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September 2016 Option Trades

September 2016 Option Trades

by | Oct 6, 2016 | Learning from Mistakes, Monthly Income, Options

Below is a summary of the option trades I closed in the month of September.

If you’re not familiar with stock options you might first read my introductory article Get Started Trading Options.

Monthly Trade Summary

September was a tough month. In total I lost $602.03. My win rate was 69% (9 out of 13). I had a total of 19 positions throughout the month: 9 of my trades were profitable, 4 were not, and 6 were “wash” trades. If I gain or lose less than $20 I count it as a wash and don’t use it to calculate my win rate.

My account is about $10,000. Some of my margin usage includes other options trades not listed here because they are made based on the trades placed by Kirk DuPlesis over at OptionAlpha.com and I am not going to post those out of respect for his paid service. I’m also NOT including any profits or losses from the OptionAlpha trades I make.

Again, the trades listed below are MY trades closed out in the month of September.

What I learned from losing $600

You can often learn more from mistakes than successes. It’s easy to Monday morning quarterback with the benefit of hindsight. I like to evaluate my trades based on what I knew at the time and what I reasonably could have foreseen.

I learned/reinforced several valuable lessons. In fact if I had followed the rules I know I need to follow to be successful and I had been more careful that $600 in losses would have been ~$70 in gains.

I want to talk about my three mistakes and the three lessons I learned from each.

Lesson One: Small Position Size

“Bears make money and bulls make money. Pigs get slaughtered.” – Old Wall Street Adage

Novavax (NVAX) Strangles
Notes: My biggest mistake was with NVAX. I made $104 earlier in September but I counted this as a separate position because I completely closed out the previous position and opened this new one.

The reason volatility for NVAX was so high was because the company was awaiting “phase three trial judgment” for a vaccine they were making. The results of the trials were unfavorable and the stock tanked down to around $1.25 from $8.25. In other words the stock lost 80% of it’s value in one day.

I would have been fine if I hadn’t opened the additional 9 8 strangle because it would have been just a ~$300 loss. I got greedy like a pig and paid the price. My account is around 10k, so I should not open a position with a margin requirement over $500 (5%). The initial margin requirement started at $420, but when I opened the 9 8 strangle the margin requirement roughly doubled.

I will cheat up around $100-$150 to open positions in the $600-$650 range because otherwise I wouldn’t be able to open some positions, but when possible, I must keep the position size at or under 5% of the total account value in order to be successful long term, which in my case is $500.
nvax-2Margin Requirement/Cost: $420 up to $840
Income: -$595.78 (-$582 less commissions and fees)

Lesson Two: Careful Order Entry

ScanSource (SCSC) Earnings Strangle
Notes: This was initially an earnings trade back on August 29. ScanSource missed earnings by a lot and the stock tanked. In after hours post earnings the stock traded down to 37.79, my break even was 37.65. I made an adjustment and held onto the position in hopes of a rebound. The stock did rebound and cut my $330 loss down to around $230.

But then I made a mistake buying the put back for more than I sold it for by entering my limit order incorrectly at the ask price instead of the midpoint. Tough $250 lesson to be more careful particularly in a less liquid market.
scscMargin Requirement/Cost: $875
Income: -$461.17 (-$449 less commissions and fees)

(VIP) Earnings Strangle
Notes: I opened this up incorrectly! I reversed the call and the put to create an inverted strangle. Closed it out when I could for a small wash loss.
vipMargin Requirement/Cost: $615
Income: -$18.20 (-$6 less commissions and fees)

Lesson Three: Be on the Correct Side of Volatility

When volatility is low (less than 60%) you want to be a net buyer of options. When volatility is high (over 60%) you want to be a net seller of options.

Adobe (ADBE) Earnings Iron Condor
Notes: This was an earnings trade and I was on the wrong side of volatility. The implied volatility percentile of ADBE was 58%. When selling options you want the implied volatility to be over 60% and the higher the better.
adbeMargin Requirement/Cost: $500
Income: -$126.16 (-$114 less commissions and fees)

Combined these three mistakes cost me $674.36. I expect to lose on some trades and that is okay. For example, I lost on the Verifone earnings trade. But because I was on the correct side of volatility, had the correct position size, and chose a stock with a consistent post earnings volatility drop, I was in a good position to win most of the time. However, these trades listed above are examples in which I could have known not to make and were preventable.

