Being a CFO and other topics

Not just finance, hobbies too ….

Tag: finance

Evaluating Opportunities

When I first moved to Silicon Valley in 1999, I routinely received phone calls from DotCom start-ups looking for a CFO. I was a Controller of a division (close to $1B in revenue) of a big company, but I had just been promoted to that level for the first time and had near zero experience in what I thought was needed to be a CFO (the general advice these days seems to be to pretend you can do it and just take the job). I used to have a list of the companies that called me, and none of them made it. At the time, they told me I was an idiot for not leaping at my chance. Cryptocurrencies remind me of that.

Now, before I continue, I must admit that one of the companies that contacted me was Amazon.com. This was after they had gone public and their stock was quite high. They were looking for employees with inventory and supply chain experience, the title and pay was far below what I was making and I would have had to move to Seattle. The stock suffered in the DotCom bust, so it seemed that my decision to not change jobs was smart, but if I were really the genius that many bitcoin experts claim to be today, I would have invested then. I would have been quite wealthy now if I had.

I can only console myself in that I was also offered a job a few years later for a lower title and pay at a major networking company. When I declined, the recruiter scolded me for being turned off by their attitude and then not long thereafter, they took the largest inventory write-off that I am aware of and the stock really has neve recovered its high-flying ways since then. Finally, and more directly related to cryptocurrencies, I was a long time participant in distributed computing projects like SETI at Home and such and the early appearance of bitcoins and the first miners came from people like me that were using idle cycles of our CPUs to do something else. However, I never installed the bitcoin mining software. In theory, I could have been mining bitcoins when it was possible to solve for them using a regular PC and do it as an individual. If I had done so and kept the bitcoins I made, at today’s prices I would be far wealthier than my reasonably successful career has taken me to.

I added those three examples because I want to make it clear that I have no magical ability to know the future and perfectly guess every opportunity. This is compounded by the fact that you need to choose now and will not know until later, and often much later, if you made the right choice. Using bitcoins as an example, there is not guarantee that I would not have sold the coins at $100. Considering that I have played Magic the Gathering (a card game) off and on for quite a while, it is likely that I would have placed coins in MtGOX and lost everything I put in there. When you back solve what could have happened, most people solve to the best possibility, not the likely one even if you made one arbitrary correct decision that you did not in the past.

I have seen quite a few posts on bitcoin value cross my feed on Linkedin in the past few weeks, much more than when it was going up and all from people that claim some expertise or professional skill for bitcoin and all suggesting that now is the time to buy the dip.

Blockchain is real technology that is finding new applications. All the cryptocurrencies are experiments and they are valuable for the same reason why anything is valuable – people are willing to spend money on them. There certainly is a good argument that a currency linked to a blockchain has merit and can quite valuable for online transactions. There is no doubt at all that blockchain as a technology will see many applications, like perhaps tracking materials in the pharmaceutical production chains.

There also is no doubt that there will be lasting wealth that comes from the innovation, but I don’t think that trading advice (buy or sell) is the right thing to promote on Linkedin or on a Facebook feed. That type of decision needs to be an informed one from individuals, and older advisers may be trapped in past expectations, but they have also seen a few bubbles pop as well.

Even the arguments around cryptocurrencies and why they have value and are a currency themselves or are more valuable than other traditional currencies are suspect. For those of you that don’t know the standard argument, the normal value drivers mentions are i) production cost, ii) scarcity and iii) utility. The basic argument is that the cost to produce a bitcoin is high, they are scarce by design with only 21 million that can be produced and the blockchain technology makes them useful.

However, the production cost is based on current brute force problem solving and scarcity is all about bitcoin itself, not cryptocurrencies in general. There are near infinite algorithms that can be designed to generate a cryptocurrency and there are plenty of new industries where the first mover did not ultimately dominate (Netscape is a good example as is Visicalc and many other similar examples). The utility is even questioned because the transaction time and process to verify a transaction is thought to be too long and many merchants that had been accepting the currency have abandoned it as the transaction time exposed them to too much valuation variance. Even the early criminal use of bitcoins (the initial foundation in its value came from criminals using it to transfer money for drug deals and to do money laundering) has suffered as authorities have proven to be much better at tracking and shutting down bitcoin fueled deals than was originally assumed.

Even the crypto part of the equation may ultimately prove to be flawed as there still is the real possibility that the assumptions behind the math that powers it may ultimately prove to be false. Eventually there may be no more “greater fools” and there is a risk when you buy that you will end up being the last and most foolish.

I’ll try and parse through my thinking on these types of opportunities to show the how I think through I as an example of what I have done in the past as a CFO and what I do today when asked for advice as a consultant.

First, the normal reaction is to shut down and say “no” to new opportunities because these always represent additional effort needed and additional risk. In the case of bitcoin, the easy responses are “tulip mania”, “artificial bubble” and “ponzi scheme”. I am not saying that those responses are correct, but the longer I have been at it, the easier I find my mind comes to a way to say no. Saying no is easier, and, since the consequences of saying yes or no are rarely immediate, you can insulate yourself from the lost opportunity or loss easily. The problem is, saying “no” is easier, but it also closes down growth and opportunity and isolates you from changes in the market. When I detect that instinctive “no”, I push it down and listen and ask one or two simple questions. This is not free, that costs time and mental effort and causes some distraction, but I think that cost is worth the possible upside, so I pay it more often than not.

The questions I normally ask are: 1) Is this a decision I can or should make, 2) Can I or we afford the expense (or not afford to spend it), 3) How long do I have to consider it, and 4) Can I understand pretty quickly what the idea is all about and how it would be profitable?

The first question is an interesting one. As a Finance professional, and especially as you move up the management ranks, you will get both increasing power over spending and increasingly be lobbied for many different ideas outside of the traditional Finance responsibilities. However, you also need to know your limitations. One advantage of being part of a team is access to opinions and expertise of your team members, and using that will probably result in more informed decisions. You also need to consider that the latest encryption standard may seem cool to you, but the head of IT may not want you to install the ransomware you were just pitched in email.

