Here is 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.
Howdy folks, let’s rock.
Q. One of the hardest lessons I have had to learn is when to really “let my profits run”. Having experienced many round trips in the past, probably due at least in part to my less than stellar stock picks, I am always worried about protecting my gains. I trimmed FB a couple of times in high 30s and low 40s and have felt like a complete idiot for having done it – not for having done it, but for having trimmed too soon. I know it can’t go straight up forever, but it still feels like there is relentless buying pressure from those that need to own at any cost combined with the steady stream of upgrades. Every time it seems about to pull back there seem to be buyers ready to drive it up again. Feet to fire, where do you see FB between now and the end of the year?
A. First, don’t beat yourself up. The fact that you’re regretting not making MORE money rather than losing a bunch of money is a win in itself, of course. Remember that. Of course, every great athlete/money manager/student/businessperson strives to do better and knows that anything less than perfection means you can indeed do better. But as I often remind you the idea isn’t to catch the bottom and the top. It’s to maximize your gains and minimize your risks and losses over the next 10-30,000 days of your life. That’s exactly what you did by trimming down some of your FB and locking in some gains. Anyway, feet to fire, I could see $FB getting close to $50 before a big pullback to $40 into year-end and then a spike to $100 sometime in 2014. Feet to fire that is.
Q. I am trying to come to an objective way to calculate the relative risk and value of the positions in my portfolio as well as how to calculate a reasonable cost effective way to hedge the risk. Every time I look at something like SPY puts of VIX calls I come to the conclusion that the amount necessary to effectively hedge the portfolio would be too large to be cost effective and possibly too risky. Do you have any benchmarks regarding how much of one’s portfolio should be allocated to such hedging instruments? Do you have any benchmarks regarding the profit goal, i.e., how much to you look to recoup from your hedge when the market corrects (% or$)?
A. You are really thinking and analyzing money management concepts well in this line of questioning. There are no “scientific” answers to your questions there because it all depends on your own time frame, your risk tolerance, the current market and earnings set up, etc. But I think these wise words from an old mentor of mine are quite poignant to your question: “Wise man sayeth, ‘May you always lose money on your hedges’. Because that probably means you likewise made some big money on your actual positions.
Q. I don’t really mind losing money on a hedge but I don’t want to spend a lot of time and money hedging to little or no effect. Maybe it’s more cost effective to simply pare back on the riskiest positions.
A. Yes, unless you’re managing millions or billions, I don’t think using options and market hedges is probably going to be much more effective for you as a hedging strategy over the long run as just using tranches and patience and trying to ride the market’s cycles with some success.
Q. Hi Cody, I have a question about how you compute the relative value of your positions. When you say that a stock is your largest position I would expect that this is not simply the number of shares. Therefore my question is: how do you combine the value of stock and options when determining your largest positions? Do you use the actual cash value of the investments, i.e., the actual cash price of the option? Example (a) 100 shares of AAPL = $50,000 + 3 AAPL Oct $500 strike @5 = 1,500 for a total of $51,500. Or do you take the value of the underlying stock under control? Example (b) 100 shares + 3 calls is equivalent to 400 AAPL controlled for a total $200,000.
A. You are right to assume that I do include some weighting to the exposure that options give me on both calls and puts when I put together the relative weighting of the positions in my portfolio. There are lots of formulas developed by the same idiots who brought you AAA Subprime Mortgage Securities that will calculate your “notional value” of each position. One thing I learned early on in economics and trading is the formulas and models are always wrong. When I ran a hedge fund I looked at my notional weightings as calculated by their formulas nightly. I use my own measures of “notional value”, which usually includes making an options position that’s “in the money” as more heavily weighted than those that are far “out of the money” because they are going to move with more gusto as the position blows past the strike. So those old FB January $30 call options that I paid less than a dollar for at some points back when the stock was in the low $20s didn’t factor much into my “notional value” until the stock blew past $30, on its way to $45, which make those call options very notionally heavy.
Q. Hi Cody, I am a new subscriber, looking to invest to build up my assets so I can start a business when I get out of the military. I would like to thank you for giving me a free membership for my service. I appreciate patriots like you who respect the military (less than 1% of the total US population) and the sacrifices we make for the defense of this great country. I am nervous about the events in Syria…I have been deployed multiple times in my 24 year career and am not looking forward to going again. What is your recommendation for me getting started in investing with so many variables that could affect the market in the near future?
