Let the Diversification Begin

Just took gains on my AAPL Jan 165 put and closed out that position for $2.79. I also initiated a position in Mosiac (MOS), selling a Jan 2011 50 put for $10.70. I am getting absolutely crushed on that AAPL 210 April call, if the slaughtering continues we'll see if I have the guts to stick to my original plan and double down when the call reaches $9.

Looks like the bears are rounding up the bulls as I speak, my only fear is that it really is the second great depression and this whole thing has been a bear market rally. Wait, the FED will print too much money to allow that, right?

CMG.B no longer

Just as Chipotle said in its last conference call that it was looking into combining the A and B share classes of their stock, today they announced a proposal to turn the B shares into A shares. Pending a vote on Dec 21, hence the 10% run-up in the B shares today, and the A shares about even. A shares sitting at $86.16 and B shares at $83.64.

I think this will be great for CMG's common stock as it will no longer show up on the S&P 1500's most shorted list. All those people shorting the A and buying the B were finally rewarded though.

One More Bullish Play

I just bought a April $210 call on AAPL for $18.25. I just don't think Apple's true earnings power is priced into the stock yet, especially when discounted for AAPL's $34 billion cash hoard.

Logic behind my reasoning. Current Apple market cap = $186 billion. The Enterprise value of the firm is hence $186 - $34 = $152 billion. Earnings last quarter of $2.85 billion, lets assume that was an above average quarter, even though the holiday quarter should be even better. So, $2.5 billion * 4 quarters = $10 billion in earnings. Still paying P/E ratio of $152 billion/$10 billion = 15.2 when market cap is discounted for cash on hand.

I plan on buying another April $210 call if AAPL dips.

Earnings Domination

Apple blew away earnings expectations. In addition to strong mac and iPhone sales numbers I wonder how much the strong GAAP numbers come from the fact that this is the first quarter that has 2 years worth of iPhone sales "subscripting" into it. Their non-GAAP numbers were absurd!

$2.85 billion in adjusted non-GAAP earnings translates into $3.18 per share, and this is in the non-holiday quarter. If the seasonal bump persists, they could be hitting $4/share non-GAAP next quarter. This could lead to fiscal year 2010 EPS of around $12 or even $13. No analysts have estimates that high right now, I bet they'll continue to play catch up.

Above is Yahoo's recent timeline of average analyst GAAP estimates. Apple beat today's GAAP estimate by $0.40, at $1.82.

VIX 22.5 and A Lesson Learned

Back down to the VIX's traditional range. This is moving up the net value of my portfolio as much as anything else. AAPL implied volatility will really drop after earnings on Monday too.

Confessional about some of the dumb moves I made during my excursion from posting all activity. Wasn't that dumb, but definitely a learning lesson. With 3 weeks until October expiration with AAPL trading at around 185 I bought an AAPL 190 call for $3.85. I held on for a couple weeks and sold the position last week for $3.60. When I sold it AAPL was up around 190, I was right about AAPL's price movement. I had feared that theta would eat away at my long call's value when I bought it, and this fear was realized. I also thought that AAPL would be reporting earnings before October expiration when I opened the position, that's the foolish part. I was thinking the increase in volatility before earnings would make up for the lost time value. Hopefully, last time I make a mistake like that.

Overall, glad I got out with a meager lose. The 190 call is now trading at $2.30 with AAPL trading at $191.28.

Dow 10,000

Now the retail investors who sold in at Dow 6600 will want to buy! Love watching CNBC on days like this.

I'm feeling very comfortable with my portfolio. I don't think it's too aggressive, but if things go my way I'll finish out the year with a great yearly return. I am still aiming for 25% a year, right now I'm up 80% this year. About to add a decent sized deposit to the portfolio soon. After which point my cash levels will be high enough to cover the AAPL 220 put.

Book-keeping

Just to keep myself honest, here's a portfolio update.

I got out of the Dec SPY 116 call for almost the same price I got in for a while ago.

Currently:

-1 AAPL 165 Jan '10 Put: sold at $15.25, now at $4.50

-1 AAPL 180 Apr '10 Put: sold at $20, now at $14.425

-1 AAPL 220 Jan '11 Put: sold at $50.20, now at $49.925

-1 $2.50 Jan 2011 C Put Option @ $1.55, now at $0.235
-2 $2.50 Jan 2011 F Put Option @ $1.28, now at $0.215

The 220 Jan '11 AAPL Put that I recently sold represents a new strategy, selling deep ITM puts. It also represents what should be my last move for AAPL for the rest of 2009 and 2010. As the other puts expire I will start opening positions in other companies to diversify as the "sure" gains from AAPL will have run their course at valuations above $220.

