LOL!'s Market Timing Newsletter

[NW-Bound]

You made me look. The bid on your 85 Jan 18 BRK.B call option is $61.50, and the ask is $66 (is that your order?).

Compared to the current price of $146, it looks like buyers do not value the option that much because $85+$61.50 = $146.50 being only 50 cents above the present value. At the same time, they are willing to pay $13.85 for the option to buy it at $145.

It looks like speculators do not like "deep in the money" options, and prefer the ones with strike prices closer to the current price. I think it provides them with more leverage. If the share price varies up/down by $15 and in the direction that they bet, they will double their money. On the other hand, "deep in the money" options do not give them such percentage gains.

It still does not seem right to me. However, if there's a flaw in the option prices across different strike prices, I am sure someone would find a way to arbitrage and make money out of it.

Someone more trained in trading can explain this, but I am scratching my head too.

[Sunset]

Yes, that $66 does seem to be my order, in fact I put in the higher one second as I wondered if it simply showed the last order or the lowest order. It stayed at the $66 and was a touch higher than that prior to my order.

Right now, it seems to me that a person can buy these deep in the money options instead of the actual stock, risking less per stock, holding more for same dollar investment ie leverage.

[NW-Bound]

So, 6 of my options expired last Friday 7/15. They included 5 call contracts that got in the money and got exercised. The rest are 3 put contracts that expired worthless.

The call contracts were sold in March, April, and June. If I did not sell the contracts and just outright sold the stocks on last Friday, I would have made more money. But of course back then, it was not easy to think of the market being at the current level.

Of the put options, I would also have made more money if I just bought the stocks 5 weeks ago. Of course, it was also not easy to see the market rising like this past month. But not being greedy, I looked at the gain from the put options as a 7.4% gain on the cash locked up for 5 weeks to secure the options. It's way better than CDs (of course at a much higher risk).

[LOL!]

Somehow equities have gone up while I was out fishing, so I have to continue selling. My equity allocation needs to be reduced by 3% to 4%.

Sold some VSS (small-cap foreign) when it was up this morning. Other international ETFs are trading down today.

The small-cap value fund I bought on the Monday after Brexit is up 10%, so I intend to sell that in the next day or so.

[Sunset]

Everyone recalls the CAT stock that I sold a call option on, which at the time was a good thing, but in the past 2 months now looks underpriced.

I had more CATs so I sold them today at $81.33 , as the run up in CAT has been fantastic as of late.
Since they are spending all their profit on the dividend, have a lot of debt, and sales are down, it just seems priced pretty high right now.

If I'm really lucky the price will fall $3 in the next month, otherwise my option will be called.

[LOL!]

I looked at my asset allocation and decided I needed to unload foreign equities instead of US equities, so today I submitted an order to exchange all the VTIAX (total international index) I bought after Brexit into the short-term corporate bond index fund VSCSX.

The VTIAX purchase was noted in this post: http://www.early-retirement.org/foru...ml#post1748710

I chose the short-term corporate bond fund mostly because I think the total US bond index fund has done too stellar a job this year with a 5.7% total return so far.

[LOL!]

An update a few days after selling: As is typical, the things I sold (VSS, VTIAX) are now trading higher than when I sold them.

But no matter, my asset allocation is sitting now right where I want it to be. Also, portfolio performance has gained on its benchmark and is even more ahead than before. So its time to sit back and go to the beach for a while.

[LOL!]

Quote:

Originally Posted by LOL! And I was totally wrong about the FOMC raising of rates. Intermediate-term bond funds were up about 2% in June. With the market recovery here in the past few days, is a rate hike back on the table for July?

And the answer is: No, of course not.

[NW-Bound]

So, I owned Gilead for a few months now, after my put option on it became in-the-money, as described earlier. It was bouncing around, then crashed 8% a day earlier in the week.

It happened after they released earnings. Their wonder drug that cures Hepatitis C works so well, it does not help them like some other companies' drugs for cancer that are more costly but only prolong life. Here, for something like $50K, a much reduced amount from earlier, a terminal patient gets a new lease on life without going through much more expensive and painful liver transplant.

Well, life is never fair. I don't know whether I should keep the stock at this point. But it's good thing I only have a bit of it (<1% of portfolio).

[Fermion]

Keep it (Gilead). Consider they have a PE of around 6.9 while the greater market is more like 18 to 20. Even if they lose every dollar of HCV revenue they still make $6 a share on their HIV drugs where they are the undisputed leader. At $79 a share that is a PE of around 13, still lower than the rest of the market. They also pay $2 a year in dividends and make $12 a year in profit. A easy payout ratio for years to come.

I bought 900 shares today after selling 1000 before earnings at $88. It ALWAYS drops after earnings, even if they beat. I have 2000 shares right now. I will buy some more if we get an overall market slump.

[NW-Bound]

I dunno. Analysts are still busy revising the earning forecast downward. I will wait for all that negativity to die down before I buy more.

Or I can lowball with another put option.

[COcheesehead]

Quote:

Originally Posted by LOL! An update a few days after selling: As is typical, the things I sold (VSS, VTIAX) are now trading higher than when I sold them. But no matter, my asset allocation is sitting now right where I want it to be. Also, portfolio performance has gained on its benchmark and is even more ahead than before. So its time to sit back and go to the beach for a while.

The world is starting to have negative rates. US bonds look awesome in relation. I bet before the end of the year our rates move closer to what is happening in the rest of the world. Treasuries rise, rates drop.