The Rest of My September Trades

Lands’ End (LE) Earnings Strangle
Notes: This was an earnings trade that went according to plan. Closed it out at the at the 50% profit target.
leMargin Requirement/Cost: ~$600
Income: $35.72 ($54 less commissions and fees)

Corrections Corp of America (CXW) Straddle
Notes: There was a lot of volatility for this stock when there was an announcement that the department of homeland security was reevaluating using private prisons. A lot of these contracts are at the state level, so I thought the move would be overstated. Closed at 25% profit target once volatility died down.
cxwMargin Requirement/Cost: ~$500
Income: $40.92 ($47 less commissions and fees)

Smith and Wesson Holding Company (SWHC) Earnings Strangle
Notes: Another successful earnings trade. My position size was too big but I was fortunate in that it worked out in this case. Was able to close it out at the 50% profit target
swhcMargin Requirement/Cost: ~$940
Income: $125.80 ($138 less commissions and fees)

Infoblox (BLOX) Earnings Strangle
Notes: Another earnings trade. They announced earnings on August 31. Implied volatility on 2 September had dropped from the 86 percentile down to the 2nd for this stock, but the option pricing didn’t reflect that, IV dropped but was approaching my break even so I just closed for a wash/small loss.
bloxMargin Requirement/Cost: ~$600
Income: -$1.08 ($5 less commissions and fees)

NYMOX (NYMX) Strangle
Notes: There was a lot of volatility for pharmaceutical stocks. Probably related to the EpiPen outrage. Not enough liquidity but was still able to close for a profit.
nymxMargin Requirement/Cost: ~$635
Income: $37.80 ($50 less commissions and fees)

Namtai (NTP) Strangle
Notes: This was another stock trading with high volatility due to an announcement. Not sure how much volatility dropped but time decay certainly helped. Closed at 50% profit target.
ntpMargin Requirement/Cost: Not recorded
Income: $28.92 ($35 less commissions and fees)

Energous Corp (WATT) Earnings Strangle
Notes: Bad Q2 earnings, net short position, high 88th percentile IV, was able to close at a 50% profit target after waiting a little while.
wattMargin Requirement/Cost: $535
Income: $83.92 ($90 less commissions and fees)

United Natural Foods (UNFI) Earnings Strangle
Notes: I calculated an expected move of +/- 2.77 from 41.80. Didn’t move hardly at all and was able to close the next day for a nice profit. Margin requirement was too high but I didn’t get burned on this one.
unfiMargin Requirement/Cost: $837
Income: $115.92 ($122 less commissions and fees)

Novavax (NVAX) Strangle
Notes: I counted this as a separate from the other NVAX position because these were September options and I closed them completely out before opening a new NVAX position. NVAX was trading with high volatility. Closed this in phases. Added a smaller strangle, which turned out to be ill advised. My initial position had a smaller margin requirement.
nvax-1Margin Requirement/Cost: ~$650
Income: $104.32 ($147 less commissions and fees)

Aralez Pharmaceuticals (ARLZ) Strangle
Notes: Another pharmaceutical stock trading with high volatility, resumed trading on Thursday 9-15 and was able to close at well over a 25% profit target.
arlzMargin Requirement/Cost: $582
Income: $147.70 ($166 less commissions and fees)

Finisar Corp (FNSR) Earnings Strangle
Notes: Had a big earnings beat, stock went up as high as 26.5 after hours. My break even on the upside was 26.61. Had a very nice drop in implied volatility. But didn’t matter as much since it moved beyond my range. Made some adjustments. Dropped down allowing me to close my original strangle, had a long position on FNSR to make up some of the losses. Closed on the 21st for a wash.
fnsrMargin Requirement/Cost: $490
Income: $17.79 ($33 less commissions and fees)

iShares Mexico ETF (EWW) Iron Condor
Notes: Somewhat high volatility, took a neutral position because I think when the fed does not tighten it will help the emerging markets. Perhaps should have gone a little bullish. ETF approached by upper call, so closed out the short call on the 21st. Maybe could of held onto it, but didn’t want the risk.
ewwMargin Requirement/Cost: ~$328
Income: -$1.25 ($14 less commissions and fees)

General Mills (GIS) Earnings Iron Condor
Notes: I prefer the strangle, but did this risk defined iron condor because of the margin requirements and position sizing. Standard earnings trade. Got some implied volatility drop but not as much as the last two earnings sessions. Closed for a wash.
gisMargin Requirement/Cost: $500
Income: $9.60 ($34 less commissions and fees)

VeriFone Systems (PAY) Earnings Strangle
Notes: Beat earnings but stock tanked beyond my break even. Adjusted the call side down for some additional credit, and hopes that the stock rebounds some. Adjustment ended up costing me more $.
payMargin Requirement/Cost: ~$640
Income: -$266.64 (-$242 less commissions and fees)

KB Home (KBH) Earnings Strangle
Notes: Earnings trade. Got a nice drop in volatility but stock was approaching my break even on the high side and decided to close out for other opportunities.
kbhMargin Requirement/Cost: $280
Income: $17.96 ($24 less commissions and fees)

Nike (NKE) Earnings Iron Condor
Notes: Another earnings trade. This one had a nice setup. NKE has a nice volatility drop after earnings, there are month contracts (which have the most volatility “juice”), and IV percentile was at 72%. I’d prefer volatility was higher, but 72% is certainly high enough for an earnings trade. I did a defined risk Iron Condor since the margin requirements are high. Nike announced earnings after hours, they beat, but the stock sold off. As of 10PM in after hours NKE was at 54.09, just hope it holds tomorrow and volatility drops! IV dropped to 28%, and with it the value of the options I sold plummeted. This was a textbook trade, if I could do this 2-3 times a week I’d be thrilled, but unfortunately these types of trades don’t come along every week.
nkeMargin Requirement/Cost: $600
Income: $101.65 ($120 less commissions and fees)

Fundamentals of Stocks Buffett Purchased

Fundamentals of Stocks Buffett Purchased

by | Oct 2, 2016 | Capital Appreciation, Value Investing

Warren Buffett is known as a value investor. He’s been very successful so I looked at the fundamental indicators and metrics of his most profitable purchases to see if the metrics I use would have led me to purchase the stocks Buffett did.

