Current Holdings

I am short a June AAPL 240 put, sold at $2.10.  Short a June 110 SPY call, sold at $2.16.  Short a June GLD 118 put, sold at $1.45.  I am hoping that this range bound market stays range bound for the next two weeks with S&P 500 trading between 1106 and 1040.

If the S&P closes below 1077 again, then I think we have officially entered a bear market.

This is the first recession caused by credit in the post WWII era. Credit must come down.

My view of what's happened in the last year is that private credit has come down, but has simply been replaced by public (deficit) credit.  These must come down in aggregate, it's going to be a painful process.

Despite this bearish outlook I still like AAPL at a price.  I'm fine with owning AAPL at $240 going into earnings.  And if not collecting enough premium to move my portfolio up by 1%.

Weekly Update

YTD:

• portfolio, 20.57%
• S&P 500 total return, (1.5%)
• S&P 500 price return, (2.3%)

I closed out my short AAPL 220 put at $2.10, looking to sell it of the 230 put on another pullback.  Closed out my short AOL position at $21.19.  Also, sold an SPY June 110 call for $2.16 on Thursday.  Shorted USO this morning at $34.18.

Portfolio YTD is overall gain including commissions.

Mostly in Cash

I am mostly in cash, the only long I have is an AAPL June 220 Put sold for $5.  My AOL and BP shorts are doing a good job keeping me above water on big down days.  I only wish I had sold more than 100 shares of AOL short at $24.  I have been keeping track of the institutional ownership of AOL, as of a week ago Google Finance reported that AOL had institutional ownership of 84%, this morning that has dropped to 81%.  I think institutions will slowly drop AOL shares as they realize that this company is not going to make a turnaround.

Even buying Apple at $220 seems a little too bullish this morning.  I'll stick to my guns though as I agree with Stefan Sidahmed that Apple's crisis September 2010 price should be around $195, derived from fiscal year earnings of $15 and a crisis P/E multiple of 13 that Apple sported during the previous 2008 crash (when using revised earnings).  So buying in at an effective $215 leaves only 10% downside risk.

There are two potential problems with this model, either that Apple's earnings fall short of $15 or that the market prices Apple to even lower valuations that during the 2008 crisis.  Apple has already earned $7 of these $15 to earn by September, I think they will make it there with the inclusion of iPad sales and a strong iPhone refresh.  I estimate that every 1 million iPads sold will add closer to $0.20 in earnings than the $0.10 others have estimated.  Using an ASP of $600, 1 million iPads yields $600 million in revenues.  During the last conference call Apple reiterated several times that the iPads were very competitively priced with lower than average margins.  However, to me it came off as an excuse to hoodwink their analysts and guide really low once again.  Using a gross margin of 35% on iPad sales, a little lower than Apple's 39-40% overall gross margin they've been running, and Apple's 29% corporate tax rate: $600 million * (.35) * (1 - .29) = $149 million.  $149 million / 910 million shares = $0.164.  From there, it's easy to see how 2 million iPads sold in this quarter and 3 million in the next could add almost $1 in earnings.

I think the 35% margin is consistent with parts cost estimates from iSuppli.  The component and assembly costs do not include the entire cost of the product, for comparison Apple's iPhone 3GS gross margin is estimated to be about 45-50% with component costs of $174 and ASP of $550.

The other problem with the model is that Apple could be discounted to a valuation even lower than that seen during the 2008 crisis.  In that case, I will have much larger problems than the value of my portfolio.

Weekly Update

YTD:

• portfolio, 17.97%
• S&P Total Return, (1.71%)
• S&P Price Return, (2.46%)

I'll post a summary of trades for the week later.  Finished my last finals of college!  Busy week.

Weekly Wrap-Up

YTD:

• portfolio - 15.25%
• S&P Price Return - 1.85%
• S&P Total Return - 2.57%

battling back.

Strategy Change

Unlike the last year, which has been a time easy money was made just by being long anything (I choose Apple), we have entered another time of high volatility and a wild range trading market.  It's important to be constantly evaluating the market and looking for reasons your current strategy is no longer working or will soon be no longer working.

My only core long position remaining is my short CMG $110 put.  Yesterday afternoon, I added another short position by shorting USO at $36.31.  I'm also surprised at how much I'm in cash, when the market is this volatile you can get 1% plus daily portfolio swings with a relatively small amount of capital allocated.

I also completed the straddle on BP by buying a June $50 call for $1.05.  I don't know why options are priced so cheaply on BP, and it seems others are catching on as I just read a great analysis of the uncertainty surrounding BP.