The second question really is about practicality. I would love to have several different phones and VR headsets and whatever else comes out to see which one is good, but I only really need one phone at a time and I barely have time to use the VR headset I already have, so even more does not help. In the case of bitcoins, like most people, I have a wide variety of investment options in front of me, and bitcoins are just one of them.

Coupled with the cost and time commitment is the need to understand if you should be doing without it. I could just use pen and paper and brain power to calculate my taxes, but Turbotax does a much better job and does it much faster. The danger with budget or time pressures are that you may ignore something important. I have used the time when I was flying to read up on new technologies and I have always carved out some time to look at what has changed in the market compared to what has been happening. This is important for personal portfolios and reserving even a small amount of your investment capital (5%) to invest in new technologies or trends can help here.

It has been my experience that the shorter time you have to make a decision, the less something makes sense. There always is lots of marketing and media hype to buy or sell now, but rarely do you need to make an instant decision. If a technology is good, or a trend really has changed, you can enjoy the benefit well enough if you spend a little more time to make sure you understand what you are considering. Most importantly, the risks it brings. In the case of cryptocurrencies, there are a lot of self-proclaimed experts, but most a simply hyping without any depth or new information. I also have seen a disturbing pattern emerge of people with fairly questionable backgrounds suddenly getting involved. It sure is easy to promote this new idea that replaces traditional investment products when you lost your broker license because you were convicted of defrauding your clients.

Counter to the previous concept of making sure you have enough time to consider the new opportunity, it also must be something that you can grasp with a reasonable amount of time and effort. There are always slight edges that someone with a decade of experience and education can exploit, but it might not be the right thing for you to try and figure out. Quite often new technology products work well for people with the specific skillset to use them but are not worth the cost f you cannot program or change all the base setting on your computer to get the additional 5% performance boost. Learn to recognize when something is more complex than you have the training and time to understand quickly and deeply enough and reach out for help. Do not be afraid to say you do not know or do not understand.

I have always been an intuitive problem solver but working in my chosen field which is seeped in process and logical progression, I have to take what I feel is right based on my internal process and break it down in a way that I can repeat and explain it to the people waiting for my decision.

In the case of bitcoins, and other cryptocurrencies, I have seen little reason other than pure speculation, to try them out in any real way. I can understand that the base technology is something to follow closely, but I do not think that it is something that needs urgent action and there are real risks of fraud and theft and regulatory curtailment. I also am concerned about the poor quality of the advisers that have attached themselves to it. As I cautioned up front in this blog, I could have made quite a bit of money just by embracing bitcoins earlier in my life and I was a natural fit for the early adapters there. Unlike the self-called experts I see in the media these days, I know that I don’t know a lot of the details and I think it is not worth my time and money to learn more, but it is complicated and I could be missing something. I have a real edge in other investment and finance areas and I am choosing to spend my time there.

Working with investment bankers

If you have followed a normal career progression through finance to make it to CFO, you probably worked with investment bankers at least once along the way. It is possible you did not, maybe you are at a start-up that is just now successful enough to go public or do some form of pre-public fund raising and you are dealing with bankers for the first time. It is a fallacy to believe that working for a big company means you would have worked with investment bankers as you climbed the ladder as normally only the Treasury department and the CFO do that, division finance staff normally are not involved. Even if you are involved, it is as a data source, not negotiating the deal. Mid-sized companies tend not to have formal Treasury departments and are a lot more egalitarian, so a much better chance of gaining some experience.

This blog is about working with the bankers themselves. Each investment bank is different and has resources far beyond the bankers that directly cover you, but you will probably never see the rest of the bank, just the small staff that covers you and the few people within their bank that they introduce you too. I try not to be too caught up in the name of the bank they work for and focus more on what my coverage team can deliver. Obviously, there are different tiers of banks, but which ones want to serve you is already at least partially driven by your company size. There just is not enough business for larger investment banks to devote resources to smaller companies.

Investment banks and their bankers get a lot of negative press. The recent, Oscar nominated film “The Big Short” is a good example. They usually are a topic in just about every major political campaign, and populist anger is stirred up against them. The current hit musical “Hamilton” has some of the Founding Fathers attacking them as doing nothing but moving money around. At the end of this blog, I will link some books that are quite critical on bankers and their culture. I can tell you that I have worked with quite a few bankers over my career and I have cannot remember working with any that are like the tell all books I have read, but the banking culture certainly is a culture into and of themselves. I will also link a few more “studious” books as well, if only for balance.

Let’s start with describing the three types of bankers you are likely to work with. The first, and most important, in your coverage banker. The leader of that team is almost always a “managing director” and typically has a small team that works for them. The MD is usually an industry specialist but otherwise a generalist. The next type of banker that you are likely to meet is a product specialist. There are many different products that a bank can sell to the market or to you and the product specialist is the one that supports the MD in pitching the products. Examples are syndicated loans, hedging instruments, convertible bonds, asset backed securities. The bank probably has someone who specializes in that product. The final banker that you are likely to meet is someone from one of the “desks”. This may or may not be one of the specialists that came to sell a product to you, but the important ones you want to meet are the heads of the Equity Capital Markets desk or the Debt Capital Markets desk.

The “desks” are always a little hard to understand, but the easiest way to think of them is that they run the sales force that will be selling your instrument to investors and they are the ones that decide on how it will get allocated between the bank’s customers (not you in this case).

What is very important here is that your coverage banker must be experienced and have clout internally. If you do a deal run by that bank, you need to best and most experienced team executing the deal and the relationship that the coverage banker has with the desk is key. A good relationship can result in above average resources devoted to your deal. A bad relationship or lack of clout in their bank and you might get the the C team and so-so execution.

One question that I get from time to time is how do you even get covered by a bank or bankers so you can get access to them and their resources. I find that question a little strange because bankers survive on fee income. So if there is a way for them to earn a reasonable fee, you should be able to get the attention of a banker. The main way to meet a banker up front is through your lawyers, accountants or through your investors if you are VC funded. If you have a deal for them or a good possibility of a deal in the near future, you will get some attention at least. If you actually have a transaction like an IPO, you can do a “bake-off”, and get a few banks to compete for your business.

