Trades

Articles on Trades

  1. The Final Update

    I've updated this site on and off for almost 10 years now, each time I've picked it back up it's because a friend has wanted to know more about how and what I've been trading. My trading has been moderately successful, paying for us to pick up our lives and move to new countries on 3 separate occasions. Each of those upheavals has meant a break in my investing and for some reason I don't get the motivation to pick it up again until someone asks me advice. Instead of giving advice I'd rather teach them to make their own informed decisions, teach someone to fish and all that.

    This time around it was a request on how option trading worked and why you'd do it. I'd not traded options since we left Australia and I'd not got deep on the technical aspects since the derivatives elective of my Financial Planning diploma. So time to dust off the site once again and teach by example. I had grand plans to cover the basics, explain The Greeks, how to implement a delta neutral straddle, where you'd use an iron condor, and the list could go on forever. But I never got past the basics. With most things in life there's a jump in understanding required to go from knowing a subject to being able to teach it. In trying to explain the hows and whys of option trading I discovered I'd been over thinking the problem and that I didn't need more than the basics to be successful. That's not to say there isn't a time and place for more advanced strategies but for my risk profile, income objectives, stress I'm willing to endure, and time I'm willing to commit… well the basics were all I needed.

    To that end this site has once again served it's purpose, it's documented what I've been doing and the mechanisms that underly them. From an archaeological perspective all my trades have entry and exit dates and prices so anyone who is so motivated can piece together what I was trading. Continuing to post the results each month just seems superfluous to the intention. So one last time to close things out…

    February 2014 Update

    People have asked what my return is relative to various indexes to get a better sense of the performance of what I'm doing. Here's a report straight out of E*Trade comparing the year to date performance of my account to the NASDAQ (the best performing index this year as far as I could tell):

    feb performance

    The Good

    • 41 total trades (up from 20)
    • 41 successful trades (100%, up from 90%)
    • Average trade length of 3 days (down from 4 days)
    • Average gain of $1,144.34 (up from $583.86)
    • Total gain of $46,918 (up from $11,677.12)

    As was true with the latter half of January the biggest impact has been more closely assessing the opportunity cost associated with keeping a trade open. If a better opportunity presents itself on a given day I'll close a trade early to move my money across to the new trade. It's meant a 25% reduction in the average time I hold a position open while almost doubling the average return.

