Scanner of the Day: Near-Term Expiration Investable Options

I thought I would start presenting some scanners I have found helpful. Here is my first one. It identifies potential near-term options that I can sell for quick turnarounds. Note that I always go through my list and only take trades where I would be fine owning the stock in case the trade goes south.

Filter Min Max Notes
Option Bid 0.1 If the bid isn’t 0.1, the contract costs will eat up too much of the price.
Days to Exp 15 Looking for short-term options. If you find some, this will compound well.
Stock Last 8 This makes sure the option is a decent % of the stock (because I have to reserve that much cash), and this is the level I play at.
Stock EPS -0.1 This makes sure the stock isn’t just oozing money. If I get stuck the stock they have a decent chance of recovery.
Option % out of the money 1% This is just to make sure I’m not hitting a stock just because it has an in-the-money option (which gives false triggers for the “option bid” filter)

Investment Report – 2018/07/17

Here’s the reality – if you find a system you like, and step outside of it, you could get easily screwed. The most important thing is to learn from it. I sold a PUT option on AQXP because it seemed like instant money, but I’m pretty sure the buyer had inside information on it. Lost a decent bit.

However, my other trades seem to be doing well. Here’s what I have going on:

This was a nice trade. Not sure who was selling this, but it was nice to be profitable with both a call and a put.

Trade Enter Value Notes
SORL 5 4.79 SORL has been bouncing. Expecting good things. Depressed due to Trump’s trade war with China, but, actually, SORL shouldn’t be affected long-term. Should bounce soon enough.
SALM 3.35, 3.98 Sold @ 5.45 Also got a small dividend payment.
SALM 4.72 4.85 Taking advantage of the volatility on this guy. Sadly, no good options for selling.
BCRH 10.40 11.2 Also got a nice dividend. Will hold to 16. This is an insurance company that got hit hard, but seems to be recovering fine.
IRL 12.10 Sold at 11.95 Bought it b/c it was a discount to asset value, but apparently not enough to be worthwhile.
DM 13.33 13.70 Looks like a decent energy company. Has decent option values, too.
Sell-to-Open DM CALL@15 0.63 Doesn’t expire until November. Wish I could have done a more recent one, but oh well. Still new to this. Planning on it being in-the-money, and using the call as a sell vehicle.
MNDO 2.25 2.09 Bought this because there is essentially no debt and the company is doing well and giving a 10% dividend. Stock isn’t doing well because they aren’t growing. I think they are doing well, and will probably branch out to new business when the time is right.
ESIO 16.49 17.85 (TOPPED at 17.50) Company was in a downturn but came out of it, but market was still pessimistic. Unfortunately, this will probably be called away at 17.50 due to my option. Still a nice gain.
Sold ESIO Call @ 17.50 1.05 This limits my upside for ESIO, but, on the other hand, I’m still doing better than otherwise unless ESIO tops 18.50 by mid-August.
Sold ESIO Put @ 15 0.4
Sold MNK Put @ 18 0.5 Probably my most profitable trade just based on the short-term nature of it. Might have been better owning the stock, but that was riskier. Option expired out of the money.
Sold CLSN Put @ 2.5 0.1 Super-small trade but a big winner percentage-wise. It’s possible CLSN could drop, but I don’t think so. I think the current price calculates all of the news in.

Overall, I think I’m doing well. The AQXP trade hurt me considerably, but I’m almost back to where I was. If I can avoid the stupid, I should be able to do well.

However, AQXP and CLSN has me thinking – I wonder if, *after* an event occurs that was pushing option prices up, if perhaps they might remain up temporarily. For example, if there is an announcement on Tuesday, will Wednesday’s option prices still be up significantly (if not as much). I’m thinking that maybe a lot of people are closing out positions early, but leaving good money on the table.

Additionally, I’m looking into some ways to use options to leverage investments more. The problem is that the theta decay (decrease of option value over time) is a killer. So, what I’m looking for is a stock whose appreciation essentially outruns its theta decay by a wide margin. So far, I haven’t found much.

