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%.