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.