Archive for July, 2010
Why Marry a Put?
By Jared A Levy
Options jargon can easily drive people nuts, whether they are novice or seasoned. Some names for certain strategies are certainly more intuitive than others. I’d like to think that the “Married Put” term is in the quasi-intuitive category. Regardless, I am going to spend the next dozen or so paragraphs addressing not only the definition, reasoning, and risk of the strategy, but also to address some of the questions we received during Tuesday’s Two Traders, One Strategy webinar. I encourage all of you to join us for this presentation every Tuesday at 4:30 p.m. Eastern Time. You can register here; it’s free.
Married Put Defined
The married put is just that; it’s a long put married to (combined with) long stock. It is a strategy that can be used to set a “stop limit” or to hedge your long stock position to the downside. For every 100 shares of stock a trader is long in her account, she would purchase one put to create the married put strategy. Off the bat, this may seem a bit strange; buying stock (a typically bullish act) but simultaneously buying a put (a bearish act)? The popular covered call strategy has a similar dichotomy (long stock, short call), but let me explain why the married put is quite different.
If you examine the risk graph above, you’ll notice that it looks completely different from the covered call. The married put strategy still offers unlimited upside potential, indicated by the 45-degree angle at the right half of the graph, above the breakeven point. On the left half of the chart, below the breakeven point, you will notice the line is flat, meaning that downside is limited. So in theory, this is a limited downside strategy, with unlimited upside; that sounds great, doesn’t it?
Two Ways to Play Apple (AAPL) Earnings
by Jared Levy on July 19, 2010
Apple (NASDAQ:AAPL) stock and the company’s product line are both definitely favorites of mine. If you have followed my writing any amount of time, you’ll know that the smartphone universe and the players within it have been under my microscope for almost two years now. Apple, of course, is more than a smartphone company, but its number-one product is the iPhone, so many analysts tend to put great emphasis on sales of that product. Even with strong iPhone sales, the other products do certainly play a role and we will want to see growth across the entire product line.
The iPhone 4 was released this past quarter and the bulk of the new iPads (3G and variants) sales will be included in this quarter’s earnings as well. Now that we are about three months past the iPad’s April 3 release, data on this device’s sales will also be key.
Based on anecdotal evidence and a statement from Apple, iPhone 4 was a record breaker in new product sales. Obviously there is the antenna issue with this product, but Apple is applying a band-aid in the form of a free case for everyone who bought the phone.
Even though some think Steve Jobs’ tone was almost “condescending” in his conference on Friday to address the issue, the equity market made its own decision and the stock actually held its ground among a sharply declining broader market. But given reports that the iPhone 4 drops twice as many calls as its predecessor, future sales are certainly a concern, as are costs to the company and a permanent solution to the issue.
Coming into its Tuesday earnings report, Apple has some serious expectations behind it. According to several sources, the consensus second-quarter earnings expectation is about $3.10 per share, up from $2.01 a year ago. Most are looking for a revenue increase of about 76.8% to $14.7 billion year over year.
Apple (AAPL) iPhone4 Conference Coming Friday
by Jared Levy on July 16, 2010
Apple (NASADQ:AAPL) is doing the unthinkable today; they plan to publicly address the issues with their newest device. The company is under extreme pressure and has even been sued over the “external antenna” design flaws with the iPhone 4.
Apple has a history of saying practically nothing in between its earnings reports and product launches. Even in the forward-looking statements provided on earnings calls, extreme lack of detail is the norm, leaving us (the general public) to really wonder what is going on in the “Wonka Chocolate Factory.” Heck, the iPhone doesn’t even come with a complete user manual; you have to dig through the web for that one. (My grandfather still can’t get past making a call and texting).
That strategy has worked thus far. The Apple mystique and magic marketing machine has pushed product sales to record levels and in turn AAPL stock, which is up $42.00 or 20% year to date (it got as high as $279.00 on June 21). But Apple now faces a serious challenge with this iPhone 4 “problem.” Of course there may be potential costs associated with repairing/recalling the hundreds of thousands of iPhone 4s produced. But the bigger issue may be the firm’s reputation and whether the “Kool-Aid” they have so far been able to get just about everyone to drink is in unlimited supply after all.
A repair solution might be to give users a free case, which could cost Apple a few dollars per phone. Jobs might also offer a big cash rebate to really make everyone happy, but I believe that this weakness has the potential to really affect iPhone sales moving forward.
You see, it’s not just an antenna issue the iPhone has had; the battery life and dropped calls (on the older phones) are reported problems as well, along with some other small quirks. How many people do you know who have broken or cracked their iPhone screen?
A Couple of Ways to Play Google (GOOG) Earnings
by Jared Levy on July 13, 2010
While Google (NASDAQ:GOOG) is not exactly known for a complete lack of volatility around earnings, its movements have not been all that violent (on a percentage basis). Thursday’s earnings report may be a pivotal one for Google, with the smartphone wars continuing to heat up.
The Blackberry, part of the Research in Motion (NASDAQ:RIMM) family, still leads the sector with a 41% market share in the U.S. and of course the iPhone craze powers on, but Google’s Android operating system is still growing at an exponential rate. I like to think of it as the 1980s Microsoft (NASDAQ:MSFT)/Apple (NASDAQ:AAPL) saga, redux. Back then, MSFT, like Google, offered its “window” operating system to multiple computer makers. In doing so, the company got folks across the world and on different hardware platforms addicted to its products.
