Goodbye 2012, Hello 2013

I came into this year like I do most years, eschewing resolutions. I’ve never found them to work, and many times backfire when they go unrealized. I broke this rule this year, deciding on one resolution that seemed easy to fulfill. That resolution was to post to this blog at least 5 times a week.

Suffice it to say, I am about a month late . . . .

But on to other matters. 2012 was shaping up to be a very good year for me. I trade in several accounts, about half of which is our taxable account. I also have several retirement accounts I trade in as well as a couple that I manage for my adult daughters. I trade these accounts very differently, being the most aggressive in out taxable account and more conservative in the others. In my kids accounts I can only write covered calls and in the retirement accounts I limit myself to covered calls and buying just a few calls or puts. Only in the taxable account do I buy and sell spreads and other multi-leg strategies. Up until about the end of October I was doing really well in the trading account projecting a return of about 25-30% for the year compared to a 10-15% return in the others.

But then, the proverbial wheels came off the wagon. AAPL started to fall just after the iPhone release and I chased it down thinking it was going to stop falling. It stopped about 600 around October earnings and then proceeded down to 502 or so. It then rebounded to above 590, making many of us believe the rally would continue. But, no. It turned around and went back down to 500 and lingered until January earnings. After that it gapped down to 460 and settled today at 440.

The numbers are staggering. AAPL lost an enormous amount of market cap and now trades at a PE of about 10 trailing earnings, a discount to the S&P 500. Back out the cash, which is almost 1/3 of the share price and the PE is about 7.

Is it over for AAPL? Will it trade down to 400, or lower? Will it gap fill back up to 500? Hell, I have no idea. But then, I read the following article:

http://seekingalpha.com/article/1132401-in-defense-of-apple-battling-the-mounting-hysteria?source=email_rt_article_readmore

One of the more interesting points in this article is how much AAPL has ramped up it’s R&D budget from about $750M to a little over a billion from the 1st quarter of 2012 to the first quarter of 2013. The implication is that AAPL is working on something new. Also, why doesn’t AAPL buy back stock at this depressed level with their cash hoard? Perhaps they are saving some to build out infrastructure to support this new product.

Analysts are all falling into line saying that the growth of AAPL is over, that their products will soon be commodities with declining margins. But leave it to AAPL to come out with something else, a product or perhaps even a service that could blow everyone away. If that happens, I don’t want it to be just about a month after I’ve sold all my stock

Sunday Evening Dec 9 2012 Why is $AAPL performing so poorly?

Like many people, I am invested heavily in AAPL common stock and options, both puts and calls. As the stock has risen my theoretical return on the year has increased, but here as it declines over 20% from its high of over 700, my portfolio has gotten considerably less valuable. Why is this happening to such a stock with incredible fundamentals?

I think the answer is two fold, and relatively simple. First margin requirements were raised last week by at least one clearinghouse, and I am sure many who hold this stock on margin don’t want to pony up the increased margin, so they liquidated shares.

Secondly, I think AAPL is also suffering from both tax loss selling AND tax gain selling. The tax loss selling is pretty straightforward, there are some that bought higher than here, significantly higher, like the high 600’s. Perhaps they have gains for the year in other holdings and want to offset some by taking some losses. This is an old technique and basically follows the idea that tax deferred is tax saved.

But this year is REALLY different, many people are selling to book gains as income tax rates will almost certainly be going up for those making over $200-250K/year which includes a lot of traders. Even if tax rates don’t increase and the politicians vote to ‘kick the can down the road’ there is a significant tax increase built in to start Jan 1. This increase is part of the Affordable Care Act (ACA, or as many call it Obamacare). For wages, the amount withheld for Medicare will go up 0.9% from the 1.45% currently paid by individuals, for wages above $250K if married, $200K for singles.

There will also be a tax on unearned income, such as capital gains, dividends and interest and this new tax is called an unearned income Medicare contribution and this tax again applies to those with incomes noted above. This tax is 3.8% of the unearned income.

No one wants to pay more tax than less, so companies have begun special dividends this year to try to distribute the $$ before the new taxes kick in. Those traders and investors may be deciding to take their gains in AAPL this year rather than next year for these taxes alone, never-mind what happens if we go over the fiscal cliff.

I think this selling will come to an end sometime in the next week or so and then downward pressure will be relieved. Right now AAPL is selling for about a 12 PE, the lowest in 10 years and has a PE of about 7-8 when you back out the cash they have.

When the buying starts and the greed sets in, the move up could be violent and surprising. Stocks move higher and lower than people expect and AAPL could test a new high, even before the end of the year.

Friday Nov 30 2012 Never Sell a Quiet Market

Investing is full of adages. You know them, ‘buy the rumor, sell the news’ and ‘ buy when others are fearful, and sell when others are greedy. But I like the one in the subject line and I think today is a relatively quiet market. Volumes are low and most of the charts are relatively horizontal.

