June expiration came and went -- hoo boy do I wish I hadn't been conservative on the last batch of Elan calls!
The good news is that I made just over $6,000 in call premium -- although some of that is through future expiration months. I made around 3.4% for just this month, easily surpassing my 2% goal. Most of my Elan and all my Wyeth was called away.
The bad news is that Taser and Sangamo lost quite a bit of actual share price. So now I have to make the decision whether to hold, and sell calls quite a bit out-of-the-money (for much less than my 2%/month goal), wait to see if they gain some back, or simply sell for the loss and put the money to work in a hopefully better place. I haven't decided for sure yet, but I am fairly sure I'll be holding on to Sangamo and selling the Taser.
With the money raised by the exercise of Elan and Wyeth, I have today bought 500 Cardiome @ 9.19 (-5 @ $1 at $10 July strike) and 400 Nvidia @ 19.28 (-4 @ .70 at $20 July strike).
Regards,
Trond
Thursday, June 26, 2008
Wednesday, June 25, 2008
Websites
The time has come for me to explain why I placed some additional websites off to the side.
In no particular order...
The BMW Method:
No, this is NOT the car. Back when I read the Motley Fool and subscribed to its message boards (oh -- back in the good ol' days before they became a newsletter driven rag... *grin*) the BMW Method board was my favorite hangout.
(The New Paradigms board was good too -- that was where I first heard mention of Dendreon)
Here's another link that explains the methodology (http://bmwmethod.com/about.php) but in a nutshell, BMW observed how the CAGR (Compound Annual Growth Rate) of large, stable, well-managed companies tends to stay at a historical average over long periods of time. The price in the short term fluctuates wildly -- both to the high side and to the low. Using his graphs, it is visually VERY clear to see when a stock is at a compelling buy price, and likewise, when it may be time to sell.
Note - this is NOT charting or technical analysis -- but simply taking the idea of buying low and selling high into a framework of how a company is performing right now.
As an example, the Tylenol scare from Johnson & Johnson would have seen the stock price far below the long term CAGR curve... and after a little due diligence to see that the company's response was a logical and good move, and that the rest of the company's product sales were unaffected, a buy would have been in order. One wonders how some of the present day banking stocks appear on the graphs right now... but I personally would hold off for a couple more months on these financial-type stocks as I think we have some more pain and possibly consolidation to endure first.
Investor Village:
Yes, this is a stock message board. It comes with the obligatory warning that you encounter all sort of rude and idiotic posters, along with obviously paid shills to either pump or pan the stocks. But for all that, you can meet some truly amazing thinkers, scientists, and satirists.
Rule of thumb: when you read the posts on a stock board, do not post yourself for a while; absorb the interactions of the prolific posters and their styles. You don't have to copy them -- but at least understand who are the well known people. If you disagree with someone popular just to have fun, you will probably start a flame war and have people put you on ignore. Yes, it's high school all over again, and things frequently degenerate into stupid arguments.
On the plus side, you will learn some amazing things. Two of the boards I frequent are the Elan and Dendreon boards. I, who if the truth be known, abhored the life sciences in school, have learned much about Multiple Sclerosis, Alzheimer's Disease, and prostate cancer -- and can speak fairly fluently about those ills and the method of action (MOA) of various drugs to treat them. I know how FDA clinical trials are designed, and what kinds of statistical bars are set for them. And, I truly *enjoy* talking about those kinds of things now.
Of course you still have to do your own due diligence, but you can also learn things about the companies you follow that are not really a part of any news item you might read until the stock price has already reacted. For example, the Elan board dissected everything known about the Phase II Alzheimer's trial results (that were released in mid June) and in the majority, hit nearly every major aspect of the summary results squarely on the head -- which in turn meant that those who understood it would most likely be good news were already buying more shares before the release.
(It's no secret that the board consensus is that the full results to be released at the end of July are going to be stellar and bring the stock to even new heights)
As further examples, from the Elan board I have learned that the company has nearly $3 BILLION in losses over the last few years that they can use to write down future profits, meaning enormous tax savings.
And that Ireland treats royalty income ... (*ahem*) ... royally when it comes to taxes -- and they constructed their Tysabri contract with Biogen so that non-US sales are all treated as royalties.
And that they have the ability to simply say, "Now" to Eli Lilly and from that point on, they get to share 50% in costs and revenues for a different, gamma secretase-based Alzheimer's treatment that looks to be very promising also.