I don't know why I didn't sell deep ITM puts on AAPL before, but this is how I view it now. I view selling deep ITM puts as a way of buying into a stock at a discount with a set sell price. I guess that's because it's Equivalent to a covered call, but I like the put more because you don't have to pay margin interest if you don't have the cash to buy underlying for the covered call.

Keeping Commisions Low

I've taken an excursion from my trading blog diary, but I want to keep it up because I like revisiting posts to see how my trading strategy has evolved over time, with the hindsight of how the market has done.

So, I didn't end up moving to Interactive Brokers and I've kept my ThinkOrSwim account. Although $1 option trades would be nice, $2.95 from ThinkOrSwim isn't too shabby. I think a lot of individual investors don't think about commissions when they put on a trade. I have a goal of keeping commission costs below 1% of my assets every year. This would keep my costs in line with the costs associated with a mutual fund or more managed ETF. If trading costs are much higher than this, the extra risk you have to take on to get a better return to make up for the cost difference will eat you up one day. At that point your money is better off in a mutual fund.

My ultimate goal is to keep commissions at 1% of profits per year (lower than 1% of assets every year you don't have a 100% gain). And how else to do that, but to aim for the commission only taking up 1% of your expected profit on every trade!

An added reason I like selling put options is that if the option expires worthless then closing out the position is commission-free. Hence, when I sold that AAPL Jan '10 165 put for $15.25. My max expected profit was $1,525. The $2.95 commission amounts to an expense of only 0.19% of my max expected profit.

A trade that I would do with lower commissions is selling E-Trade Jan '11 $2.5 puts for $1.2. Almost 100% return on risk, but the commissions eat up 2.45% of max expected profits. To me, the broker is getting too much of my potential return and I take on all the risk! Selling at the $5 strike for $3.50 might better.

Finally Switching to Interactive Brokers

Although I am very happy with ThinkOrSwim, I think I'm ready for a little more active trading style that $1 stock and option trades at Interactive Brokers will enable.

There are many other smaller plays I have been missing out on by either not doing enough research, or just thinking it's not worth the cost of commissions at TOS. For example, buying a $1 SPY Oct put or shorting USO in anticipation of a correction.

With a little bit more of a correction I'm looking at selling the AAPL Jan '10 $150 put for $10. Hopefully, my new account will be up and running in time to catch that. Would probably close out the Oct 140 put at the same time, to take gains and leave less risk on the table in case we have another disastrous September/October.

Bought very small SPY call

I think the market is fairly priced here, and I find it harder to find good valuation plays.  I will not put my money at risk to chase these valuations, as I would be a seller with 10 to 20% moves up.  However, I will play with a very small amount of money to go along investing in the Bigger Fool strategy - buying something you don't think is worth as much as you're paying in the hopes that a bigger fool comes along to buy it off you for more.  I just bought a single $116 SPY Dec '09 call for $1.

The motive behind this move is almost identical to when I held the AAPL Jan '10 $200 call.  I just found this SPY play to be a lot cheaper.  For AAPL to get to 200, SPY will have to break 115.  It's almost the same play, but with less risk-return.

Out of CMG.B, look to buy in lower

CMG.B has been showing considerable weakness in this market correction sell-off.  I'm sold out of my small 20 share position at $78.28, taking a $50 gain.

It seems like the realization that the stock market going up can not bring the economy out of this recession, and instead of a new cyclical bull market we are seeing a bear market rally.  I'm thinking of buying an SPY put as portfolio insurance to hold onto my gains, similar to the way Trader Mark has outlined.

AAPL is showing considerable strength though...

Sold Long Term Jan 2011 AAPL Put

I just sold the 155 AAPL Jan '11 put for $26.10.  I will hold this until expiration, as it'll give me around a healthy $5/day income.  Then I will continue to sell AAPL put options only 3 months to expiration assuming AAPL's valuation stays reasonable (near $160).

I also got out of the AAPL 200 Jan call, selling it for $3.45.  A gain of $0.49 from buying it at $2.96 the other week.

Figured Out What to Do

Holding onto the short 140 AAPL put until October would have been painful if AAPL continued upward.  Instead of rolling up the position (premiums are low right now), I basically closed out my gains by buying a $200 January 2010 AAPL call for $2.96.  I will hold onto the 140 put until expiration, which is now trading for $3.25.  This way if AAPL goes up I don't mind, and if it goes down I don't mind buying in at 140, especially after the great earnings yesterday.

I'm hoping for a great Chipotle earnings tonight.

Bought 20 shares of CMG.B

I just bought 20 shares of CMG.B at $75.30 (probably the high for the day).  I plan on dollar cost averaging into this position over the next few months and expect it to be a core position in my portfolio for years.  I have that much faith in the company.