My favorite option trade is some sort of variation of a calender spread. I’ll try to buy an in the money spread that’s out a few months and with a really high spread in between in lieu of buying the underlying security. I’ll give you a real example that i have on now with GOOG.

I own a small position in GOOG, 100 shares with a basis of 684 and today GOOG is trading at about 695. Some time in the last month I bought two spreads one is a January call spread – buying the Jan 600 call for about $70 and selling the 720 for about $9. Total cost – $61 or $6,100. Right now I am up about $2200 on this spread today

I also bought the March 600 for $83 and sold the 740 for $11, total cost about $7,200. I am up $1,200 on this spread today

So the way I look at it I am essentially long 300 shares and can write short term calls against them.

Right now I am short a Dec7 695 call at $6.5, and short a Dec7 700 at $5, I am also short a Dec22 690 call at  $3.5.(took this one out when I opened the Mar spread).

Should GOOG take off from here I will have to cover the short calls I have but 700 seems to be resistance. If that is the case I can liquidate my spreads to finance the buy back. But usually the premium deteriorates so that by Thursday when the new weeklies come out I can roll them into the next week. In fact I have been doing that for some time now.

I really should only write credit spreads short term and say I will do it the next week, but it comes at a cost and, of course, I am a bit greedy . . . . . just like everyone else.

Thursday November 29 2012 Climbing and Stumbling the Fiscal Cliff

Yesterday, I think it was, one of the traders on Fast Money said that the way to time the markets was to find out when Harry Reid was going to speak, and then go short. Then find out when John Boehner was speaking and go long.

That correlation held for about . . . . let’s see . . . .24 hours or so. I was sitting at the computer today when Boehner walked out and started speaking at 11:40. I know what time he came out b/c I looked at the chart and saw the drop in the SPY with the spike in volume.Boehner was definitely much more of a Debbie Downer today than the last time. In fact the markets sold in his first sentence.

So you tell me, is this a skittish market or what? I mean, really . . . . ?

But as it turns out it was a good opportunity to get a bit longer, which I did in PCLN and AMZN. I tend to buy deep in the money spreads that are out a few months and then sell short dated bear credit spreads against them. The move up in PCLN caught me a bit flat footed and was happy to see it pull back to 660 to square things up a bit. I am now short a 660 call expiring tomorrow and a 675 and 680 call expiring next week against my January 600/700 spreads. If it pulls back more I may buy a next week 670 call.

The market did come back, but this time after Harry Reid started speaking. He was no less stern than Boehner but I suppose the market is used to him being a Debbie Downer, so the event was discounted.

AAPL, I think, is consolidating still and may very well have some upside to it after all. David Pogue had a review of the tablets in the NYTimes today and says the iPad Mini is the best. Having just gotten one myself, I can see why they are going to be the gift this Christmas. Like the iPhone 5 the only thing that will limit them is the ability to make them.

Must be great to be a company where the limitations as to what you sell is how fast you can make your product.

You can read David Pogue’s article here: http://nyti.ms/TlUhPD

 

Wednesday Morning 11/28/2012 AAPL Weekly Options

Pre-market indicators were down this morning and the equity markets did, indeed, open lower. I took advantage of the pullback in AAPL to square up a few weekly positions.

Speaking of weekly options . . . .

Something interesting happened the week before Thanksgiving and that was weekly options in AAPL all the way until the traditional monthly December expiration became available to trade all at once. If you trade these weekly options you know that the following weekly options that expire on Friday become available to trade on Thursday morning eight days before, but this time on, Nov 15th, the options expiring on Nov 23, Nov 30, Dec 7, and Dec 14 all appeared.

Normally I make sure that I am present at the market open on Thursdays as I trade weeklies not only in AAPL but also in AMZN, GOOG, MA, PCLN as well as the SPY and the SSO. I trade these options because the underlying equities trade at high volumes and are therefore liquid, but also (with the exception of the SSO) all have a share price over 100. In fact AAPL, GOOG, MA and PCLN all trade over $400/share. This makes the options much more interesting and valuable. On Thursdays I usually roll my short option positions from one week to the next as the premium almost always has come out by Thursday before expiration.

But on that Thursday, I had to decide about putting on some positions for the whole month and the amount of open positions I held swelled. Not a position I like to be in . . .

The only other equity that I trade in on a regular basis that seems to be offering these ‘new’ weekly options is the SPY. However, after I did a bit of research it looks like the CBOE amended a rule to allow up to five weeks of weekly options to be open at any given time and I have seen that now the Dec28 options are available for AAPL

So much for making my trading, and my life, simpler. I guess I will need to step up some self imposed rules and rely less on the market makers to keep me in check . . .