On the IV message boards, there are a number of nice features. You can sort by the "most recommended" posts so that you see the truly GOOD posts first and do not have to wade through fluff. You can ignore idiotic posters so that you don't even see their posts. It's easy to add boards and navigate around the site.
I am going to skip a number of people who deserve a mention, but if you look at the Elan board, look for posts from Liposghost, Jivetalkin, Doodah, Pinvestment, and OKZ. On the Dendreon board, Ocyan is the king of the science, and MingtheMerciless is worth reading for his sense of humor.
Marketocracy:
This one is easy and short -- you can create your own virtual mutual fund. To be ranked, you have to follow some simple rules that professional money managers have to follow too -- and here's the kicker: the 100 best portfolio managers actually get paid by the site, which has its own mutual funds based off those portfolios. Fun!
Frugal Upstate:
I've plugged this before, but this blog is written by one of my best friends, who happens to have a wonderful site about living frugally. The point isn't to *not* spend money, but to choose what you are spending your money on, and to enable the lifestyle where you can afford the things you truly want.
The Sanity Check and Deep Capture:
I actually think Deep Capture should be required reading before investing money in individual stocks. I don't want to sound like a conspiracy theorist, but it is totally obvious to me that hedge funds are an enormous threat to small companies, and especially biotechs. The ability to "sell short" shares of a company -- regardless of whether it is "naked shorting" or legal -- caps the stock price of companies that you and I invest in. The SEC and some of the media are unwilling to look at some of the facts and do their job.
Here are a couple examples:
The company Taser has about 60 million registered shares. At a recent annual meeting -- 80 million votes were cast.
Another company, (and the name escapes me at the moment) had one investor buy up the number of registered shares. He watched in amazement as thousands of shares continued trading on the open market over the next few weeks.
... And yet, total silence on the part of the media, Deeply Captured...
The Sanity Check is a blog by the anonymous tipper (called Bobo) who alerted Overstock CEO Patrick Byrne to the naked shorting campaign against his company, and who figures prominently in the Deep Capture story.
Please -- read Deep Capture for yourself and let me know what you think!
Regards,
Trond
In no particular order...
The BMW Method:
No, this is NOT the car. Back when I read the Motley Fool and subscribed to its message boards (oh -- back in the good ol' days before they became a newsletter driven rag... *grin*) the BMW Method board was my favorite hangout.
(The New Paradigms board was good too -- that was where I first heard mention of Dendreon)
Here's another link that explains the methodology (http://bmwmethod.com/about.php) but in a nutshell, BMW observed how the CAGR (Compound Annual Growth Rate) of large, stable, well-managed companies tends to stay at a historical average over long periods of time. The price in the short term fluctuates wildly -- both to the high side and to the low. Using his graphs, it is visually VERY clear to see when a stock is at a compelling buy price, and likewise, when it may be time to sell.
Note - this is NOT charting or technical analysis -- but simply taking the idea of buying low and selling high into a framework of how a company is performing right now.
As an example, the Tylenol scare from Johnson & Johnson would have seen the stock price far below the long term CAGR curve... and after a little due diligence to see that the company's response was a logical and good move, and that the rest of the company's product sales were unaffected, a buy would have been in order. One wonders how some of the present day banking stocks appear on the graphs right now... but I personally would hold off for a couple more months on these financial-type stocks as I think we have some more pain and possibly consolidation to endure first.
Investor Village:
Yes, this is a stock message board. It comes with the obligatory warning that you encounter all sort of rude and idiotic posters, along with obviously paid shills to either pump or pan the stocks. But for all that, you can meet some truly amazing thinkers, scientists, and satirists.
Rule of thumb: when you read the posts on a stock board, do not post yourself for a while; absorb the interactions of the prolific posters and their styles. You don't have to copy them -- but at least understand who are the well known people. If you disagree with someone popular just to have fun, you will probably start a flame war and have people put you on ignore. Yes, it's high school all over again, and things frequently degenerate into stupid arguments.
On the plus side, you will learn some amazing things. Two of the boards I frequent are the Elan and Dendreon boards. I, who if the truth be known, abhored the life sciences in school, have learned much about Multiple Sclerosis, Alzheimer's Disease, and prostate cancer -- and can speak fairly fluently about those ills and the method of action (MOA) of various drugs to treat them. I know how FDA clinical trials are designed, and what kinds of statistical bars are set for them. And, I truly *enjoy* talking about those kinds of things now.