I guess if it's valuation got somewhere ridiculous around 40-50 P/E I would take gains and try to buy back in at lower prices.

P.S. - I made my first manual error.  When trying to quickly cancel and replace a limit order to up the limit, I accidentally replaced with a sell 100 shares order.  Terrible!  Ended up costing me $10 in commissions to get out of, and lost $7 in the bid/ask spread.

I have no idea what to do

The market has shot up in the past couple weeks.  AAPL has gapped up significantly on 3 of the 4 past openings.  Up about $20 or 15% in the in the last 2 weeks.  I'm not complaining my bullish positions are doing well, but it puts a wrench in my plans for the rest of the year.  If catastrophe days are gone, then the days of collecting fat premiums for selling puts at risk-averse valuations are also gone.

With my short AAPL $140 put marked at $4.90 with 88 days til expiration my positions stand little to gain if this monster rally continues.  However, I have little to lose if it fizzles out.  I could chase again and roll up the position, but I feel like this time is different.  If after earnings tomorrow I find reasons for a higher valuation at $150 or $155 for AAPL I'll consider rolling it up then.

I am gaining confidence in my short Sunoco (SUN) put as I see $20 as a huge support.  A road trip up to Ithaca this weekend also boosted my confidence as the drive through Pennsylvania is Sunoco-country.  Even got a Sunoco trucker to honk his horn!

Maybe the world and the market is back to normal and I should hold some long-term stock positions.  I'm considering dollar averaging into CMG, buying 10 shares a month for at least the next 5 months.  The B shares of course, since they are at a huge discount.

Out of AAPL July 125 Put

I bought myself out of the short AAPL 125 put for $0.05 on Tuesday.  Leaving my gain from the transaction at ($10.19 - $0.05)*100 - $3 commission = $1,011.  A solid 3 month gain.

I'm expecting a beat for AAPL on earnings next week which isn't saying much since everyone expects a beat, and AAPL's recent move up above $140 shows that a beat is being priced in.  The October 140 put that I sold for $13.51 is already down to about $7.  I might roll this up to an August put because the August put is selling for $3.70.  Holding that position an extra 2 months for a $330 gain doesn't seem worth it.

Short July 125 AAPL put now under $1

Yes, with 22 days to go my short put has eclipsed the $1 mark. I looking forward to July 17 expiration and I'm hoping to receive a plaque from CBOE for my patience in holding an option to expiration.

An added bonus of holding until expiration is that if it expires worthless there are no closing costs, no further commissions. My brokerage, thinkorswim, does have a policy of making commission free trades to close out short option positions trading at under $0.05. It might make sense if it reaches $0.05 with a few days left, especially if I were to open another AAPL position going into earnings.

Sunoco

I have casually watched Sunoco over the past year. It looked enticing when it was approaching $20 last fall, but then it shoot back up to $30 and $40. I was left thinking, "Yup, would have been a good buy" and stopped following it. Well, guess what. That ship hasn't sailed. Yesterday it closed at $22.89.

I thought about buying it outright. However, even if it goes up to $30 or $40 again, I don't trust my ability to sell at the right time. I looked at covered calls, but the premiums there were not worth it. So, I've decided to stick to my guns and sell another short put. I sold the November 24 put for $3.51 this morning. If put to me I'll be buying in at $20.49 and sporting a 5.8% dividend yield. To which I could easily add a 10%/year yield selling OTM calls.

See, I'm not just an Apple fanboy.

Risk, Leverage, Diversification

My July 125 put is now less than 30 days away from expiration. I can see how an investor could be tricked into being overly comfortable as days and weeks go by in a leveraged position with nothing going wrong. The first day I sold the 140 Oct '09 put I was very nervous at being obligated to put up so much money towards AAPL. On that first day I could barely go an entire lunch without looking at AAPL's ticker. Now, I could go the whole day. However, the price of my 125 option has barely changed in those 2 weeks, why am I so much more comfortable?

I can see how investors (or should I say speculators) are lulled into a false sense of safety.

I would like to address why my portfolio is not more diversified. For one, I believe that asset classes such as US equities are much more tightly correlated than most believe. Second, I hate paying commissions. A $2.95 option commission for a $1,000 profit keeps my commissions expense ratio low (0.3%). Third, I don't have enough capital to be in more than a few companies. There are many companies I would like to own shares of long, although in this environment I would probably only consider a hedged pair trade.

Possible pair trades that pop into my mind are long Under Armour, short Dicks Sporting Goods or Long Chipotle, short PF Changs.

WWDC '09 Impression

Apple is trying to fuel investor confidence by keeping surprises, and thus violent price swings, to a minimum. Having Steve Jobs show up a few weeks earlier than planned to cause a short-term spike in AAPL price would be foolish. He will be back later as planned, investors like things to go as planned.