[harley]

Quote:

Originally Posted by Fermion Keep it (Gilead). Consider they have a PE of around 6.9 while the greater market is more like 18 to 20. Even if they lose every dollar of HCV revenue they still make $6 a share on their HIV drugs where they are the undisputed leader. At $79 a share that is a PE of around 13, still lower than the rest of the market. They also pay $2 a year in dividends and make $12 a year in profit. A easy payout ratio for years to come. I bought 900 shares today after selling 1000 before earnings at $88. It ALWAYS drops after earnings, even if they beat. I have 2000 shares right now. I will buy some more if we get an overall market slump.

I've still got a fair number of shares at a just under $100. I've been thinking of loading up to drop my basis, then selling if I ever get into positive territory again. I haven't been paying much attention to it, just keeping an eye on it in case of a big change. I'm not ready yet to buy more, but it's getting close.

[NW-Bound]

As described earlier, my wife's 401k had to be rolled out to an IRA in cash, so that boosted up my cash AA quite a bit.

I have not found much to buy, so much of her IRA is still in cash. Earlier this week, I sold off some equities, both US and international, from other accounts to raise the cash level further. I am now about half stock and half cash, with less than 3% in bonds.

Whichever way the market moves at this point is fine with me. I will sit around to see what transpires. May sell some covered calls, or cash-secured puts just for fun (and for a bit of profits).

[Sunset]

Quote:

Originally Posted by NW-Bound You made me look. The bid on your 85 Jan 18 BRK.B call option is $61.50, and the ask is $66 (is that your order?). Compared to the current price of $146, it looks like buyers do not value the option that much because $85+$61.50 = $146.50 being only 50 cents above the present value. At the same time, they are willing to pay $13.85 for the option to buy it at $145. It looks like speculators do not like "deep in the money" options, and prefer the ones with strike prices closer to the current price. I think it provides them with more leverage. If the share price varies up/down by $15 and in the direction that they bet, they will double their money. On the other hand, "deep in the money" options do not give them such percentage gains. It still does not seem right to me. However, if there's a flaw in the option prices across different strike prices, I am sure someone would find a way to arbitrage and make money out of it. Someone more trained in trading can explain this, but I am scratching my head too.

I finally sold my BRK.B deep in the money options.
I was refusing to sell them without any time factor value.

So I sold them for $66.80 (time value was $3.12) for a profit of about $2,940 or 28% return in 7 months

[LOL!]

It has been a month since I last reported transactions. I haven't made any trades in the last month, but I will review the outcomes of trades of a month ago.

Basically, I would have been better off doing nothing or doing what I had first decided to do instead of what I actually did.

Sold VTIAX: It is up 3.4% since I sold. Sold VSS, it is up about the same amount.

Kept VSIAX: It is up 1.4% since I sold VTIAX instead.

Bought VSCSX instead of VBTLX: VBTLX since is up slightly more than VSCSCX.

I did go to beaches on two different coasts for vacations. The tan is looking nice.

I've got no transactions planned at the moment, so just cruising into Labor Day.

[Sunset]

My CAT call options were exercised, I did get the dividend from last week.

So this is a good example of the problem with "safe" call options. Sure when I sold the option 2 months ago, I was selling it for a strike price of a few dollars (~$5.00) over current price plus the time premium of $1.09.
I ended up missing out on some $$ because, this effectively locks up my position, and then the price soared in the 2 months. It's easy in hindsight to say to close it out at a lose during the time, but at the time the stock could have easily fallen below the strike price (as many in the past have before, if they ever got over it).

So I didn't lose money, but I lost out on some appreciation when I compare it to sell the stock instead of doing the option, and buy something like VTI.
I have not actually run the numbers, but this is my gut feeling, so not a super wise trade, in hindsight.

[Sunset]

It bugged me, so I ran the numbers on the various choices over the past 10 week period.

My call option fun netted me: 9.8% in the 10 wks.
Had I simply sold CAT and bought VTI I would have gotten: 4.6% in 10 weeks.
Had I done nothing and then sold CAT I would have gotten: 17.8% in 10 weeks.

So It's not as bad as it could have been, since my real motivation was to sell off CAT and buy VTI as part of my simplification process.

[LOL!]

Fair warning: I sold some shares of VTI yesterday at a small gain in order to pay some bills. These shares were purchased in late June but before the Brexit vote. This means the US stock market is going to go up another 10% now.


(Notice how I left out the time frame though? )

[NW-Bound]

Quote:

Originally Posted by Sunset My CAT call options were exercised, I did get the dividend from last week. So this is a good example of the problem with "safe" call options. Sure when I sold the option 2 months ago, I was selling it for a strike price of a few dollars (~$5.00) over current price plus the time premium of $1.09. I ended up missing out on some $$ because, this effectively locks up my position, and then the price soared in the 2 months. It's easy in hindsight to say to close it out at a lose during the time, but at the time the stock could have easily fallen below the strike price (as many in the past have before, if they ever got over it). So I didn't lose money, but I lost out on some appreciation when I compare it to sell the stock instead of doing the option, and buy something like VTI. I have not actually run the numbers, but this is my gut feeling, so not a super wise trade, in hindsight.

I have been doing sporadic covered call options for 15 years. And the few times I thought the stock was headed even higher and bought back the option, the doggone thing turned around, and I kicked myself for not just let it be.

Now, I tend to just let the thing run its course. I may still reinvest in the same stock, i.e. buying it back, if in light of new information or development I think the stock's prospect has improved. However, for hedging I often immediately write another out-of-the-money covered call. One limits his gain by doing this, but avoiding loss of principal is getting more important when one is living off his stash.

With the market recent ebbing, I am looking at about $2K of option money being mine to keep (expiring worthless) in about a month. Not a lot of money, but still additional money I squeeze from the stocks I am holding anyway. I think of it as dividend enhancement. Heh heh heh...