Of course you still have to do your own due diligence, but you can also learn things about the companies you follow that are not really a part of any news item you might read until the stock price has already reacted. For example, the Elan board dissected everything known about the Phase II Alzheimer's trial results (that were released in mid June) and in the majority, hit nearly every major aspect of the summary results squarely on the head -- which in turn meant that those who understood it would most likely be good news were already buying more shares before the release.
(It's no secret that the board consensus is that the full results to be released at the end of July are going to be stellar and bring the stock to even new heights)
As further examples, from the Elan board I have learned that the company has nearly $3 BILLION in losses over the last few years that they can use to write down future profits, meaning enormous tax savings.
And that Ireland treats royalty income ... (*ahem*) ... royally when it comes to taxes -- and they constructed their Tysabri contract with Biogen so that non-US sales are all treated as royalties.
And that they have the ability to simply say, "Now" to Eli Lilly and from that point on, they get to share 50% in costs and revenues for a different, gamma secretase-based Alzheimer's treatment that looks to be very promising also.
On the IV message boards, there are a number of nice features. You can sort by the "most recommended" posts so that you see the truly GOOD posts first and do not have to wade through fluff. You can ignore idiotic posters so that you don't even see their posts. It's easy to add boards and navigate around the site.
I am going to skip a number of people who deserve a mention, but if you look at the Elan board, look for posts from Liposghost, Jivetalkin, Doodah, Pinvestment, and OKZ. On the Dendreon board, Ocyan is the king of the science, and MingtheMerciless is worth reading for his sense of humor.
Marketocracy:
This one is easy and short -- you can create your own virtual mutual fund. To be ranked, you have to follow some simple rules that professional money managers have to follow too -- and here's the kicker: the 100 best portfolio managers actually get paid by the site, which has its own mutual funds based off those portfolios. Fun!
Frugal Upstate:
I've plugged this before, but this blog is written by one of my best friends, who happens to have a wonderful site about living frugally. The point isn't to *not* spend money, but to choose what you are spending your money on, and to enable the lifestyle where you can afford the things you truly want.
The Sanity Check and Deep Capture:
I actually think Deep Capture should be required reading before investing money in individual stocks. I don't want to sound like a conspiracy theorist, but it is totally obvious to me that hedge funds are an enormous threat to small companies, and especially biotechs. The ability to "sell short" shares of a company -- regardless of whether it is "naked shorting" or legal -- caps the stock price of companies that you and I invest in. The SEC and some of the media are unwilling to look at some of the facts and do their job.
Here are a couple examples:
The company Taser has about 60 million registered shares. At a recent annual meeting -- 80 million votes were cast.
Another company, (and the name escapes me at the moment) had one investor buy up the number of registered shares. He watched in amazement as thousands of shares continued trading on the open market over the next few weeks.
... And yet, total silence on the part of the media, Deeply Captured...
The Sanity Check is a blog by the anonymous tipper (called Bobo) who alerted Overstock CEO Patrick Byrne to the naked shorting campaign against his company, and who figures prominently in the Deep Capture story.
Please -- read Deep Capture for yourself and let me know what you think!
Regards,
Trond
Tuesday, June 17, 2008
Alzheimer's relief?
Well, vindication is sweet.
I've been singing Elan's praises for over 2 years now -- starting at around $13 a share in early 2006. (Too bad I didn't see it in 2005 for $3 a share!!!)
If you haven't seen the news (although early news items were unwarrantably negatively slanted) one of the more even-handed articles is shown as a link below.
http://www.reuters.com/article/marketsNews/idINL1769229220080617?rpc=44
If you don't want to wait for it -- basically Elan's Phase II Alzheimer's Disease trial results (the summary info, at least) were released today -- full details will be released at the ICAD meeting in late July. (ICAD is the International Conference on Alzheimer's Disease).
Those results show that based on a gene, you could be helped a great deal by this drug, called AAB-001. People who do NOT carry the APOE gene had improvements in cognition (on two different scales) and also improvements in daily function. The gene carriers did not meet statistical significance. That isn't the whole story, either, as some who carry the gene encountered Vasogenic Edema -- temporary swelling within the brain -- and left the trial, which hurt the trial as they still counted against the participants in the study.
Elan had seen interim data last summer and based off that peek, started a Phase III trial which kicked off December of 2007.
That Phase III trial has two cohorts with carriers and two cohorts with non-carriers (one of each in the US and one external to the US). Each cohort has 1000 patients expected to be enrolled -- and the carrier group has a lower dosing amount scheduled to see if that helps the VE.