People love to second-guess Apple because the company has uniquely positioned itself to have a lot of opportunities. It is easy to point at something they could have done, such as an OLED screen for the iPhone.

Waiting another year before ditching the AT&T subsidy is also a case of maximizing profits, and minimizing risks. The risk being that incremental unit sales to Verizon wouldn't be enough to make up for the decline in profit margins. Apple can make drastic strategic changes through venturing into new product categories. However, they have consistently proven that they change product pricing, margin, mix strategies within each category very gradually.

Just look at how they gradually made the aluminum 13" macbook join the 'macbook pro' family. They gradually reduced iPhone's price, with the iPhone 3G at $99 (and the subsidy from AT&T unchanged) Apple is gradually sacrificing profit margin for market share.  

I think Apple is conservatively fairly valued in the $140-$150 range.  I am done rolling up my AAPL put options for now.  A new product release such as the much rumored netbook tablet, an AppleTV that is no longer a hobby, or the release of the iPhone in China might be reason enough to roll up the put $10.

Chased It.

I chased after the $140 Oct '09 AAPL option and sold it for $13.50. I didn't want to let it get away, and had just read about the possibility of AAPL releasing a $99 iPhone. I should probably close out the $125 July put, but I'll wait and see if I can handle the stress levels associated with being leveraged this much. There are only 45 days left until July expiration, and I really want to hold until then. If AAPL retraces to $125 and is put to me then I'll sell the Oct '09 125 call to reduce risk.

Just the fact that I wrote "I really want to hold until then" tells me that I'm holding this put based on emotions, I can't leave $270 for holding on for 45 more days (that's a free burrito everyday). If this position goes against me, I will remember this post, and learn my lesson... don't value your portfolio in burritos.

Synthetic AAPL

I know I didn't actually make a synthetic AAPL holding through options (for those too lazy to follow the link: I would have had to be buying the same calls as the puts I sold). After repeatedly moving up my naked puts during this rally, I'm sure many would say why didn't you just buy AAPL at $95. Well, I wasn't expecting a 50% rally in 3 months.

If my current AAPL $125 put were exercised I would enter an AAPL position with a cost basis of $114.81. I put in an order to sell the $140 AAPL Oct '09 put for $15, which is marked at $14 right now, and I expect will get filled on any decent pullback. Assuming the July put expires and the Oct 09 order is filled, if AAPL were put to me at $140 I'd still be buying in for $114.81.

I <3 Theta

I see theta as a way of being on the house side of the wall street casino. By being a seller of options, I make money on days when the market doesn't even move. I read all these articles about how great dividends are, how it's great to be a dividend investor. Anyone can turn their long stock position into an income vehicle by selling out-of-the-money covered calls. Sell the call at a price you told yourself you'd sell your position anyways. Then you get paid to follow your investment plan... a little easier to stick to your plan when you're getting paid to do it.

Contemplating Taking Gains (wait, I can't)

When the price of the July $125 put got down to $5.90 this morning I was tempted to close out my position. I didn't really want to close out my position, but rather sell half of my position to take some gains. Too bad that's not possible with a single put option.

I wonder at what point an investor feels like he has enough money to pursue all of his ideas, without being limited by securities available. At that point is probably where you start to feel limited by the time it takes to do due diligence on an investment that makes up only 1% of your portfolio. I think no matter how large my portfolio gets I should limit myself to a manageable number of investments that I can track fundamentals as closely as I can. At the primary source, though, listening to conference calls, reading balance sheets, etc.

The market's action since last Fall has made me firmly reject the notion that 'tracking fundamentals is pointless because the chart reflects the company's worth'. Also, faith in a company's fundamentals also enables you to hold or add to your position in tough times.

Looks Like Apple is continuing to be range bound around 125. If I had another 125 put that I'd been flipping at the top and bottom of this range, I'd be looking at a sizeable gain. However, there are always opportunities that look good in hindsight and even though the coin flipped heads 3 times in a row, there's still a 50% chance next flip. APPL $125 July put is now back to $6.90. At least I'm eating my $6 worth of theta everyday.

Dollar Devaluation

All of my current leverage comes from the short AAPL July $125 put option. I am very comfortable with holding this position until expiration. Why so comfortable? Aside from the company's great fundamentals that I already addressed, the biggest threat is obviously the macroeconomic situation.

Over the past couple months, it is becoming increasingly clear that deflation is not going to be a threat. If it becomes a threat again, governments will respond by printing more money than ever before again. If the S&P tries to retest March lows more money will be printed. It is clear that devaluing the dollar is preferred by the Fed to having retirement accounts and home values down 50% (and consumer budgets cut accordingly). The devaluation* of the dollar is eminent, another reserve currency (yuan) will be there before the next financial or asset-bubble collapse, and the U.S. will not be able to reap the benefits of being the world's sole reserve currency.

