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.

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!

Some Criticisms of George Gilder’s Knowledge and Power

I’ve been reading (actually listening to) George Gilder’s new book, Knowledge and Power, dealing with what he calls the “information theory of capitalism.” The book is, overall, fantastic. I heartily recommend it to anyone, and believe that Gilder provides both an excellent defense of capitalism as well as an excellent understanding of it. Hopefully soon I will write an overview, because it really is good. However, before I forget, I want to cover some of the places where I think Gilder is wrong. Gilder is an optimist. I like optimists. That’s actually one of the things about my book – it’s an optimistic prepare book. However, Gilder often goes beyond optimism to all-out rose-colored-glasses.
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Babies for Free

Many people think that having a baby is an enormously expensive ordeal. However, one woman found that it costs less to raise a baby in their first year than it does to have a cup of coffee each day. Read her story about how individual frugality and community value merged together to help Naomi raise her baby for next to nothing.

Here’s what she said about toys:

I didn’t buy any toys. Your friends and family will take care of that. And the funny thing is, toys are nice, but what they really want to play with is real stuff, like Tupperware, car keys, books, and the baby wipe container. Why buy toys that will just add clutter? Plus if you are home with your baby, you don’t need so many toys to entertain them because YOU get to play with them!

A simple life, without too much stuff, can be very enjoyable. My daughter certainly isn’t deprived. She’s very happy, always looks cute, enjoys her food, her library books, going outside and playing with Mommy and Daddy. And I can’t even begin to tell you how much we enjoy her. Everyday she does something new and her smiles and laughter lift us up like nothing else. I look forward to spending these years with her discovering the whole world and the One who made it, for about the price of a coffee a day.

Current Metals Price Craziness

Now, in the book, I point out that the point of investing in precious metals is NOT that I think the value will go up – I have no idea whether or not the value of gold and silver will go up or down. The point of investing in precious metals is that it is a permanent asset. You can hand it to your grandchildren. In addition, it’s value is intrinsic, not extrinsic. It doesn’t depend on the reliability or morality of another group to hold its value. An entry in a portfolio is extrinsic value. The numbers in the statement mean that there is value somewhere else. But owning physical gold/silver means that the value is right here. Where I can see it.

Anyway, having said that, owning precious metals has meant that I do take the time to look at the market, and right now it is crazy. The price of gold and silver are below what it costs to mine it. In other words, let’s say I owned a silver mine, and owned all of the equipment to mine silver. I already own it. Done. At the current price of silver (less than $18 according to SLV), it would cost me less money to go to the coin store and buy my silver than it would be to go into my mine and dig it up.

Because of this, some precious metals vendors are beginning to close up shop. Golden Minerals just announced that a href=””>it is suspending production until prices come back up (list of current company press released here).

So, the question is, with physical demand high, and prices too low to allow more supply to come into the market, where will this lead to on the silver front? Higher prices is the obvious answer, but that has not been how it has played out so far. I predict an interesting ride ahead.