I might close out one of my shorts this afternoon, specifically looking at how oversold oil is.  However, USO is a tempting long term holding to keep since the oil futures contango is currently so steep.

Profit Off BIDU Profit Taking

I remember hearing that BIDU was issuing a stock split soon a few weeks ago, but lost track of it.  This morning I came across an article addressing their 13% run up yesterday.  I watched them this morning, and then shorted 50 shares at $79.80.  I issued a One Cancels Other (OCO) order with a buy stop at $81.15 and a limit buy at $75.50.  I later changed this to $77, as I didn't want to get greedy and was happy with capturing part of the move down after the irrational overbought move up.  Contrary to popular belief a stock split does not immediately make a company more valuable.  Anyways, the buy order closed out my position at $77 for a nice gain.

Almost enough of a gain to counter the OCO order I issued on the E-mini Crude Future.  I bought into a QM contract at $74.40 and set a $74.05 stop loss along with a $75.225.  Shortly thereafter, crude briefly touched below $74 and shot up to $75.5.  Hitting my stop loss and then going up as I thought it might bounce off these oversold levels.  There is no partial credit in the market though.  I should not be in a contract that requires so much capital that I am only putting my stops .5% down.

In the future I will be limiting myself to USO to capture oil moves, at least for a few years until I have a much higher capital base.  But due to the structure of USO, its severe contango means I will mostly trying to capture moves down in oil by shorting USO.

I also shorted 100 shares of AOL at $24, and have an order to short another 100 at $25.

Sobering Stats on AOL

From AOL's detailed report on Q1:

Clearly, they are still bleeding subscribers and AOL admits that this will continue until everyone who realizes they're paying $25/month for dial-up changes their email addresses over to Gmail.  Their future is in advertising.  Which, didn't do all that well either with a 19% year over year decline.  Take a close look at AOL's advertising revenue break-down:

Search and contextual advertising makes up about 1/3 (120.7 / 354.3) of AOL's total advertising revenue.  Notice that Search and contextual advertising declined by 29% while Subscription revenue declined by 28%.  This is no coincidence as all of AOL's search advertising revenue is made by AOL subscribers that search through the AOL portal instead of Google, Yahoo, or Bing.  Assuming that the rate of subscriber decline continues at 25% year over year.  Assuming all other revenues stop declining and display advertising, AOL's supposed future starts growing.  In order to keep total revenues from declining AOL needs to see display advertising grow revenue (120.7 + 282.7) * .25 = 100.85 or close to 80% year over year.  I don't see this happening, sorry Tim Armstrong.

Hectic Week

I made a few mistakes during the volatile week, destroying a lot of the gains that I'd earned YTD:

• portfolio up 12.72%
• S&P 500 Price Return, up 4.34%
• S&P 500 Total Return, up 3.65%

Tuesday morning I closed out my short DNDN $55 put for a small lose at $10.39.  

Looking back at things I was not ready to stomach owning the AAPL $300 strike put at $65.5.  I looked at managing my delta exposure to Apple, but neglected to adequately take into account how much the put would go up in price if the VIX spiked.  I sold out of the AAPL put at $82.35 on Wednesday morning.  Going into that morning I knew I wanted to get out of AAPL at its current pre-market price, so made my first futures trade and sold a /NQM0 E-mini Nasdaq 100 future short at 1950.50, covering it after closing out my AAPL put position at 1938.00.

Wednesday morning I also closed out my short MTB $85 put for $5.70.  Also, closed out my short VXX position at $23.52 for a loss from $20.27 (this could have been a lot worse).

Going into the flash crash on Wednesday I was still short the AAPL Jan '12 200 put with a Good Til Canceled $20 limit order outstanding for AAPL Jan '11 220 put.  I think the put was marked to $17.75 that morning, so prior to or during the flash crash that order got filled.  Wish I had asked for more on that limit order, and gotten filled at the bottom of the flash crash.  I guess I should be thankful that I don't use stop-losses, although that has been a conscious decision to never use stop-loses.  

On Thursday I closed out my AOL short at $21.68 for a small gain from my $22.35 average cost basis.  I will look to short AOL again on strength if it climbs above $25.  I don't care how great their new management is, this company can not be saved.  And the $11 million stock purchase by their new CEO Tim Armstrong is just an attempt to buy more time.  The man is estimated to be worth $500 million, $11 million is pocket change for him. 

My biggest mistake of all was trying to catch a bounce on the oil futures /QM, a couple different times.  This contract is way too big for the amount of money I am managing and it was a mistake to use it.  The leverage provided by futures is awesome, but I would never put 200% of my portfolio into USO and the same should be true of a future eating up just $2,000 of buying power yet exposing my to P/L of an equivalent 200% USO position.  I lost a total of $575 on these two trades.  I do see the possibility of using these futures in a hedged way in the future, but I promise to be much more patient in choosing buy/sell spots.