Largely unknown at this point, all cohorts are EACH powered to be a pivotal trial by the FDA, and after 6 months of safety data, Elan could file a BLA (biologic license application) for the drug.
I have several other points about Elan (Tysabri, nanotechnology, $3B of losses to carry forward, Ireland's favorable tax treatment of royalty income, multiple other Alzheimer's treatments in the works) but for now -- I truly hope for AD patients that this moves forward, and quickly.
This post is dedicated to my maternal grandfather, Carl H. Carlson, who suffered from Alzheimer's.
Regards,
Trond
I've been singing Elan's praises for over 2 years now -- starting at around $13 a share in early 2006. (Too bad I didn't see it in 2005 for $3 a share!!!)
If you haven't seen the news (although early news items were unwarrantably negatively slanted) one of the more even-handed articles is shown as a link below.
http://www.reuters.com/article/marketsNews/idINL1769229220080617?rpc=44
If you don't want to wait for it -- basically Elan's Phase II Alzheimer's Disease trial results (the summary info, at least) were released today -- full details will be released at the ICAD meeting in late July. (ICAD is the International Conference on Alzheimer's Disease).
Those results show that based on a gene, you could be helped a great deal by this drug, called AAB-001. People who do NOT carry the APOE gene had improvements in cognition (on two different scales) and also improvements in daily function. The gene carriers did not meet statistical significance. That isn't the whole story, either, as some who carry the gene encountered Vasogenic Edema -- temporary swelling within the brain -- and left the trial, which hurt the trial as they still counted against the participants in the study.
Elan had seen interim data last summer and based off that peek, started a Phase III trial which kicked off December of 2007.
That Phase III trial has two cohorts with carriers and two cohorts with non-carriers (one of each in the US and one external to the US). Each cohort has 1000 patients expected to be enrolled -- and the carrier group has a lower dosing amount scheduled to see if that helps the VE.
Largely unknown at this point, all cohorts are EACH powered to be a pivotal trial by the FDA, and after 6 months of safety data, Elan could file a BLA (biologic license application) for the drug.
I have several other points about Elan (Tysabri, nanotechnology, $3B of losses to carry forward, Ireland's favorable tax treatment of royalty income, multiple other Alzheimer's treatments in the works) but for now -- I truly hope for AD patients that this moves forward, and quickly.
This post is dedicated to my maternal grandfather, Carl H. Carlson, who suffered from Alzheimer's.
Regards,
Trond
Tuesday, June 10, 2008
Let's talk Covered Calls
Well I realized I've been mouthing off about the Portfolio 24 and the wonders of covered calls -- and haven't really explained what they ARE to newcomers.
Options experts can tune out for a couple paragraphs here -- with the knowledge that I do admit upfront that selling puts has the same risk/reward profile, and slightly less commissions. But -- keep in mind that most people reading this probably don't have the upfront capital or time or specialized charting techniques to find good put possibilities.
Let's get the basics out of the way.
There are two kinds of option contracts -- calls and puts.
Buying a call allows you the right to buy a stock at a certain price, by a certain date. Selling a call obliges you sell that stock to the call buyer at that certain price.
Buying a put allows you the right to sell a stock at a certain price, by a certain date. Finally, selling a put obliges you to buy that stock from the put buyer at that certain price.
Note that buyers have rights while sellers have obligations. Exercising a call means that the option buyer forces the option seller to consummate the deal.
That "certain price" is called the strike price, and the "certain date" is called the exercise date -- the third Friday of the month.
Ordinarily, option contracts are for bundles of 100 shares. But the prices are quoted at a per share basis. So if you see a premium price of $1.00, the contract would actually cost $100 plus whatever commission your brokerage charges.
So -- when you buy a call, you pay a premium for the right to purchase the stock by the exercise date for the strike price. Let's look at a concrete example.
Elan (ticker ELN) closed today at $24.65. The June
2008 exercise date call for a $25.00 strike price (I abbreviate this at the Jun08 $25 - ticker ELNFE) could be bought for $2.20. So if you buy three contracts, you pay $2.20 * 100 * 3 + commission ... at Scottrade this would cost you $670.75.
So you've spent $670 bucks -- let's look at the negative first. If the stock closes below $25 on June 20 (11 trading days from now) then you lose the entire amount. Ouch! (note -- I am not a huge fan of buying calls -- you have to be right in both the timeframe AND the price direction of a stock) The good news is that as Elan goes above $25, your option starts having intrinsic value -- for example if Elan is at $26, then a $25 call would be worth $1 intrinsically, since you could buy the call and then exercise and sell the shares on the market for $26.