    The Trades

    Option Qty Opening Date Opening Price Closing Price Gain Trade Length
    GILD Feb 07 '14 $74 Put -8 02/03/2014 0.51 0.1 305.86 2d
    AKAM Feb 07 '14 $43 Put -23 01/31/2014 0.71 0.01 1,575.20 6d
    AKAM Feb 07 '14 $43 Put -14 02/04/2014 0.84 0.01 1,138.08 2d
    GMCR Feb 07 '14 $71.50 Put -8 01/31/2014 1.2 0.01 929.85 6d
    GMCR Feb 07 '14 $76 Put -2 02/05/2014 2.35 0.02 461.62 1d
    GMCR Feb 07 '14 $76 Put -4 02/05/2014 2.35 0.01 920.26 1d
    ATVI Feb 07 '14 $16 Put -37 02/03/2014 0.13 0.01 392.31 4d
    EXPE Feb 07 '14 $60 Put -4 02/06/2014 2.7 0.05 1,047.05 1d
    EXPE Feb 07 '14 $60 Put -11 02/06/2014 2.7 0.05 2,898.61 1d
    ATVI Feb 07 '14 $15 Put 21 02/05/2014 0.06 0 108.31 3d
    ATVI Feb 07 '14 $15.50 Put 64 02/06/2014 0.04 0 216.4 2d
    EXPE Feb 07 '14 $55 Put 11 01/31/2014 0.81 0 878.39 8d
    EXPE Feb 07 '14 $55 Put 10 02/04/2014 0.75 0 737.9 4d
    EXPE Feb 07 '14 $55 Put 18 02/06/2014 0.8 0 1,423.81 2d
    TSLA Feb 14 '14 $167.50 Put -5 02/07/2014 1.55 0.21 659.07 3d
    TSLA Feb 14 '14 $167.50 Put -1 02/07/2014 1.55 0.21 124.82 3d
    FOSL Feb 14 '14 $100 Put -10 02/07/2014 1.21 0.05 1,135.81 5d
    FOSL Feb 14 '14 $105 Put -9 02/10/2014 2 0.07 1,713.82 2d
    FOSL Feb 14 '14 $107 Put -8 02/11/2014 2.04 0.1 1,533.10 1d
    FOSL Feb 14 '14 $107 Put -7 02/10/2014 2.58 0.1 1,718.58 2d
    CSCO Feb 14 '14 $21 Put -12 02/10/2014 0.19 0.01 203.11 3d
    CSCO Feb 14 '14 $21 Put -35 02/10/2014 0.18 0.01 550.42 3d
    CSCO Feb 14 '14 $21 Put -43 02/10/2014 0.12 0.01 419.84 3d
    CSCO Feb 14 '14 $21 Put -38 02/12/2014 0.12 0.01 370.2 1d
    TSLA Feb 14 '14 $182.50 Put -2 02/11/2014 1.26 0.04 227.98 2d
    WFM Feb 14 '14 $49 Put -20 02/07/2014 0.44 0.03 785.62 6d
    WFM Feb 14 '14 $51 Put -9 02/10/2014 0.6 0.04 485.86 4d
    WFM Feb 14 '14 $51 Put -23 02/10/2014 0.52 0.04 1,068.53 4d
    WFM Feb 14 '14 $51.50 Put -26 02/12/2014 0.63 0.05 1,467.50 2d
    WFM Feb 14 '14 $52.50 Put -20 02/12/2014 0.71 0.07 1,245.62 2d
    GRMN Feb 22 '14 $42 Put -16 02/14/2014 0.28 0.01 404.7 5d
    GRMN Feb 22 '14 $42 Put -12 02/14/2014 0.28 0.01 308.77 5d
    TSLA Feb 22 '14 $177.50 Put -5 02/13/2014 3.97 0.09 1,923.51 7d
    TSLA Feb 22 '14 $177.50 Put -3 02/14/2014 3.9 0.09 1,130.31 6d
    HPQ Feb 22 '14 $27.50 Put -34 02/14/2014 0.31 0.01 978.35 7d
    HPQ Feb 22 '14 $27.50 Put -1 02/14/2014 0.32 0.01 29.98 7d
    HPQ Feb 22 '14 $27.50 Put -43 02/14/2014 0.27 0.01 1,067.17 7d
    HPQ Feb 22 '14 $27.50 Put -12 02/18/2014 0.28 0.01 307.95 3d
    HPQ Feb 22 '14 $27.50 Put -10 02/19/2014 0.27 0.01 249.81 2d
    HPQ Feb 22 '14 $27.50 Put -10 02/18/2014 0.28 0.01 254.44 3d
    HPQ Feb 22 '14 $27.50 Put -1 02/19/2014 0.28 0.01 25.76 2d
    HPQ Feb 22 '14 $27.50 Put -3 02/19/2014 0.27 0.01 74.29 2d
    HPQ Feb 22 '14 $27.50 Put -8 02/19/2014 0.27 0.01 198.1 2d
    HPQ Feb 22 '14 $27.50 Put -10 02/19/2014 0.27 0.01 240.63 2d
    PCLN Feb 22 '14 $1075 Put -3 02/20/2014 1.22 0.05 333.96 1d
    MU Feb 28 '14 $22 Put -45 02/24/2014 0.05 0.02 75.16 1d
    TSLA Feb 28 '14 $195 Put -10 02/24/2014 1.43 0.06 1,345.81 1d
    LOW Feb 28 '14 $44.50 Put -20 02/25/2014 0.12 0.01 192.63 1d
    LOW Feb 28 '14 $44.50 Put -2 02/25/2014 0.12 0.02 17.96 1d
    LOW Feb 28 '14 $44.50 Put -24 02/25/2014 0.12 0.02 208.55 1d
    LOW Feb 28 '14 $44.50 Put -1 02/25/2014 0.13 0.02 9.98 1d
    LOW Feb 28 '14 $44.50 Put -9 02/25/2014 0.12 0.02 73.84 1d
    LOW Feb 28 '14 $45 Put -6 02/25/2014 0.15 0.02 70.14 1d
    LOW Feb 28 '14 $45 Put -2 02/25/2014 0.16 0.01 27.26 1d
    LOW Feb 28 '14 $45 Put -18 02/25/2014 0.15 0.01 222.12 1d
    TGT Feb 28 '14 $52 Put -1 02/25/2014 0.13 0.02 2.99 1d
    TGT Feb 28 '14 $52 Put -1 02/25/2014 0.13 0.01 10.98 1d
    TGT Feb 28 '14 $52 Put -9 02/25/2014 0.13 0.04 71.83 1d
    TGT Feb 28 '14 $52 Put -12 02/25/2014 0.12 0.04 80.41 1d
    TGT Feb 28 '14 $52 Put -1 02/25/2014 0.13 0.04 7.98 1d
    TGT Feb 28 '14 $52 Put -3 02/25/2014 0.13 0.04 23.94 1d
    TGT Feb 28 '14 $52 Put -13 02/25/2014 0.12 0.04 87.12 1d
    TGT Feb 28 '14 $52 Put -4 02/25/2014 0.13 0.03 35.92 1d
    TGT Feb 28 '14 $52 Put -6 02/25/2014 0.13 0.03 53.88 1d
    BIDU Feb 28 '14 $150 Put -8 02/14/2014 2.06 0.04 1,593.84 13d
    BIDU Feb 28 '14 $160 Put 8 02/21/2014 2.51 0 1,996.90 8d
    BIDU Feb 28 '14 $160 Put 6 02/25/2014 1.99 0 1,183.93 4d
    BIDU Feb 28 '14 $160 Put 25 02/26/2014 1.69 0 4,205.20 3d
    TSLA Feb 28 '14 $242.50 Put 2 02/26/2014 2.12 0 415.98 3d
    TSLA Feb 28 '14 $242.50 Put 1 02/26/2014 2.13 0 212.49 3d