*devaluation is different that just inflation. Devaluation is the dollar becoming worth less relative to other currencies. Devaluation of the dollar occurs when the dollar out inflates other currencies.

Apple is in a good position to handle a devaluation of the dollar because 45% of their revenue is generated from overseas. International demand for Apple products will continue to increase, and who knows, maybe if international sales reach 75% of revenue AAPL will become the world's reserve currency.

How Greedy are you Mr. Market?

We are in the middle of one of the sharpest and strongest rallies in history. Today, the VIX got below 33 for the first time since September. That is at the upper end of a historically normal range for the VIX. I personally think valuations were just too cheap in early March and we've bounced off of very oversold levels. A VIX that low tells me that people are not expecting to retest the March lows, to which I agree. However, I expect and hope that the rally stagnates at this valuation level. I have already taken more agressive positions in AAPL short puts throughout this rally. Mr. Market wants me to get even more aggressive. I think I'll wait until my short AAPL put expires worthless.

On another note. I am kicking myself of late about CMG. I am a big Chipotle fan, believe in the company and management. I'm pretty sure 100 shares of Chipotle held til retirement would leave me a happy camper. At it's current valuation $80, I think it's a little too expensive of an entry. When it was in the 50s a couple months ago, I thought about opening a position and was deterred by the extremely large short interest. At the time 50% of float was short, the most out of any stock in the S&P 1500. I thought it was odd that Chipotle, a well managed company that will definitely survive the recession would be a favorite for the shorts. I totally forgot about the B shares!!!

CMG.B shares are trading at a significant discount to the A shares, even though B shares have 10x the voting power of A. Apparently, shorting the A shares and buying the B shares was a popular pair trade. So many people did it, that CMG has gotten much more volatile with some short squeezes that exacerbated the B share discount. Chipotle management addressed the B share issue in their latest conference call, and are investigating ways they could merge the B shares into the A. Anyways, I was dumb for not taking the little bit of extra effort to investigate the A and B share pair trade that accounts for the high short interest.

Disclosure: short APPL put option

My (Current) Strategy

I have fully disclosed my actions, and some reasoning behind those positions. However, I would like to clarify what I envision as the long-term strategy I am building towards with these positions.

The reason I say current strategy is that I think there is a right strategy for optimizing reward and minimizing risk depending on where we are in the market cycle. I would label our current market cycle as a bottom trading range, with the possibility of a full recovery and bull market.

In this part of a market cycle my ideal portfolio would consist of holding fairly valued large-cap stocks from which I could routinely sell OTM call options. These large-cap stocks would be the core positions of my portfolio. The other part of the portfolio would consist of OTM put options for small-cap companies with a higher beta. These small-caps are great companies, but are too overpriced to justify buying at their current valuations.

The portfolio is leveraged because the capital required for the put options if they were to be exercised is not in cash, rather the large-cap companies. If the market were to fall again, the large-caps would be sold at a loss, but you would enter small-caps with potential for explosive growth when the recovery does happen. If the market stays in its range, you have made a nice return, repeat. If the market goes up, you have made a nice gain, think about adjusting your strategy.

I think the best way to explain would be through an example, I'll make the example the portfolio I am building towards.

Long position in AAPL stock

Short Dec '09 CMG $55 put

Short Jan '10 ISRG $100 put

I Got Scammed

As you can tell by my excursion into trading options with a meager amount of money to leverage, I try to optimize my finances. I am also internet savvy, make purchases online, and keep track of checking and credit card spending through justthrive.com. Yesterday, I noticed a charge labeled "Shopper's Discount 800-8898776" for $12 on my debit card. I thought I'd seen it before and looked back at the previous month's statement. Sure enough, there it was again for $12. In all, I'd been charged each of the last 3 months.

A quick google search revealed that it is a prevalent scam, and I found multiple sites with thousands of complaints registered. Apparently to resolve the issue, all you have to do is notice it on your card, call the 800 number, and demand a refund.

My research into how this happened led me to some findings that would make a wonderful business ethics example. When I purchased something from buy.com in January after completing the checkout, I was prompted with an offer to save $10 on my next purchase. All I had to do was type in my e-mail address twice. Of course, I have my yahoo e-mail account for things like this, which I long ago ceded to spam and never check anymore. If I had ever checked my yahoo e-mail account I would have known that by typing my e-mail twice I had actually registered for a shoppers discount savings club, with a 30-day free trial, after which they would bill a monthly membership fee to the card I'd used to make my buy.com purchase.