So after the shares hit $27.20, you have all profit (you bought the calls for $2.20, so $2.20 + $25 strike price = $27.20. Excluding commisions, of course!) Keep in mind that the longer the option has until the exercise date, the more extrinsic (time) value the option will have, too. Remember, you bought the call when Elan was below $25 -- so all $2.20 was time value. So if the price zoomed tomorrow from $24.65 to $27.20, the option would not only be worth the $2.20
-- it would still have some time value too -- maybe being worth around $3.50 or so. You can also sell the option before the exercise date -- if you buy 3 contracts for $670 and sell them for $3.50 * 100 * 3
(- commission) = $1039.25 then you've made $370 off that $670 in one day! That, my friends, is the lure of options -- they are HIGHLY leveraged.
The exact terminology you use to trade options is very important. When you start your trade, either buying OR selling your call, you buy-to-open, or sell-to-open, respectively. Then when you end your transaction, either selling the call you bought, or buying back the call you sold, you buy-to-close or sell-to-close. If you buy-to-open, and then want to end it, but choose to sell-to-open, then you have two open transactions still!!
Okay, let's go over selling calls, and why I think they are a phenomenal method of generating returns.
Let's stay with Elan.
The Jun08 $25 sells for $1.90 (just like you have to buy a stock at a higher "ask" price than you could sell - "bid" - it for, option contracts generally have a pretty wide spread). Normally, if I were selling the call, I would set a limit trade for a little above the bid price -- maybe $2.00 in this case. You run the risk of not having the trade go through, but you also get a higher price if it goes through -- and usually during a trading day it will fluctuate a fair amount! Let's say this goes through at $1.90 though -- those same 3 contracts will give me an extra $1.90
* 100 * 3 (minus commission) = ~$560. Note -- whether exercised or not, I keep this premium of $560.
Okay -- before going through the rest of the example, I'm going to throw one more term at you. I always do Covered Calls. Remember, if you sell a call, you HAVE to sell the shares to the call buyer at the exercise price, if they choose to exercise it. If you are selling "naked" calls, then imagine this scenario.
You sold 3 $25 Elan calls at $1.90, and the stock skyrockets to $40. The call buyer exercises, and you have to buy 300 shares of Elan at the current $40 per share and then turn around and sell the shares to the call buyer at $25. You LOSE ($40 - 25 + 1.90) * 300 = $5070 (plus whatever commissions you are forced to pay)!!!
A covered call, on the other hand, means that you buy (or previously own) the stock, prior to selling the calls. You are "covered" against having to buy them at market price.
So let's see what happens to me, buying 300 shares at
$24.65 and selling 3 calls at $1.90. First I buy the 300 shares for $7,402 (remember your commission
costs!) and gain $560 premium from selling the 3 calls. 560/7402 = 7.5% return for the next 11 days!
(that translates into an annualized return of 250%, but who's counting? *grin*) And that $560 stays with me no matter what.
If Elan is below $25 on June 20, then I keep not only the $560 but my 300 shares (and probably turn around and sell the July $25 or $30 calls for more premium).
Do note that if the stock tanks to $15, then it is VERY small consolation to still have 300 shares of a
$15 stock that you bought 11 days ago for $25. So there is some risk here. This strategy is meant for stocks that you wouldn't mind holding onto for a while anyways, even it does go down!
Now, if Elan is above $25 on June 20, then my shares will be exercised away from me. The call buyer will force me to sell the 300 shares at $25.00, which means I get credited $7,500 (minus commission) = $7483.00.
That means I spent $7402, made $560, and made $7483 =
$641 for 11 days worth of work. That is 641/7402 = 8.66% return -- just imagine doing that 12 months in a row and you are looking at 100+% returns.
PLEASE DON'T EXPECT 100% RETURNS. Really. That is one example, and to get such high premiums usually means there is quite a bit of risk too. I think you can get 2% a month without undue risk, but nothing is ever certain. Except, err... taxes.
Let's talk about taxes. To avoid very complex reporting requirements, follow these guidelines:
Do not sell calls more than 2 strike prices below what the share price is.
Do not sell for a loss and then buy again -- wash sale rules apply to options too.
If you sell January options less than 60 days before the exercise date, let them expire or buy them back at a gain.
In future posts I will share some ideas, in as real time as I can, for situations that I think are ripe for selling covered calls. And of course, my Portfolio 24 can be tracked as I always post the trades within a day and keep track of commissions within it.
