Cody Kiss & Tell: Options, options, options 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.

All right, gals & guys, let’s rock n roll.

Ask me anything.

Q. Cody, I read and enjoyed your recent book on Everything You Need to Know About Investing. As a pretty new investor, I am interested in learning about options trading. The options section in your book understandably presumed a baseline of knowledge that is above mine. The particular difficulty I have is understanding the relation between options pricing and stock price. I.e., assuming the stock hits the strike price, is there any correlation to how much your option Ks would increase in value?
A. Great question. And yes, there is a direct correlation between the magnitude of the option moves with the crossing of the strike price. Said differently, let’s go back to the BIDU January 2014 options with a $200 strike price that was asked about earlier. Each one will cost you $400 right now as you get the right to buy 100 shares with each option, which is priced at $4 right now, but does indeed represent the right to buy a full 100 shares at $200 each on the third Friday of January 2014. As the stock rallies towards that $200 strike price those options will go up in value, but not at the same dollar amount every time the stock goes up. In other words, if the stock rallies $20 from its current $115 price, those options would probably only go up in value about $2 or 3 each, so they’d be trading at $7 each, up from the $4 you paid for it. But if the stock were to get closer to $200 over the next year, you’d probably see those options valued at $20 or so each, because the value of the long-dated expirations you originally paid for back today has faded relative to the value of the underlying option, but because the stock is near the actual strike price of the call option, there’s a better chance that option will indeed be in the money by January 2014, which at that point in this example, would be just five months away. So at that point, let’s pretend that the best case scenario plays out for you and the stock rallies to $250 by the end of that year. The underlying call options at that point will be trading for about $55-60 each because they’re $50 in the money and there’s still three weeks til they expire. At that point, those call options will indeed trade almost dollar-for-dollar with the stock, because they are so far in the money and so near expiration. So if the stock drops to $220 by the third weekend of January 2014 when those options expire, they’ll be back to being worth “only” $20 each, down from their recent $55-60 level, but still way up from the $4 you paid for them. And if the stock rallies miraculously to $300 a share by that third weekend of January when they expire, those options would be worth $100 each. Then again, if the stock were to close at $199.99 cents on the third Friday of January 2014, those same options would be worth exactly $0 each.
Have a great break, you deserve it (I guess we all do, but it’s not our birthday).

Q. When you buy puts, do you have a low and high target price in mind, where you will sell even if its well before the expiration b/c you think the stock is not going lower? Thanks and Happy Birthday!
A. I always try to stay flexible and take gains by trimming and limit losses by selling whenever I do any option trade. No set rules on it though.

Q. Happy Birthday, Cody! Now, I had submitted a BIDU long dated out of the money calls question via email this morning, so let me expand on it a bit here. After reading your article this week on BIDU and say I buy into the part suggesting BIDU is a potential triple from here. Are there calls you would suggest, say JAN ’14 $200 strikes? …Furthermore, I want to get out of the short term losing options game and want to start looking way out. It’d be great if you could select a group of companies, like BIDU, FIO, etc. where we could make realistic way out of the money bets with plenty of time. For instance, if FIO could be a 10-bagger I’d like to leverage that but allow the time for it to get at least part of the way there. Do you see what I am saying?
A. If you’re going to use just a tiny bit of capital and are willing to pay up and lose 100% of your capital if there is a major market crisis before your options expire, then yes, I’d look out at the $160s-$200s and go as far out as possible on the expiration dates. FB is probably another good risk/reward name for that type of long-term, out-of-the-money call options trading using $30-$35 strikes and going out as far as possible, but knowing that you can lose 100% of any options trade with bad timing.

Q. Cody– Of course you are still bullish on BIDU. I picked up some calls on your advice when the stock was 112, and sold yesterday at around 120.50 (near term profit target was the daily 8EMA for me). Now that has pulled back again (looking really ugly, btw), should we wait to reload around 110?
A. That fast of a style of trading isn’t my bag at all, as Austin Powers would say. I don’t know how to game it’s day to day moves. I’d like to buy more near $100, but I’m happy to hold what I’ve got if the stock rallies straight up from here. I plan to own BIDU for the next two to three years, not the next few days or weeks. Sorry. Best advice is to always stick with what you know.