    Published on in Trades

  2. January 2014 Update

    Another month has flown by already, and so it's time to look back at how things are tracking.

    The Good

    • 20 total trades
    • 18 successful trades (90%, down from 93%)
    • Average trade length of 4 days (down from 6 days)
    • Average gain of $583.86 (up from $86.97)
    • Total gain of $11,677.12 for January (up from $3,652.83 for previous quarter)

    A very significant improvement over the previous months, mostly through being more selective about the trades I enter.

    The Bad

    It wasn't all sunshine and roses though, there were still 2 losing trades. One of those trades resulted in a net loss of over $4K. That trade was a Sears Holdings Corporation Jan 18 put at $35.42, at the time a strike price that was approximately 25% below the SHLD trading price. When the market didn't like the company update it was hit pretty had and quickly dropped from $46.40 down to $35.30. At that point the option was now in the money, and my trade was underwater, so I sold to try and stem any bleeding.

    The Ugly

    If you take a look at the price chart for SHLD you'll notice I sold at the absolute low, the price recovered and the option expired worthless as was the plan. I lost $4.1K on that trade because I didn't stick to the plan.

    It did make me realize I'd not explicitly defined what my exit criteria were beyond letting the option expire. I've spent a lot of time tuning my entry criteria to help remove emotion from my decision making, I'd not come up with an objective way to determine go/no-go after I'd entered. The expectation was I'd ride every trade out until the end and it's obvious now that's not always going to be the most sensible option.

    Looking back to look forward

    So I looked back over my previous trades and noticed a few patterns I'd missed previously:

    • All of my losing trades have recovered shortly after I closed out, meaning they would have all been profitable if I'd held them for 1-3 days longer.
    • I'd missed out on a number of profitable trades by holding on to winners too long.

    On the first point, I'm still not confident it's a good enough reason to hold on to what looks like a loser. The market in general has been on the up and with so few losing trades at the moment I've not got enough data to put thousands of dollars on the line every time.