So all in all a very hectic week. 

My current positions:

• -1 AAPL Jan '11 $220 Put
• -1 C Jan '11 $2.50 Put (from long time ago)
•  +1 BP Jun '10 $47.5 Put (basically insurance against having my vacation ruined by this oil spill)
• -1 CMG Jan '11 $110 Put
• -1 SPY May '10 $116 Call

Wish me luck out there!

The Game is Changed

I've made so many changes to my portfolio that I think I'm going to be splitting it up into a few entries over the next few days.  Unfortunately, I still got hit bad by this sell-off.  I'm alive and well though.  Living to trade on another day!

Don't have time to post all my trades and thoughts as I'm finishing up my last week of classes ever at college, and all the end of the semester homeworks and projects.

Weekend Update

YTD:

• Portfolio up 29.0%
• S&P Price Return, up 6.42%
• S&P Total Return, up 7.05%

So, the stock market was finally deemed overbought this week.  It was overbought each of the last 8 weeks though so trying to buy downside protection would have been a waste of money then.  I've been listening to Hedgeye's morning call quite a bit.  They think this will be a year the 'April Flowers, May Showers' saying holds true with a correction coming in May.  Keith has called for a correction down to 1140 and a resumption of the rally, which would be healthy in my mind.  I put on a hedge late Friday in anticipation of this, buying an AAPL 250 put for $3.00.  I will look into either shorting SPY into strength or buying a SPY May put at a strike of around 115.

Friday morning I also sold a Dendreon (DNDN) put for $9.50 at a strike of 55.  I don't mind allocating a small portion of my portfolio to this risky biotech play.  Provenge was finally approved by the FDA, and this purchase is based on the chance that the immunotherapy will work for other cancers besides late-stage prostate cancer. The market cap of close to $7 billion is a little overblown for just Provenge, but if a steady pipeline of treatments develop for a variety of cancers then $7 billion is a deal.

I also closed out my long AUD/USD position, selling the Aussie dollar at $.9285, a nice little profit from the $.9176 I bought it at a few days ago.

Changed Around Portfolio

Made a few trades since last Thursday.

Closed out the following positions:

• Short 165 July '10 AAPL put, bought back at $0.17
• Short 185 Oct '10 AAPL put, bought back at $1.75
• Short 220 Jan '11 AAPL put, bought back at $11.05
• Short 80 Jan '11 BRK.B put, bought back at $7.20

Opened up one new position:

• Short 300 AAPL Jan '12 put, sold for $65.50

So, I still got hit by that sell off on Tuesday, but I got hit for my new position I opened up.  I'm going to hold onto this new position because it pays me adequately for the risk I'm taking for it.  I have confidence that Apple's earnings will continue to grow as the second derivative of earnings shows no sign of slowing down despite its emergence as a uber-market cap company.

I also bought AUD dollars at $0.9176 yesterday as I was looking to go long the Aussie again if it dropped below $0.92.  Today, the Fed continued their zero interest for an 'extended period' rhetoric, which should mean the carry trade is still on for the Aussie dollar.

Weekly Wrap-Up

YTD:

• portfolio up 36.54%
• S&P 500 Price Return up 9.00%
• S&P 500 Total Return up 8.39%

OK, I know it looks like I'm super duper levered, but look back at the positions I've used to get these gains.

That said, I just came across a link to a new paper out by a pair of Yale professors who have found that young investors should be more than 100% invested in equities and buying stock on margin when they are young, and gradually becoming unlevered into a  more conservative asset allocation as they age.  This confirms what I've intuitively been doing as at 22 (just turned) the small amount of savings I have are a small small portion of what I'll save over the course of my lifetime (hopefully).  Instead of contributing to my 401K I will be contributing to my margin account for the first 5 years of my professional career.  

I hope more research is done and the rules are rewritten for young investors.  I think its reasonable that  accredited investors be expanded to individuals under the age of 29 without kids making more than $50,000 a year.  Most young people are too busy to keep up with the market the way investing on margin requires and would need professional management, hedge funds are the only way to get this on margin.

Bought actual AAPL shares

I am positioning myself for a potential run-up in AAPL shares, selling puts is not the best way to get exposure to this, and as I have sworn off buying call options I am buying shares flat out.  I bought 25 shares at $261.61 yesterday.  I will be buying 25 more shares in the next week, 'dollar cost averaging' into position.

