MET and AIG

I bought up my odd lot of MET shares at 55.81; the final VWAP ended a few percentage points higher, as funds bought in to take advantage of the exchange. I'm looking to get out of RGA above 50, but I won't get my shares until next Wednesday. I'm hoping that it doesn't go down before then. I'm guessing that we're going to see some pretty big moves next week; the VIX is above 25, which means that blood is on the streets and it's time to buy.

I've been watching the AIG debacle with increasing interest. Lehman's problems caused a huge sell off in financials last week. I'm not entirely sure why, since it seems like they are firm-specific. Like Lehman, AIG is also facing losses on mortgages; it also has to pay out hurricane damages. Yes, these losses will happen, and they will be huge, but from a valuation standpoint, the equity looks great, and IV is through the roof, making it even more attractive.

Success with FMCN

Although I did not get in at the bottom, FMCN had a strong rebound today. I sold my shares at 29.98. My return of 3.4% was excellent, and wiped out the losses that I realized when I entered into my CEDU trade.

I also exited my CEDU trade at 4.75 on Thursday in preparation for taking part of the MET tender offer next week. Overall, this week was a good one for my portfolio; unfortunately, I cannot say the same for the market.

Days like this happen

The market is doing terribly. That's why selling options is great; it reflects the fact that stocks do not always go up. In fact, if a stock rises too quickly, that is usually time to be fearful.

As the market sold off, so did FMCN. I think that today would be a stupid day to sell it.

Ambac strikes again

My largest holding has outdone itself once again. That's right - ABK is up 25% on news that regulators approved Connie Lee.

As my stocks have bounced, I have continued to sell calls on my holdings. I sold Oct 08 calls (strike - 5) on WM for $0.45. I was also lucky to sell Sept 08 calls (strike - 12.5) on ABK for $0.25. Whenever a stock rises very quickly in a very short amount of time, volatility goes a little crazy. This is a good time to sell options. I remain bullish on all of my holdings (obviously) which is why these calls are out of the money. Some I am more bullish on than others.

I also had a good day trade on LUV today; shorted it at 15.93 and bought back at 15.65. It seems like there is strong selling interest (or weak buying interest) at and above 16. This is the second time that I have done this trade.

I believe that China is particularly oversold. I'm not sure why; I am going to overnight FMCN today if I can get it at a good price. (Update - I got in at 28.9).

Yesterday was a perfect day

Small personal aside before I talk shop: yesterday, I went to Pavillon de la Grand Cascade for lunch and had an amazing 8-course meal with my mom and grandparents. The meal was incredible, truly haute cuisine. Then I came home and had a very happy GDP day - all of my stocks were up, and my entire portfolio jumped 23%, again, mostly due to ABK.

Good time for selling covered calls. I sold some SLM October calls with a strike of 20 for $0.45. I am ready for a big upswing, but at the same time, I recognize that another 20% rise by then would be a huge move for SLM. I hope that they will report earnings after my calls expire, but I do not have a problem with buying back if earnings are earlier than I assume.

I also sold some BBX September calls with a strike of 2.5 for $0.1. Free money.

I cannot take credit for this idea, but it is a good one:
MetLife (MET), the insurance giant, is doing a voluntary exchange offer in which holders of MetLife stock can tender in their shares to receive shares in a publicly traded subsidiary called ReInsurance Group of America (RGA). MET is doing this to distribute its 52% interest in Reinsurance Group's B shares (which currently are not listed). You can find official details of this offer at the information agent's website. To encourage participation in the exchange offer, MetLife is going to give holders of MetLife stock the three day volume weighted average price of MetLife stock + 11% of value of the three day volume weighted average price in Reinsurance group class A shares. So just as an example if the VWAP price for both stocks were $50, you would receive 1.11 shares of RGA.B for each MetLife share tendered into the offer. Subject to a limit of 1.3071 shares of RGA.B for every one share of MET.

This offer has an unusual provision for odd-lot holders. If you own less than 100 shares of MET, you will not be prorated should the offer be oversubscribed. It is safe to assume that giving a free 11% premium to rational stockholders will result in oversubscription.

Tata Motors (TTM)

TTM is another ADR that I like a lot. It has been beaten up by rising Indian interest rates, which have been rising because of anti-inflationary policy by the Reserve Bank of India (RBI). I think that this is an indirect rate play - we have seen the price of oil drop from $145 to around $115, which should lower the inflation outlook by the RBI and perhaps even encourage it to lower rates, which are currently at 9%.

