Selling ASFI March 26, 2007

Posted by srini in : Analysis, stock , comments closed

The following is excerpted from an email response to Omar.

I’m selling ASFI. It’s too risky to keep because:

Schwab gives it a “D” grade. It’s the only D stock I have in my portfolio - I usually sell a D stock without thinking about it.
Shorts have piled up on the stock: Short % of float is around 45%. What do they know that we don’t? The recent runup might be a mini short-squeeze.
Their business is too complicated.

More pessimism can be found in this thread:

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_A/threadview?m=tm&bn=1448&tid=3779&mid=3779&tof=11&rt=2&frt=2&off=1\

I have this sinking feeling that I might miss out on a 5x return, but oh well; I’m taking my gains and exiting.

Diversify Internationally - It’s all about the Beta December 22, 2006

Posted by srini in : Analysis , 2 comments

In the short to medium term, I personally think we’re in for a correction. Our profligate consumer spending has turned America into a nation of debtors. This will correct itself in the form of a falling American dollar, higher inflation, and increased exports. Who knows how this will play out in terms of GDP growth and corporate profit, but one thing is for certain: your dollars will be worth less.

Investing internationally can help balance out slowing US GDP growth and can also work as a proxy hedge against the falling dollar. Even if you don’t believe any of my speculation, investing internationally lowers portfolio volatility, or Beta. Over the last decade, foreign markets have become more correlated with US markets, but I think they’re still good beta reducers.

Most importantly - international economies like China, India, and Russia are just growing faster than ours. Their companies are growing faster and their valuations are often lower. These companies are just BETTER investments.

I’m not going into individual stocks, but here are a few of the funds I own to diversify internationally:

For European, Japanese, and Korean holdings (”developed international”):

DODFX - 20.47% 5 year average return, a low 0.70% expense ratio
WBIGX - 16.08% 5 year average return, a high 1.42% expense ratio
UMBWX - 13.67% 5 year average return, a reasonable 1.03% expense ratio
PGVFX - 20.98% 5 year average return, a high 1.29% expense ratio, many US stocks as well
QFVOX - a 23.53% 5 year average return, a high 1.69% expense ratio, some emerging stocks as well

For Emerging Markets:

VWO - an ETF, 24% return year to date, a very low 0.30% expense ratio
VINEX - 22.25% 5 year average return, a very low 0.48% expense ratio, may be closed
EUROX - 43.36% 5 year average return, a very high 1.97% expense ratio, Eastern Europe and Russia focus
LZOEX - 29.89% 5 year average return, a high 1.59% expense ratio
PRLAX - 34.99% 5 year average return, a high 1.29% expense ratio, Latin America focus

You’ll notice that all these funds have knockout returns; for example, had you invested $10,000 in EUROX 5 years ago, you’d now have $60,000. That’s how stellar the last few years have been for international bourses, especially in emerging markets like Russia and India. Beware though: past returns are no indication of future returns. I have to say that so you don’t sue me

I think there’s a ton of money to be made as the next 3 billion people (China, India, Russia, Brazil) catch up to the first. And that’s why I keep about half my portfolio in international stocks and funds.

Airlines from Brazil: Volatile value in GOL, TAM

Posted by srini in : stock , add a comment

What do you know about Brazil?

It’s a big country, the fifth largest in the world. The economy is growing robustly. It’s agricultural sector is quickly becoming the new bread basket of the world (sorry Kansas). And its natural resources are without rival.

GDP per capita is $4,000 and growing. It’s a large country and people will want to get around it. Ground transportation infrastructure is poor across much of the country.

That’s why my two new speculative investments are TAM and GOL. TAM leads the Brazilian airline industry with something like 40-50% marketshare. GOL is the up and coming low-cost airline, with financial statements that look eerily similar to a young Southwest Airlines.

Fundamentally, the companies seem sound. Their P/Es are under 15 and their PEGs are well under 1. Earnings are consistent. My gut says go. I haven’t done enough research on them, but I jumped into GOL and TAM two days ago.

They are both down ~5% since I bought them. I’m hoping for long term results like Southwest Airlines, so I’ll give’em more room to breathe.

FDX: Using options to protect against earnings misses

Posted by srini in : Process, options, covered call , add a comment

I’ve found a way to protect against downside from earnings misses as long as I’m willing to give up heavy gains. The trade is to buy a PUT with a lower strike price and sell a CALL with a higher one. Writing the calls serves to subsidize the puts.

On 12/20, FDX was trading at $111.80 or so.
I sold January $115 CALLs for $1.40.
I bought $110 PUTs for $1.60.

For $0.20 a share, I’m protected if FDX dips under $110. I give up any gains over $115.

Why didn’t I just sell FDX? I think it’s getting overbought, but I’m not sure. It’s run up 40% and the PEG just crossed above 1. This trade allows for another 3% gain while limiting downside to 1%. It’s a holding pattern until I figure out what to do.