True dollar cost averaging is buying however many shares a certain dollar amount can buy you on a series of dates.  A more accurate description of what I am doing is scaling into a position.  I am going to make this a long term hold in my account with the logic being that Apple will reach yearly earnings of $20/share eventually.  At that point I will be looking for signs that Apple's growth rate is subsiding and will sell out of my position (hopefully for a profit).

Chipotle Fares Well too

Chipotle (CMG) reported earnings of $1.19 a share, same store sales of 4.3%, and projected same store sales growth in the mid-single digits.  Chipotle now operates 976 stores and will be reaching 1,000 along with its first international store opening in London.  The stock has popped significantly to the upside, after being up 2% yesterday during the day, it is up another 12% this afternoon to $142.

This makes my short January put at a strike of $110 look pretty safe, with the premium all the way down to $4.50 from the $10.70 I sold it for.  It now looks like a given that Chipotle will overtake its all time highs around $150.  However, from a valuation perspective I think that the run-up today is overdone and I will not be rolling up my put.  I'll be happy to put up the $1,550 in margin to keep the extra $450 at the end of the year.

This run-up today makes Apple's valuation at $250 look cheap in comparison.

Apple Destroys Earnings

Absolutely crushing numbers...

I went back to my post 'Earnings Domination' following AAPL's earnings last October.  From that post earnings estimates according to Yahoo at the time were:

So the estimate for fiscal year 2010 earnings a little over 6 months ago was for $7.08.  Well, so far 2 quarters into Apple's 2010 fiscal year Apple has already achieved $7 in earnings, $3.67 in Q1 and $3.33 announced yesterday for Q2.

I made the mistake of thinking estimates would only come in a little above estimates, thinking like $2.80 and closed out the Jan '21 210 put for 25.55 on Tuesday morning.  O well, my core AAPL short put options have paid off handily this morning.

When I googled AAPL this morning, I saw this show up as a twitter result:

• "Have raised my price point on $aapl to US treasury status and a new currency standard- We accept - 'fiat 'gold' and 'apple common"

I mean there is a chance AAPL could reach $100 billion in revenues in its 2011 Fiscal year, if not then 2012.  These kind of numbers are absurd.  Bringing in that much in revenue, AAPL will be priced to close to a half trillion dollar company, by far the biggest market cap ever.

I will be pondering how I can make the most money with the least amount of risk, or the risk vs. reward sweet spot I want to be in for one of the best company performances in history.

From the earnings call I particularly liked the part where Tim Cook explicitly announced their China revenues for the first two quarters at $1.3 billion.  Iphone sales there increased 9 fold year over year and they're opening up 20 new Apple retail stores in China over the next year.  Currently, they only have a couple of stores there.  I wouldn't be surprised if revenues from China grew to $10 billion in the 2011 fiscal year.  

Weekend Wrap-Up

YTD:

• portfolio up 24.6%
• S&P 500 price return up 6.91%, total return up 7.5%

I made two new moves.  On Thursday, I sold an AAPL 210 Jan 2012 put for $25.3, bringing my delta exposure to AAPL back up to a total of 96.  This was poorly timed with the pullback coming a day later, but AAPL sold off less than the overall market which is bullish on the margin.  I'm eagerly awaiting the earnings on Tuesday afternoon.

I also made an earnings play on M&T bank, selling the MTB $85 July 2011 put for $5.40.  I think M&T is one of the best regional banks to own, and wouldn't mind getting a 3% dividend for holding them as collateral against my other short put options.  We'll see how their earning come in Monday morning.

Out of Mosaic, Off to Greener Pastures

The chart on this looks bad, and don't want to risk losing my profits on this position for the amount of premium I have left on it.  Bought back the short Jan '11 MOS put for $4.30 today.  That is down from my selling price of $10.70 back in October, for a gain on the position of $6.40 (x100).

Although Mosaic is a great hedge against food inflation, I think that will come later on as it did during the last inflation bout 2004 - 2008.  If the Fed does not start raising rates soon then I think the inflation trade could get too much momentum behind it and the Fed will be unwilling to take drastic enough rate hikes to stop it.  I will be looking to repositioning into a put on one of the big oil companies as I think oil and not fertilizer is the place to be at the beginning of another inflation wave.

I also think the chart for M&T bank looks great, and I'm looking at selling the $85 July put for around $5 to gain exposure to this company again.  My delta on AAPL is all the way down to 66!  Can not believe how quickly AAPL has moved up from $200 in the past month without any significant pullback, I'll be looking to raise my delta to AAPL to up closer to 100 on a pullback, maybe selling another $200 Jan '12 put since to me it looks like free money.  When it looks like free money, seems too obvious that given Apple's cash hoard and earnings power it will stay above $200 for the next two years, that things are dangerous.  However, it looks like Apple's success has been recognized by the market and the American people, it has truly become one of our greatest companies looked up to around the world.  I think the days of being able to buy them at $180, close to 10x forward earnings ex-cash are over.