    I was caught off guard by the latter finding though. There has been many trades that have moved into positive territory very quickly that I've continued to hold until expiry. Continuing to hold means the option will ultimately expire worthless, I get to keep the premium, and I don't have to do anything until I pick my new trades next week. In my laziness I'd forgotten lessons from options 101, that time-decay was working against me. The underlying stock had moved further away from the strike price on my current trade so that buying my puts back would only cost me in the region of $70, meanwhile a more profitable trade was having it's value eroded rapidly as the option expiry date approached. In the case of the NFLX trade I placed on Jan 22nd the 2 trading day delay in me selling the puts meant the net gain was reduced by $1,500.

    As a result I started closing out trades prior to the expiry if I'd already captured >90% of the possible gain, if there was a better use of my money somewhere, and if there was still a market to buy my options back on. You'll see the average trade length for the latter half of January is much shorter as a result.

    Knowing that a single day difference in timing on two trades would have had a $5,600 impact on the results for the month is frustrating. But it's always been the costly mistakes that have been the most valuable ones, and this lesson has already been applied to improve what was already a really good month.

    The Trades

    Option Qty Opening Date Opening Price Closing Price Gain Trade Length
    MU Jan 03 '14 $20 21 12/23/2013 0.17 0 339.18 12d
    MU Jan 03 '14 $20 20 12/24/2013 0.07 0 122.7 11d
    MU Jan 10 '14 $19 78 12/27/2013 0.26 0 1,980.78 15d
    MU Jan 10 '14 $18.50 94 12/30/2013 0.2 0 1,824.54 12d
    SHLD Jan 18 '14 $35.42 33 01/06/2014 0.23 1.46 -4,106.62 8d
    NFLX Jan 24 '14 $265 3 01/13/2014 1.97 0.01 572.7 10d
    NFLX Jan 24 '14 $265 1 01/13/2014 1.97 0 194.74 12d
    FAST Jan 18 '14 $44.50 10 01/14/2014 0.15 0 137.91 4d
    TSLA Jan 18 '14 $146 1 01/14/2014 0.69 0.02 64.58 2d
    TSLA Jan 18 '14 $146 4 01/14/2014 0.69 0.03 249.67 2d
    TSLA Jan 18 '14 $146 2 01/14/2014 0.68 0.03 125.63 2d
    FFIV Jan 24 '14 $91 13 01/21/2014 1.3 0.04 1,610.74 2d
    SNDK Jan 24 '14 $67 11 01/21/2014 0.81 0.02 843.8 3d
    NFLX Jan 24 '14 $305 1 01/22/2014 7.9 0.02 784.64 1d
    NFLX Jan 24 '14 $305 2 01/22/2014 7.9 0.03 1,560.28 1d
    FB Jan 31 '14 $51 13 01/23/2014 1.05 0.01 1,326.69 7d
    ISRG Jan 24 '14 $405 1 01/23/2014 3.24 0 316.49 2d
    ISRG Jan 24 '14 $405 1 01/23/2014 3.3 0 329.48 2d
    MSFT Jan 24 '14 $33 1 01/23/2014 0.09 0.01 6.74 1d
    MSFT Jan 24 '14 $33 23 01/23/2014 0.08 0.01 132.02 1d
    MSFT Jan 24 '14 $33 5 01/23/2014 0.08 0.01 21.71 1d
    SBUX Jan 24 '14 $68 13 01/23/2014 0.25 0 311.38 2d
    ALXN Jan 31 '14 $126 3 01/24/2014 1.9 0.09 530.61 6d
    ALXN Jan 31 '14 $126 6 01/24/2014 2.05 0.09 1,165.2 6d
    AMZN Jan 31 '14 $355 3 01/27/2014 2.69 0.13 750.95 4d
    FB Jan 31 '14 $51 5 01/29/2014 1.3 0.01 630.96 1d
    AMZN Jan 31 '14 $370 1 01/30/2014 5.35 10.51 -527.51 1d
    AMZN Jan 31 '14 $370 1 01/30/2014 5.35 10.56 -525.52 1d
    BRCM Jan 31 '14 $26.50 18 01/30/2014 0.15 0.01 219.67 1d
    GOOG Jan 31 '14 $1060 1 01/30/2014 7.01 0.03 682.98 1d

    Published on in Trades

  3. 2013 update

    So I've been quiet here the past few months, in part that's been because I've automated large parts of my trade selection and posting the trades here hasn't been part of my workflow.

