ground. Preferred Shares are a financial instrument that functions as both debt and equity.  Preferred Shares usually provide a higher yield than common shares but have little beta when it comes to capital appreciation. For more information on Preferred Shares I would suggest utilizing Quantum Online excellent resource on the topic Quantum Online .

Option Plays: AAPL RIG

I am finding it difficult to find decent entry points for long term holdings at these levels. I believe we have some upward momentum building so I initiated two aggressive option plays this morning.

First I bought 10 Sept 270 AAPL Calls at $1.98 and sold 10 Sept 280 Calls at .25 for a net cost of $1,730.00

Apple has faced serious resistance at the 265-266 level and this morning we have broken past this level at high volume. The real test will be when the fade comes later in the day. Obviously this trade has a very short leash with expiration on Friday and decay eating at my profits. If the market rally continues this week (which I think it will as next resistance point is at SPY 1130) this trade should be profitable.

Second I bought 10 Oct 65 RIG calls at $1.36 for a net cost of $1,360.00

Rig has been forming a bottom since early June and is approaching its resistance in the $59 area. If it breaks through this level it could make a run at $70-$72.50 range. This is speculative play as there is still a considerable amount of uncertainty in this sector. With mid terms approaching, look for Dem’s to concede on the drilling moratorium. It’s about Jobs now, not the environment.

I will keep you posted on profit and loss for these two plays.

Best,

CM

Going Long: WINTEL

Today I initiated a small long term position in both Microsoft (MSFT) and Intel (INTC). I believe both of these stocks are extremely undervalued and provide a safe, sustainable dividend. Additionally, both stock prices have been unfairly punished, while the companies’ long term story remains strong and intact. 

Microsoft has one of the largest competitive moats of any company I follow. Their bread and butter- the Microsoft Office suite is a renewable source of income with extremely high profit margins. The company generates tremendous free cash flow and possesses one of the most recognizable brands in the world. Regardless of economic conditions, businesses will eventually upgrade their computers and business software.

Shares of MSFT have recently been beaten down for a myriad of reasons:

Worry about the global economic recovery:  This is a real concern. Business will undoubtedly push off nonessential spending which will include cyclical upgrades. For long term investors such as myself, this is merely a phase I am willing to wait out. The story is intact, companies will eventually upgrade.

Failure to successfully penetrate the smart phone market: MSFT’s attempts to break into the Smartphone market have been abysmal. The Kin? That was cancelled quicker than The Michael Richards Show. This is too big of a market to simply ignore; something will have to be done to at least put them in the same park as the IPhone or Android. I don’t have much faith in Windows 7 Mobile.

Speaking of Apple: I believe people are actually assuming that the Apple will steal market share from Microsoft. This is hogwash. Corporate America is NOT going to convert to Macs. Apple products are fun, they are functional but they are not cheap or business friendly. Nothing compares to Microsoft Office or its dominance in corporate America.

It’s Boring: Of course it boring, but who cares? The company is the bluest of the blue chips and is about as safe of an investment you are going to find.

Even with all these worries factored in, the stock is still ridiculously undervalued.

Forward Price to Earnings:           9.02

5 Year Projected PEG Ratio:         .99

To put this into context the average PE ratio for Microsoft over the last decade is over 15.  MSFT is holding an incredible amount of money on their balance sheet. Plus a credible rumor that there is a dividend increase in the foreseeable future. This will hopefully push its current 2.20% dividend yield to amount greater than 3%.

At 25.00 and below Microsoft is a screaming buy.

Bill Gates: 11 rules your kids did not and will not learn in school

This is a bit off topic but too good to pass up!

C


Rule 1: Life is not fair - get used to it! 

Rule 2: The world doesn't care about your self-esteem. The world will expect you to accomplish something BEFORE you feel good about yourself. 

Rule 3: You will NOT make $60,000 a year right out of high school. You won't be a vice-president with a car phone until you earn both. 

Rule 4: If you think your teacher is tough, wait till you get a boss. 

RIP Frank Thaddeus Walendziak

The 20YM will be offline as I head to New York to celebrate the life of a great American, my Great Uncle Teddy. God rest his soul.

I will be back on Thursday with the run down of some stocks I'm watching.

All the best-

CM

Frank (Ted) Thaddeus Walendziak, of Ghent died September 2, 2010 at Pine Haven Nursing Home.

Mr. Walendziak was born January 20, 1919 in Detroit, MI to the late Alexander A. and Bertha R. Sitkowski Walendziak.

He grew up in Manhattan and Brooklyn and graduated from Haaren High School in Manhattan. He was employed by the Charles Pfizer Company, Brooklyn, and most recently worked as a pressman for more than 26 years at the Universal Match Company, Hudson, before retirement.

Mr. Walendziak served in the U.S. Army from 1942 until 1945 as an engineer with the 75th Engineers in Central Burma and Indian Burma. He received the American Service Medal, Asiatic-Pacific Medal and the World War II Victory Medal.

Growing up in Brooklyn, he enjoyed sports, including football, baseball, and running track. He was also a member of the BB (Barbell Club). He loved dancing and singing and sang on the radio as a child in the 1920’s. In later years, Mr. Walendziak continued to love sports and played golf with his friends at Meadowgreens.

Mr. Walendziak was a communicant of the St. James Roman Catholic Church in Chatham, where he was an usher for more than 50 years. He was a 25-year member of the Austerlitz Fire Company and a life member of the Ghent V.F.W. Post 5933.

He is survived by his sister Irene Brickley of Ghent and many nieces and nephews. Besides his parents he was predeceased by his brothers Edward C. Walendziak of Georgetown, Conn, Walter Walendziak of Brooklyn, and his sister Opaline Mackowski of Ghent.

Don't fight the tape.

Lesson learned. Don’t fight the tape no matter how confident you are. I sold out of half my SDS position for a $1,900.00 loss. I’m holding 15 contracts heading into tomorrow but I am not overly confident about a decline. I still think this market is a house of cards, but unfortunately my opinion doesn’t really count for much.  

I hate losing money. But I guess that’s all part of the game. Keeping with this weeks Rocky theme. 

Now it’s back to saving for my long-term positions. I should be back to $10,000 within a month. I just hope there are some good entry points left.

My new prediction: Job numbers comes in awful, market will rally.

See you tomorrow.

C

Like a red headed step child.

Yup, ouch.....

I doubled down on my short before ISM.... I added again at the peak. I am very leveraged right now and I am not feeling very good about it. I guess one bright spot is  I dollar cost averaged down to $1.60.

My current position is 30 Sept 34 SDS Calls at $1.60. I feel like a punching bag. I am a gluten for punishment.

Lets hope I can get up off the mat tomorrow. I'm down $1,971.

CM

Here we go again...

It’s the first of the month, so mutual fund money will come pouring in. I am also aware that a lot of hedge funds who have been on the sidelines the last couple of months need to get back in the market to salvage some gains for their clients. I understand that China, India PMI came in in-line or better than expected…. But I did not expect this type of bounce.

The market just shrugged off and then RALLIED on a -10,000 jobs report from ADP. This is befuddling. We are getting by bombarded by weak data.  We keep getting revised down and yet we keep missing, or mildly beating the estimates. The idea that this is ‘priced in’ is hogwash. But hey, you can’t fight the tape.

On low volume days like today, there is nothing you can do but sit back and watch. I still hold my SDS Sept 34 Calls @ 2.18. I’m going to be down a grand at the open.  I’ll be stubborn.  I’m not taking this loss. No one ever made a dime by panicking.

My prediction for today:

PAIN

Best,

CM