Friday Wrap-Up

YTD:

• Portfolio up 23.9%
• S&P 500 Price Return up 6.4%, S&P Total Return up 6.98%

This market is on a tear, that is all.

Getting Busy

Just sold a January 2011 $80 put on BRK.B for $5.90.  I think this is a fairly safe play, in a company I don't mind owning at $74.10.  Really the only major risk they face is what happens when Warren Buffet steps down.

Also, sold the Euro short at $1.3470, this is a play on the $1.32 - $1.35 range and a way to (kind of) lock in the gains the Aussie has had against the dollar the past couple days.  The Aussie and Euro tend to move in the same direction against the dollar.

Rally Continues, Un-nerving to Watch

I'm not sure what about this rally is unnerving for me to watch.  No doubt my portfolio has been benefitting from it.  I don't think its that the negative news is affecting my psyche enough to feel a contradiction in my stomach when the markets go up.  The problem is that each day of a rally up my portfolio goes up less than it did for the same move up in the markets last time.  By selling puts to get into positions I reduce my downside exposure, but my upside exposure is limited.  My delta has been decaying, putting pressure on me to open new positions to continue experiencing the upside.

Ideally, I'd like to open a new position or two after a pullback in the markets.  The problem is, me and every other person in the market.  A pullback similar to the one we experienced in February is what everyone expects, is waiting for, and that's why we're not getting it.  Selling my Berkshire Hathaway shares at $79.88 ended up not being the top for BRK.B, but yesterday closed at $79.68.  The position is looking attractive purely based on how much it has underperformed during this rally up.

Closed out Short Euro Position + A mistake

The short Euro position worked a lot quicker than I thought it would.  I got in this position solely as a technical trade noting that the Euro was in a $1.35 to $1.32 range, credit goes to hedgeye.com.  I closed out the position yesterday at $1.3363 for a gain of $120 ($1.3483 - $1.3363 = $0.012).  I am still long the Australian dollar and I think that is becoming a long-term hold, at least until the US significantly raises interest rates.  I think I will short the Euro again if it reaches the top of its range.

I also made a mistake yesterday.  I don't really know why I did this, I think I just thought it sounded cool or something.  I bought 100 shares of VXX at $20.53 yesterday morning.  I ended up selling out of the position a couple hours later at $19.96.  Including commissions this mistake cost me $67.  This was put on as a hedge, but still very dumb.  I hadn't seen the retails number when I did it, DUMB.  Clearly, the VIX is very low right now at 16.48 and it will go up at some point in the coming weeks, but you can't make money off that, if you take a look at calls and puts on the VIX this is clearly apparent.  It is expected that the VIX go up, so the forward month futures that VXX buys are probably priced at around 19 or 20 even while the VIX currently stands at 16-17.  I should never have put money into a product that I didn't understand fully (VXX).  Since ThinkOrSwim does not support VIX futures I have been unable to find quotes of the VX futures contracts, but I'm 99.9% sure my hypothesis regarding these futures prices is correct.

Looks like we're due for another strong open this morning.

Picking up Forex Trading

I have been long the Australian Dollar since March 22 when I bought it at $0.9205.  Yesterday, I added a short Euro position at $1.3483.  With the Australian Dollar it has been fun to see interest added to my account every late afternoon.  I can now say that I've been on the long side of a carry trade.

Although the daily P/L on these positions can be significant due to the 1:100 leverage granted in Forex accounts.  I have put only 2.5% of my portfolio into the separate Forex account.  I assume if I mess up badly and by buying power in this account goes to zero my Forex positions will be liquidated.  Thus, worst -case I get a great learning experience for 2.5% of the portfolio.

I think the Forex account has been a good distraction to me during this huge rally up.  During huge rallies like this I feel pressure to get more long, as my delta exposure gets lower every day due to the nature of being short puts.  It's also important for me to keep my trading activity relatively low to avoid running up a large commissions bill.  Forex trades are commission-free as my broker makes its commissions as part of the spread.

Apple Verizon iPhone?

The latest rumor that added another 2% to Apple's stock price this morning just shows that there are so many more rumors that could move this stock up than move it down.  Another reason besides increasing revenues and profits, that make it more likely that the stock continue on its uptrend.