    Almost all of my trades have been a variation on the strategy I suggested for trading Blackberry, which is selling put options. Essentially I've isolated a short-list of stocks that I'm willing to trade, and sell out of the money put options that I hope won't get exercised. Here's a breakdown of all my trades

    The Trades

    Option Qty Opening Date Opening Price Closing Price Gain
    DOW Oct 25 '13 $39 2 10/21/2013 0.17 0.00 25.98
    EMC Oct 25 '13 $23.50 4 10/21/2013 0.09 0.00 26.95
    F Oct 25 '13 $16.50 6 10/21/2013 0.05 0.00 19.92
    GILD Oct 25 '13 $64 1 10/21/2013 0.55 0.00 47.49
    HAL Oct 25 '13 $49.50 2 10/21/2013 0.34 0.00 59.98
    WMB Nov 01 '13 $33 3 10/21/2013 0.16 0.00 39.46
    UPS Oct 25 '13 $89 3 10/24/2013 0.14 0.00 33.46
    AIG Nov 01 '13 $48 2 10/28/2013 0.08 0.00 7.98
    GM Nov 01 '13 $33 3 10/28/2013 0.08 0.00 15.46
    WMB Nov 01 '13 $34.50 2 10/28/2013 0.17 0.00 25.98
    SBUX Nov 01 '13 $74 1 10/28/2013 0.26 0.00 18.49
    OXY Nov 01 '13 $89 1 10/28/2013 0.16 0.00 8.49
    GILD Nov 01 '13 $64 1 10/29/2013 0.19 0.00 11.49
    WMB Nov 01 '13 $34.50 2 10/30/2013 0.14 0.00 19.98
    SBUX Nov 01 '13 $74 1 10/30/2013 0.22 0.00 14.49
    WMB Nov 01 '13 $34.50 2 10/31/2013 0.10 0.00 11.98
    MDLZ Nov 08 '13 $30.50 3 11/04/2013 0.08 0.00 15.46
    APC Nov 08 '13 $89 2 11/04/2013 0.33 0.00 57.98
    QCOM Nov 08 '13 $65 1 11/04/2013 0.20 0.00 12.49
    APC Nov 08 '13 $89 1 11/05/2013 0.19 0.00 11.49
    QCOM Nov 08 '13 $65 1 11/05/2013 0.18 0.00 10.49
    MDLZ Nov 08 '13 $31 3 11/05/2013 0.08 0.00 15.46
    MDLZ Nov 08 '13 $31 3 11/06/2013 0.08 0.00 15.46
    QCOM Nov 08 '13 $64.50 1 11/06/2013 0.16 0.00 8.49
    CSCO Nov 16 '13 $21.50 12 11/11/2013 0.08 0.00 82.82
    CSCO Nov 16 '13 $22 -4 11/13/2013 0.09 0.47 -166.61
    CSCO Nov 16 '13 $22 4 11/13/2013 0.00 0.00 0
    LOW Nov 22 '13 $48 -4 11/18/2013 0.18 0.14 0.23
    LOW Nov 22 '13 $48 2 11/18/2013 0.00 0.00 0
    HPQ Nov 29 '13 $23 12 11/22/2013 0.32 0.00 370.82
    SPLK Dec 21 '13 $67.50 3 11/22/2013 1.25 0.00 366.46
    FB Dec 06 '13 $43.50 6 11/29/2013 0.13 0.00 67.92
    GMCR Dec 06 '13 $62.50 2 11/29/2013 0.26 0.00 43.98
    TSLA Dec 27 '13 $100 1 12/02/2013 1.03 0.00 95.49
    MU Dec 13 '13 $20.50 35 12/04/2013 0.19 0.00 639.96
    FB Dec 13 '13 $44 5 12/05/2013 0.17 0.00 75.43
    VRTX Dec 13 '13 $62 6 12/09/2013 0.35 0.00 199.91
    SHLD Dec 21 '13 $41 20 12/16/2013 0.40 0.00 782.69
    MU Jan 03 '14 $20 21 12/23/2013 0.17 0.00 339.18
    MU Dec 27 '13 $20 70 12/24/2013 0.02 0.00 96.94
    MU Jan 03 '14 $20 10 12/24/2013 0.07 0.00 64.85
    MU Jan 03 '14 $20 10 12/24/2013 0.07 0.00 57.86