I'm pretty sure this is why Amazon is eating up e-retail market share. I want to know how much agreeing to this scam run by WebLoyalty Inc. helps buy.com's margins. I wonder if buy.com gets paid everytime a customer sees the ad, whether buy.com gets a commission everytime someone types their e-mail in twice and they send credit card, name, address info off to this credit card leeching company. Or maybe the agreement is even more conniving and buy.com gets a cut of the monthly membership fee. Whatever it is, this is the kind of stuff that kills an online retailer's brand. Any company that agrees to do business with WLI is sacrificing the future of their brand for improved short-term margins. What were the executive's logic at buy.com...O, we can undercut our competitors' prices and maintain our margins with this increased revenue from WLI, which will lead to more market share. No, No, No.

The worst part is that it's all legal, this company WLI, has been very successul. They have gotten start-up awards, and last year recognized over $200 million in revenue. On their site they claim to have over a million members to their various scam clubs. I just feel sorry for all the people having a hard time balancing their budget and can't figure out where all their money goes...

Staying Smart

Holding onto the Jul '09 $100 AAPL option call to try to squeeze out an extra two hundred bucks in 3 months would have been dumb. The risk of having an overnight Steve Jobs health rumor break through my conditional order into margin call territory greatly outweighs the reward.

I just covered my $100 put at $2.19. I had sold it at $6. Therefore I made a gain of $381 before commissions and $375.10 after commissions.

Wow, I just looked up when I had sold the option. April 6th, less than 3 weeks ago! I try to balance being a trader with being an investor, but this market is moving so fast it has me looking more like a trader. Here's to holding the short $125 put until expiration no matter how low Apple goes to prove that I'm also an investor!*

*Note I said "no matter how low", if Apple shoots up above $150 before July there's nothing wrong with taking gains. If that were to happen I'm not going to chase again by selling another put option at a higher price, at that point I may as well just have bought shares. Above $125 an investment in Apple has a lot more risk as you get further from conservative valuation support levels at $80 and $100.

Disclosure: short Jul '09 $125 AAPL put option

Sold an At-the-Money Put Option For AAPL

Getting a little more adventurous, I sold a $125 July AAPL put for $10.19 today. That would mean if APPL is below $125 on July 15th, I'm buying AAPL for $114.81. If this were to happen I would immediately sell a call option to reduce risk and the amount of capital I would be paying margin interest on.

I just have to be careful to take my gains on my short July $100 AAPL put if the stock gets much below $120; I should probably put a conditional order in. The ISRG $100 Jan '10 put is looking very tempting...(to sell). However, I definitely won't open another position until I've gotten rid of the liability of the $100 AAPL July put.

Disclosure: short Jul '09 $125 AAPL put option
short Jul'09 $100 AAPL put option

Covering AMZN short at $81.35

AMZN hit $81.35, so my conditional order was triggered. I was a little tempted to move the conditional order up a couple bucks to keep me short up until tomorrow's earnings report, but resisted. Overall, it was a loss of $50 with commissions. I'm fine with it as it was mostly a hedge against the possibility of this rally giving up. A pullback from the rally is what was expected, and although we got a big loss on Monday, that loss has almost all been erased. I think we'll find a new trading range up here, and I'll continue to sell puts just below the trading range in great companies I wouldn't mind owning.

The Jul '09 AAPL 100 put is now trading for $2.67. I wouldn't sell for such low premium, so it makes me wonder if I should hold for such a low premium, or take my gains and open a new position. At some point I'll probably end up putting a conditional sell on to take gains if APPL drops and open up a new Oct '09 position with a fatter premium.

Intuitive Surgical Catching My Eye

Intuitive Surgical was a very hot stock on par with the likes of HANS in the last bull market, but it seems that the stock price has come down to earth.  After hitting a 52 week low of $84.86 it has bounced back.  Even in this miserable environment, with hospitals cutting back on budgets they managed to sell 68 Da Vinci robotic units in Q1, down from 76 last year.  My thought is that hospitals probably can't change their budget on a dime, and that the decline in sales will come later in the year.  However, even if that is the case ISRG has sold enough units that the sales of replacement parts could keep them afloat through the recession.

Some highlights from ISRG's Q1 2009 Earnings Call transcript:

• "Total recurring revenue grew to $121 million, up 36% from prior year comprising 58% of total revenue."
• "First quarter instrument and accessory revenue was $79.5 million, up 29% compared with $61.9 million for the first quarter of 2008 and down 3% compared with $81.6 million in the fourth quarter of 2008. The change compared with the first quarter of last year was driven by the 60% procedure growth partially offset by the revenue deferral of $2.1 million and lower instrument and accessory revenue per procedure."
• "The amount of instrument and accessory revenue we realized per procedure including initial stocking orders and adding back the deferred revenue of $2.1 million was approximately $1800 per procedure, down approximately $200 per procedure compared to the fourth quarter and down approximately $400 per procedure compared to the last year."
  
