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.