Cody Kiss & Tell: A short strangle, Apple’s rise, Amazon’s P/E and more…

Here’s the transcript to this week’s Live Q&A chat. Join me next Wednesday at 2pm EST at http://tradingwithcody.com/chat or send me an email with your question at support@tradingwithcody.com.

Howdy folks. Let’s ride. Ask me anything.

Q. Cody, as a new subscriber, do you recommend immediately going out and buying the 8s and 9s on your buy/short list? Hate to miss another FIO!
A. I don’t recommend just running out and blindly plowing into these stocks. Here’s how I answered that question in the new book, Everything You Need to Know About Investing: Q: How do you get started with your first trade? How much of each stock do I buy when I start building my portfolio? A: You want to try to have your cake and eat it too — start off by putting 1/3 as much money as you want to eventually invest into the top 5 or 6 stocks that you have done your homework on and want to invest in and put some more in after a few weeks in whatever stocks are rated highest at that point and so on. Use scales and don’t rush in. Always have plenty of cash and/or income to be able to sleep at night no matter what happens to the markets.

Q. If we do experience a break out, what positions should we pick up now if it materializes? I trimmed a bit yesterday, so I have some money on the sidelines. Thanks!
A: If you don’t feel like you’ve got enough long exposure, I’d go back to my answer above about buying 1/3 as much as you want to buy and focus on the 9s in the long side of the portfolio.

Q. Cody, I know you’d rather focus on teaching us how to fish BUT I’ve been to several rodeos and would like your reaction to a specific trade. I’m considering writing an AAPL Jan. 14 short strangle in the 530/730 range for a credit of a little over $10,500 I’d happily buy at $425 but be equally happy to sell at $835. Do you have any thoughts on this. Would you write a shorter time frame for a lower credit? Anything you could offer would be appreciated.
A. Interesting set up you create with that short strangle. Here’s a good explanation of a “short strangle,” btw http://www.theoptionsguide.com/short-strangle.aspx – The short strangle, also known as sell strangle, is a neutral strategy in options trading that involve the simultaneous selling of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying stock and expiration date. Short Strangle Construction Sell 1 OTM Call Sell 1 OTM Put The short strangle option strategy is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term. Short strangles are credit spreads as a net credit is taken to enter the trade.
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I’d probably look at a shorter time frame than January though, because if that stock were to rally in an Apple-esque manner between now and year end catalyzed by either clear blow iPhone 5 demand and/or by blowout earnings on the next report, you’ll end up losing even selling at $825. Maybe time it so the trade closes before the next earnings report instead of in January.
Thanks for your input Cody. I forgot to mention that I am probably in need of a trim for my AAPL holdings and was looking to this trade as a way to reduce my holding but at a higher price. Covered calls just didn’t give me the premium I was looking for. I’ll think on it a little more. By the way, I really enjoyed your post about the fire. Lots of food for thought in there. Glad to hear your house made it intact.

Q. Seems everyone is snoozing and not asking questions. Just like the volumes are pathetic in the markets for the last few weeks. Is this time to trim cody?
A. The big fish are definitely on hiatus as they sip champagne and eat caviar at their mansions in the Hamptons for the last couple weeks of the summer as usual. But the question is whether they’ll be net buyers or net sellers when they get back. Feet to fire, I think if the market can sustain these levels or can rally into summer’s end, those guys will feel naked and/or overly short and they’ll have to be buyers in September. That’s not exactly scientific analysis there though, and I’m not exactly betting the farm that such a scenario plays out.

Q. Great posting on preparing for the forest fire..and appreciation the earth resilience! Hey I have an overweighted amount of JPM shares in the account now. How might be some different ways to use them for this shorting the “Morgan’s”?
A. I’m not quite ready to pull the trigger on Morgans puts yet. I’d like to see them really start to crack and/or really spike to what might be some “blow off” highs. Stocks and stock sectors often peak with a major short squeeze which produces an artificial high price in the stock which can mark a long-time top. At this point the Morgan shorts are more of a hedge for a broader markets melt-down than an outright momentum/catalyst bet for now.

Q. Is it time to short treasuries?
A. I’d also wait to see the bond/Treasury markets crack before re-entering a short bonds/Treasuries position. The entirety of the Treasury and bond and debt markets are highly manipulated by the banks, the regulators and the government, so tread carefully until you see the cracks start to show. I’ve off and on tried timing a top in the bonds/Treasury markets for the last three years and it’s been a waste of time, even as it hasn’t cost me much money in the way of outright losses.

Q. Hi cody, AAPL has gone up quite a bit since its earnings call. Almost $50 up. Do you think we will meet our targets of $700+ in the next 2 months. or more?
A. AAPL’s actually up more than $50 from where it traded after earnings. And yes I do think we’ll see Apple get to $700 before year end and maybe even higher, but I have much more confidence in saying that I think we’ll see AAPL at $1000 by 2014.

