Here’s the transcript to this week’s Live Q&A chat. Join me next Wednesday at 2pm EST at https://tradingwithcody.com/chat or send me an email with your question at support@tradingwithcody.com.
Everybody still in business? Let’s rock n roll. Ask me anything.
Q. Cody, what is this massive decline about? Something ominous into next year when Q4 is usually a strong quarter for tech in general?
A. As I’d written last week, earnings and guidance have overall been rather poor and the US economy is definitely feeling the Euro drag. Apple, Google, FIO, Amazon, Sandisk are fairing fine fundamentally for now, but their stocks are being trashed along with everything else. Buy the panics, sell euphoria. There’s definitely some panic out there today, so time to do some buying. Won’t mean you make money tomorrow, but you have to follow the playbook.
Q. Cody, Wondering if you could give me your 2 cents. I’ve followed your advice and done some virtual options trading. Now I want to do the real stuff. When I try to sign up on TDAmeritrade, I get 3 options plans, tier 1, 2 and 3. Tier 1 – Covered -Write covered calls; write cash–secured puts. Tier 2 Standard Margin, Create spreads, Purchase options, Write covered puts, Write covered calls, Write cash-secured puts. a Tier 3 Advanced – Write uncovered options, Create spreads, Purchase options, Write covered puts, Write covered calls. Should I go for Tier 2, or do you have any other recommendation or observation regarding the plans? Thanks!
A. First things first — PLEASE DO NOT RISK MUCH MONEY, WHATEVER THAT MEANS TO YOU, ON YOUR OPTIONS TRADING AS YOU START. It’s very hard to trade options and no matter how well you’ve done on paper and how much you’ve learned from TradingWithCody about options thus far, it’s still very hard to actually handle the emotions and swings incumbent in such trades. At any rate, Tier 2 is probably what you want if you’re looking to follow some of the options trading that I’m doing here on TradingWithCody.
Q. Cody, You have consistently articulated the Apple bull case quite eloquently. Also, you have been equally dismissive of technical analysis, writing how you’ve never drawn a line on a chart. I am with you on both counts. My only regrets in the time I’ve been a subscriber is that I’ve not followed more closely your trades around core positions, most recently your call to take profits when Apple traded at $700 last month. That said, I’d like you to comment a bit on the current technical picture of AAPL. The stock has broken decisively below the 200 day moving average, something we haven’t seen to this degree since the 2008-9 market meltdown. My experience with stocks has been that fundamentals ultimately trump technicals, in the long run. However, I’m wondering if AAPL has gotten itself into a unique situation, being the market’s largest capitalization stock though continuing to have a growth rate atypical for a company of its size. That is, given its huge weighting is several indexes and ETFs, is AAPL now in a situation where technicals will trump fundamentals in a permanent way?
A. Interesting question. I’d answer it like this though — if Apple generates $60 billion in net cash next year, $65 billion in 2014 and $70 billion in 2015 and pays out $12 billion, $14 billion and $18 billion in dividends respectively over that time period, the company will end up with more than $300 billion or so in net cash since they’re already sitting on $130 billion in net cash. Further, let’s say the company sees absolutely no growth after that, so it generates $70 billion in earnings/cash flow in 2016 too. For the technicals to trump those kind of fundamentals and to presume, say, just another 10-15% decline from the current levels, you’d be talking about a stock trading at a $500 billion market cap with $300 billion net cash, paying a 6% dividend with an enterprise value to earnings ratio of less than 3x. Over that scenario, I think the fundamentals would push AAPL higher, thus trumping whatever technical issues the stock is currently facing, as always is the case.
Q. I have been investing for a long time and began my subscription with your service this past February. I really appreciate what you do and can see that your method should work if I can learn to be patient enough to wait for the extreme days like today to buy and be disciplined enough to sell when things are overly optimistic. One of my problems has been the patience to wait for the former and the difficulty in identifying the latter. You have been very helpful in that regard; now I need to do my part. I remember when I first started my subscription reading some of your comments about not paying too much attention to the headlines of the day because of the tens of thousands of investors/speculators buying and selling for a myriad of reasons. I also understand that there is a herd mentality and many people do react to the hysteria or euphoria of the day, thus driving prices to extremes. My question and where I am confused is how exactly the “institutions” can drive down the price of a stock in order to profit from its subsequent rise. AAPL trades around 19-20 million shares daily + options. Where do they get enough stock to sell (short?) for this purpose, and when do they start to buy and how can they buy back enough fast enough? Do they sell short and use the proceeds to buy call options? This sounds like one of those conspiracy theories that always seem to be floating around. It seems like an incredibly dangerous way to try and make money. How does this work?? What are your comments? BTW I bought some AAPL June 725 calls this morning.
A. I’m glad TradingWithCody’s service is of help. That’s what we strive for. You basically answered your own question when you wrote, “This sounds like one of those conspiracy theories that always seem to be floating around.” I don’t think that there’s any AAPL long/bull who would want to push AAPL down. Most institutions are truly herd-mentality index-chasing blind idiots. Some hedge funds are certainly always trying to game/move/create advantages in any stock, but 20 million * $600 a share is $12 billion and I don’t think there are institutions out there successfully moving AAPL to their benefit. In the end, our job, as you say, is to have the guts to buy when these opportunities are created, whatever their cause.