Sometimes CNBC Makes Me Crazy

Just about every morning I get up and go to the gym, getting there about 45 minutes before the market opens. I get on the elliptical trainer first and usually turn on CNBC and watch ‘Squawk on the Street’. But sometimes I catch the end of ‘Squawk Box’ and I almost always regret it. I used to like to watch Joe Kernan, but no more. It seems to me since the 2008 election that CNBC has become much more of a political channel than a pure financial channel. Now, instead of more focused insight into issues that matter to traders and investors, we are treated to a sour grapes bitterness about the last election and why, despite the fact that the election is over, why it should not have been decided the way it was. Right before the 2012 election the person on CNBC that summed it up best was Cramer, of all people. He said (and I paraphrase) ‘I’m on the side of making money’.

And Kernan is not the only one. The Tea Party favorite, Rick Santelli, whiteboards ideas from the CME, again denigrating our elected officials, and seems sure his view is correct because he turns around and asks the traders on the floor what they think and they all clamor his position. Since when is a CME trader pool a representative sample of the United States? Lastly there is Michelle Caruso Cabrera who rails against the nanny state and government regulation as if the only impediment to a robust economy is the federal government.

I realize that ratings helps sell advertisements which is the life blood of cable news, but CNBC does not need to use the tactics of Fox News or MSNBC to get people to watch. Or maybe they do . . . .and maybe I just need to vote with my feet.Come to think of it, Bloomberg has stolen some of the best of CNBC and are certainly  less hyperbolic.I should just make it a point to watch them instead, if I just have to watch financial news.

I remember the old days of FNN in the mid 80’s. Sue Herera and Bill Griffith were the two I remember and its great to still see them in the afternoons on CNBC and I remember them here because they are NOT part of what I perceive to be the problem at CNBC. They represent just good, solid financial reporting.

Please, if I want to get stirred up, I can watch Fox or MSNBC. But all I want out of my financial media is just a little help making money.

Tuesday Morning Nov 27 2012

The market opens down a bit this morning but seems to have firmed a bit as we approach halftime. I have 31 open positions in AAPL this morning as I write this. I think I had about 6 more this morning but I spent some time closing out deep in the money call spreads and out of the money puts and put spreads that I was net short, that is bull credit put spreads.

I opened a new bull put credit spread, the Dec22 600/570 spread for which I received about $15. However I came into the morning already short a Dec22 580 put at about $25 so this creates a bit of a put fly.

I also opened a new bull call spread, the Feb2013 600/700 which cost me $24.35. Seems pretty safe that AAPL should close above 624.35 after Q1 earnings

GOOG opened down below 660 but looks to rebounding above 668 now. I am long the equity itself but also long a Jan2013 600/720 call spread and a Dec22 680/690 call spread. Against this I am short a couple of this weeks 680 calls at 2.25 each. I am considering rolling these short calls into a Dec22 700 short call and then Thursday will look to sell another weekly call expiring on Dec7.

 

Trading is an Emotional Experience

Every endeavor in life takes practice. I have practiced both medicine and law and I have come to believe that there is no such thing as a ‘natural’ in anything. Anyone who masters their craft, whether it is a profession, a fine art or an athletic skill, has put in a significant amount of time getting there. Malcom Gladwell, in ‘Outliers’ says it takes about 10,000 hours to get good at something. Trading is no exception. Some of my former colleagues think that all one has to do to trade is read a few books, paper trade a bit and voila, thousands can be made in a day.

But if you trade with any regularity, you know this isn’t true. It takes a while. And the reason it takes a while is because trading is incredibly emotional. The score is kept in dollars and it is hard to hide and fudge the results. It stares at you on computer screens and mocks your intelligence at every chance.

I don’t agree with those that say that hedge fund managers and institutional traders manipulate the market to the disadvantage of the retail trader. The big advantage, besides their size, is that they are trading with someone else’s money and they can weather emotional storms much better.

I think that if we get better at trading, it is because we know that sometimes stocks go down, way down (like AAPL!) but they come back eventually, especially if the fundamentals are so strong. But when AAPL is trading at 506, it feels hopeless and you can never imagine that within a week it could be closing in on 600 again. If you can keep from panicking and throwing in the towel at levels like that you can be positioned for the comeback. I’m not gonna tell you that I closed out all my short calls when AAPL was 506, because I didn’t. I actually sold a couple of 525/530 weekly credit bear call spreads down there, but I did close them out when it passed 520.

The only way to get to this point though, is to suffer a few losses, only to see the equity bounce back. That’s why I don’t think paper trading works, because it doesn’t count. Losses don’t hurt and gains don’t feel good.

The only way to get there is to do it, and do it, and do it.