Choosing a banker

Let’s say you have had your bake-off, or you have met a few bankers and now you are trying to decide which one to go with. I’ll try and list out some of the things that I consider the most.

The first is that is this is not a smaller transaction, then you probably will have several different banks working on the deal. Whoever you choose as the lead banker (the bank on the left of the list of bankers on the front page of the offering document) will end up controlling the deal, so I generally try and focus the most on picking that one. As an aside, banks and their bankers are very competitive and expect to have several ridiculous conversations about position and typeface and variations of the title they are called. You will need to make it very clear that the banks are to work together well. Most are professional, but they also want to position themselves for the next deal and they are perfectly happy to throw their competition under a bus if given a chance.

I tend to look for experience, both in the bank and from the banker, trustworthiness, and strategic sense. All banks will have two different experience elements in their initial pitch books – league tables and deal tombstones. They will cut industry data in a way that shows that they are a leader, usually the leader in whatever deal they are trying to get onto (or your industry if an initial meeting). They will list out all the deals they were on, sometimes even if they had only very minor roles if they need to, but usually any deals they were some form of bookrunners.

I am a little cynical about league tables because the data chosen is cherry-picked to make the pitching bank look good, but they do have some reference value because if you have 3-4 banks come see you, you can compare the tables and see if there is a pattern as to who is number 2 or three in all of them. That is a good indication of who the leaders really are. Having a big market share and being a leader for a long time can be a good indication of how strong the bank is. And if the banker cannot make his bank look good, then you need to ask yourself how good a job they will do for you with investors.

The tombstones are much less useful. I normally look at the dates to make sure enough are recent, and I ask if the banker and his team personally worked on the deals presented. With typical turnover, anything more than several years old was likely done by a different team and different leaders at the bank.

The next criteria is trustworthiness. This may be surprising, but even with the books listed at the end and my cynicism about the process, I like my current bankers very much and I have had almost uniformly positive experiences with them. What I need to know is that are they there to help me as their priority or themselves or their bank and if they can keep details confidential. Both are easy to tell. Are they listening and advising or are they selling? Are they sharing details of competition that would make you uncomfortable if they shared the same about you?

One of the best ways to tell if you are a priority is coverage (visits, phone calls, emails) even when there is not a deal on the table. The next best indication is if they lend you resources, typically an associate or two to help in a project you are working on. Banks tend to have very good in house models for M&A, for example, or they may have very good knowledge and advice on what to use for standard valuation metrics.

The final part, their strategic ability, is the toughest to determine from just one meeting. Normally this comes out over time. I already have defined that the purpose of strategy is to win. If you find a banker that can help you win more often and by bigger margins, then you have found someone worth their fees. The first thing you need as a start is that they have to look at your business and start giving suggestions. Could be a suggestion on recapitalizing your company. Could be intel on what the competition is up to. Maybe how to reposition yourself with your investor base. The idea is some value added advice that. Comes from them and. shows their understanding of your business and how it is positioned in the marketplace. I have found that the average banker I work with to be quite smart, And the more experienced and business savvy ones can give you very good advice.

Fees

Fees are always negotiable to a certain point. If there is push back on banking fees, you can often tackle it another way via professional fees like the lawyers and accountants. Your lawyers and accountants can tell you what is usual and standard. Do not be afraid to push back here. There is a risk that if you push the fee too low the desk and sales people may not be too excited to sell your deal, but normally only the hugest deals get the very low fees. You can move part of the fee into a success or bonus fee payable at your discretion for over performance.

This isn’t an area to ignore as they can add up, but better performance can give you much better terms than expected and will save a lot more than a small fee reduction up front. Of course, the fee reduction is guaranteed and the extra performance is not, but you do want a motivated banking team.

Indicative Ranges

When a banker is pitching a deal to you, they can be a little too aggressive on the terms they say they can close a deal at. I have seen interest rates quoted well below the last few deals for similar companies quoted to me. Some think that once they have won your business and you are committed and on the road with them, they can always talk you up and blame market conditions. You are somewhat trapped and exposed once you start a deal process. This is where pushing the fee down and making some contingent on performance helps. If they start waffling on their indicative terms once you put some of their fees at risk, you know they are not as sure as they claim. You can always ask them what rate they would backstop the deal at or if they are willing to make it a bought deal and they take the risk or reward of the marketing. This is an area where getting several different banks pitching gives you a much better read on the market.

You need to trust your banker and believe that he is honest if you are going to be happy working with them. Their honesty about indicative ranges is a good touch point. No one can really guarantee what the market will be when the deal is launched, but over promising is dangerous to you. Someone that is not scared but who properly prepares you before a deal launches is very important. Fund raising is very much your responsibility as CFO and delivering a good deal reflects well on you. You need a banker that is a reliable team member.

A few final items

I have been out at events where several CFO’s are being taken to dinner. I find it quite questionable that some take the opportunity to order the most expensive bottle of wine. As much as you will see stories from the books I linked below about the excesses of Wall Street, the real crazy days are way behind us. You don’t want your banker to take advantage of you, so give him the same respect and courtesy. This may be someone you build up a relationship that spans years and maybe they are the one that give you the recommendation that gives you a board seat later in your career.

If you borrow staff and get additional support over time, remember that and try and steer business their way. If they do well, recommend them to other business contacts. They can be very helpful to you personally and can make a big difference in your career prospects, and it is much easier to work with people you respect. Don’t forget their lower level staff that work on your deals. Far too often the celebration at the end forgets your staff and the banking associates. Try to make sure that they get included. If not appropriate for the formal closing dinner, have the junior bankers take your junior staff out.

Finally, don’t get too caught up in the anti-banking media hype. There are plenty of good bankers out there that really care a out their clients. Be careful, remember that they are probably smarter than you with much more resources than you can bring to bear, but buil the right mutually beneficial relationship.