I have just gotten back from spring break in the Dominican, I highly recommend any of the all-inclusive resorts there if you can get it at a good price.  I knew I'd get a chance to go to a casino, so I bought Beat the Dealer.  It was a good airplane and beach read teaching me the basic strategy and a couple different card-counting methods.  Playing the basic strategy I was able to turn $60 into $150 in a couple of hours of play.  With this basic strategy the house odds are brought down to less than 1%.  I was unable to practice counting cards before visiting the casino, and even if I had I doubt I'd be able to keep up counting with the speedy dealers down there.  They're fast!

Anyways, card counting basically just says that when the remaining deck is composed of a larger proportion of 'high' cards you should increase your bet.  These high cards are 9, 10, J, Q, K.  The idea being that since the dealer must hit any total of 16 or less the dealer becomes more likely to bust.  When these favorable remaining decks arise you should increase your bet.  Seeing as Wall Street is the world's largest casino, I must draw the comparison to Apple's deck of remaining rumors being stacked with high cards.  These high card rumors are more likely to come out and bust any shorts.  Although there are low card rumors that can send Apple's stock lower, I'll take my odds with the deck stacked against the house.

Friday Wrap-Up

I finally decided to chase Chipotle, selling a January 110 put for $10.70.  I am a strong believer of Chipotle's earnings power going forward and wouldn't mind having this as a long-term holding in my portfolio at a price of $100/share.  I'm willing to pay the steep current P/E of 25 at that price because I think Chipotle will be one of the best growth stories of this decade.  That said, I hate to chase after a run-up as big as the recent one, but I see no reason for Chipotle to underperform going forward, so chase I will.  Time will tell if this is a short-term trading mistake.

YTD:

• Portfolio up 15.8%
• S&P 500 up 3.15%

The run up in Apple helped me again.  Mosiac's move up today following Potash's higher guidance also helped my short 50 put be worth even less.

Given that the S&P is the de-facto standard for how to compare portfolio manager's relative performance, I've actually been noticing that there are really three different ways to gauge S&P 500 performance.  The total return of the S&P 500, which includes dividends, is likely a better gauge of how a portfolio manager is doing.  Surely, any manager includes dividends as part of his portfolio gains.  The S&P 500 total return YTD is currently 3.6%.

However, the S&P 500 is merely a metric.  Probably the best way to compare performance is relative to the SPY ETF, adjusted for dividends being reinvested.  Over the next week I'll look for a site that's calculating this, and if I don't find one I'll just calculate it out myself.

Opened Futures and Forex Accounts at TOS

Although I don't anticipate myself doing much trading in either of these accounts (or allocating much money to them), I think they'll be good learning tools

On Sunday night I had to stay up til 4 am finishing up a problem set.  Naturally, as soon as I was done I opened up my TOS desktop platform and to see how the overnight futures and forex were trading.  It's fun to witness how it all pieces together with the price of oil being traded 24/7, how the algorithms/people up at 4am perform the elaborate bid/ask spread dance with much lower liquidity to determine where we'll open in the morning.

I am thinking about taking out a long position on the Australian Dollar, will have to keep watching it for a while.  I might start putting up paper trades in the Australian Dollar and oil futures up here.  However, these seem more like day-trade ideas as they trade almost entirely on technicals.  If the paper trades grow consistently profitable I can see myself allocating 5-10% of my portfolio to swing trading, with the rest locked into my long-term plays.

Can't believe it's already been a year since the market low.  Congrats - the world didn't end!

Friday Wrap-Up

I'm going to start posting my YTD performance every Friday afternoon.  I think it'll be a good way for me to look back and check my relative performance week to week along the way.

• Portfolio YTD - up 12.07%
• S&P 500 YTD - up 2.12%

I'll post post the S&P 500 ytd performance as a reference for how the overall market is doing.  I think I must have some alpha in there somewhere, since my portfolio isn't just beta weighted 6 times the S&P.

Without the AAPL call option bluster in January I'd be doing a little better yet.  O well, put the losers behind and learn from 'em.

I also sold my longest dated option yet today, a 2012 AAPL put at a strike of 200 for $29.05.

Roommate Ups my Apple FY 2010 Q2 Earnings Estimate $0.0000002

That's $2 x 10^-7, or 2 hundred thousandths of a cent.  I was getting a little worried because my roommate came home about a month ago excited about ditching her iPhone for a Blackberry.  By the next day she was already lamenting about how she missed her iPhone.

Yesterday, she'd reached the end of the 30-day limit she could return her Blackberry at no cost.  Drove in the last hour the store was open to return it, forgot her wallet, raced home and back to the store to be sure to get her iPhone.  I have never felt so good about my long Apple (AAPL) position.