What I found was that the six metrics I use when choosing a value stock are consistent with Buffett’s purchases.

By way of background, here are the six Value Investing Metrics I use:

  • Price to book of less than 1 (can go up to a PB of 1.5)
  • Price to earnings less than 15
  • Positive Cashflow
  • Positive Earnings per share
  • Return on equity greater than 8% on average per year
  • Dividend Yield

Wells Fargo (WFC)

Total return: 9,417%

Buffett started buying Wells Fargo stock in 1990. At the beginning of the year, the P/B was 1.668 and by the end it was 1.379, for a rough estimated P/B ratio of 1.5. Using similar tactics We find the metrics for Wells Fargo around the time Buffett was buying up shares:

  • Price to book: 1.5
  • Price to earnings: 8
  • Cashflow: 1.668 billion
  • Earnings per share: $.3450
  • Return on equity: 19.52%
  • Dividend Yield: 4%

Source: ycharts.com

PetroChina (PTR)

Total return: 720%

Buffett bought this Chinese stock in 2002-2003 and sold in 2007.

  • Price to book: Data not available
  • Price to earnings: 6
  • Cashflow: 1.668 billion
  • Earnings per share: $3
  • Return on equity: 15.41%
  • Dividend Yield: 7.5%

Fundamentals in 2007:

  • Price to book: 3.194
  • Price to earnings: 17
  • Cashflow: 26.83B from operations
  • Earnings per share: 10.64
  • Return on equity: 23%
  • Dividend Yield: 3%

It’s interesting that the price to book was relatively higher than a traditional value stock. The dividend yield had fallen and both cashflow and earnings per share had expanded tremendously.

His decision to sell PTR would likely also have factored in management, industry climate and political optics. To that last point, he may have wanted to pivot from an oil company to an electric car company because of the long term prospects and that it is more consistent with what democrats in the US find acceptable.

Source: ycharts.com

BYD (BYDDF)

Total Return: 671%

Buffett bought this Chinese electric car maker in 2008. I had trouble finding historical stats for BYD. The following BYD stats are based on this article and the 2008 financial report.

  • Price to book: 2.5
  • Price to earnings: <8
  • Cashflow: $273 million (converted from RMB1,816,362)
  • Earnings per share: $.08 (converted from RMB0.50
  • Return on equity: ???
  • Dividend Yield: none in 2008 but did pay a dividend in 2007

Source: http://bydit.com/userfiles/attachment/2009042009130534224.pdf

The price to earnings ratio is certainly attractive and the company is cashflow positive. The price to book is rather rich but a large factor in this purchase was probably the endorsement of Buffett’s right hand man, Charles Munger:

In 2008, Munger sold Buffett on Chinese car battery company BYD by saying that its CEO, Wang Chuan-Fu, was quite obviously a descendant of both Thomas Edison and Jack Welch. He solves problems like Edison and gets things done like Welch, Munger said. “I’ve never seen anything like it in my life.”

Source: http://fortune.com/2014/10/31/warren-buffett-best-investments/

Coke (KO)

Total Return: 1,600%

Buffett is famous for owning Coke. He started buying the stock in 1987. I found an insightful article on why Warren Buffett bought Coke in 1987. Coke wasn’t a value stock by traditional metrics.

Coke was selling around 15 times earnings and I believe somewhere around 5 times book value at the time.

Source: http://basehitinvesting.com/mohnish-pabrai-heres-why-buffett-bought-coke-ko-in-1987/

Buffett instead looked at the value of the brand and determined that it would cost $100 billion to build a similar brand and that Coke was undervalued since the whole company could be purchased for $20 billion.

He also started buying it in the same year as the 1987 stock market crash, putting into practice his adage: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

It’s a great example of how the value investing metrics are important, you can still be successful without them if there is an overarching larger reason why the stock is relatively undervalued.

Berkshire Hathaway (BRK.A)

Total return: 1,745,300%

Buffett bought this new england textile company in 1965 and used it as a holding company by the same name. I found some stats in this article.

  • Price to book: .76
  • Price to earnings: 7
  • Cashflow: yes
  • Earnings per share: Start of year: $3.7
  • Return on equity: ???
  • Dividend Yield: yes

A Proven Strategy

Value investing is a proven strategy. While there are few guarantees in life or investing it is no coincidence that one of the world’s most famous investors and wealthy investors is a value investor.

For a current list of the value stocks I like, click here.