Q. Cody, in regards to options pricing: I’ve been reading up on the greek components that determine an options’ theoretical value, and got a pretty good handle on it. My question specifically, has to do with timeline. I.E. There is ALOT of time premium built into the overall cost of an option the farther out in time you go. My experience has been, that a lot of that premium burns off over time, either through the underlying price gyrating or churning, or through significant movements. The time decay in mind, but conversely the time for the trade to play out, how do go about looking at an expiration date for a particular option? Which then falls into part B: do you go shorter term, near/in the money; or longer term out of the money? How do you walk that fine line? Thanks! Love your insight.
A. Great question. The short answer is that buying an option is more of an art than a science and it depends on each and every scenario what my time frame and what I’m willing to pay for that time frame is. I do not think that the mainstream theoretical values of options is very helpful because it simply looks back at what the stock has done and doesn’t factor in new catalysts ahead — which is where our advantage is. So I don’t use greek valuations on the options except maybe as a rough guideline. I’ll gladly “overpay” vs. what the theoretical value of an option is if I think the stock will double or something over the timeframe before expiration. I generally like to use the longest-dated calls I can except when I’ve got a clear near-term catalyst that I think I have an edge on.
Q. Hello Cody, I really appreciate your insights into the market, strategy, and patience. I tend to get too close to the daily gyrations and allow my emotions to cloud my judgment. I am posting a really long question with apology in advance for its length. I followed your advice last week (and my instincts) and sold my position in AAPL calls. I was unable to just trim just a part because I only had a few, literally 3; bought them in anticipation of the introduction of the iPhone5. AAPL is now back to about $9 higher than when I first bought these calls two weeks ago and the calls – Feb750s – are trading slightly above what I had paid for them. I know you don’t think much of charting but many people do and while I do not buy or sell exclusively using charts I do look at them for an indication of where the chartists might be inclined to see a line in the sand. Looking at the chart for AAPL one sees that there have been times in the last two years when it breaks its 50 day line and other times when it tracks its 200 day line, and at this point AAPL remains comfortably above both the trend lines that the chartist hold so dear. I point this out because of all the hype that seems to be present in the chatter recently, myself included (From last week”… with the sales data that is being reported and with the holiday season soon coming up I find it hard to imagine that this stock can sell off significantly unless the market completely tanks.”). Some of the reported excuses that I read for the selloff in AAPL seem rather myopic in regards to the longer term performance and prospects for AAPL. It is pointless to try and game an exact entry point, but if the guidance does go down and the stock sells off further from here (with the probable related gloom and doom) it will probably then be a good time to buy longer some term options at higher strike prices. One of the things that I have learned is not to look for an entry point based on the fact that when a stock that is under pressure, it seems to be holding at a price level on a particular day. Often there is more “bad” news in the wings or the “market” will choose to interpret some news in a negative way to “justify” further sales. From your post today (9/26): “If you don’t have any Apple yet, or if you sold some Apple near its highs, I’d start to build an Apple position up for now. Maybe 1/4 as much as you eventually want to own, just getting started today. Same with DDD and FB and some of our other stocks that are down big recently. Don’t plow into them, but you want to tranche into these stocks on weakness as we’ve been doing over and over so profitably for the last few years. Everybody should have some money on the sidelines ready to move into more stocks on more weakness if it comes. It’s starting to feel like it could get ugly again for the short-term. Path of least resistance is probably lower for now.” PATIENCE! Very difficult to reconcile with the FEAR of missing the profits. Is there near enough fear present to justify buying long dated calls at this level? You might make money, but I am inclined to think that there may be a better entry point ahead. I have built up a position in AAPL common which I will hold. What do you think of all this? Too much over-analysis? Am I being to OCD?
A. First point, you could have sold just one or two of the three Apple call options you had instead of all of them and thereby stick with the tranche approach that I use so often. Second, I do not think that there’s “enough fear” to be getting aggressive in Apple after it simply pulled back to where it was trading just a couple weeks ago. You know that I will be pounding the table, jumping up and down and screaming about buying stocks and getting aggressively long when the markets are in panic/fear mode next time. This isn’t it. That said, we have been in a strong bull market and until that changes, it’s possible that AAPL doesn’t pull back any further from here. That’s why I use the tranche approach and patience. Your thought process is great and I’d suggest you just listen to yourself: If you’re wondering if you’re being OCD and myopic, then you probably are.
Cody, I did actually sell the options one at at time. I had already sold one when I asked the question; I sold the second when you responded with your advice and I sold the third a couple days later when AAPL had sold off to around $688.