    Retrospective

    So the TL;DR; for the last quarter is:

    • 42 total trades
    • 39 successful trades (93%)
    • Average trade length of 6 days
    • Average gain of $86.97
    • Total gain of $3,652.83

    All in all things are looking up. That said the market in general has been pretty strong over the same period so it's hard to know if it's due to smart trades or just a rising tide raising all ships. You may also notice that the trades have changed slightly each month. October was a bit of a scatter-shot approach to see what worked while minimising risk. In total there were 16 trades in October, but the average gain per trade was only $24.22. November saw me increase the size of the trades I was placing so the 17 trades saw the average return more than double to $53.70. December I decided to scale back the number of trades and instead go bigger on the ones I did place so there was only 9 trades for an average return of $261.31.

    That also means almost 2/3 of the total gain for the quarter were for the December trades. It'll be interesting to see if this fewer but larger trade success will continue into the new year.

    Published on in Trades

  4. Blackberry - Trading the takeover hype

    So full disclosure, this is not a trade I'll be entering. I've a friend who was considering buying BBRY before the current takeover rumors, so I said I'd detail a few ways to play it.

    Trading on hot air?

    Management have confirmed they're looking at offers, but the current price is based on pure speculation that they find an attractive one. To that end, there's every chance the mania will subside and the price will pull back a bit in the coming day's.

    Rather than pay today's price, you could try your luck selling put options to pick it up at a lower price. As discussed in the previous link, it's a lot like setting a limit order below the current market price except you receive money for agreeing to buy the shares at a lower price.

    The 13th Sept 2013 expiring BBRY put option wih a $10.50 strike price is currently trading for a $0.23 option premium. You could sell 100 contracts and receive $230 in fast money today (100 put option contracts x 100 shares per contract x $0.23). If between now and the 13th of September BBRY shares drop below $10.50 you'll then have to purchase 10,000 shares of BBRY. That's a 2% return this week if you promise to buy the stock at almost 5% below the current market price.

    If the price doesn't drop below $10.50 by the end of next week, you won't have any BBRY shares. You will have a guaranteed 2% return, and you might be able to repeat the same trick again the following week to bank another 2%.

    But I want to own the stock too

    They hope to have something sorted by November. Whatever the offer is, you have to hope it's higher than the current stock price to be of any interest to anyone. One way to play it is to buy the 16th November 2013 expiring call option at the $11.00 strike. This gives you the right (but not obligation) to buy the stock any time between now and the 16th of November for $11.00. If the stock is trading at $14.00, you still only have to pay $11.00. If it's trading at $9.00, then you'd ignore the option and just pay $9.00 (assuming you still wanted it).

    The option is currently trading at $1.38, so it's going to cost you $1,380 to reserve that privilege (100 call option contracts x 100 shares per contract x $1.38). That's offset at least $230 by the put options you'd sell from the previous section. You might be able to offset it further if you're able to keep repeating that put option strategy.

    Published on in Trades

  5. Walmart

    Next on the block for stocks I'm planning to hold for the long-haul, Walmart (WMT).

    Reasons to hold

    It's best in show by pretty much every measure vs it's competitors (Costco and Target). It pays a higher dividend (2.5%), it grows that dividend at a higher rate, has better margins, and has a better return on equity.

    It operates at a scale that is incomprehensible for many, and it does it with extreme efficiency. Anybody working in the Bay Area has likely been approached by one of their internal recruiters or seen them canvassing for applicants at various hangouts in SF. I've no idea what they're up to with WalmartLabs, but they're bringing their A-game to technical recruiting and that should make all of their competitors scared. In isolation that's probably not a reason to buy, but combined with everything else it definitely fills me with confidence in the company.