Q. What if apple slightly misses in Q4, do you think the stocks momentum will slow down after 3 missed quarters?
I’d say Apple’s momentum has already slowed down, or stopped.
A. I agree, Apple’s momentum has already “slowed down” and/or “stopped”. Or as I called it yesterday, it’s got the flu for now.
What tech stock doesn’t have the flu- the only 2 good ones are DDD and LNN holding up for now. 3-4 % declining days week after week doesn’t make sense based on its fundamentals that don’t matter now. We can see that!
Q. When I meant slowed momentum I mean longer term. As in the stock trading sideways for months just to clarify. Yes the stocks down huge but trading sideways for more quarters would be bad for option holders.
A. Fair enough. And yes, that’s certainly a possibility, although I stick to my analysis that a booming xMas iPhone/iPad (I’m coining that xMas iPhone/iPad phrase right here right now, by the way) would drive estimates and thus the stock higher over coming weeks.
Q. Is everyone’s focus on AAPL an indication that it has more to fall until a capitulation?
A. Oh man, that’s a good insightful question. Perhaps all this handwringing over AAPL is just a sign that we haven’t had enough capitulation yet. With an enterprise value trading at just 7x next year’s earnings and a $50-70 billion year of cash flow ahead, at some point the fundamentals will kick in for AAPL. Can hurt for a long time before that though, as history would tell us.
Q. Cody, It seems like every time AAPL starts to see daylight another negative item hits the press. Today it is the VirnetX patent award and Foxconn’s chairman saying the iPhone 5 is just too difficult to manufacture efficiently. Each of these items (iPad mini is too expensive, Forstall is fired, etc.) pulls the stock down. Man, it feels like death by a thousand cuts. Now that I’m through whining, where do you see APPL’s price at year end 2012?
A: Feet to fire, I’d guess Apple ends the year at $682.91 with a bid of $682.905 and an ask of $682.92. Ha. Or, just under $700 a share, I’d guess. But the stock market will need to stop collapsing and the xMas iPad/iPhone demand will need to be very strong for that to happen. Feet to fire, I think the stars will align for a near $700 year-end price, but I wouldn’t bet my ranch on it.
Cody, thanks for the revised year end close number, but I was hoping for something a little more precise.
Q. Overloaded on apple calls and (Dec-Feb 2013, 615-700 ranges) and am now feeling a lot of pain. I know, I was greedy and am paying the price, especially on the January 2013 calls. Better to sit tight or cut back (with heavy losses, but salvage a little).
A. No easy answer when you’re down like that, obviously. I guess I’d do the math and decide that whether a $682.905 year end bid in AAPL would be enough to get some of that money back, but know that you might end up with a huge loss on the whole of it because it was so aggressive on your part. Hang in there, stay in the game.
Q. How high did you go on the strikes for the AAPL calls today? And did you get filled on your bids?
A. Strikes are all right near the $700 range. I did get filled on the whoosh down earlier and I’m not putting in any more bids today unless there’s a further crash.
Q. What are your thoughts on Bidu?
A. I’m a buyer of another long-term tranche of BIDU at $100 a share, but not before.
Thanks Cody. When will you be a buyer of Apple?
Uh, I wrote today about buying Apple and how I’m doing it.
Q. When you see a freefall in stocks like FIO and AAPL does it give you pause or do you get excited as stocks get dumped here in light of what you saw from your holdings quarterly reports?
A. Typically it’s the fundamentals and sentiment around a stock that gives pause. I like both FIO and AAPL down here right now.
Ok thanks- I am always amazed even today at the PAIN FIO down 7.6% today so oversold but who cares sell to alleviate the pain right now. However on a stock like Apple the decline is just for myself mesmerizing.
Q. Apollo puts (expiring in Jan) are way up. Do you see it falling more? Is it good to take profit and set up a longer position?
A. Congrats on the Apollo short! Yes, always take a little off the table when you’ve got huge profits on a put position like that. You don’t have to do them all, cover 1/3 or 1/4 now and another in a couple weeks and so on.
Q. About the APOL puts, when do you take the Jan ones off the table (in general, how close to expiration is it wise to hold an option)?
A. No set answer to that either. Thus, the selling in tranches. I would probably get out of all them before mid January and look to roll them over into some longer-dates and lower priced strikes over the same time.
Q. As you, I like FB for the long term. With a huge chunk of stock coming to market on 11/14, would you hold off in opening a position? Just for the record, I have an outstanding order to by my first tranche, but its a smaller tranche because of the impending lock-up expiry. Would you scale in 25% at a time of your intended final position or something less / more?
A. I think everybody on the Street is aware and every bull in FB is holding off on more purchases because of the coming lock up expiration. I think you want to be in most of your long-term position by then, but as with anything, don’t do it all before hand, leave yourself some room for buying more FB the week of 11/21 for example.
Q. Cody- FIO down nearly 9% today from its 32.5 hi weeks ago pre earnings- down 30%. Any buys in this one today?
A. Yeah, I might look to add a little FIO common tranche here today or tomorrow. No rush though. We sold calls higher and I’m not trying to force myself back into anything.
Okay folks, that’s a wrap. Exit stage left. Don’t forget to take off your microphone and earpiece before you leave. And don’t forget to zip up your suit pants before the show starts next time, ok? (No joke, it was a running joke with my stage director when I did the show at Fox — I must have started 100 shows with my fly down over the years. Ha.) See you next week.
Thanks.