Q. Cody, might I convince you to start putting relative percentages of your portfolio next to your list of your positions each week? This would probably just work with your common holdings. For example, you say often that AAPL is your biggest play, but I would like to know specifically what percentage of overall exposure you have to it, and how much that declines or increases when you “tranche.” I think doing this with options would be tricky and unnecessary, but for common it would be as simple as you looking at your gross investment, and dividing out a percentage per stock. No need for actual dollar figures obviously. The 1-10 bet the farm number rating system is helpful, but it’s a bit simplistic. We’re not holding you to anything here, we do this at our own peril or fortune, but I would love to see what relative weight you personally invest in these stocks to add more information for my own decisions on how to balance my own portfolio weight.
A. I tend to think that showing “allocation percentages” can be misleading because my own risk profile is vastly different than anybody else’s on here and so is yours. The stocks in the Latest Positions posts are listed by their relative weighting in my own portfolio already, plus I give you a weekly rating from 1-10. Not to I notify you every time I do a trade and we send out a weekly summary of that too!
Q. I am wondering how much of my portfolio I should set aside for options trading as opposed to stock holdings?
A. And like my answer about percentage allocation earlier, I’d say that it all depends on your, your income, your career, your future earnings, your potential inheritance, your risk tolerance, your age, your goals and so many other factors. Unless you’re 23 years old and you have a trust fund to support you the rest of your life, I wouldn’t put more than 30% or so of your portfolio into options at any given time and even that is VERY aggressive for most people.
LOL, one of my favorite answers to all legal questions, taught to me by a now deceased law partner and friend: “It depends.” Kicking my self for not knowing that here.
Q. Cody do you think that QE 3 will boost the markets even further than you had predicted before and further fuel your app/ecosystem/smartphone revolution bubble predictions? Not to mention their are still lots of people unwilling to let go of bonds even though yields are at all time lows, might this provide some extra juice?
A. I think QE3 is just another in a long line of overt and covert means of juicing corporate earnings and forcing savers into riskier assets like stocks. I don’t know that it can “boost the markets ever further than I’d predicted” since I’ve been expecting this developing bubble anyway and I sure wouldn’t be surprised an outright crazy equity bubble before it pops again.
Q. “It’s starting to feel like it could get ugly again for the short-term.” Two questions: (1) in your mind’s eye, what does “short term mean?” 2-3 months? and (2) can you give us some general insight on the types of things that drive market psychology? E.g., it makes no sense to me that AAPL is pulling back the way it is with a new product supposedly coming out next month, while GOOG is going through the roof with no obvious catalyst.
A. Short-term is maybe 2-3 weeks and up to 2-3 months. Mid-term is maybe 3-month to 9 months. Long-term maybe is a year or more. Google and Apple have gone up a ton over the last decade as they’ve grown their earnings. The short-term and mid-term fluctuations can drive you nuts. It’s why you have you to trust your analysis and then follow through on it. In this case, buying weakness and selling huge rallies in these two stocks for the last decade has been very winning.
Q. Cody, regarding your Apple comments that now is a time to begin scaling in 25% of a position. Is this for stock and leaps? Thanks.
A. I’d probably stick with AAPL common for now and wait for the next great pitch to buy call options again.
Q. I’m looking to buy some Feb13 APPL calls, there are strikes available at every $5 price point. With AAPL trading around $665 currently, how do you determine the best strike price at which to buy-in?
A. You see my answer about how each scenario in buying a call option is always unique? That said, I just don’t like the AAPL calls here right now as I’ve been selling them. I’d rather wait for a primo-pitch from Apple before getting aggressive with the calls again. And that said, I’d probably look at the January 2013s with strikes starting at about $710 or so, which will give you huge upside if Apple can get to $800 before February, but again, I’m not making that trade right now.
Q. Cody, what are your thoughts about the long term implications of the Apple shift away from GOOG maps and ultimately GOOG search?
A. I think Google’s got to make sure they drive the Android eco-system into something even grander and easier to use than it already is because traditional search and website ad display and YouTube ad display growth are great, but not enough. That said, I do think Google is delivering and executing.
Q. Hi Cody, I know you’ve trimmed down your GOOG position and you’re sitting tight for now. I was wondering specifically what percentage of your Jan 13 calls have you sold? Thanks.
A. I’ve sold nearly 3/4 of my GOOG January 2013 calls, starting with the lowest strike prices first. I’d like to buy some back next time GOOG crashes, but I will be patient as we’ve made great money on this trade/name overall and I’ve got my common stock core position from much lower levels too. Still a top 3 position for me.