A. Start slow! Use tranches to buy and sell. Don’t get greedy or leveraged up beyond your means. Start with the highest rated stocks in the portfolio, but realize that I will also make mistakes on individual names, trades and investments but that with a steady, smart approach we can at least keep your financial future as protected as you try to keep our defense. Thank you for serving and sacrificing and please tell all your fellow soldiers to sign up for a free TradingWithCody.com subscription for the extent of their time in the service.
What I meant was there are less than 1% of the US population that is currently in the military. I know there are many that support us–Thank You! It is awesome to come back from overseas and get great treatment from our countrymen and women!
Just so you know, there are MANY of us who have amazing respect for the military — just not for some of the ways and reasons in which you’ve been deployed. Syria would be one of those. But you’re brave and we’re proud of you. Good luck in your investments — you’re in good hands with Cody.
Q. Any thoughts on buying VXX as a hedge through the end of the year? I have some nice gains on a few positions that I don’t want to sell but would like to make some $$ should the market fall.
A. I’d suggest taking some partial profits, maybe 1/10th or 1/5th of your positions with the big wins if you want to truly lock in the profits. That said, I do think the VIX and VXX are both going to see days above 20 again before year end.
Q. Cody, I do not own DDD or SSYS and hold a small position in XONE. Does it make sense to start buying at these levels I am also looking to get into AMZN, at what level do I start buying?
A. I always suggest doing a tranche approach to buying stocks, especially ones that are on fire like those have been. I’d buy 1/3 of how much you eventually want to own in each name this week and then do another 1/3 in a week or two and/or buy another 1/3 if there’s a big sell-off for no good reason in one of the stocks in the meantime. Spread out your purchases and sleep better at night.
Q. You’re going to tip us on the time to load up on more VIX calls, right Cody?
A. I’m going to TRY to tip you on the right time and place to buy back those VIX calls. LOL.
Q. Do you see Apple as broken? Will it take Tim Cook leaving to get it back on track?
A. New AppleTV and/or wearable iOS products must meet the market in the next 12 months, or yes, you are dead right and the stock will still be below $500 or less.
Q. Hi Cody, Any comment on Apple after the event and the recent downgrade? One thing I noticed from the keynote is when Phil Schiller presented the iPhone 5C. He did not look excited nor comfortable during his presentation. All the photo leak before the event is really a killer for excitement on actual Apple event nowadays. Some people are saying the death on iPhone 5 marked the end of the Jobs era in some way. Are you still positive about the Apple in long run with its leadership group? How about the fundamental of the pipelines of products they have? Also, what would be your recommendation on the APPL Jan 2014 600 Call? Apple Keynote – Phil Schiller introduced iPhone 5C.
A. I remember shocking everybody at the Apple Investor Conference back in 2012 when the stock was near $700 as I warned that sentiment had gotten wildly positive on the stock and there were a litany of potential downside catalysts. I think sentiment on AAPL has finally gotten truly awful here, as evidenced by the questions about my buying AAPL in this chat. That said, like I wrote above, we need new products from Apple and soon or this stock will languish and fall further.
Q. Hi Cody, I know the sentiment being extremely low now. I do want to see their come up with the next revolutionary product but all the blog has not shown strong sign of such just yet. Back to another part of the question, what is your recommendation on the Jan 2014 600 Call that I currently hold at 90% loss?
A. I don’t know if AAPL can get over $600 by January, but I’d expect it can get close sometime before year end and that you might be able to coup some of that 90% loss on that particular call option.
Q. Cody, why do you think apple has bottomed here and did you buy OCT 13 calls or 2014.? I’m curious because I rarely ever see you buy calls that only have 30 days until expiration. Also It has done a complete 180 from a month ago and to me looks like its heading back down. Thanks
A. Like I said this morning when I noted my AAPL call buys here, I made a tiny purchase on the idea that it bottomed nicely and rallied off the lows after getting downgraded by several of the largest analyst names in the business yesterday morning. Yes, I bought some OCT 13’s.