    The trade

    As with the previous JNJ trade, I don't have the free cash available to buy in today. I want to make sure I don't miss the ride, and I'm willing to pay a premium now to lock it in. As a result I bought 1 call option expiring the 21st of December 2013 at a strike of $77.50 for $2.61. Total cost was $261 (1 option contract x 100 shares x $2.61 premium).

    Much like that previous trade, I also took this out a month or two ago when WMT was trading higher, so the same trade today could be taken for a total of $76.

    Come December, if WMT is trading above $77.50 I'll exercise my option and buy 100 shares for $77.50. If it's below that, I'll let the option expire and just pay the cheaper market price.

    Published on in Trades

  6. Johnson & Johnson

    I'm slowly stacking my investment portfolio with strong companies that pay a reasonable dividend and have a history of growing that dividend. Johnson & Johnson (JNJ)

    Reasons to hold

    The dividend is currently around ~3%, but more importantly it's been growing steadily between 5%-7% each year. They First there is the dividend. Even if the stock goes nowhere, I stand to make a 3.61% return right now just from the dividend income. It's hardly going to make me rich, but it's certainly better than letting my money sit in the bank.

    The trade

    Unfortunately I don't have a spare $10k lying around, but I'm hoping I will by October. So I've purchased 1 call option for JNJ, expiring 19th October 2013 at a strike of $92.50. At the time I bought it a month or two ago (I've been a bit slack posting this update) it $1.54, but JNJ has since dropped and the same option last traded for $0.30. That means I paid $154 (1 option contract x 100 shares x $1.54 premium) to lock in a maximum price of $92.50 for JNJ.

    I could purchase the same today for a total of $30, or I could chose to lock in a lower strike price.

    Should we get to the 19th of October and the JNJ is still below $92.50 then my option will expire worthless, and I'll just pay whatever the lower market price is to buy the stock directly (currently $86.41).

    Haha, you're losing!

    It's easy to consider this trade a loser so far, but I plan to own JNJ for the long-haul and I'm willing to stomach some volatility in the interim. Had I had the funds available I would have purchased the stock weeks ago when it was around $92, and I would currently be sitting on a ~$600 loss. Instead I'm likely to lose $154 on my options trade, but I'll be buying to stock at a much cheaper price anyway. So either way it's a win.

    Published on in Trades

  7. Tesla Motors

    Come on, you know this one. It's that car company that only makes gorgeous looking all-electric vehicles.

    Reasons to hold

    This one is pure speculation, I don't have anywhere near the same level of reasoning as I have previous trades. I think electric cars are the future, and this things look stunning. If they were slightly more convenient (I'm renting, I can't just install a supercharging station in the street) I'd probably have bought one already.

    I'm seeing Tesla (TSLA) as an all or nothing type of company. They're either set to explode and change the way we all think about fuelling our vehicles, or they'll disappear under the weight of their expectations and be a footnote in the history books.

    The trade

    I bought 1 option contract for the 17th of January 2015 at a strike price of $285 at $13.00, total cost was $1,300 (1 option contract x 100 shares x $13.00 premium). Note the expiry is almost 18 months away. If in that 18 months TSLA manages to double in value then I stand to make a tidy profit. For example if they do double and are trading at $338 in January 2015 then my gain stands to be approximately $4,000. That's because my strike price is $285, the stock price at the time $338, and so it's reasonable to assume someone would be willing to pay a $53 premium ($338 stock - $285 strike) for my option contract, netting me income of $5,300 ($53 option premium x 1 option contract x 100 shares). Alternatively I could exercise the option myself and then immediately sell the TSLA stock I now own, the math would work out the same. From that $5,300 windfall you need to subtract the initial $1,300 outlay to buy the option. So net gain is $4k.

    But, if TSLA are trading at anything less than $285 in January 2015 then I've done my money.

    Published on in Trades

  8. Pembina Pipelines

    Pembina Pipelines (PPL) recently popped up on my radar while looking for an energy stock with good income potential over the medium term. I'd originally been considering Duke Energy (DUK), but settled on this one instead.