Lastly, if you decide covered calls are for you, please do several “dry runs” first – write down what you think might be a good trade and wait to see if everything happens as you expect. Your real money accounts are NOT a good place to learn!
Regards,
Trond
Options experts can tune out for a couple paragraphs here -- with the knowledge that I do admit upfront that selling puts has the same risk/reward profile, and slightly less commissions. But -- keep in mind that most people reading this probably don't have the upfront capital or time or specialized charting techniques to find good put possibilities.
Let's get the basics out of the way.
There are two kinds of option contracts -- calls and puts.
Buying a call allows you the right to buy a stock at a certain price, by a certain date. Selling a call obliges you sell that stock to the call buyer at that certain price.
Buying a put allows you the right to sell a stock at a certain price, by a certain date. Finally, selling a put obliges you to buy that stock from the put buyer at that certain price.
Note that buyers have rights while sellers have obligations. Exercising a call means that the option buyer forces the option seller to consummate the deal.
That "certain price" is called the strike price, and the "certain date" is called the exercise date -- the third Friday of the month.
Ordinarily, option contracts are for bundles of 100 shares. But the prices are quoted at a per share basis. So if you see a premium price of $1.00, the contract would actually cost $100 plus whatever commission your brokerage charges.
So -- when you buy a call, you pay a premium for the right to purchase the stock by the exercise date for the strike price. Let's look at a concrete example.
Elan (ticker ELN) closed today at $24.65. The June
2008 exercise date call for a $25.00 strike price (I abbreviate this at the Jun08 $25 - ticker ELNFE) could be bought for $2.20. So if you buy three contracts, you pay $2.20 * 100 * 3 + commission ... at Scottrade this would cost you $670.75.
So you've spent $670 bucks -- let's look at the negative first. If the stock closes below $25 on June 20 (11 trading days from now) then you lose the entire amount. Ouch! (note -- I am not a huge fan of buying calls -- you have to be right in both the timeframe AND the price direction of a stock) The good news is that as Elan goes above $25, your option starts having intrinsic value -- for example if Elan is at $26, then a $25 call would be worth $1 intrinsically, since you could buy the call and then exercise and sell the shares on the market for $26.
So after the shares hit $27.20, you have all profit (you bought the calls for $2.20, so $2.20 + $25 strike price = $27.20. Excluding commisions, of course!) Keep in mind that the longer the option has until the exercise date, the more extrinsic (time) value the option will have, too. Remember, you bought the call when Elan was below $25 -- so all $2.20 was time value. So if the price zoomed tomorrow from $24.65 to $27.20, the option would not only be worth the $2.20
-- it would still have some time value too -- maybe being worth around $3.50 or so. You can also sell the option before the exercise date -- if you buy 3 contracts for $670 and sell them for $3.50 * 100 * 3
(- commission) = $1039.25 then you've made $370 off that $670 in one day! That, my friends, is the lure of options -- they are HIGHLY leveraged.
The exact terminology you use to trade options is very important. When you start your trade, either buying OR selling your call, you buy-to-open, or sell-to-open, respectively. Then when you end your transaction, either selling the call you bought, or buying back the call you sold, you buy-to-close or sell-to-close. If you buy-to-open, and then want to end it, but choose to sell-to-open, then you have two open transactions still!!
Okay, let's go over selling calls, and why I think they are a phenomenal method of generating returns.
Let's stay with Elan.
The Jun08 $25 sells for $1.90 (just like you have to buy a stock at a higher "ask" price than you could sell - "bid" - it for, option contracts generally have a pretty wide spread). Normally, if I were selling the call, I would set a limit trade for a little above the bid price -- maybe $2.00 in this case. You run the risk of not having the trade go through, but you also get a higher price if it goes through -- and usually during a trading day it will fluctuate a fair amount! Let's say this goes through at $1.90 though -- those same 3 contracts will give me an extra $1.90
* 100 * 3 (minus commission) = ~$560. Note -- whether exercised or not, I keep this premium of $560.
Okay -- before going through the rest of the example, I'm going to throw one more term at you. I always do Covered Calls. Remember, if you sell a call, you HAVE to sell the shares to the call buyer at the exercise price, if they choose to exercise it. If you are selling "naked" calls, then imagine this scenario.
You sold 3 $25 Elan calls at $1.90, and the stock skyrockets to $40. The call buyer exercises, and you have to buy 300 shares of Elan at the current $40 per share and then turn around and sell the shares to the call buyer at $25. You LOSE ($40 - 25 + 1.90) * 300 = $5070 (plus whatever commissions you are forced to pay)!!!