TTM also recently announced that they were decreasing the size of their proposed rights offering. I believe that this announcement has yet to be disseminated into the market as the stock is trading on very low volume today and is actually down for the day.

Full disclosure: long TTM (calls).

Shameless earnings play: CEDU

I sold out of FMCN at a 2% loss; I could have booked a 1% gain today but I forgot to put in a limit order. So it goes; I am not abandoning my strategy, I just desperately wanted to buy more CEDU.

I really cannot stress how awesome this company is and how completely invisible it is to the rest of the market. Its online degree segment, which accounts for the vast majority of its revenue, has a gross margin of 79.3%. Its tax rate increased to 25% this year after China passed the new Chinese Enterprise Income Tax Regulation; however, the company should qualify for the status of ''new and high technology enterprise,'' subject to the 15% preferential tax rate. I do not really know how you could ever say that this company is not a ''new and high technology enterprise,'' and when they obtain approval from the Chinese government, that should provide a nice boost to shares. Oh, and did I mention 20%+ YoY growth and the fact that their clients (large Chinese universities) are tied into 20 year contracts?

Earnings came out after the bell and the company beat on EPS, beat on revenue, and beat on guidance. I am absolutely giddy.

Full disclosure: long CEDU.

Intraday momentum

I have noticed a very strange arbitrage opportunity in this market: strong price movements (greater than plus or minus 5%) which occur in the first half of the trading day tend to be extended in the second half of the day. This is different from what I perceive as "normal" market activity; i.e., the market opens at a certain price and then trades around that price for the rest of the day.

In an attempt to try to exploit this arbitrage, I bought into FMCN yesterday. Of course, I also like the advertising business. I would almost never buy a stock whose business I felt was going nowhere. (As an aside - one notable exception to this is VNDA, which is currently trading below cash. The business is going nowhere, but I just cannot justify selling my shares at this level.) Since this is a short-term trade, I am hoping to make 3-5%. After I bought it, the market tanked, and the stock fell with it. Perhaps my observed intraday momentum is affected by the direction of the market. I will keep you updated with my experimentation with this new trading strategy.

Full disclosure: Long FMCN, VNDA.

Trash Cramer? Don't mind if I do

I almost feel bad criticizing Jim Cramer, the host of Mad Money. However, I'm not going to talk about how his picks are awful, even though they have underperformed the market. I'm also not going to talk about his lackluster industry analysis, such as, "Ignore financials, they're terrible."

What I am going to talk about is his recent 5 part series, 'Playing Defense.' This set of 25 investment tips to "keep you from losing your money" range from the obvious to the downright stupid. I thought that I would pick out three of the downright stupid ones and talk about why they're wrong.

Tip #1: Diversify. Cramer says: always be diversified, and never keep more than 20% of your money in a stock or sector.
I say: It depends. Value investor Joel Greenblatt's The Little Book that Beats the Market describes, essentially, that if you have a portfolio of great companies, there's no need to diversify. I prefer to think in terms of valuation. If a stock or industry has an incredibly cheap valuation, there is nothing wrong in being overweight in it.

Tip #16: Don't sell call or put options. Cramer says: selling calls gives up your upside, and selling puts has unlimited downside.
I say: This is exactly what I thought when a friend of mine first told me about selling calls. Why would I want to sell my upside to someone? Then, after actually doing some research on options, I realized that options, like stocks, come in expensive and cheap varieties. Since then, I've focused on selling the expensive ones and buying the cheap ones. Call options are amazing. Sure, if a stock goes above the strike, you're not making that profit. Nevertheless, you're not losing anything, either, and you still get to keep the options premium. Moreover, selling calls decreases your cost basis and acts as a hedge against downside risk. Cramer's advice is just foolish.

Tip #17: Never use margin. Cramer says: if the price of a stock drops, you will get a margin call and it will be painful.
I say: This is basic financial accounting. If your return on equity (the return of your portfolio) is greater than the rate that you pay to borrow money from your broker (the margin rate), margin yourself up and watch your portfolio grow. That being said, don't ever margin yourself to a point where you could receive a margin call that you won't be able to meet.

A note on analysts

I'm sorry that I have not been posting for a while. My investments were losing money at a very rapid pace and although I continued to invest, I felt like my advice had lost a great of credibility and, perhaps, verity. However, with my recent success, completely attributed to Ambac (thanks, Michael Callen!), I feel invigorated enough to start posting again.