Apple, in typical Jobs’ style, only sold its operating system software (and all software, for that matter) for Apple-made PCs. This strategy hurt Apple in the early days. Obviously, things have improved for the company and now the iPhone is like the Rubik’s Cube of the 2000s. Apple has done a good job at getting the public addicted to a cool (albeit flawed) product. Now that Consumer Reports won’t bless the iPhone 4 because of antenna issues, I’m looking forward to seeing how Apple spins it.
Earnings Season Survival Guide
by Jared Levy on July 12, 2010
Buy, sell, hold?
The days of reckoning are upon us! So earnings season officially kicks off today with Alcoa’s (NYSE:AA) report. CSX Corporation (NYSE:CSX) and Novellus Systems (NASDAQ:NVLS) are on today’s schedule as well. As I write this at 6:00 a.m. Monday morning, futures in the S&P, DJX and Nasdaq are lower after a week’s worth of gains.
I wanted to take a couple of quick minutes today to highlight some things to remember and consider during earnings season as you make your decisions to buy, sell or hold. These things are also important to remember if you plan on employing an options strategy. Some high-profile companies that are scheduled to report this week are:
- INTC, YUM and FAST on Tuesday
- MAR on Wednesday
- AMD, JPM and GOOG on Thursday
- BAC, GCI, C and GE on Friday
There are many others reporting; the above issues are simply some of the more heavily followed. If you are wondering when a company of interest reports earnings, check out the OptionsHouse Research tab to locate the next earnings date under the “Events Calendar.” If none is posted, go to the company’s website, as some corporations may announce changes close to its report date or wait to disclose their exact earnings date.
Now that you know the relevant earnings date for your stocks, here are some factors to examine when deciding how to proceed:
- What are EPS expectations?
Take a look at not only the consensus estimates, but the range of EPS estimates and commentary offered by analysts.
- What has the stock done in past earnings reports?
Reversion to the Mean
by Jared Levy on July 8, 2010
One of my favorite things to do is observe and sometimes laugh as market pundits (and sometimes that includes me) attempt to explain the reasons why the market does what it does. I woke up Thursday morning to S&P futures again moving higher by seven points and 10-year note yields above 3%. Lo and behold, the same folks who were calling for near-Armageddon last week now seem to think all is good in the world. The headlines read, “Unemployment Claims Drop More Than Expected … Market Looking Strong.” But is it … really?
The S&P was up 31 points Wednesday and is up roughly 60 points from its recent low of 1010 just a couple of days ago. When the the S&P was trading at those lows, the index was below the two standard deviation daily Bollinger band, an oscillator that many analysts and traders use to pinpoint overbought or oversold conditions, (in this situation, the reading was obviously indicative of an oversold condition).
Supposedly, the big catalyst yesterday morning was that first-time unemployment claims for benefits dropped 21,000 in the past week to 454,000, when analysts were expecting a more narrow pullback to roughly 458,000. First off, the weekly numbers tend to be extremely volatile and generally don’t tend to get a ton of attention because of their unpredictable nature and their high tendency for revisions. Aside from all that, this number is not great and is just a tad below what analysts were expecting; it certainly doesn’t strike me as earth shattering.
Five Notable Options Myths
by Jared Levy on July 8, 2010
1. All Options are Extremely Risky
Even though options are becoming more and more mainstream, there is still a large faction of the investing crowd that believes all options are extremely risky. In fact, there are many options strategies that are less risky than the underlying stocks they derive their price from. Out-of-the-money (OTM) options may be the culprit of this misconception as they tend to be cheap and lure many new, inexperienced investors with their cost. We all know that many things in life are cheap for a reason, and while there may be a time and place to invest in OTM options, you must always use caution.
Also, be sure you fully understand what your risk is at the onset of a trade. Buying options will give you a limited risk, typically at a cost that is cheaper than buying 100 shares of the stock outright. The other mistake options traders can make is to invest as much in options contracts as they would in 100 shares of stock. While this can increase leverage, it may also increase risk. There are actually options strategies that can greatly reduce risk and volatility and while some may limit profit, they can still provide returns that many investors would consider exceptional.
2. An Option’s Behavior is Mysterious and Magical
This is another complete misconception. Again, this myth stems from inexperienced traders who don’t understand how options are priced or realize how and why options prices change. Understanding all of “The Greeks” and how they measure an option’s sensitivity to specific variables is critical to grasping the behavior of options.
Remember that options:
- Are legitimate financial products
- Are not mysterious or magical
- Perform “as advertised”
- Require work to be properly understood
3. Market Makers are Out to Get Me (A/K/A: “They” Know What I’m Doing!)
Getting an Edge on Jim Cramer
by Jared Levy on July 6, 2010
For more than a year, I took Mad Money host Jim Cramer’s investing ideas and gave them a thumbs up or thumbs down according my own technical analysis and views. Here at OptionsHouse, it’s not about telling you what to do, but rather offering some strategies for you to explore based on your own individual opinions.
We all have a right to agree or disagree with Cramer and while I have great respect for the man, I can’t say that I am in full agreement with all of his recommendations. Furthermore, as options traders, we can take his thesis and augment it into acceptable risk for our individual personalities and risk tolerances.
Watching my DVR recording of Friday’s program, I actually liked what Cramer had to say about investing after the crash (I think this was taped earlier). He talked about the difference between trading and investing and how today’s market participants perhaps need to be an amalgam of the two. I happen to agree with Cramer’s suggestion that traders learn as much as they can about a company, although even with soup-to-nuts knowledge of a company and its business, you can still find yourself in a losing position. This is due to factors beyond the quality of a company’s product or their ability to sell that product or service to the public. Cramer noted this when he talked about a company’s stock price becoming “un-glued” from its fundamentals.