Being a CFO and other topics

Not just finance, hobbies too ….

Tag: investing

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.

Going beyond the headlines

Every day, at the end of the day, there is a series of articles wrapping up the market. There always is some sort of facile explanation in the headline and then a few facts in the article around the headline. Every market day and usually a wrap up on the weekend. There normally are a couple of pithy comments and reference to some news item of the day. Typically there is a comment on the Fed, or the latest job news, of maybe a reference to Asian markets or some economic item in Europe.

There are similar news items on individual stocks, especially famous ones, just about every day as well. Some little news items is grabbed for Apple and attached to whatever the stock price movement is that day. Even for lesser followed stocks, when they do their earnings release any movement is attached to the market’s reaction to something in the release or a comparison to analyst expectations. Often there is a quote from the latest analyst report supporting the reasons cited for the stock move.

I can tell you, if you want to be a better individual investor, you need to learn to ignore such articles of reasoning. They tend to be very shallow and are written more to fill space than they are to offer any sort of thoughtful response to what actually has happened. Same thing for much of the instant analysis that is on the live financial news shows.

I am not saying that real news does not move stocks. If a company genuinely releases unexpected news, either good or bad, then the stock may immediately react. If there is a major geopolitical news item like a terrorist bombing in a financial or political center or some surprise currency move, then markets can and often will react and that news will be the cause of the reaction. However, news of that nature tends to be pretty rare and even rarer for an individual stock.

In my first substantial blog post for this site, I discussed my strategy of selling puts to generate income and profit. In that blog I listed several long tables of share prices that I suggested should be studied before deciding on a stock and committing to an investment. In my blogs on investor conferences and non-deal roadshows, I talked about the process the typical fund uses to decide to buy and sell and emphasized that the process tends to be slower without an immediate reaction causes by one conference meeting or visit in their office.

The same thing can be said about the analyst reports that appear right after an earnings call. Normally the analysts are rushing to get something written and they have call after call during earnings season. Their time with management is normally limited to. The questions you can hear on the call and about 15 minutes afterwards are all the time they normally get with the company and then they publish. Quite often what is written is a rewording of the press release with a highlight or two from the conference call. Earnings calls can be catalysts but they are more of a retail investor or a fast trading hedge fund play than the longer term investment trends that give stocks their underlying values.

If you want to learn about the market or a company, you need to do more than just read headlines or look for one answer to what something is happening. A good example is oil prices and energy stocks. There is a connection between the two, but small changes in oil prices that are within the range of normal expected volatility are almost for sure not causing the move in one particular stock or sector. An above average increase or drop is more likely a larger investor increasing a position or decreasing a position, and the chances that it happened that day because of the news item being identified is almost zero. A .5% move in Yen value is not going to change investment decisions on a company that gets some of their revenue from Japan.

This goes back to my advice to CFOs on doing the outlook section — you need to look past your spreadsheets and listen to the other functions and what they are telling you. When you are making long term capital commitments, you will a lot of simple answers to questions. These answers may sound right, but when making an investment decision you need to think a little more on it. Make sure that your question was really answered. Try and look at the question from a couple of more angles and ensure that you are making the right choice for your company.

Of course, most individual investors don’t have the training or the background to understand what is happening with the markets. From reading books like Flash Boys by Michael Lewis, even my understanding of the trading in the markets is somewhat shaken. With all the “Dark Pools” and algorithm based trading that is happening and the speed and velocity of dollars being committed, even the basic fundamental reasoning for stock valuation might be broken down. Individual stocks may get caught up in this trading and change pricing for no reason other than it was traded.

I try and keep my financing deals as simple as possible and avoid derivative collars or enhancements to them because even after I study carefully I cannot account for all of the factors that might move their deciding valuation factors more than expectations. If I cannot reasonably assess risk, then I do not commit. It is the same for me for investing decisions. If I do not understand and agree with how a stock is being valued, then I do not invest in it.

This blog entry is the reasoning I use when I encourage people that ask my advice on what to invest in to avoid individual stocks and buy low cost index funds. You have little chance of getting rich quickly but you’ll at least make the market average returns which are quite compelling. If you want to gamble with a stock, accept that you are doing no more than buying a lottery ticket or pulling a slot machine handle. Nothing wrong with dreaming, but recognize that you are dreaming. As a CFO, you need more than a dream. Lottery tickets are not a good strategy to make sure that you can meet payroll and pay suppliers.

I am not saying that you should not invest in individual stocks. With careful reasoning and some luck you do have a good chance of beating average returns. As a CFO you will be asked to greenlight new products or business areas. In the short run saying no is more safe but you may not have a long run if you say no to everything. Just make sure you understand the ways you can lose money on the deal and what you would do if that happened. If it does happen, you will at least have a plan. No different than if you were acting as CFO. You can take the risk and say yes to a new area of business or a new customer, but have a back-up plan you can execute on.

If you do want to invest in a particular stock, investing in something you know and maybe not in the industry you work in (to avoid concentration risk). Try and understand the product you like and other investing reasons for the company. Try and figure out who owns the company and why they would want to own it. A classic example of this for me is Hasbro. They own Wizards of the Coast and they own Magic the Gathering and Dungeons and Dragons. I play and like both games and think that Magic is important to Hasbro and I can at least tell if that game remains popular. They pay a dividend and raise it annually which I like. They have the rights to Star Wars for toys. They have been able to monetize their other properties in the form of movies that have done well at the box office. All were good reasons to buy. That stock is up almost 100% for me and continues to pay a good dividend. Every quarter there is a news article of two update based on the earnings release but because I keep track of the company, I know that the news articles are very superficial. I think I understand the main valuation drivers and what causes short term swings in value (short term is usually tied to movie releases).

Musashi tells you to study well. Not just your sword work and strategy, everything you do. Don’t be fooled by what is on the surface and easy explanations. Understand your decisions and make them as well as you can. People are depending on you.

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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