Recently I also overheard something particularly interesting as it applies to the smartphone market share front.  I can't pin exactly where or when I heard this, but I know I did - "I don't want to get rid of my iPhone because I'm used to it."  Something I've heard countless people say with 'my iPhone' replaced by 'Windows.'  It's a strange position for Apple to find itself in, but I think they will find it's easier to defend a dominant market share position than convince people to switch.

*$0.0000002 based off of $200 / 900 million shares

Trades Recap

I was a little lazy and didn't post my trades immediately over the past week.  Last Thursday I got a little fearful and sold an April 110 SPY call for $2.50, closed out that position for a $100 loss yesterday at $3.50.  I also adjusted the way in which I'm long AAPL:

• AAPL July $165 put sold for $5, now $2.92
• AAPL Oct  $185 put sold for $13.40, now $10.80

instead of the AAPL July $220 put, which I closed out of for a $300 loss.  Still also have:

• AAPL Jan 2010 $220 put sold for $50.20, now $30.98

I didn't like the risk the $220 July put was putting me under - buying into AAPL at $190 if things went downhill from here.  I'd rather lever up at a lower price if need be, and decrease the risk of being called.  I still have a lot of buying power in my portfolio, so I'm looking to research a couple new long plays.  I really like Chipotle, but don't want to chase - feels just as good to let a winner go if its overpriced (even just short-term overbought).  However, I've yet to find a company I feel as confident about as Apple.  Even with no further sales growth, $220 in January will have Apple selling at an enterprise value to earnings ratio of 15.  Sales are still growing though as Mac sales numbers are coming in very well, and I expect iPhone sales will continue their uptrend following the July refresh.  iPad revenue is just gonna be the icing on top.

Buffet's Annual Letter

It's must-read for every investor, and something to look forward to every February.  Buffet once again addressed the put options that he sold on a major US index that expire within 3.5 to 9.5 years.  From the sale of these puts Berkshire has acquired $6.3 billion worth of "derivatives float" as Buffet calls it.  I would call it $6.3 billion worth of options premium.  Many have criticized Buffet for getting involved in these derivatives contracts, but I think depending on the strikes these European options Buffet sold will likely expire worthless.

The way Buffet looks at his short long-dated puts are similar to the way that I look at mine.  Although mine are expiring within a year, I see them as a great way to sell stock insurance on the price of companies I wouldn't mind owning at the strike price minus option premium received.  For my short AAPL puts I would own AAPL at prices of between 160 and 173.  Meanwhile, while I wait for these strike dates I can use my cash balance to take other equity positions I like.  On this topic Buffet says: 

• Only a handful of our contracts require us to post collateral under any circumstances. At last year’s low point in the stock and credit markets, our posting requirement was $1.7 billion, a small fraction of the derivatives-related float we held. When we do post collateral, let me add, the securities we put up continue to earn money for our account.

Good Weekend Reading

I enjoyed reading Keith McCullough's Diary of a Hedge Fund Manager: From the Top, to the Bottom, and Back Again.  He takes you on an insider's story along his short career starting as an analyst during the tech bubble and bust, followed by his quick ascension up the hedge fund managing ranks (aka $ managed).  Most of all I enjoyed Keith's conclusion about where the industry is headed - more transparency.

I know old money likes the idea of having all their money taken care of in a far away place and they don't have to think about it, a quarterly letter from their fund saying the money's still there is enough.  However, I think that when my friends grow up to have money that won't be enough.  When you get updates from 500 people you barely know every time you log into Facebook, an update on what your money's doing seems a lot more relevant and hardly too much to ask.

Keith also takes pride in the fact that he never uses leverage, which I think is great considering he's using other people's money.  Of course, you do need a margin account to short stocks - but I assume he means he's never buying on margin or trading options.  I feel fine using leverage with my own money, but it is a choice I'll have to face if I ever managed other people's money.

I'd say the most interesting part of the short novel is after he's fired from his position at Carlyle Blue Wave Partners for being a couple months early in shorting the market in 2008.  After that he's done with the secretive hedge fund world and decides to open up his own independent research firm, open to all institutions and individual investors with a subscription.  I checked out the site, hedgeye.com and enjoyed listening to yesterday's morning call that they have up on their site for free.  The intensity with which this guy follows the markets really comes through on the call.

-- The book was a quick read and I read the entire thing on my iPod Touch in an afternoon after buying it through the Kindle app.  The experience of reading it off the iPod wasn't as bad as one might think.  Nice to get a book instantly rather than waiting three days, and makes me believe in the whole e-reader movement.

The other read was Warren Buffet's annual letter (pdf) that came out today.  I'll try and put up my take on that tomorrow.

