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.