Feb 2010 options expiration

The puts I wrote on PCL expired without being exercised.

The puts I bought on ANF expired OTM, for a 100% cash loss; ouch. I still own May $34 puts on ANF.

Wrote TUP puts

I wrote July $40 puts on TUP for $2.00 per share. With approximately 5 months to expiration, my potential return is:

(premium)/(strike price) = $2.00/$40.00 = 5.0 %

This is the return I get on the cash ($40 per share, or $4,000 per contract) I've set aside to secure the puts. I never write puts on margin.

This comes out to about a 1% return per month, which is the minimum return I require for taking a risk of this nature.

AAPL iPad profit margins

http://www.theregister.co.uk/2010/02/11/ipad_breakdown/

This from The Register; a breakdown of the profit-after-materials-cost for the iPad by a market research firm. Of course, this doesn't include R&D, advertising, and so forth.

"The research firm said the total cost of materials and manufacture for Apple's big iPhone ranged from $229.35 for the 3G-less, 16GB version, which sells for $499 to $346.5 for the top of the range 3G 64GB version, which carries a $829 price tag.

While the top end product produces a profit of $482.85, it is the 32GB 3G version which iSuppli says will produce the biggest chunk of profit. That's because while it sells at $729, its manufacturing cost is a mere $287.15, less than 50 bucks more than the bottom end iPad, producing a bumper profit of $441.85."

Bought GILD calls

Bought Jan2012 $45 calls on GILD for $8.50/share. If exercised, GILD will be 3% of my portfolio. I may turn this into a synthetic long by writing puts later.

GSK puts exercised early

The February puts I wrote on GSK were exercised early; I now own GSK at $42.50. The stock is currently trading for $37 and change.

Wrote puts on PCL

Wrote Feb $35 puts on PCL for $0.60 each. This is a shorter option period than I normally use, but I would be happy to own this stock, and the option return was good; 1.7% in 12 days, or about 4.3% per month, or about 51.4% annualized.

PCL sell order triggered.

A sell order on my PCL stock was triggered. I sold at $36.01, for a 20% gain.

AAPL sell order triggered

A sell order on my AAPL stock was triggered. I sold at $192.00, for a 5% loss. I still own 2012 calls on AAPL.

Sold LNN

Sold LNN for $37.99. I had a 18.6% profit on the position, and while it may climb higher, it's volatile (See the June, July, August, and October 2009 posts) and nearing fair value.

Bought RIG, again

I put 3% of my portfolio in RIG at $83.75.

Bought more ANF puts

Today I bought May $34 puts on ANF for $3.25 per share. I still have my $34 February puts, which are a loss at this point. I bought the May puts cheaply on a 7% jump in the stock price following a positive monthly sales report which I believe to be misleading. When/if the share price drops again, I may close my February puts, rolling the remaining value into the May puts. However, with option expiration in two weeks (on the 20th) and a possible catalyst in ANF's earnings report (on the 16th) it may not be worth it.

Here's the sales report I mentioned:

http://www.prnewswire.com/news-releases/abercrombie--fitch-reports-january-sales-results-83534537.html

Note, in the 5th paragraph "At the beginning of the fiscal month, the value of complimentary gift cards issued but not redeemed was approximately $22 million, substantially all of which has been recognized in sales in January." (emphasis mine). Eleven words yet O! how they catch the heart.

Set up a strangle on INTC

I set up a July 2010 strangle on INTC, a stock in which I did not previously hold a position.

First, I bought INTC for $19.97 per share. Then, I took two actions; I wrote covered calls against my newly purchased shares, and I wrote puts to purchase more. The calls have a strike price of $21, and the puts have a strike of $19. That is, by July I will be obliged to sell my new shares for $21, or buy more at $19. I was paid $0.97 for the calls and $1.22 for the puts. The total option premium is $2.19 per share, and remember that I keep that no matter what the outcome of the options at expiration. The possible outcomes are as follows:

IF:
In July, INTC is trading above $21 per share.
I will sell my INTC for $21 per share.
My gain will be:
(sale price - purchase price + option premium) = $21 - 19.97 + 2.19 = $3.22 per share.
Profit = $3.22 per share.

IF:
In July, INTC is trading somewhere between $21 and $19 per share:
I will not be obliged to sell my INTC.
I will not be obliged to buy more INTC.
I will keep the option premium of $2.19 per share.
Profit = $2.19 per share.

IF:
In July, INTC is below $19 per share.
I will not be obliged to sell my INTC.
I will buy more INTC at $19 per share.
Profit = $2.19 per share.

There are two risks involved here; risk to capital, and risk to profit. In the former, my risk is that INTC will have dropped substantially in value by the expiration date. I would be obliged to buy it at $19 even if it was trading for $0.19. Therefore it's important to consider the quality of the underlying security. In this case, I believe INTC is a stable, financially strong company which I would be pleased to buy at $19. I believe the underlying value is there. I would not make this trade if I had doubts about the financial strength or management integrity of this company.

The latter risk, risk to profit, comes into play if my covered calls are exercised. If INTC is trading at $100 per share at expiration, I'm still obliged to sell at $19. In essence, I'm trading all my profit above $19 for the $1.22 premium payment (for that leg). Therefore, I wouldn't make this trade on a stock like AAPL, which is known for it's sharp and unpredictable changes in price. For this trade, I'd also avoid any stock which has an upcoming event which could affect the price, such as FDA approval of a drug.

Bought GOOG calls

I bought one 2012 call on GOOG. The strike is $530, and I paid $88 per share.