Q. BRCM hasn’t done much even though its firing on all cylinders….is it worth adding to going into the fall here per the Apple play?
A. I’d like to buy BRCM on weakness and I almost hope we get a 10% or more sell off from these current levels so I can get aggressive in that name.

Q. Cody, why do you think some stocks like AMZN and FIO trade at such large PE ratios, while other companies with similar growth don’t, like AAPL?
A. Amazon’s P/E is vastly inflated because the company is so focused on investing in their infrastructure to fuel future growth. Bezos could and will some day turn on the earnings spigot and lay off the spending and earnings growth will blow away most analysts’ minds and models. Amazon is trading at “only” 1.3x sales, while Apple, as previously noted, is trading at 3x sales. And in FIO’s case, it’s that the market rightly sees that there’s a potential that this company could grow sales 5-fold over the next five years and that would make earnings power huge in five years.

Q. Cody based on your Amazon Price to Sales, is the bullish case that Amazon could triple from these price levels over the next 5 years as the earnings improve?
A. Yes, well said.

Q. I was at the beach on a family vacation, so I apologize if I am being repetitive, but at what price would it be wise to open a position in FIO. Also, I own KORS and SODA, should I trim my position in KORS? & I am totally confused about what to do about SODA. Thanks.
A. I’d start with a 1/3 position in FIO right now and scale into more over the next couple weeks. I’ve got no advantage on KORS or SODA as I’ve not done any homework on them in a long time. Sorry.
Thanks!

Q. Last question from me about BIDU. My calls are almost 100% up since you last said to buy it. Should I add more or trim?
A. I’d trim maybe 10-20% of those BIDU calls and sit tight. Congrats on the trade!

Q. I see that CSCO is rated 7, could you elaborate a little why it has this rating?
A. I just have some out of the money CSCO calls that were left over from a much larger CSCO trade that we mostly nailed lost month and they’re not worth very much at this point even though they’ve been on a tear of late. I’m mostly out of CSCO but these calls are still in the portfolio. I’ll sell all of them if CSCO were to pop tomorrow off tonight’s earnings report.

Q. What are your thoughts on Marvel MRVL earnings tomorrow? Also, long term, Einhorn has been a buyer, buying back shares etc. Is this a good one to slowly ease into? Thanks!
A. Marvell also sells into the hard drive storage business and with Seagate and Western Digital having been talking about a market comeback, I’d rather be long than short Marvell for the short-term and because it’s got other businesses including supplying into the Microsoft Kinect sensors, I’d also rather be long than short Marvell for the long-term.

Q. Cody , I work at INTEL and I remember you had a good feeling about INTC earlier around when it was trading in the $19-20’s and you had said that you think it will double in coming years. Where are we on this trade? I own a lot of ESPPs in it and as you know its a slow mover.
A. I think INTC’s still headed to the high $30s by 2015.

Q. What’s your view on Tata Motors (TTM)? Jaguar Land Rover, their luxury car division accounting for 70% of profits, seems to go from strength to strength, on the back of attractive new product and strong emerging markets demand.
A: I don’t like the car industry on the whole as it also is way too integrated/dependent upon government largesse/policy and it’s become increasingly difficult to guess how the tides will flow next. That said, I do think overall global unit sales will grow 5% or so for the next couple years, and if that were to happen and Tata were to nail the cycle with good product, that stock could double or triple over that time frame.

Q. Cody what are your views on a different sector like ISRG ? I am thinking of going long just like AAPL on this.
A. I’m not up to speed on ISRG of late, but I’ll throw a couple warning flags vis a vis AAPL since that’s what you asked: ISRG has a $20 billion market cap, trading at 10x sales and 30x earnings. AAPL has a $600 billion market cap trading at 3x sales and less than 10x earnings when you include the net cash on the balance sheet. I prefer AAPL not just because it’s cheaper, but also because I can envision its market cap growing double or more from even these levels and I think ISRG is already discounting a huge amount of future growth while sustaining huge margins.

Q. I’m a new subscriber and didn’t get a chance to join in the chat today. What do you think of CMG as a possibility for the breakout you see as likely? The chart is starting to look like a nice rebound is coming. I’m long the Aug 305 calls.
A: CMG, Chipotle Mexican Grill, has got a $15 billion market cap. McDonald’s market cap is $88 billion. Wendy’s is less than $2 billion (too much debt there). YUM Brands’ cap is $30 billion. That Chipotle is the one that’s still got lots of market penetration ahead of it, so there still could be upside even with a market cap that size already and trading nearly 5x sales for a restaurant is expensive stuff. Hope that relative perspective helps, because I have little edge on the stock itself and how it trades as it’s not one really on my radar.

All rightie folks, that’s a wrap. I got blisters on my fingers!
http://youtu.be/QBWB61ClHvU