A covered call, on the other hand, means that you buy (or previously own) the stock, prior to selling the calls. You are "covered" against having to buy them at market price.
So let's see what happens to me, buying 300 shares at
$24.65 and selling 3 calls at $1.90. First I buy the 300 shares for $7,402 (remember your commission
costs!) and gain $560 premium from selling the 3 calls. 560/7402 = 7.5% return for the next 11 days!
(that translates into an annualized return of 250%, but who's counting? *grin*) And that $560 stays with me no matter what.
If Elan is below $25 on June 20, then I keep not only the $560 but my 300 shares (and probably turn around and sell the July $25 or $30 calls for more premium).
Do note that if the stock tanks to $15, then it is VERY small consolation to still have 300 shares of a
$15 stock that you bought 11 days ago for $25. So there is some risk here. This strategy is meant for stocks that you wouldn't mind holding onto for a while anyways, even it does go down!
Now, if Elan is above $25 on June 20, then my shares will be exercised away from me. The call buyer will force me to sell the 300 shares at $25.00, which means I get credited $7,500 (minus commission) = $7483.00.
That means I spent $7402, made $560, and made $7483 =
$641 for 11 days worth of work. That is 641/7402 = 8.66% return -- just imagine doing that 12 months in a row and you are looking at 100+% returns.
PLEASE DON'T EXPECT 100% RETURNS. Really. That is one example, and to get such high premiums usually means there is quite a bit of risk too. I think you can get 2% a month without undue risk, but nothing is ever certain. Except, err... taxes.
Let's talk about taxes. To avoid very complex reporting requirements, follow these guidelines:
Do not sell calls more than 2 strike prices below what the share price is.
Do not sell for a loss and then buy again -- wash sale rules apply to options too.
If you sell January options less than 60 days before the exercise date, let them expire or buy them back at a gain.
In future posts I will share some ideas, in as real time as I can, for situations that I think are ripe for selling covered calls. And of course, my Portfolio 24 can be tracked as I always post the trades within a day and keep track of commissions within it.
Lastly, if you decide covered calls are for you, please do several “dry runs” first – write down what you think might be a good trade and wait to see if everything happens as you expect. Your real money accounts are NOT a good place to learn!
Regards,
Trond
Saturday, June 7, 2008
Retiring on 70% of your income
One person commented on my most recent 401(k) post (thanks, Ming!).
Although the main point of that entry was a way to jazz up the returns within your defined contribution plan (allocate most of your contributions towards stock mutual funds, and transfer more in during down stock market periods), I mentioned that most people underestimate the amount of money they will need in retirement: those assuming they could retire on 70% to 80% of their pre-retirement income could be in for a nasty shock. Ming took exception to this.
(I love comments, by the way, positive or negative – please keep them coming!)
His arguments make sense, by the way, for him. One's income and lifesytyle are so personal that you can't pigeonhole everything into nice, neat packages and say, “Voila, here's your plan!” Everyone's idea of what the ideal retirement situation will be different, and there is no “right” or “wrong.” Depending on expectations and what makes you comfortable, you might need thousands a month more, or less, than someone else in your golden years. The two things I would consider sad, though. are to have the amount in your retirement fund limit what you want to do, or to run out before you die.
Comment:
****
I'd have to say to a certain extent I disagree.
When you retire, you'll typically need less than what you need now. Especially if you've purchased a home. I honestly don't expect to continue giving my mortgage company any more money after I've paid off my mortgage. Honestly, my mortgage is about 30% of my current living expense, so I don't believe my standard of living would be lower when I retire at only 70% of my current income. And I can see the justification for people believing that they can live off 70% of their current income too.
Personally, I don't know if I'd stay in California eiher. I could easily move to another state where there is little or no property tax (ie. TX) or where there is no sales tax (ie. OR). I could even move up to Alaska (AK) where the US govt would give me a stipend to live there and make my home up there. Though I don't know if I could handle so many months with no sun light.
Now in terms of medical expenses, we'll just put a couple of democrats like Hiliary or Obama in office and all our medical expenses will be covered... or we could simply move to Canada.
****
So – the major points are 1) owning one's home will decrease your expenses 2) moving to lower income/tax advantaged locations 3) universal healthcare.
Let's deal with #3 first – and although I recognize the humor, let's treat this seriously. I don't have exact numbers in front of me but Medicare cost about 1/3 of a TRILLION dollars in 2006. I would submit that expanding Medicare to everyone, and having it cover “everything” will cost $4+ trillion dollars. With the US Gross Domestic Product at around $13T, I just don't see this happening. Even expanding it slightly will increase taxes for most of us.