• "In March, the company delivered the $150 million to Goldman and received and retired 1.4 million shares which is the minimum number of shares due under the program."
  
• "During the first quarter we sold 66 da Vinci systems, 44 in United States, 17 in Europe, and 5 into rest of world markets. A total of 6 system sales were part of trade-up transactions. The net 60 new system installations brings to 1171, the cumulative number of da Vinci systems worldwide; 863 in the US, 211 in Europe, and 97 in rest of world markets..."
• "We ended the first quarter of 2009 with cash and investments and $822 million, down $80 million from December 31, 2008. The decrease reflects $150 million used to buy back and retire shares and $27 million invested in fixed assets intellectual property partially offset by $79 million in gross cash flow from operations."
  

I especially like that they knew when the time was right to issue a share repurchase program.  Many companies make the mistake of repurchasing shares at the peak of the bull cycle.  They also note in the conference call that they may retire up to $150 million more in shares between now and June, and that the effect of the 1.4 million retired shares will be realized in the second quarter.

They also suspended guidance for instrument and accessory growth as well as system sales.  So basically, they suspended all guidance since that's the majority of their business.  ISRG is a very volatile stock, but they will survive this downturn since they have a monopoly on robotic surgery.  600 patents is quite a moat, and they are not benign to acquiring other start-ups to get the technology they need.  I think ISRG's valuation becomes very attractive below $100, and will be thinking of selling a put with a strike of 90 or 100 and expiration 3 - 8 months out on any weakness in ISRG's price below $120.

Disclosure: no position in ISRG

The Long Case For Apple

The difference between GAAP and non-GAAP earnings for AAPL has been spreading because of the phenomenal growth in iPhone sales. The iPhone is not yet 2 years old, this quarters GAAP earnings will still recognize profit from iPhones sold on the first day of release. This is because Apple spreads out the cost and revenue for iPhones in their accounting over the course of 8 quarters (because of the AT&T subsidy for signing a 2-year contract, although AT&T pays AAPL upfront at the time of sale). Many shareholders complain that this makes Apple's earning power seem less impressive. However, I think it serves to make the stock less volatile as earnings are spread out, thus insulating them from a bad quarter due to where they are in the iPhone product cycle. Regardless, anyone who knows anything about this stock understands the distinction caused by subscription method accounting. Non-GAAP earnings for 2009 are expected to come in around $7, and GAAP earnings are expected to come in at $5.

Apple has all of its competitors on its heels. The entire consumer electronics industry could not catch up by trying to emulate the iPod. Now, everyone except for Research in Motion is trying to emulate the iPhone. Guess what, it's not going to work. Their engineering teams are too good, give them a two year head start in any product category and no one will catch them. Other engineering teams can copy the product in a year, but in that time Apple will have an update with significant improvements and be leveraging market share. The momentum from the iPod and iPhone along with frustration about Vista is helping fuel sales of Macs. I assume you've seen the new Microsoft commercials. Microsoft's message in the new commercials is that they want to compete with Apple on price. I think Apple's marketing team knows they've got Microsoft in check-mate. It's admiting that a PC is a commodity, price determined by its specs, no value added other than what hardware goes in.

Finally, if i were to speculate on what the next big thing for Apple is, I'd say it's going to be Apple TV (with an app store).

Apple also has about $30/share in cash with zero long-term debt.

Dislosure: Long AAPL

Dipping My Toe in AMZN Short

I believe Amazon is a great company with great fundamentals, but this is a technical trade, and Amazon is overpriced.

Amazon fell below its 5 day moving average of $77.8, and I decided to sell 10 shares at $77.35. I only sold 10 shares because I do not want to get burned if AMZN continues it's trend upward. I think I am going to put a stop loss in at $81, which I see as AMZN's next resistance. If that happens I would rather take the very tiny loss, and come back to short when AMZN pushes up against its 52 week high of $88.  If AMZN goes down like I think it will, I'll add more shares short at $73.

Earnings is coming up April 23 and you never know what to expect in this season, except that Amazon is 'priced to perfection' and any inclination of weakness will drive the stock down. A report came out this morning that said Amazon may be responsible for a third of U.S. e-commerce, when you account for other companies selling through Amazon this wouldn't surprise me. However, Amazon has been sacrificing margins to achieve market share.

In terms of long-term e-commerce I think you will see that as people become more comfortable with buying things online, they will be more willing to try sites that don't have as strong of a brand. However, currently Amazon is clearly the place to shop. The real question is whether Amazon will be able to achieve economies of scale to match prices of the other discount sites before people start shopping other sites. There are some other great sites out there that specialize in certain things. I envision that eventually people will have a mental online mall, different shops for different things...Newegg for computers, Zappos for shoes...and I guess Amazon will be the catch-all.