    Reasons to hold

    The PPL dividend is slightly higher than the DUK one, and it has a long history of growing that dividend. However, all is not rosy because that growth has slowed in recent years. There are a bunch of projects in the pipeline that, should everything go to plan, will charge that growth rate again but in the interim I'll have to be happy to pocket a 4.8% yield. And the ex-div date for this quarter's dividend is this coming Friday.

    Compared to it's peers, it's also the most attractively valued. A trailing P/E of 12.6x and a forward be of 14.5x makes it cheaper than DUK and SO at the moment.

    Overall the long-term view seems to be that PPL has much to look forward to, but has some short-term uncertainty about it. As a result I'm going to buy it but also look to maximize my short-term income.

    The trade

    Just before the last close trading I bought 300 shares of PPL @ $30.70. When the market opens tomorrow I'll look to sell the 21st Sept 2013 call option at $31.00 for $0.22. I'm hoping that the recent trading range continues and that the stock doesn't trade at or above $31.00 before Friday. What would be great is if the stock traded just above $31.00 on Monday morning, because here's the result:

    • $0.22 option premium x 300 shares = $66.00
    • $0.3675 dividend payment x 300 shares = $110.25
    • $0.30 capital gain ($31.00 sale price - $30.70 purchase price) x 300 shares = $90.00

    A total gain of $266.25, or almost 3% for holding the stock for a week. The other likely outcomes are that the stock increases $0.30 to more than $31.00 and I get exercised early (the most probable outcome given there is a guaranteed dividend of $0.36 on Friday), or that the shares drop and I'm left holding them because the option isn't exercised.

    I'm fine holding them as I'm hoping to ride them well into 2015 when their new projects come online. Whatever happens the trade is going to make between $156 and $266 in income this week.

    Published on in Trades

  9. Intel

    I've got a short-list of companies that I'm looking to purchase and hold for a year or two. Intel (INTC) is one of those companies.

    Reasons to hold

    First there is the dividend. Even if the stock goes nowhere, I stand to make a 3.61% return right now just from the dividend income. It's hardly going to make me rich, but it's certainly better than letting my money sit in the bank.

    And by most fundamental measures, Intel is leading their sector. They're among the best when it comes to returns from reinvesting their earnings, have the highest gross margin, and the best operating margin. Yet their stock hasn't moved a huge amount in the past 3 years, mostly bouncing between $20 and $30.

    A large part of that has been the decline of the PC business and the growth of mobile/tablet devices. I think that is all set to change. Their new low-power processors are among the best (Intel Haswell is what is in the recently announced 13" Macbook Air with 12 hour battery life) and they've finally landed contracts with tablet producers.

    Early days, but I'm willing to sit on this for a while and I think the downside is limited thanks to the dividend.

    The trade

    So I bought 500 shares of INTC today @ $25.34. But that's not very exciting, so lets spice it up a little bit by writing some covered calls.

    Now that I own 500 shares, I can sell 5 option contracts (remember, each contract is for 100 shares), and pocket that money from someone else. The Jul 20th call at $27 was at $0.22 when I placed the trade. So I sold 5 call options, and netted $110 ($0.22 * 5 contracts * 100 shares per contract). My initial outlay to by the stock was $12,670 (500 shares * $25.34), so that's an immediate return of 0.86% (not considering brokerage costs). It doesn't sound like much but through the power of compounding interest, in some fantasy land where I could do this reliably each and every month it'd net an almost 11% return for the year.

    What's the catch?

    Every trade has risk, and on this one there are two to take into consideration:

    • What happens if the share price drops significantly?
    • What happens if the share price goes above $27?

    It always sucks if shares you own drop in price, in this instance I don't particularly care too much. I'm willing, and hoping, to hold Intel for a year or two and I'm willing to ride out any rollercoaster action in between. So the first risk isn't really a risk given my objectives.

    If it goes above $27, then I'm going to have to sell all my Intel stock. That really doesn't fit with my long-term objectives, but it means I'd make a 7.36% return in a month. I'd happily take that money and look to re-invest it Intel when I saw another buying opportunity, or put it into something else that is on my watchlist.

    Published on in Trades