Books and Movies (I have read or seen these myself)

The Culture of Bankers

Liar’s Poker

Liar’s Poker (Norton Paperback)

Liar’s Poker (25th Anniversary Edition): Rising Through the Wreckage on Wall Street (25th Anniversary Edition) Kindle

The Big Short

The Big Short: Inside the Doomsday Machine

Bankers Behaving Badly

Straight to Hell

Straight to Hell: True Tales of Deviance, Debauchery, and Billion-Dollar Deals

Wolf of Wall Street

The Wolf of Wall Street

The Wolf of Wall Street (Blu-ray + DVD + Digital HD)

The Buy Side

The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess

The Industry

Too Big to Fail

Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System–and Themselves

The Bankers’ New Clothes

The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It

Selling Put Options for Income

One evening after fighter practice while we were enjoying a beer at “church”, Patrick and I were discussing income from investments.  I talked about my “selling puts” strategy, and promised him I would explain it in more detail.  I figured why not explain it here so more can benefit and comment.

I will start by saying that using options is by definition using leverage.  One option represents 100 shares. As such, gains and losses are magnified.  As well, options create “ordinary income” and you will be taxed at your full income tax rate for the gains you make (unless you do this in a 401(k) or IRA account).  This is USA tax advice, obviously varies by country.

To do the strategy I will describe, you need to have basic option functionality for your account and available margin.  Brokerage fees/commissions tend to be higher than stock transactions.

First, here are some base statistics for options.  There is an erroneous statistic that is quoted that 90% of options expire worthless.  That is actually false.  10% are exercised.  That does not mean that 90% expire worthless.

10% are exercised (in the money at expiration date, seller could have made a gain or loss)

55%-60% are closed out before expiration (could be at a gain or loss)

30-35% expired worthless (seller makes 100% gain if held to expiration)

So the ratio is still 3-1 for exercised compared to expired worthless, but the 90% “internet truth” is wrong.

I would hope before anyone trades in options that you have a basic understanding of them, but here is a simple explanation.

An option is a right to buy (call) or sell (put) a stock at a certain price (strike price) before a certain time (expiration date).  “American” style options can be exercised at any time.  Selling an option is going short the option (you hope the option goes down in price).  Buying an option is going long an option (you hope that an option goes up in value).  When you buy an option, maximum loss is your investment.  When you sell an option, you can lose much more than the price you receive.

Options have two components of value – actual value which is the actual price of the underlying security less the strike price of the option and time value which is the trading price of the option less the actual value of the option.  Time value is a complex relationship between the volatility of the underlying stock and the actual remaining time.  Valuing options is typically done via a Black-Scholes model (there are even more modern valuation methods) and there are a huge number of firms that specialize in trading differences between the market value of options and the valuation model.  In general, if you trade liquid options on stocks with good value, then the market price tends to revert to the model price because of the automated buyers and sellers.

That was a pretty long intro.  There is just too much background information on options that I could explain, but that should cover the basics.  Here is a book that can help.  I prefer Options as a Strategic Investment, but it is way more expensive.

http://www.amazon.com/Understanding-Options-2E-Michael-Sincere/dp/0071817840/ref=pd_sim_14_2?ie=UTF8&dpID=51q5Y48G6JL&dpSrc=sims&preST=_AC_UL160_SR105%2C160_&refRID=0EYQMNRN4D2J8J79SE4S

My strategy is to sell slightly out of the money Put contracts with a fairly short time to expiration date.  This a bullish to neutral strategy as you hope the stock stays the same price or goes up (or goes down less than the “slightly out of the money gap”).

Breaking it down, you need to do the following:

  • Pick a stock
  • Pick the time you want the option to be outstanding
  • Pick the strike price of the option

You also need sufficient margin in your account to support the trade.

My strategy has two built in flaws. Because you use shorter duration contracts, you will do more transactions in a year and incur higher commission expenses. Because I tend to use shorter time durations (one month to one week), there is less “time value” available.

The other basic flaw is that you can make a lot of small wins and then lose all of in in one trade if the stock moves much larger than expected downwards.  I try and reduce this risk by carefully selecting when the trade will happen, but this is the basic downside to any options trade.

  • Picking the stock

This is a leveraged, short time duration strategy. It has a slightly bullish orientation. So you need to select a stock that you have some confidence that it will at least be stable in the period you choose and it probably should be a stock that you understand well and that you would be comfortable owning. However, this is not my other selling puts strategy (backing into owning a stock that you like but is too expensive).  This is an income generating strategy.

One potential source for a stock to pick is the S&P Platinum Portfolio.  It is S&P’s “best of the best” list.  The list is not perfect, of course, but it does have a very long track record of good performance versus the market.

You can also pick an index or an ETF that tracks an index.  Many stable stocks track the market in the short term anyways, so the overall market is as good a choice as any.

Finally, you want a stock that trades pretty often and has a lot of option trades.  Otherwise spreads are quite wide and it is hard to enter into and close trades.

I personally pick AT&T.  I own the stock, follow it pretty closely, it trades a lot and options are liquid, in a disaster it pays a good dividend anyways, and it is completely a USA business so less need to worry about something happening overseas.  It is pretty stable overall so there is less time value premium.

For purposes of this example, I will also look at Apple and SPY (Vanguard S&P 500 tracking ETF).  I have included the option chains (from TD Ameritrade)  from the day I am typing this plus the current stock price and the last three months of historical prices (Yahoo Finance is great to get those).

I could be a smarter blogger and put all these tables at the end of the blog, but this is actually important. If you want to follow this type of strategy, you need to spend some time studying this type of information to get comfortable with it. If you don’t spend the time, I recommend the don’t pass line at the nearest casino with reasonable craps rules. After options commissions, “trading” without knowledge and a plan is probably not as good as the odds at the don’t pass line.