Q. Cody I’ve been looking to buy MRVL Jan 13 $11 options they are currently at $0.82. The risk reward seems favorable your thoughts? Also why are there two sets of options in a lot of the stocks with the same strike and expiration date but the purchase price is different?
A.I don’t know that there’s a good catalyst between now and year end to get MRVL juiced other than being part of a high-beta outperformance rally into year end, which could happen. That said, those options sure are cheap for as high of a beta stock this MRVL usually is. High-beta means that the stock tends to bounce more than the market in rallies and to collapse more than the market in sell-offs. The good thing about those cheap out of the money options is that they’ll limit your downside exposure to 100% of whatever small amount of capital you might throw at them while giving you huge upside leverage if the stock is to rally just 10% from its current levels, passing that $11 strike price.

Q. I also have the same question: “Why are there two sets of options in a lot of the stocks with the same strike and expiration date but the purchase price is different?”
A.I would guess that it means there are two market platforms and/or major market makers in that particular option. Let’s ask our other professional money managers if that’s correct.

Q. Cody, what are your current thoughts on Juniper’s next 52 weeks? Have you heard anything about their build out of video delivery capacity that’s suppose to be underway? Any catalyst that you might foresee over the next 6 months? Reason why I’m asking is because I’m thinking of buying a good chunk of 2013 Jan calls $20 strike price.
A.Careful with those options trading — remember you can lose 100% of your capital if the timing is off just a tiny bit. That said, I do think Juniper’s new mega-routers are about to gain traction in the last half of this year/first half of next year.

Q. Hi Cody. I currently have a good portion of my portfolio locked up in my current employer’s 401k program. I am using my personal account and a self directed IRA for my Cody-directed investments. Do you have any recommendation as to investing in the limited funds that 401k’s provide? Large Growth, Small Value, etc…I had already instinctively moved funds away from funds containing many Financials (not easy). Following your advice this week I took a large amount of my 401k off the table and parked it in a stable value fund…thoughts on how I might maximize returns from these monies moving forward? Thank you in advance!
A. That is a great question. I’ve sometimes thought about starting a show called “Money Crashers” that’s based on the HGTV “Kitchen/Yard/House/Etc Crashers” meets “Restaurant Impossible/Kitchen Nightmares” model. I’d go find someone like you who needs help figuring out how to set up their portfolios/401ks/IRAs/savings, etc and spend 2 or 3 days getting to know everything that’s going on with their financials and then help them to figure out a good plan for the long-term. I can’t bring myself to call my TV agent (who’s one of the most powerful men in Hollywood according to Variety, by the way) and tell him about it. I love what I’m doing and where I’m doing it from these days, and I can’t picture going back to TV, even though I’ve got a lot of potential offers out there still. Anyway, without truly getting to know everything about your portfolio sizes, your income, your age, your expectations, your children, your life, etc, I can’t be of too much help when it comes to figuring out what to do with your individual IRAs/exposure/etc. Sorry.
Thanks Cody. Can I be first on your list for the show if you ever do it?

Q. I find that having a clear head is very difficult especially at times when unexpected events happen. How do you keep you head together so you can think clearly? Do you recommend yoga or meditation before the market opens? And when the market opens do you turn off the CNBC audio and read stock reports on the Internet?
A. I can’t remember the last time I made it through more than five minutes of the nonsense you mostly get from CNBC and any other financial show/station. That, and having seen the machine that gets the nonsense on there from behind the scenes for so many years, keep me from ever caring too much what the mainstream media are freaking out about at any particular moment. I do think watching and listening have some merit, if only to help you figure out what to trade against, but I highly suggest reading dozens of different sources, including many non-corporate blogs/news sites, every day.