No stock tips in this post - just a short rant. I find Fortune's recent article on Oppenheimer & Co.'s Meredith Whitney to be borderline hilarious. For some reason, Fortune loves Whitney, naming her their #2 stock analyst of 2007 (whatever that means). My question is, why does Whitney get so much praise? We are currently in a bear market. She has been making bearish calls. It should be no surprise that at least one analyst that gets it right, because there are predictions across the board. Forbes notes that her stock picking record has been average.

There is a great Russian joke on this subject:
Reagan has 100 bodyguards, and one of them is a terrorist, but he doesn't know which one.
Mitterrand has 100 lovers, and one of them has HIV, but he doesn't know which one.
Gorbachev has 100 economic advisers, and one of them is right, but he doesn't know which one.

IDCC straddle

IDCC's earnings are coming out May 7. I think that a straddle is a good idea for two reasons:
1) There is a good chance that the stock will actually move more than 15% in either direction after they report earnings.
2) The VIX dropped below 20 - I think that we will see a rebound. This is just a hunch - it seems low when compared to the last 6 months.
The details:
May '08, Strike 22.5 call @ 0.35
May '08, Strike 17.5 put @ 0.40

New, exciting activity

I sold IDCC because LNG dropped 35% on no news and I felt like I would be missing a great opportunity if I did not buy more shares. The nitty gritty:
Sold IDCC @ 19.50. I have had a good return on IDCC: 0.5 from price appreciation and 0.75 from selling calls for a return of 6.6% since Feb 14.
BUY LNG @ 7.1466, sell May '08 call (strike - 7.5) @ 1.45. If the stock goes above 7.5, I will be getting a return of 31%.

LNG CC

I have been following this company after an analyst recently downgraded it, and I decided to sell a covered call after the IV went above 150. I bought in at 10.80 and sold a call for 2.20 (May '08, strike - 10). If the stock stays above 10 (which is below the 52wk low), I will make a 16.2% return on a cash on cash basis - slightly less than 200% annualized. Awesome.

A note on earnings

ETFC and SLM both announced that they will be reporting earnings next week - I think there is significant upside potential, so I have bought back my options on both of them for 0.05 per contract. I definitely do not want my upside capped during such a market-moving event.

ARQL CC

1 minute before the market closed, another one of my orders got filled - I sold an April '08 ARQL covered call (strike - 5) for 0.15. It was funny because I had just raised my price from 0.1 to 0.15 and it got filled very soon after. I'm not sure what to do with ARQL. Including this covered call, I've had a return of 16% since 2/21. But I have no long term interest.

More option sales

ETFC had another nice jump today so I sold an April '08 covered call (strike - 5) for 0.10. On a cash on cash basis, I'm making 2.5% with IDCC (37% annualized) and 2.2% with ETFC (47% annualized). The cash on cash numbers may look small but on an annualized basis, they're HUGE. If you like money, sell calls.

Happy April Fools!

I tried to sell calls against all of my holdings today, but unfortunately the bids are too low for me to justify selling April calls on a lot of them. I'm unwilling to sell May calls right now, because many of my holdings have earnings coming up, and I'd rather be naked through earnings to maximize my portfolio volatility.

I did sell an April '08 covered call on IDCC (strike - 22.5) for 0.50.

IDCC CC

There are a lot of C's in that title, but that is no mistake - yesterday, I sold a March '08 covered call (with a strike of 20) on IDCC for 0.25, taking advantage of its strong rebound. It is fully possible for the stock to appreciate another 12% in the next two weeks, but in that case, I would be more than happy to sell my shares and buy it again on a dip.

ABK @ 12.4

I got into ABK again and held on for a little too long (i.e. more than 5 minutes). I'm unwilling to sell for a loss, since I'm confident that this deal is going to happen. And a 40% short float is pretty attractive. I've basically gotten fucked for 4 days in a row as Financials have crashed. ABK is going to be a great catalyst for the sector's comeback.

I also feel like I missed out on covered call writing this month. I kept trying to time the market and catch the big rebound, but it never came. I should have just sold the calls and collected the time premium. A good lesson!

ABK, revisited

I am absolutely fascinated by market volatility, and ABK is a prime example. Any stock that can have daily swings of 20% is ridiculous in my book. So today, I did the reverse of what I did on Friday - instead of shorting it, I bought it when it dipped after hitting 12.50 (11.485). Less than an hour later, I sold at 12.50 for an 8.8% gain.