Calculating the Value of an Options Trade

I’ve found that it is sometimes difficult to “see” the value of an options trade. The reason is simple – premiums compound *when* they are taken. That is, a premium earned quickly compounds much faster than the same percentage over the long haul.

So, for instance, I entered a trade to sell a PUT option on MNK with a strike of $18.50 at $0.25 for a close date of June 29 – 3 days away! Now, first of all, my cardinal rule is that I would only sell a PUT with a stock that I don’t mind owning. That’s rule #1 (unfortunately, exercise fees on Ameritrade are $20, so that’s kind of expensive, but we’ll let that go for now).

Now, $0.25 doesn’t seem like a lot, especially since it is only a tiny return (after fees, it winds up being only 0.93%). However, for 3 days, that’s a lot! Now, you might try to do a simple multiplication to find out what that is worth over the year. You might think that, since there are 365 days in a year, 1% for 3 days will yield 120% averaged for the year, but you would be wrong!

The reason for this is that you have forgotten compounding periods. Because you get the premium money *now*, the compounding period is only 3 days. Compounded over a year, this is:

((1 + r)^n – 1)

Where r is your total return for the trade (0.0093), and n is the number of compounding periods (121 in this case). Therefore, the return that I will get is (1.0093^121 – 1) = 2.06 = 206% annualized return!

The method I have been following for finding premiums is this:

  1. Search for the best short-term (within the next weeks or months) out-of-the-money puts.
  2. Screen the list for companies you wouldn’t mind owning. Check the fundamentals, and see if likes it.
  3. Use these calculations to find the best option to sell.
  4. Don’t use margin. Make sure you have the cash to cover anything put to you!
  5. Also remember to factor in your “friction” – the amount that your trading platform will charge you. If you are doing small trades, this can be very difficult, and you may wind up having to sacrifice some of these principles just to avoid friction issues.

To find the “r” in the above formula, I am using this formula:

r = (p * c * 100 – f) / (s * c * 100)

where p is the premium, c is the # of contracts, f is your “friction” (cost of using the trading platform), and s is the strike price. To be super-conservative, you might add in the “exercise” price to “f”. Right now, using Ameritrade, f is calculated as

f = 6.95 + c * 0.75

And, if I was including the exercise price, I would add another $20 to f. This makes a huge difference in small trades, but not much difference in large ones.

Investment Report – 2018/06/14

Haven’t updated in a while. I doubt anyone is listening anyway. I’m still holding on KGJI and FTFT. They haven’t done jack squat over the last several months, but the story on them hasn’t changed. One thing to realize is that, if you find a low price now, then that means that you believe that the market is wrong. Why should it suddenly right itself after you buy it? The reason to sell a stock isn’t because it does something, but because the company itself has changed, or the company’s situation, or you learn something about the company that you didn’t know before.

In any case, a friend of mine suggested a strategy that I have been working on implementing.

Think about this – imagine that there is a stock you want, but you wanted to buy it at a lower price. You *could* put in a limit order and wait for the price to drop. But what if someone PAID YOU to put in that limit order? Don’t think this is possible? Well, actually, it is.

If you write a PUT option (that would be “sell to open”), that is precisely what you are doing. Most people write put options with the hope that they won’t be exercised. They believe the stock will go up, and if they wind up having to buy the stock that is considered a fail. However, a better strategy would be to find a company whose stock you WANT, and write a put option for the price you want to pay. You get immediate cash just for writing the option, and then, if the price goes down, you get to buy the stock at the price you asked for! It’s like a limit order that pays you!

The other side works the same, you can write call options for the price you want to sell at. You don’t really lose if the price goes up too high, because you were going to sell anyway. Instead, you get paid to write the sell order.

Anyway, I’m experimenting with this now. I purchased DM at $13.32, and wrote a call option for $15.00 that pays $0.63 per share, which expires on Nov. 15 (5 months). The cost of the shares was $2665 and I got paid $126 for the call option. That is a 4.7% gain in 5 months, if the stock does nothing, for an annualized return of about 11.3%. If the stock actually goes up to $15, then I would earn an additional $320. That is an additional 28%.

