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.