Disclosure: Short AMZN

Taking Gains (just in case)

It's been a great 5 week rally. Since I sold the AAPL $60 Jan '11 put option for $11.05 on Febuary 25th, it has depreciated dramatically. This option is now trading at under $6, and I felt I had to take the gains when sucking up almost half of the premium value for such a long-dated option in less than 2 months. I closed out my position at $5.95, leaving my gain at $510 minus $5.90 in commissions. Not bad for my first completed option trade. Maybe I might have the touch for trading options that I did for trading baseball cards in 3rd grade (took those chappaqua kids for a ride).

My portfolio is still very bullish on AAPL with my delta from my remaining AAPL option hovering around 20. If this rally were to reverse I think I will sell the $60 Jan '11 put again for anything above $9. I think I'm due for a long post referring to the research and fundamentals that has made me so bullish on AAPL. I also want to get some photos of the lovely card collection up here.

Disclosure: short AAPL $100 Jul '09 put

Thinking about Next Week

I'm thinking about adding a bearish position to my portfolio. Although I think that Amazon is a great company they are looking like a prime target, with their P/E ratio now eclipsing 50. Is it 2009 or 1999?

However, by that logic it made sense to short AMZN when the P/E was at 40, which is exactly what Marc Krieger did and he is finding himself in quite a bind with AMZN hitting $80.

• Short Opportunity for Amazon - January 4, 2009
• Amazon's Rich Valuation Defies Logic - March 9, 2009
• Amazon: Dirty Little Secrets Persist - April 8, 2009

It will be interesting to see how his short position ends. Those are some great reads with the hindsight the chart below gives you.

Looking at the yearly chart it is amazing how much the stock ground the stock has covered since last fall. And what a clear trend, it's like a chain e-mail went out to sell last August, and then in November a buy chain e-mail went out.

There is no telling how high Amazon will climb, but I am fairly sure that however high it goes it won't just stay up there. I will be watching the 5 - 20 day moving average closely and looking for signs that a new e-mail went out.

Greedy Market

It fascinates me how quickly the market can switch from fear to greed. I think the past month has been the perfect example of this, and I hope to remember the March 9th - April 9th 2009 month decades from now.

On March 9th, people on the sidelines could not have been happier. They were winning, as others who had any money in the market slowly watched their buying power sink. However, how a rally can flip that smug person upside down. He is nervous. He is wondering how much his competition has gained in this rally, he can not be left behind by not having enough long positions. Even if the market doesn't believe this rally should hold, it could go on for a long time. The fear of losing money has turned into the fear of not keeping up, which for some reason we call greed.

Over the past month I have realized that investing is a competition. If everyone's portfolio goes up 20% your buying power relative to everyone else hasn't gone up. In order to win the competition you must lose less money on the downside, and make more money on the market upside. The fastest way to increase your relative buying power is to make money while everyone around you is losing it, that's the reward of shorting.

Activity Disclosure: In case this rally reverses I'd like to take some gains and close out my AAPL 60 Jan '11 put. I put in a conditional limit to buy back that put if APPL is marked at or below $108. AAPL is currently trading at $119.

Current Holdings

As of April 8, 2009:
-1 $60 Jan 2011 AAPL Put Option @ $11.05
-1 $100 Jul 2009 AAPL Put Option @ $6.00
-1 $2.50 Jan 2011 C Put Option @ $1.55
-2 $2.50 Jan 2011 F Put Option @ $1.28

I executed the Citigroup and Ford positions this week mostly because the premiums covered over half of my risk. You'll notice the Citigroup and Ford positions are very small bets. I wanted some sort of bullish position in the auto and finance sector for my own sanity over the next couple years. Think of those small bullish positions as coping mechanisms for every bailout article I read. Although, with Ford the lack of bailout for GM or Chrysler would help.

I sold the Jan 2011 Apple option last month and it has done very well during this rally. I sold the Jul '09 this week because I wanted a little more upside exposure in case this rally continues (or holds), and if the rally ends I am comfortable with owning Apple at $100/share.

Purpose

I will be writing to this blog as a way of holding myself accountable for my investment decisions.  Every trade that I make I will document on this site, including the results of my trades when I close out positions.  From past experience I have found that I am prone to making rash buy and sell decisions, such as "Wow, that blog post really lays out the foundations for going long LDK, MOS, CHK, and PBR" and then purchasing all four of those positions later that day.

I am currently out of the market as I cashed out my Zecco account and am moving it over to ThinkOrSwim.