To me, this seems like a win/win. The problem I’ve had is that, with the limited amount of cash that I have, the stocks I want to buy are very limited in the options that are available. Micro-cap stocks often don’t qualify for options. Hopefully, when I have a bigger account, I’ll be able to be more flexible with my option strategy.

In fact, I was looking for a company to write put options for, but I haven’t found one which (a) I can afford, and (b) which you can write PUT options for which someone is willing to buy for a reasonable price.

Five month call options are the only things I have found that I can lucratively write.

As for other trades, I found SALM at $3.35, bought 500 shares, and sold at $3.97 and $4.50. I still have 200 shares which I will just hang on to indefinitely.

I bought IRL – probably a bad idea, but it’s a fund whose asset value is below the stock price.

I’m currently looking at GURE, BCRH, and SORL. GURE and BCRH both fit the profile of good, solid companies that have had a bad year. GURE got hit with a bunch of regulatory stuff, but have almost no debt. BCRH is an insurance company that got hit with major claims due to a hurricane, but other than that seem solid. SORL is just an undervalued stock.

Anyway, currently my portfolio is only gaining about 12%/year. Of course, since it is only half-invested, that’s not too bad. On the other hand, having a pile of cash to pick up good deals is part of the strategy, so I can’t readjust my numbers for that. If I am correct, my longer-term numbers should be about 40%/yr. If I’m incorrect, it will be probably still be at 12%/year.

Another strategy I’ve been thinking about is buying dividend-paying stocks and writing covered calls on them. If I can get a stock that pays an 8-10% dividend, and then gain 10% writing covered calls, that would be a nice easy way to earn 15-20% year-over-year.

Investing Status Report – December 2017

For anyone paying attention, I mentioned my first significant trade here, buying FTFT (Future FinTech, formerly Skypeople Fruit Juice – SPU). As per usual, after I bought the stock, it went down. I got in at $2.15, and it dropped to $1.37. Ouch!

But, I decided to ignore it, and it jumped to $8.00 before settling back down around $5. I sold half my position at $5. That gives me all of my money back with a small profit, and I get to keep the stock! Instead of Return on Equity, it is Return of Equity. What’s better than getting a valued stock is essentially getting one for free. I also have a standing sell order to sell half of what remains if the stock gets to $8.

At this point, since I have all of my money back, it is fairly irrelevant to me what FTFT does as long as they stay in business.

I will say, thought, that I am a little more skeptical of them than I used to be. They jumped on the blockchain bandwagon. That’s actually one of the reasons for the jump in price and why I let so much of the stock go at that price. I don’t think that blockchain is a good technology. It’s very interesting and innovative to be sure, but I don’t think it really is as good as people say. Now, they said they were building blockchain environments. If they do and they make money at it, great. But, if instead they are just jumping in with the latest buzzword, that indicates that the company is just pumping their stock price with fancy buzzwords.

So, it shook my faith in them, but I did get back all of my money plus I still have half of my position. Not a bad play. I unfortunately didn’t have a lot of money to play it with, but I put a significant stake in their.

My safe play right now is MNDO. Basically a stable dividend-producing company with a solid backoffice solution they are selling. Because they are producing a dividend, that is not only helpful monetarily, but it is a direct indication that they know the goal of a business and how to acheive it, and probably aren’t playing games with their stock price.

Additionally, the dividend is pretty steep – about 10%. So you get the return of a junk bond but the benefit of equity ownership in a stable company. Not bad.

For a risky venture, I’m looking at GURE, but can’t quite yet determine if they are for real or not. Haven’t decided for sure whether to commit. They say they have a P/E of 2.77, a P/B of 0.23, and a 37% gross margin. They don’t pay out a dividend, so that is a drawback. Also, the company has hit some hard times because of regulatory issues, so they are going to report a Q4 loss. Anyway, I’m waiting for the Q4 loss to come out and see what it does. If it drops hard, I’ll probably pick it up, because they seem to be a stand-up company letting everyone know about the issues ahead-of-time and when the picture isn’t so rosy, plus they have a nice cash position to help them weather through these times. I think the price will drop hard soon and then there will be a great buying opportunity. It’s not a bad opportunity now, but right now it is tough to say that it would be better than keeping it with a dividend-returning stock like MNDO.