T 5 days until expiration ($33.51)

Puts  Bid Ask Last Change Vol Op Int
32.5 Put 0.04 0.05 0.04 0.00 0 626
33.0 Put 0.09 0.10 0.08 0.00 0 1,844
33.5 Put 0.22 0.23 0.20 0.00 0 1,643
34.0 Put 0.50 0.55 0.46 0.00 0 510
34.5 Put 0.78 1.02 0.89 0.00 0 126
35.0 Put 1.24 1.51 0.00 0 0

 

T 26 days until expiration ($33.51)

Puts  Bid Ask Last Change Vol Op Int
32.5 Put 0.17 0.20 0.17 0.00 0 3,432
33.0 Put 0.27 0.31 0.29 0.00 0 412
33.5 Put 0.45 0.49 0.43 0.00 0 516
34.0 Put 0.71 0.75 0.67 0.00 0 302
34.5 Put 1.00 1.10 0.88 0.00 0 36
35.0 Put 1.29 1.54 1.49 0.00 0 6

 

AAPL  5 days until expiration ($119.5)

Puts  Bid Ask Last Change Vol Op Int
117.0 Put 0.66 0.68 0.66 0.00 7,894 2,084
118.0 Put 0.97 1.00 0.98 0.01 6,267 3,274
119.0 Put 1.41 1.43 1.43 0.04 5,965 2,766
120.0 Put 1.92 1.98 1.92 0.00 11,584 3,860
121.0 Put 2.58 2.65 2.53 -0.05 4,205 1,327
122.0 Put 3.35 3.45 3.30 -0.05 1,158 593

 

AAPl  26 days until expiration ($119.5)

Puts  Bid Ask Last Change Vol Op Int
117.0 Put 2.06 2.12 2.06 0.00 128 426
118.0 Put 2.45 2.50 2.41 -0.03 41 135
119.0 Put 2.89 2.95 2.70 -0.19 109 92
120.0 Put 3.35 3.50 3.20 -0.15 113 137
121.0 Put 3.90 4.00 3.39 -0.51 33 86
122.0 Put 4.55 4.65 4.32 -0.23 43 58

 

SPY 5 days until expiration ($207.93)

Puts  Bid Ask Last Change Vol Op Int
206.5 Put 0.89 0.97 0.93 -0.04 9,073 11,100
207.0 Put 1.08 1.12 1.09 -0.03 18,145 15,832
207.5 Put 1.21 1.29 1.29 -0.01 7,246 5,922
208.0 Put 1.43 1.48 1.46 0.01 32,493 8,987
208.5 Put 1.61 1.70 1.77 0.07 14,330 5,232
208.8 Put 1.14 1.85 1.10 -0.73 0 56

 

SPY 26 days until expiration ($207.93)

Puts  Bid Ask Last Change Vol Op Int
206.5 Put 2.33 2.43 2.27 -0.06 314 1,680
207.0 Put 2.49 2.60 2.28 -0.21 116 1,394
207.5 Put 2.67 2.78 2.44 -0.23 303 514
208.0 Put 2.85 2.94 2.91 0.00 650 2,264
208.5 Put 3.05 3.18 3.25 0.07 370 307
208.8 Put 3.10 -0.15 10 41

 

T historical prices

Date Open High Low Close Volume Adj Close*
Oct 30, 2015 33.62 33.75 33.51 33.51 24,420,900 33.51
Oct 29, 2015 33.48 33.67 33.28 33.55 17,746,000 33.55
Oct 28, 2015 33.36 33.60 33.13 33.42 27,780,400 33.42
Oct 27, 2015 33.57 33.61 33.16 33.21 24,356,700 33.21
Oct 26, 2015 33.75 33.76 33.48 33.66 25,400,300 33.66
Oct 23, 2015 34.70 34.74 33.62 33.74 46,213,200 33.74
Oct 22, 2015 33.46 34.16 33.46 33.96 32,707,100 33.96
Oct 21, 2015 33.88 33.94 33.33 33.60 27,215,000 33.60
Oct 20, 2015 33.59 33.85 33.52 33.75 20,014,100 33.75
Oct 19, 2015 33.63 33.69 33.42 33.63 27,757,500 33.63
Oct 16, 2015 33.75 33.86 33.54 33.83 32,868,400 33.83
Oct 15, 2015 33.33 33.50 33.20 33.49 18,564,200 33.49
Oct 14, 2015 33.23 33.39 33.10 33.27 23,282,700 33.27
Oct 13, 2015 33.19 33.29 33.06 33.22 22,063,400 33.22
Oct 12, 2015 33.20 33.31 33.07 33.30 14,109,800 33.30
Oct 9, 2015 33.42 33.52 33.00 33.14 19,351,300 33.14
Oct 8, 2015 33.11 33.41 32.87 33.40 17,305,200 33.40
Oct 7, 2015 33.07 33.34 33.01 33.12 21,010,300 33.12
Oct 7, 2015 0.47 Dividend
Oct 6, 2015 33.50 33.52 33.25 33.31 27,867,000 32.84
Oct 5, 2015 32.98 33.49 32.97 33.43 27,876,700 32.96
Oct 2, 2015 32.34 32.64 32.19 32.64 28,505,900 32.18
Oct 1, 2015 32.48 32.64 32.17 32.53 30,815,500 32.07
Sep 30, 2015 32.36 32.71 32.24 32.58 34,815,500 32.12
Sep 29, 2015 31.99 32.18 31.85 32.07 33,785,200 31.62
Sep 28, 2015 32.26 32.34 31.88 31.90 35,924,900 31.45
Sep 25, 2015 32.27 32.70 32.16 32.33 27,104,200 31.87
Sep 24, 2015 32.02 32.23 31.95 32.11 24,741,400 31.66
Sep 23, 2015 32.29 32.34 32.04 32.20 15,739,200 31.75
Sep 22, 2015 32.32 32.45 32.13 32.27 25,518,700 31.81
Sep 21, 2015 32.55 32.69 32.45 32.56 19,870,300 32.10
Sep 18, 2015 32.68 32.79 32.41 32.55 44,627,200 32.09
Sep 17, 2015 32.73 33.14 32.41 32.78 37,922,100 32.32
Sep 16, 2015 32.86 33.10 32.76 32.94 23,514,200 32.48
Sep 15, 2015 32.68 32.93 32.54 32.86 22,371,700 32.40
Sep 14, 2015 32.74 32.78 32.51 32.55 18,504,700 32.09
Sep 11, 2015 32.73 32.78 32.56 32.72 17,626,900 32.26
Sep 10, 2015 32.77 32.84 32.55 32.75 25,602,300 32.29
Sep 9, 2015 33.40 33.50 32.72 32.78 22,559,100 32.32
Sep 8, 2015 32.95 33.19 32.81 33.14 18,851,000 32.67
Sep 4, 2015 32.68 32.78 32.35 32.56 29,318,900 32.10
Sep 3, 2015 32.97 33.24 32.92 33.04 22,833,400 32.57
Sep 2, 2015 32.97 32.97 32.50 32.82 24,093,000 32.36
Sep 1, 2015 32.60 32.79 32.16 32.32 33,048,000 31.86
Aug 31, 2015 33.20 33.28 33.01 33.20 22,286,500 32.73
Aug 28, 2015 33.34 33.45 33.10 33.29 24,154,000 32.82
Aug 27, 2015 33.01 33.49 32.82 33.44 42,589,900 32.97
Aug 26, 2015 32.36 32.85 32.01 32.69 49,631,200 32.23
Aug 25, 2015 33.11 33.11 31.77 31.80 50,674,200 31.35
Aug 24, 2015 32.18 32.69 30.97 32.37 77,231,300 31.91
Aug 21, 2015 33.70 33.95 33.38 33.38 41,636,700 32.91
Aug 20, 2015 34.17 34.46 33.95 33.95 38,363,400 33.47
Aug 19, 2015 34.30 34.50 34.07 34.36 21,139,300 33.88
Aug 18, 2015 34.16 34.43 34.12 34.35 20,538,200 33.87
Aug 17, 2015 33.96 34.23 33.90 34.23 21,050,600 33.75
Aug 14, 2015 33.91 34.05 33.78 34.05 22,759,600 33.57
Aug 13, 2015 34.01 34.17 33.79 33.81 35,521,100 33.33
Aug 12, 2015 33.86 34.07 33.45 34.02 61,974,500 33.54
Aug 11, 2015 34.60 34.96 34.57 34.65 35,402,700 34.16
Aug 10, 2015 34.30 34.78 34.20 34.78 29,179,800 34.29
Aug 7, 2015 34.11 34.26 34.04 34.21 25,627,600 33.73
Aug 6, 2015 34.55 34.59 33.95 34.24 32,734,200 33.76
Aug 5, 2015 34.79 34.83 34.51 34.57 22,837,600 34.08
Aug 4, 2015 34.79 34.80 34.50 34.58 26,249,900 34.09
Aug 3, 2015 34.95 35.02 34.50 34.66 29,677,600 34.17
Jul 31, 2015 34.94 34.99 34.72 34.74 29,880,900 34.25
Jul 30, 2015 34.86 34.89 34.68 34.80 25,958,800 34.31