Q. Dear Cody; 1) how do you see market evolution in this election year? i.e. pullback between now and september and growth again immediately before and after election? 2) What do you think about MLNX , whose performance is quite peculiar in semis industry? Many thanks and HAPPY BIRTHday. Btw, I am a virgo too . 3 days later but 25 years earlier.
A. Wait, does that make you 15 years old??? Thanks for the kind words. Feet to fire, I expect the market to mostly rally higher into year end with an occasional pullback of 2-3, maybe up to 5% along the way. Nasdaq could get up to 3300 or higher by year end though and I wouldn’t be shocked. I’ve not been on top of MLNX. And my bad for not having been so, dang it. Let me get my guys to do some homework and then I’ll do some too and then we’ll have some answers.
No Cody, unfortunately I am 65. Sept 3rd 1947….. sigh
Oh, now I feel silly. Well, anyway, happy birthday next week!

Q. Happy Birthday Cody! Mine is on the 31st but 18 years earlier. You might check the math on the calculation of your days on this earth. Did you give yourself credit for leap years?
A.My dad’s brother’s, my brother’s daughter and my birthday are all on August 31, spaced out over 50 years. Happy bday to you! Here’s an email I got from another astute subscriber who caught my Leap-Year-deficient mistake: Cody, I’ve been a subscriber for a little over two months, and the analysis has been awesome reading. You keep it light and real. I would read this even if I didn’t trade. So now, my analysis: you have been alive 146007 days. Friday is the 14609th day. You were born on a leap year, but after the leap day. Have a great birthday, and thanks for the great insight you’ve shared. And remember, if you are ever wondering how many people read your work, make a typo.

Q. It is inexplicable to me that YELP goes up +20% on a day where its lock ups expire. Pointing it out as a great example of not being able to game the system…Cody, thoughts?
A. How many times have I written about the potential for the market to overcompensate for a coming news event, including a lock-up expiration event that everybody has known about for months, such as just happened today at Yelp and will happen in coming months for Facebook. I just don’t think you can simply go: “Well, more shares are coming on the market, so this is a great sell/short.” It’s tough to game any event, including a lock up expiration when more shares come on the open market since that doesn’t technically change the value of the stock.

Q. How do you expect the market to react when Ben does NOT announce QE3 tomorrow?
A. See my earlier answer about trying to game a lock-up expiration that everybody knows about for months. Does QE actually do anything for anybody but the TBTF banks anyway? Has the market not figured out that the QE is a scam to transfer wealth to insolvent banks and to help keep the Republican/Democrat Corporatist Regime and its trillion dollar stimulus/ongoing bailouts/0% interest rates/bond-buying/etc is not a viable solution to turn things around? It will at some point, and at that point the market will skyrocket whenever the Fed/government loses control.

Q. Happy BDay Cody! What are your thoughts on holding DDD. Does it still have a lot of upside?
A. Thanks for the birthday wish. I can’t believe I’m 40. I’ve had friends tell me over the years that I usually act either 10 years old or 60 years old, so maybe 40 is a good compromise. No kids, no family though. Yet. Anyway, to your question about DDD, I still very much like it for the mid- and long-terms and I sure wish I owned ever more than I do already. I’m planning to hold a decent/good-sized position for a long time.

Q. Could you recommend any calls for DDD and FIO? Thanks.
A.You’ve seen me remind people many times that sometimes the best trade is no trade at all. Don’t force the options trading. I spend my life trying to maximize the risk/reward on trading options in our stocks and you see how often/how rare I pull the trigger on such trades. All things in their place and time. Take the pitches the markets give you. Rock on. Etc.
Thanks. Have a great weekend.

Q. What’s a good buy entry point for FIO?
A. Do about 1/3 of a purchase now and then use tranche buying over the next couple weeks to build up a full position in FIO, hopefully getting the chance to buy on some intraday or broader market sell-offs.

Q. Can you please update us on AAPL suppliers?
A. I’m sticking with Apple, Broadcom, Nuance, Fusion-IO as my Apple plays.

Okay, thanks everybody. Great stuff. My 40-year old fingers, broken, busted, dislocated and jammed so many times over the years sure do hurt when I finish these marathon Live Q&As.

Have a great break, you deserve it (I guess we all do, but it’s not our birthday)!