Q. From what I’ve read, Gold is expected to drop once tapering begins…do you believe that and are you taking that into consideration for when you purchase Gold and GDX moving forward? I see you were interested in more GDX calls today ahead of what many think will be a bigger drop in gold here soon.
A. Yes of course I’m taking the mainstream media concept that the FED is supposedly going to stop funneling $85 billion a month into the economy in the name of “tapering QE”. First, the FED will be way too late when they finally “taper” much less get interest rates back up to somewhere somewhat reflective of the actual cost of capital when they finally do act. And second, I think the financial system as we know and the dollar that supports it is doomed at some point in my life. It’s corrupted and broken.
Q. On your response to tapering: does this make my January puts on IEF not as attractive a hold as I think? Please advise.
A. I think rates are headed higher no matter what the FED does over the next few months or years.
Q. Good afternoon Cody. For today’s 9/12 Q&A. Both Qs relate to your “confidence” level. Q #1 is WAGE: you seem surprised that it’s held up, and still believe it’s a loser…in time. Yet many of us hold near and mid-term-expiring puts based on the initial recommendation. Specifically, for these, what would you advise — October 19 $40 (currently down 66%) and November 16 $45 (currently down 45%). Add? Stay put? Dump and lick wounds? Your earlier comments weren’t clear to me. Q #2. GDX! You trimmed, are re-adding January $32. I didn’t trim (yeah, I know, the toughest decision…), so I’m now still holding those (down abt. 70%). How confident are you/should I be? (Also holding January $29s, down 48%) Should I double down (average down) here and add some more, and still on GDX:…and on which call?
A1. WAGE seems unstoppable into the Obamacare launch into which it was set up to profiteer. I don’t like the action as it keep moving towards $50 and the long-term chart is straight up. At some point, I think we’ll make some great money on the short side of WAGE, but I think I might have been early here. I’m holding off on adding to it as a short and am probably going to just eat the puts I bought at a total loss.
A2. Doubling down is always dangerous, whether at the blackjack table or the Wall Street stock casino. I do think GDX will get up toward $35 or above again by year end, but I don’t know that I’d suggest doubling down on the calls you didn’t trim. Maybe buy another 1/10th tranche just to lower your cost basis a little bit, but be patient on that one too. Good luck on both!!
Q. Cody, on your GDX call, are you covering or buying new?
A. I bought a bunch of GDX call options back when it was near $22 or so. Then when it rallied near and above $30, I took a bunch of profits. Today, I back some of the GDX call options I sold for profits.
BTW: got 80% profit on XIDEQ, another great bankruptcy call thanks! 🙂
Nice going! Rock on.
Q. Cody, taking your advise and buy SOME common LONG GDX today for the first time ever here at 25.5
A. Is you buying GDX along with me a “good signal” or a bad one? LOL
Q. Hi Cody, on your latest positions you still have the MS short listed as a 9. Would you recommend buying any MS puts right now to start a position and if so, what strike and when? Cramer was all over the overpriced financials yesterday and I’ve read other articles hinting at financials leading a downturn…so wanted to be in on your best shot.
A. Yeah, if no existing MS position on your portfolio, a start into some MS puts as a first tranche here sounds good to me. MS seems to have gotten awfully “toppy” here in the high $20s and any hiccup in the markets/economy/financial system will take them down in a hurry, I do believe. I have been so wrong on MS for so long though, I feel like a fool on that one.
Q. On MS puts would you do Oct, Nov, other?
A. Probably go out as far as possible, maybe 6-12 or even 18 months on the puts. Like I said, I feel like a fool about this MS call I made.
Q. Any comment on the FIO puts that have been discussed on the board over the last day? Would you buy into a FIO Sept put based on this acquisition run up speculation?
A. Interesting idea, especially given the 40% pop since the rumor of a possible takeout hit. I’d remind you that you can lose everything on any options trade, so be careful, but yeah, I could see FIO fade lower into the next quarterly report and then crash if the company blows it again.
I want my revenge on FIO!
Revenge is a dish best served cold…and never served as a reason to trade. That is, emotions make us make bad decisions and if you know outright that you’re being motivated by revenge, then…don’t do it!
Q. If Facebook ever pulls back, what’s a good entry point?
A. Closer to $40 or below would probably pique my own interest in buying some more FB back again.
All right folks, that’s a wrap! Thank you!