 

AAPL historical prices

Date Open High Low Close Volume Adj Close*
Oct 30, 2015 120.99 121.22 119.45 119.50 48,812,000 119.50
Oct 29, 2015 118.70 120.69 118.27 120.53 50,240,800 120.53
Oct 28, 2015 116.93 119.30 116.06 119.27 85,023,300 119.27
Oct 27, 2015 115.40 116.54 113.99 114.55 57,953,600 114.55
Oct 26, 2015 118.08 118.13 114.92 115.28 66,019,500 115.28
Oct 23, 2015 116.70 119.23 116.33 119.08 59,139,600 119.08
Oct 22, 2015 114.33 115.50 114.10 115.50 41,272,700 115.50
Oct 21, 2015 114.00 115.58 113.70 113.76 41,795,200 113.76
Oct 20, 2015 111.34 114.17 110.82 113.77 48,778,800 113.77
Oct 19, 2015 110.80 111.75 110.11 111.73 29,606,100 111.73
Oct 16, 2015 111.78 112.00 110.53 111.04 38,236,300 111.04
Oct 15, 2015 110.93 112.10 110.49 111.86 37,341,000 111.86
Oct 14, 2015 111.29 111.52 109.56 110.21 44,325,600 110.21
Oct 13, 2015 110.82 112.45 110.68 111.79 32,424,000 111.79
Oct 12, 2015 112.73 112.75 111.44 111.60 30,114,400 111.60
Oct 9, 2015 110.00 112.28 109.49 112.12 52,533,800 112.12
Oct 8, 2015 110.19 110.19 108.21 109.50 61,698,500 109.50
Oct 7, 2015 111.74 111.77 109.41 110.78 46,602,600 110.78
Oct 6, 2015 110.63 111.74 109.77 111.31 48,196,800 111.31
Oct 5, 2015 109.88 111.37 109.07 110.78 51,723,100 110.78
Oct 2, 2015 108.01 111.01 107.55 110.38 57,560,400 110.38
Oct 1, 2015 109.07 109.62 107.31 109.58 63,748,000 109.58
Sep 30, 2015 110.17 111.54 108.73 110.30 66,105,000 110.30
Sep 29, 2015 112.83 113.51 107.86 109.06 73,135,900 109.06
Sep 28, 2015 113.85 114.57 112.44 112.44 51,723,900 112.44
Sep 25, 2015 116.44 116.69 114.02 114.71 55,842,200 114.71
Sep 24, 2015 113.25 115.50 112.37 115.00 49,810,600 115.00
Sep 23, 2015 113.63 114.72 113.30 114.32 35,645,700 114.32
Sep 22, 2015 113.38 114.18 112.52 113.40 49,809,000 113.40
Sep 21, 2015 113.67 115.37 113.66 115.21 46,554,300 115.21
Sep 18, 2015 112.21 114.30 111.87 113.45 73,419,000 113.45
Sep 17, 2015 115.66 116.49 113.72 113.92 63,462,700 113.92
Sep 16, 2015 116.25 116.54 115.44 116.41 36,910,000 116.41
Sep 15, 2015 115.93 116.53 114.42 116.28 43,004,100 116.28
Sep 14, 2015 116.58 116.89 114.86 115.31 58,201,900 115.31
Sep 11, 2015 111.79 114.21 111.76 114.21 49,441,800 114.21
Sep 10, 2015 110.27 113.28 109.90 112.57 62,675,200 112.57
Sep 9, 2015 113.76 114.02 109.77 110.15 84,344,400 110.15
Sep 8, 2015 111.75 112.56 110.32 112.31 54,114,200 112.31
Sep 4, 2015 108.97 110.45 108.51 109.27 49,963,900 109.27
Sep 3, 2015 112.49 112.78 110.04 110.37 52,906,400 110.37
Sep 2, 2015 110.23 112.34 109.13 112.34 61,888,800 112.34
Sep 1, 2015 110.15 111.88 107.36 107.72 76,845,900 107.72
Aug 31, 2015 112.03 114.53 112.00 112.76 56,229,300 112.76
Aug 28, 2015 112.17 113.31 111.54 113.29 53,164,400 113.29
Aug 27, 2015 112.23 113.24 110.02 112.92 84,616,100 112.92
Aug 26, 2015 107.09 109.89 105.05 109.69 96,774,600 109.69
Aug 25, 2015 111.11 111.11 103.50 103.74 103,601,600 103.74
Aug 24, 2015 94.87 108.80 92.00 103.12 162,206,300 103.12
Aug 21, 2015 110.43 111.90 105.65 105.76 128,275,500 105.76
Aug 20, 2015 114.08 114.35 111.63 112.65 68,501,600 112.65
Aug 19, 2015 116.10 116.52 114.68 115.01 47,445,700 115.01
Aug 18, 2015 116.43 117.44 116.01 116.50 34,560,700 116.50
Aug 17, 2015 116.04 117.65 115.50 117.16 40,884,700 117.16
Aug 14, 2015 114.32 116.31 114.01 115.96 42,929,500 115.96
Aug 13, 2015 116.04 116.40 114.54 115.15 48,535,800 115.15
Aug 12, 2015 112.53 115.42 109.63 115.24 101,217,500 115.24
Aug 11, 2015 117.81 118.18 113.33 113.49 97,082,800 113.49
Aug 10, 2015 116.53 119.99 116.53 119.72 54,951,600 119.72
Aug 7, 2015 114.58 116.25 114.50 115.52 38,670,400 115.52
Aug 6, 2015 115.97 116.50 114.12 115.13 52,903,000 115.13
Aug 6, 2015 0.52 Dividend
Aug 5, 2015 112.95 117.44 112.10 115.40 99,312,600 114.88
Aug 4, 2015 117.42 117.70 113.25 114.64 124,138,600 114.12
Aug 3, 2015 121.50 122.57 117.52 118.44 69,976,000 117.91
Jul 31, 2015 122.60 122.64 120.91 121.30 42,885,000 120.75
Jul 30, 2015 122.32 122.57 121.71 122.37 33,628,300 121.82