Sold Out of Berkshire Hathaway

So, my limit sell order that I put on Friday went through today at $79.88.  That along with the chart above makes me feel like I actually know what I'm doing.  I'm still just picking up pennies in front of the steamroller though.  Looks like I saw the steamroller coming today as lots of sell orders came in after it hit $80 - see the big spike in volume around 1:30pm when it briefly tested above $80.  I don't normally analyze intraday charts this closely, but I do like the feeling of selling right at the high.

We'll see if this becomes a 1 or 2-month high, as I'm more of a monthly holding period trader.  Looks there is still some index buying going on, but after that subsides I think a lot of people will sell-out.  Interestingly enough, with all the action going on in Berkshire with money following the index move, option premium prices seem low to me.  If I were more adventurous I would try an option straddle a couple months out.

I will wait and see how high Berkshire ends up going before a major pullback.  Then I will look at selling a put to get back in - but the premiums are pretty low.  I think people are expecting more of Berkshire's traditional (pre-split) volatility and beta, and are viewing the volatility we have seen as a symptom of the index rebalancing.  However, I think what we are seeing is more of what to expect as Berkshire is becoming a popular trading vehicle.

Getting Back, Going to View this Less as a Blog and more as a Trading Journal

The more I think about it the more important I think it is to keep a trading journal. I'm going to be posting my trades here for my sake once again. I think making it public helps keep me honest, and forces me to have a fully rationalized trade plan. It'll make sure I don't cut corners on the journal entries.

Just to recap, my 2009 performance came in at 100%, well 99.8%, but I'll round that up. Handily beating my after-tax goal of 25% a year.

The only big plays I've done since posting was selling an M&T Bank (MTB) short January 2011 put at a strike of 65 for $15. At the time MTB was trading at around 66 - can't remember exactly because I didn't write it down. I closed out of that position on 2/4/2010, buying back the put for $8.50 to reduce risk exposure when the market pulled back a couple weeks ago.

I also sold a Chipotle (CMG) February 2010 put short at a strike of 90 for $4.50. This was done with Chipotle trading around 88, as a potential way to buy into Chipotle. However, on a big analyst upgrade CMG shot up a few days later above 95. After a good earnings report Chipotle has reached $105, and my short put has expired worthless. I don't mind missing this move, as I already captured about 1/3 of it with my option play. I am looking to sell another short-dated put on CMG at either a 90 or 95 strike on any significant pullback - looking for a pullback around $100.

Although much of my gains from 2009 came from option plays with Apple. So far, in 2010 I have yet to learn from my failed option moves of AAPL in 2009. I got really bullish about AAPL around the January 25th conference call, where I correctly expected them to finally change their GAAP iPhone accounting. Apparently, this was already priced in - wish someone had told me because I got long two 220 February calls for $5.50 each when AAPL was trading around $210. I ended up closing them out for $1.50 each - a total loss of $800. My biggest lose from a single trade yet. I have decided that I am not an option buyer, I am an option seller.

I think it's easier to make mistakes on the buy side of options as theta hurts you, and harder to make mistakes on the sell side as theta helps you.

I have sold a $220 January 2011 AAPL put for $50, now trading at $36.8. I am also staying short a $220 July 2010 AAPL put I sold for $27.67 and its sitting right where I sold it. I added the $220 July short put when I was really bullish in January. I am proud to say I stomached the pullback to $188, when my stomach wanted to take a loss on the July put. 'Just wait til July, just wait til July' got me through it though - a mantra that doesn't work for me on the long side of options.

Finally, back in December I bought a share of BRK.B for $3,365. I thought Berkshire was undervalued as it was, underperforming during the rally from July onward. Once, I heard about the stock-split for the BNI deal, I couldn't resist owning a share of such a great company for its historic first stock split. I also thought the S&P 500 addition rumors had some validity to them, and it turns out I was right. After the split I owned 50 BRK.B's at a cost basis of $67.30. BRK.B closed Friday at $78.73 - when I first bought in I thought a sell price target of $4,000 was good. And I think I'll stick to this, I have a limit sell order on at $79.88 - gotta front run all the sellers at $80 a little bit.

I think Berkshire is such a great company I wouldn't mind keeping it as a buy and hold component of my portfolio long-term, but given such great gains on such a short time-span I must take them. I will look to re-enter at a lower price through short-dated put sales (awesome that you can trade options on BRK.B now, kinda hard to afford 100 shares at 3.5K).

Overall, up 2.9% YTD - not bad considering the blunder with AAPL calls.

Alright, that's quite the post - lots to write down when you don't do it for months. Feel like I've been reading Philip Davis too much and I'm picking up his writing style, haha.