Q. Would you consider buying GOOG weekly puts, seeing as google has skyrocketed with no catalyst.
A. No I’m still a bull in Google. I’d prefer to buy puts and/or short stocks that I think are crappy and falling apart.
Q. I see that options on JNPR began trading recently with Jan 2015 expirations. I thought that the Jan 2015’s at 25 or 27 might be interesting, and now as JNPR appears to continue to be hated and has retraced about 50% of the move from the low of July to the high around $20 the 20s and 22s seem to offer an interesting entry point with relatively low cost and lots of time till expiration. I could not find your comments on JNPR new routers for introduction over the next year. Please reprise your thoughts on the prospects for JNPR over the next year or two. Do you think this is a good entry point? 2015 options are very thin and I don’t completely trust the quotes.
A. I expect the new line of Juniper core routers that are coming out right now to sell well and stir an upgrade cycle amongst current customers too. The January 2015s are good in that they give you a long time before expiration, but of course you pay for that in the time premium. If you’re concerned about the spread and prices of the options, then put in a bid just a nickel above the current bid and hope that they get filled. You might have to put that order in every morning for a few days before someone sells it to you there though, which means there’s risk the stock could move up before you get filled, but there’s never any silver bullet as you guys know.
Q. I’m usually inclined to place an order closer to the middle of the bid/ask but as you say the stock can move away from you and not be filled. Of course it can also move in your favor giving you a better entry point. I realize that there is no exact answer. Part of the problem for me is the FEAR of missing the maximum profit, but that is one of the lessons that I am hopefully learning and which must be overcome to be successful in the long run.
A. You wrote “I realize that there is no exact answer. Part of the problem for me is the FEAR of missing the maximum profit, but that is one of the lessons that I am hopefully learning and which must be overcome to be successful in the long run.” And yes, that is so awesome. Recognizing the traits that you possess that hurt your performance is so crucial to long-term outperformance.
Q. Absolutely, I have fallen into your shoes about “missing the play” many times. For me, one of the best tools I’ve learned from the short stint here with Cody, is simply have patience and wait for the point of entry/exit–and most importantly, sometimes the best trade, is no trade at all.
A. Great advice and thanks!
Q. Looking to scale into FB… there is a lot of talk of 1 billion + shares coming to market via lock-up expiration. Would you wait to see how the shares are impacted before scaling in? I know the term scaling in means you buy in tranches. However it seems like a strong possibility that the lock-up expiration can lead to a significant share decline. Is it better to wait and potentially start scaling in at a possible lower level, since we know there is something DEFINITE happening (Lock-up expiry) that MAY move shares lower?
A. For the last two months, I’ve heard/read/and been asked about the coming FB lockup expiration probably at least a thousand times. In other words, I would expect that something that is so widely as you say KNOWN is probably already priced into the current quote. If everybody on the planet is worried and waiting for the share lock up to pass, then they will all be plowing in all at once when that very event finally happens and the stock would do exactly opposite of what everybody was expecting. The biggest risk to FB in the near and the long-term are if it doesn’t execute and grow and deliver on the fundamentals — I don’t think the big lock up that is so visible ahead of time for so long is going to be a catalyst at all.
Q. Interesting article you published last night about Staples. Are you studying an entry point for this company?
A. Yes, I’m considering an entry into a Staples short, but I’m not in a rush and I’m not sure I’ve got my arms around the entire company’s prospects yet.
Q. Do you have concerns about barriers to entry for DDD and others in that space – an HPQ coming in etc?
A. Yes, most definitely I am concerned about the barriers to entry for 3-D printing and I am hoping to see that DDD can create a de facto standard of its products and/or drive the technology forward so much that someone has to buy them.
Q. Any view on INTC? Two downgrades today and up? Bottoming?
A. I’ve been working on the INTC lately — great minds think alike. Intel’s got to start getting some serious traction in mobile or the whole industry is going to move past them. I don’t like seeing them cutting investment and R&D and capital expenditure when they should/could ramp up mobile. That used to be the INTC way — invest big when others were struggling, but Intel’s off that path for now. I like the yield you get and down here near $22 a share, I think INTC’s probably a good risk/reward for the long-term, but my conviction level on that isn’t high enough yet for me to have pulled the trigger.
I think INTC now is better than cash.
Q. And now, a very straightforward question. Do you think MS will be below $16 by October 20th 2012?
A. I don’t have any idea if it’ll be below $16 in the next twenty trading days. Those puts I have in MS are a hedge and they’ve served their purpose as that well regardless.
Q. You bought DDD calls recently. Good day to add another tranche with stock down another 4%?
A. I do think another tranche of DDD isn’t a horrible idea here. Tough to buy it right now. That probably means it’s a good trade. Could tank further tho.
Okay guys, that’s a wrap. Thanks again and see you all on the “FLIP” side.