 

SPY historical prices

Date Open High Low Close Volume Adj Close*
Oct 30, 2015 209.06 209.44 207.74 207.87 125,338,300 207.87
Oct 29, 2015 208.35 209.27 208.21 208.89 84,727,800 208.89
Oct 28, 2015 207.00 208.98 206.21 208.94 132,528,000 208.94
Oct 27, 2015 206.20 207.00 205.79 206.57 74,930,600 206.57
Oct 26, 2015 207.30 207.37 206.56 206.99 66,254,500 206.99
Oct 23, 2015 207.25 207.95 206.30 207.52 138,355,700 207.52
Oct 22, 2015 202.98 205.51 201.85 205.21 164,941,500 205.21
Oct 21, 2015 203.61 203.79 201.65 201.87 99,149,500 201.87
Oct 20, 2015 202.85 203.84 202.55 203.09 75,598,000 203.09
Oct 19, 2015 202.50 203.37 202.13 203.32 73,106,800 203.32
Oct 16, 2015 202.83 203.29 201.92 203.27 109,692,900 203.27
Oct 15, 2015 200.08 202.36 199.64 202.29 125,812,600 202.29
Oct 14, 2015 200.18 200.87 198.94 199.30 95,532,400 199.30
Oct 13, 2015 200.65 202.16 200.05 200.18 83,578,000 200.18
Oct 12, 2015 201.42 201.76 200.91 201.59 55,425,200 201.59
Oct 9, 2015 201.38 201.90 200.58 201.40 94,899,000 201.40
Oct 8, 2015 199.41 201.55 198.59 201.20 148,387,100 201.20
Oct 7, 2015 198.90 199.83 197.48 199.43 120,246,700 199.43
Oct 6, 2015 198.31 198.98 197.00 197.81 106,144,200 197.81
Oct 5, 2015 196.46 198.74 196.33 198.48 122,213,200 198.48
Oct 2, 2015 189.77 195.03 189.12 194.99 206,129,500 194.99
Oct 1, 2015 192.08 192.49 189.82 192.16 127,828,700 192.16
Sep 30, 2015 190.37 191.83 189.44 191.59 152,593,200 191.59
Sep 29, 2015 188.27 189.74 186.93 188.08 152,279,900 188.08
Sep 28, 2015 191.78 191.91 187.64 187.91 158,514,500 187.91
Sep 25, 2015 194.64 195.00 191.81 192.87 142,052,900 192.87
Sep 24, 2015 192.15 193.45 190.56 192.93 159,378,800 192.93
Sep 23, 2015 194.11 194.67 192.91 193.60 92,790,600 193.60
Sep 22, 2015 193.88 194.46 192.56 193.90 153,890,900 193.90
Sep 21, 2015 196.44 197.68 195.21 196.44 105,726,200 196.44
Sep 18, 2015 195.71 198.68 194.96 195.36 223,657,500 195.36
Sep 18, 2015 1.033 Dividend
Sep 17, 2015 200.02 202.89 199.28 199.70 276,046,600 198.67
Sep 16, 2015 198.82 200.41 198.41 200.14 99,581,600 199.10
Sep 15, 2015 196.61 198.99 195.96 198.45 113,806,200 197.42
Sep 14, 2015 196.95 197.01 195.43 195.98 79,452,000 194.97
Sep 11, 2015 195.38 196.82 194.53 196.81 119,691,200 195.79
Sep 10, 2015 194.56 197.22 194.25 195.85 158,611,100 194.84
Sep 9, 2015 199.32 199.47 194.35 194.76 149,347,700 193.75
Sep 8, 2015 195.94 197.61 195.17 197.46 116,025,700 196.44
Sep 4, 2015 192.85 193.86 191.61 192.59 207,081,000 191.59
Sep 3, 2015 196.26 198.05 194.96 195.65 152,087,800 194.64
Sep 2, 2015 194.62 195.46 191.77 195.36 160,269,300 194.35
Sep 1, 2015 193.12 194.77 190.73 191.92 256,000,400 190.93
Aug 31, 2015 198.11 199.13 197.01 197.54 163,298,800 196.52
Aug 28, 2015 198.50 199.84 197.92 199.24 160,414,400 198.21
Aug 27, 2015 197.02 199.42 195.21 199.16 274,143,900 198.13
Aug 26, 2015 192.08 194.79 188.37 194.68 339,257,000 193.67
Aug 25, 2015 195.43 195.45 186.92 187.23 369,833,100 186.26
Aug 24, 2015 197.63 197.63 182.40 189.55 507,244,300 188.57
Aug 21, 2015 201.73 203.94 197.52 197.63 346,588,500 196.61
Aug 20, 2015 206.51 208.29 203.90 204.01 194,327,900 202.95
Aug 19, 2015 209.09 210.01 207.35 208.28 167,316,300 207.20
Aug 18, 2015 210.26 210.68 209.70 209.93 71,692,700 208.84
Aug 17, 2015 208.71 210.59 208.16 210.56 79,072,600 209.47
Aug 14, 2015 208.43 209.51 208.26 209.36 72,786,500 208.28
Aug 13, 2015 208.73 209.55 208.01 208.70 89,383,300 207.62
Aug 12, 2015 207.11 209.14 205.36 208.83 168,996,000 207.75
Aug 11, 2015 208.97 209.47 207.76 208.66 126,081,400 207.58
Aug 10, 2015 209.28 210.67 209.28 210.63 80,270,700 209.54
Aug 7, 2015 208.16 208.34 206.87 207.92 117,858,000 206.84
Aug 6, 2015 210.29 210.42 207.65 208.35 116,030,800 207.27
Aug 5, 2015 210.45 211.31 209.73 210.10 85,786,800 209.01
Aug 4, 2015 209.70 210.25 208.80 209.32 81,820,800 208.24
Aug 3, 2015 210.46 210.53 208.65 209.73 113,965,700 208.65
Jul 31, 2015 211.42 211.45 210.16 210.45 103,266,900 209.36
Jul 30, 2015 210.16 211.02 209.42 210.82 91,304,400 209.73