Others are as torn as I am, but with FDX at $108.54 today, the bears appear to be winning:

Pessimistic case for FDX: http://transport.seekingalpha.com/article/22901
Optimistic case for FDX: http://www.fool.com/investing/general/2006/12/21/fedex-is-just-fine.aspx

With my PUTs, I don’t give a damn (at least until they expire).

NTES: Making money on options November 18, 2006

Posted by srini in : Analysis , 2 comments

I recently got out of NTES at $15.20. I’ve accumulated NTES for 18 months; my cost basis was $15.50. My return on the stock was a sucky -$0.30.

I should’ve sold it a long time ago. It was hitting $25.00 earlier this year. I should’ve banked my $10 (66%) profit in 12 months and called it a year. Or maybe I should’ve held it longer. My gut tells me that the Chinese MMORPG market is going to be huge; and the valuation is nice. I don’t know, and I’m too lazy to do the research on why it’s dropped since May…maybe it’s World of Warcraft, maybe it’s more competition in general, maybe it’s govt. regulations.

If I’m too lazy to do that research, I shouldn’t ride the volatility. I got out.

Funny thing is…I’ve been selling options on NTES since July. By selling calls on the way down, I’ve made $2.55 in options profits. So my absolute return on NTES is actually $2.55 - $0.30 = $2.25, or 14.5%. It’s not 60% in one year, but I’ll take 14.5% in 18 months for a mistake.

I love options as tools for downside protection.

November options wrapup

Posted by srini in : Uncategorized, Analysis, options, covered call , 1 comment so far

How did I do in covered call writing this options month?

1. RSTI: The stock dropped 0.3% from $60.49 to $60.32 in the last month. It was doing very well until the earnings report. I thought the report was OK - others didn’t seem to. I wrote two covered calls, both profitable: $65 calls which I sold at $1.10 and bought at $0.10 and $60 calls which I sold at $0.80 and bought back at $0.50. That’s a profit of $1.30. Net effect of options: I turned a 0.3% loss into a 1.9% gain.

2. FDX: The stock gained 1.1% from $116.20 to $117.44. I sold two options this month: a $120 call that I sold for $1.55 and bought back at $0.15 and a $115 call that I sold for $0.95 and bought back for $2.60. The net effect of my options writing was -$0.25, so my total return was only 0.9%.

3. NTES: The stock dropped 3.1% from $16.66 to $16.14. However, I sold after earnings at $15.20, so in reality it was a 8.8% drop for me, mitigated by a $0.55 options profit, which means a 5.5% drop. I should’ve sold this stock before earnings, as I was souring on it a bit anyways (should’ve listened to Zack).

4. SPY: No options this month, but my buy and hold increased from 136.84 to 140.42, a 2.6% increase.

Quick summary:

RSTI: Relative = +2.2%, Absolute = +1.9%
FDX: Relative = -0.2%, Absolute = +0.9%
NTES: Relative = -2.4%, Absolute = -5.5% (didn’t hold all the way through month)
SPY: Absolute = +2.6%

The conclusion: I would’ve been better just sticking to the S&P this month. That’s the way the cookie crumbles.

The only options trade I have lined up for December:

QRTLL - RSTI $60 calls for $2.50

I’m not doing FDX this month, as the premiums for $115 and $120 calls seem way too low. As for RSTI, I’m only writing calls to cover a half of my shares; this gives me roughly ~2% of downside protection, but still leaves upside potential if RSTI goes above $62.50.

Options Reset November 9, 2006

Posted by srini in : Uncategorized, options, covered call , add a comment

It’s been a bad week for NTES and RSTI - they both missed on earnings. On the limited bright side, this also means that all the options I wrote on this stock are worthless, so I quickly closed them out and wrote new positions that expire in a week.

NTES: I bought back my $17.50 options at $0.05. I sold my NTES stock; I just don’t like it anymore. I didn’t make or lose money on the stock itself, but have made out well on the options I wrote on it these past 6 months.

RSTI: Ouch - earnings misses hurt. I bought back my $65 options for $0.10 and sold new $60 options at $0.80. I still am way ahead on RSTI; I’ll need to research the earnings miss.

FDX: Bought back my $120 call for $0.15 and sold a $115 call for $0.95.

October Options Wrap-up October 24, 2006

Posted by srini in : options, covered call , 50 comments

I haven’t posted in about a month, mainly because my investments haven’t changed much. I’ve researched a dozen or so stocks I’ve read about in Business Week, Forbes, Business 2.0, and online. None of them passed the test.

My friend Zack loves CRDN and it’s been showing up on many “hot stock” lists. I’m not sold on it, mainly because my gut tells me that the gravy train that is Iraq has to dry up someday. As for others, Mark and Omar are investing in some bulletin board stock. What was the name again? I’ll pump it here.