This time, I knew what was happening, and got paid. Information is power.

New investing hypothesis!

The implied volatility of options is well correlated with the CBOE Volatility index. When the VIX is high, sell options - when the VIX is low, buy options. I'm going to do more research on this idea.

My dumb trade of the day

I am bored as my financial accounting professor is talking about present value, and I saw ABK go up by 20% in minutes. I look around to see what happened and I find this article. Good news for the insured bond market, to be sure, but a 20% rise in ABK? Gleefully, I shorted ABK @ 10.30 with a target of 10, only to be forced to cover @ 10.90 (for a loss of 5.8%) as the stock rose to new highs. Little did I know that the reason for ABK's jump was actually this.

I think the most important lesson is that this demonstrates the value of information - don't trade until you feel like you know the stock and what is going on with it. An important lesson for me is to take advantage of the market to sell what I've bought at market lows - not to speculate on future negative price movements. A much better move would have been to buy ABK when it briefly dipped below 10, but hindsight is 20/20.

ARQL CC

Another sweet covered call trade:
Buy ARQL @ 4.74
Sell AQK CA @ 0.75 (March '08 exp - strike of 5)
Cost basis of 3.99 - max return of 25.3%. Generally speaking, buying into a stock below the 52-week-low and at an 18.8% discount is pretty nice.

ETFC @ 5.05

I am back into ETFC, for the same reasons as before. I will sell a call when the stock continues to rise (such as on the CEO announcement), or I will make a quick buck if it goes above 5.30 tomorrow.

IDCC @ 19

I got my tax return, freeing up some more cash for another position. I have been bullish on IDCC for a while. It services market darlings like AAPL and RIMM but does not carry the same nosebleed valuations. IDCC comes out with earnings on Feb. 28. Guidance should be good as we are entering the 3G cell-phone era. I will probably sell a call on it when shares rebound.

Options

Ironically, the day after I make a post about not updating this blog daily, I have another update in mind. Predicting short-term trends is difficult, if not impossible. :)

I was recently talking with a friend of mine who had just made his first options transaction. I argued that he had made two serious mistakes. First, he bought short-term options. Second, he bought options whose implied volatility was higher than the historical volatility of the underlying. (If you did not understand the previous sentence, an excellent introduction can be found at IVolatility.com.) Allow me to explain why I felt that these were mistakes:

1) Short-term options (generally) have higher implied volatility than long-term options.
2) Options and their underlying do not necessarily trade in tandem. Options are just like stocks - their prices change based on demand. You should only buy the contract when the implied volatility is lower than historical volatility, or else you are paying too much for your options.

A note about updates

I will probably never start updating this blog daily. I am not Jim Cramer - I would rather take a page out of Warren Buffett's book and make you money while keeping transaction costs low.

$80 base for oil?

I was unhappy to learn that OPEC ministers said that they would cut production if oil fell below $80. Judging by proven crude oil reserves, OPEC controls 69 to 84% of total reserves, making it difficult to argue with them.

I guess that asking for $60 per barrel is probably wishful thinking. Nevertheless, there are still many factors that have the potential of significantly reducing the price of oil - a strengthening dollar, a US recession, or some invention of an alternative energy. In addition, I remain bullish on Southwest in light of upcoming mergers in the airline industry.

Show me some LUV

The outlook seems to be getting better for the economy and the airline industry. It may be terrible now, but remember, the stock market is a forward-looking indicator. LUV had great earnings but the stock has fluctuated around 12. So, I doubled my LUV options today and reduced by cost basis by 25%.

Trading update

Covered calls are amazing. If they expire out of the money, you just sell them again. Although my January ETFC calls expired OTM, I sold February CC (strike - 5) at $0.4 each today. I have no problem with making a guaranteed 10%+ return from the calls in a mere 16 days, and if they expire OTM, I'll sell my golden goose a third time.

Update (12:47 pm): In the same regard, I just sold an April CC (strike - 25) at $1.15 on SLM.

I was right: WU

I hope that none of your are choosing to sell your positions at lower prices than what they should be worth. These are crazy times! As you might remember, I recommended WU on 05/18/2007. It hit 24 on 12/21/2007.

The verdict is still out on my last buys. I've taken hits on all of my positions, but my long-term outlook remains excellent.