 

That was a lot of numbers ….

You should be looking over the numbers for ranges that have happened in the prior year in one month and one week buckets.  Of course, past performance does not guarantee future performance, but it often gives you a good clue.

What is my conclusion?  Apple seems to swing around a lot more than the options premium would justify. I don’t think just out of the money puts make sense, you would have to go to much more out of the money options to balance the risk of the stock movements.  The stock trades high volume and the options and pretty liquid as well. If you are a big Apple fan and follow them closely, it might work.

AT&T moves in a much tighter range in weekly and monthly buckets. Premiums are small but volatility is small as well.  This is the stock that I use to trade my strategy. Because the weekly profits are small, it is harder to recover if there is a week where the trade swings against you. The main advantage for me is that it pays a good dividend so if I cannot close a trade and get put I do not mind owning the stock.

SPY is also good. Much more of a swing than AT&T as the general market had some large up and down days in the period being reviewed. This is instructive as it reminds you that you can have a quick and bad day at any time. Stops help some but do not help much when there is a flash crash. That is why it is important to pick a stock that I you are put you do not mind owning.

So three stocks and any of the three could work, it depends on your personality and emotional ability to handle price changes.  You cannot make money every week or month, you need to accept and cut losses and roll over to the next period. Over time, with the right focus, you should be able to make a profit more often than you make losses (which tend to be fewer but larger).

  • Pick the period

The longer the period you pick, the more time value you receive and the more time for a temporary change in trading to revert back to the expected pattern.  However, it also is more time for the entire market to change direction or some external event to change a stock price (of course, longer dated options do give more time to recover).

I have traded one month, two month and one week options with this strategy. All worked.  For AT&T I prefer 1 week options, but 1 month work well too. When I tried Apple, I tried 2 month options as the stock was up and down more but the overall trend was flat to up so the longer term options gave more time for the strategy to work.  I found the price swings too much and there was too much non-company news that moved the stock and too many “event” days so I stopped trying to use this trade with Apple.

The other very important strategy is to avoid “story” weeks. When a stock goes ex-dividend the stock often reacts more than just the dividend. Earnings releases should also be avoided with this strategy. There is extra volatility those weeks which are good for options pricing, but they are also weeks that do not follow the pattern and the trading that you are attempting. They can be traded, but not via the strategy I am explaining here. Avoid them.

  • Pick the option

You want options that are out of the money so if the stock is flat through your period the trade works. That allows for upwards or flat movement to be a winner. You need to look at typical stock moves for the stock you picked and make sure the average down move will not cause such a large loss that it wipes out the gains you had made before.

For AT&T I have been trading weekly options and the option closest to the actual share price that is in the money. For monthly options I pick options that are deeper in the money but still give me more return than the weekly options.  For AT&T I switched to weekly options mainly because the premiums for deeper in the money longer term options did not give me the return I wanted considering the extra time used for each trade.

My results

I trade 30 AT&T options a week for about $400 – $500 a week of option premium. That is about $24K to $26K of potential income.  I have averaged $20K a year for the last several years doing it. If you get put you need about $100K to buy the shares (margin). I can trade a lot more options but my schedule often means I cannot monitor the price all day (especially when I am in China) so I am often “naked” on the close day and just need to accept being put because the stock is too close to close the trade.

Most people that do not trade on margin have enough margin available for this strategy and you can make much more than the smaller number I said above.

Options as a Strategic Investment

 

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