Anyhow, let’s see how I did on my October expiring options, ignoring commissions and spreads:

1. RSTI $60 calls for $1.65: During this options month, RSTI appreciated from $56 to close at $60.49 on Friday, a nice 8% return. The covered call options netted an extra $1.16 per share in gains, raising the total return upwards of 10%.

2. NTES $17.50 calls for $0.65. NTES depreciated from $17.30 to $16.66, a 3.7% loss. The covered call options expired unassigned, netting a full $0.65 per share in profit, covering the loss. The total return with options was 0%.

3. FDX $115 calls for $1.35. FDC appreciated from $107 to $116.20, an 8.6% gain. The covered call options netted only $0.15 per share in gains; total return is still around 8.6%.

4. SPY $132 calls for $1.87. SPY appreciate from $132 to $136.84, a 3.7% gain. The covered call options were assigned, capping gains at $133.87, meaning that I was only able to realize a 1.5% gain.

Analysis:

This was a good month for the S&P, but a better month for me.

The NTES trade was my worst in absolute terms. I lost a tiny bit after accounting for commissions. I still like the trade, since it preserved my gains in NTES, and I still like NTES for the long term. On the other hand, the SPY trade was OK on an absolute level but underperforming when compared to buy and hold. The FDX and RSTI trades were rock solid by any measure.

For this options cycle, I am executing the NTES, FDX, and RSTI trades again. SPY is a different story. I’m going to buy and hold that guy for the time being - especially since the option premiums are so freaking low.

This month’s outstanding options:

QRTKM - RSTI $65 calls for $1.10
NQGKW - NTES $17.50 calls for $0.60
FDXKD - FDX $120 calls for $1.55

My outstanding October calls September 29, 2006

Posted by srini in : Uncategorized, options, covered call, Log , add a comment

For the record, I went ahead and wrote the following covered calls to generate a little extra return:

QRTJL - RSTI $60 calls for $1.65
NQGJW - NTES $17.50 calls for $0.65
FDXJC - FDX $115 calls for $1.35
SFBJB - SPY $132 calls for $1.87

The main goals are down-side protection for my gains (NTES, RSTI, FDX) and some speculation on volatility being overvalued in options (SPY). With 3 weeks to go until expiration, the options are still young. We’ll see how they turn out.

RSTI: It’s that time of the month again September 18, 2006

Posted by srini in : Analysis, options, covered call , 2 comments

My favorite weekend of the month just passed. Options expiration weekend is fun, fun, fun!

This past weekend also revealed that Stanford football has quite a bit of “rebuilding” to do, but I digress.

I wrote three different options contracts last month:

2 RSTI calls at strike price $55 for $1.80 each, expired this weekend (QRTIK)
2 SPY calls at strike price $131 for $1.11 each, expired this weekend (SFBIA)
6 NTES calls at strike price $17.50 at $1.40 each, expires December (NQGLW)

I’m going to evaluate the RSTI trade in detail and skim over the others.

The QRTIK trade’s goal was down-side protection. I’ve owned RSTI for over a year, a year that’s been quite good to the stock. I still love the stock and hope to hold it for years to come. Since I planned to hold the stock anyways, I got a 3.5% down-side buffer by selling the $55 calls for $1.80.

Compared to just holding the stock, the new profit curve became:

If the option expired and RSTI was below $56.80, the options trade was more profitable, by up to $1.80 a share (at under $55).
At $56.80, the trade was a wash.
At above $56.80, just holding the stock would be more profitable.

When I wrote the option, I figured I’d be happy even if the stock went above $56.80. It still would have meant a nice profit. On Friday morning, the very last day before options expiration, RSTI opened at 55.92 and I walked around with a smug, contented look.

But as I’ve learned, the market likes to punish hubris. RSTI rallied some 5% over the day to close at $58.12. Had I just held RSTI, I would have made 200 * (58.12 - 56.80) = $264 =~ 2.5% more profit.

I still made out on the trade OK. My profits are 200 * (56.80 - 53) = $760 on RSTI this month. For tax reasons, I closed my call position early so that I could offset against the same trade last month; they basically cancelled each other out.

As for next month, I still love RSTI and executed a similar options strategy again this month. I sold 2 calls on RSTI at $60 for October for $1.65 each. I’ll be happy if RSTI gets up to $61.65 or above by then; if not, I’ll do better than buy and hold.

I’m executing a similar strategy wth NTES. I have similar unrealized gains and a bullish outlook on NTES. This month, I’ll be closing out the December options and selling October ones. It’s always better to sell options that expire sooner; the premiums drop by more in the last few months. It’s not linear. I had my reasons for writing longer term December NTES options: impatience and scale being paramount; they are no longer issues.

As for the SPY options, the trade is a bit more speculative. I am moderately bullish on the S&P and figure covered-calls would best reflect this sentiment. I’ll probably do the trade again just because I have some spare cash lying around. Last month was only slightly more profitable than buy and hold; the previous month, worse. It’s a crapshoot; that’s why it’s speculation, but speculation that loosely tracks the S&P with less volatility (in theory).

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