Why is Wall Street Always Blamed?

My purpose of this post is not to exonerate Wall Street from its misdeeds, but rather to ask its accusers to be more introspective about their own role in Wall Street greed.

Let’s face it – everybody knows that the people on Wall Street are overpaid for what they do. Our problem with them is not that we begrudge them their money, but that we are envious and want to be able to make that kind of cash ourselves. It isn’t so much that we are mad at them for mis-spending our money, but rather we would like to be able to be overpaid for mismanaging the companies we ourselves work for. The problem is not that they are making the money or putting us into risky positions that they should know better about. The problem is that we are not making the money and when we put our employers in risky positions through our own ineptitude, we don’t get a similar payday on the way down.

The real reason everybody goes to Wall Street is because they are greedy bastards. There is a measure of safety in that realization. If you know that someone is completely amoral and only does things for money, you can be sure that if you pay them enough, their amorality is on your side. Similarly, this also puts somewhat of a cap on their own individual immorality, because, in real life, continual immorality sets a limit to the payday. Markets only function because of the general morality within business. If someone is amoral rather than immoral, they are more likely to behave morally in a generally moral society.

We actually have a sense of safety knowing that our money is tied up with greedy bastards who just want to know the bottom line.

If you actually did have a grudge against Wall Street that was based on true moral indignation and not simple envy at their ability to win bigger than you on every trade, there is a simple thing that you would be able to do to combat this.

Stop giving them money.

Instead, make money by offering loans to your friends and family to start businesses. Invest in local startups – people that you know have the strongest moral fiber. Invest in your local community.

What? That’s not liquid enough? There isn’t a big enough market? There’s too much risk and not enough reward? The people with character don’t make the deals that give the company the most profit? Local people don’t have the winner-take-all attitude needed to go to the top?

Well, then take Wall Street. But don’t act like you didn’t know what you were buying. And don’t act like you weren’t complicit when they do what they always do and leave you holding the bag. You went with them because you wanted to be the one holding the bag, right?

Yellen’s Performance as Fed Chair

Yellen often gets the short end of the stick when it comes to monetary policy. Being that she is the leader, anything that isn’t perfect gets pinned on her. The real perpetrator of Central Banking shenanigans is Ben Bernanke. He has been gone for a while, but Yellen has mostly been trying to fix things that he broke.

All-in-all, I feel for her, and think that, while I would have done things a little differently (I would have been much more hawkish), I think that she represents a real moderating position which balances a number of issues. She is moving towards pulling us out of ZIRP, but very, very slowly. I do, however, appreciate her resolve to keep moving forward, and hope that she really does start to unwind the balance sheet. It will hurt in the short term, but in the long term it will be great for the economy.

Unfortunately, her plan only gets us to a 3% rate. Certainly better than now, but not great. We really need at least 5%. The goal is to have a moderate deflation so that savings has real meaning again. Stashing money in the mattress should at least keep its value, and putting money in a bank should beat all metrics of inflation.

Anyway, Yellen gets criticized a lot, mostly just because she is the fed chair, and that makes her the face of all the bad fed policies. She hasn’t been as hawkish as needed, but she’s in a tough position, because she would probably be lynched if she did the right thing, and the person who replaced her would do the wrong thing. So, because she has stayed the course, my hat is off to her. Yellen, I know many complain, but I appreciate your work!

Choosing a Trade

In his book Basic Economics, Thomas Sowell says that economics is the study of the allocation of scarce resources that have alternative uses.

This is the true of our stock trades. Every stock trade uses money, and that money has alternative uses. You could have spent it on a chest freezer, which would have earned you money every month by allowing you to buy meats in bulk when they are discounted. Which one is more beneficial? We all get $$ in our eyes, and assume that the stock market is preferable. Anyway, that’s the thing to think about.

The reason people make bad decisions with the stock market, is that they think that price is everything. If price is your only concern, you are not an investor. At best, you are a speculator, but probably a bad one. When you choose stocks, you need to image what would happen if the price of a stock went to zero or was de-listed. If so, assuming nothing changed about the company, was it still a good buy? Note I didn’t ask if you could get a better buy – if you only look for the best buy ever you will be disappointed. The question is whether or not it was a good buy. If the answer is “no”, then you shouldn’t buy the stock, period.

Now, a lot of people who only hear about the stock market in the news may wonder how this can be true. Isn’t the whole reason to own stock in order for the price to go up?

No, it isn’t.

The purpose of owning stock is to own shares of a company that produces value to its shareholders over a long period of time. This is true even if the company’s shares are never traded. Imagine that you were the owner of a private company. Ownership still yields value even though there is no price or market for trading your company. Instead, you get benefits through (a) increased value of assets, and (b) dividends/profits. (a) only really matters if the company goes out of business. (b) is really what you are looking at.

If you purchased a stock at $10 and the stock is de-listed (i.e., you can’t trade it – the price is effectively zero) but the company generates $1/year in dividends every year, you would have still made a winning trade. If the company goes out of business, and its assets are liquidated for the price of $20/share, you would have doubled your money.

None of these are typical situations, but the point is that focusing on purchase price alone will get you in trouble.

The way that I trade is that I look for companies where, at the current price, I would rather have the stock than the money. This way, even if the company’s price goes down, it doesn’t bother me, because I would want the stock more than the money even more. If I wouldn’t still like the stock if it were lower-priced, I don’t buy the stock. If the entire stock market is overpriced, this means I don’t join in – which is a PERFECTLY FINE way to be, and don’t let anyone tell you otherwise.

Now, the circumstances of the company can change, or you may not have known something that other people know, or that nobody knows. And this knowledge can change how you feel about the company. That’s okay. That happens. That’s learning, and buying bad stocks because you didn’t know all the things is the price of learning.

Anyway, all of that to introduce my main current trade, Future FinTech Group, currently trading at $2.70. I don’t have the time to tell you everything I like about them, but let me give you a few things:

  • The price-to-book ratio is 0.15. That means that buying a share for $2.70 literally gives me $18.00 in assets. That’s a great price! Now, not every price-to-book ratio is good. Sometimes a company has “assets” that they couldn’t possibly sell, or they are losing money so as to eventually wipe out the book value of their company. But in this case, these seem to be factories and land. So buying $18 worth of factory and land for $2.70 is a great price, if the business is viable.
  • The company has a gross profit. The gross margin is not great, but it is workable – 23%. Kellogs, for instance, has a 43% gross margin. This could definitely improve, but what it means is that the company is stable enough to probably not bleed out its book value.
  • They have an EBITDA profit – they actually pulled in a 10% profit. However, once taxes, depreciation, and amortization are factored in, they were not profitable. They did post a loss, but MOST of that loss is in depreciation and amortization. Apparently, they had a write-down from a previous acquisition. If I understand the numbers correctly, they actually posted a 3% NET PROFIT. That means that the value of the company is going UP

Additionally, it looks like they are expanding markets. The company used to be called SkyPeople Fruit Juice (I actually wish they kept that name – it’s fun!) but renamed themselves to Future FinTech Group to reflect their growing markets. They are getting involved in the commodities markets in china, so wanted to have a more serious sounding name than just the name of their public brand.

So, we have profitable, expanding company, which for $2.70 you get to buy $18.00 worth of assets, plus a share in future profitability. I’m in. Additionally, I heard rumors that this was one of the few chinese firms that didn’t have to restate earnings after being audited by NASDAQ. If true, that also means that they are very reputable.

Because it is a chinese micro-cap stock, the stock itself has been quite erratic. But, even if it goes down to $1 I’m still holding on, because this seems like a great company. I’ll start thinking about selling out at $10, and probably do it at $20-$25. At that point, the value of the money will be near the value of the company itself, and it will be time to look for another bargain. And, if it never goes that high, the value of it seems like it is more valuable than the dollars I can trade for it.

Additional Note

I should note that when you choose the price that you are willing to buy at, you are in a much stronger position. You choose your price. If later it goes on sale for a better price, that doesn’t really impact you if you chose the stock for the intrinsic value. I set the price that I buy and sell at, not the market. If the market doesn’t play along, there is not reason I have to play.