(For a good read on both Social Security and Medicare funding, read http://www.arlingtoninstitute.org/wbp/economic-collapse/438#)
Regarding #1, of course you won't be paying off the mortgage forever. Here a couple thoughts, however.
Once the mortgage payment is gone, so is that sweet interest deduction. Do me a favor and recalculate what your taxes would have been this last year without that! And I keep harping on it – but taxes in general will be going up in the future!
Okay, so you're still looking at much more disposable income once the mortgage is gone. Recall my other point; once you are not spending 8+ hours a day at a job, you will want to DO something with that time. Recreational activities will become a larger percentage of your expenses – maybe not 30% but a good chunk of it. Will you enjoy dining out more? Travel? That hobby you always wanted to try your hand at?
Finally, as you get older, and assuming you stay in your house, will you need to spend some money to remodel your house to make it more comfortable and safer?
On #2, there are two points worth mentioning.
The first relates back to your mortgage – now you're selling your house here. When you buy your retirement home, is it a small condo in North Dakota? Or somewhere really nice, with lots of amenities and by the coast in a place where you still pay a “sunshine tax”? If you opt for luxury, you may end up, if not with a new mortgage, then perhaps with not quite the nest egg you thought you had in home equity.
The second is that there really is no such thing as a free lunch. If you move to a state with no income tax, then property taxes or rent is going to kill you. If there is no sales tax, then odds are that you'll see a hefty income tax.
Yes, if you are spending a good percentage now on your mortgage, then you may not need to replace all your income when you retire. But let's shift our focus to instead talk about that retirement and the "bucket" concept.
Ideally you will have multiple “buckets” to dip money out of at retirement. Having different income streams allows you some flexibility in managing income, taxes, and even inheritance issues.
Although the main point of that entry was a way to jazz up the returns within your defined contribution plan (allocate most of your contributions towards stock mutual funds, and transfer more in during down stock market periods), I mentioned that most people underestimate the amount of money they will need in retirement: those assuming they could retire on 70% to 80% of their pre-retirement income could be in for a nasty shock. Ming took exception to this.
(I love comments, by the way, positive or negative – please keep them coming!)
His arguments make sense, by the way, for him. One's income and lifesytyle are so personal that you can't pigeonhole everything into nice, neat packages and say, “Voila, here's your plan!” Everyone's idea of what the ideal retirement situation will be different, and there is no “right” or “wrong.” Depending on expectations and what makes you comfortable, you might need thousands a month more, or less, than someone else in your golden years. The two things I would consider sad, though. are to have the amount in your retirement fund limit what you want to do, or to run out before you die.
Comment:
****
I'd have to say to a certain extent I disagree.
When you retire, you'll typically need less than what you need now. Especially if you've purchased a home. I honestly don't expect to continue giving my mortgage company any more money after I've paid off my mortgage. Honestly, my mortgage is about 30% of my current living expense, so I don't believe my standard of living would be lower when I retire at only 70% of my current income. And I can see the justification for people believing that they can live off 70% of their current income too.
Personally, I don't know if I'd stay in California eiher. I could easily move to another state where there is little or no property tax (ie. TX) or where there is no sales tax (ie. OR). I could even move up to Alaska (AK) where the US govt would give me a stipend to live there and make my home up there. Though I don't know if I could handle so many months with no sun light.
Now in terms of medical expenses, we'll just put a couple of democrats like Hiliary or Obama in office and all our medical expenses will be covered... or we could simply move to Canada.
****
So – the major points are 1) owning one's home will decrease your expenses 2) moving to lower income/tax advantaged locations 3) universal healthcare.
Let's deal with #3 first – and although I recognize the humor, let's treat this seriously. I don't have exact numbers in front of me but Medicare cost about 1/3 of a TRILLION dollars in 2006. I would submit that expanding Medicare to everyone, and having it cover “everything” will cost $4+ trillion dollars. With the US Gross Domestic Product at around $13T, I just don't see this happening. Even expanding it slightly will increase taxes for most of us.
(For a good read on both Social Security and Medicare funding, read http://www.arlingtoninstitute.org/wbp/economic-collapse/438#)
Regarding #1, of course you won't be paying off the mortgage forever. Here a couple thoughts, however.
Once the mortgage payment is gone, so is that sweet interest deduction. Do me a favor and recalculate what your taxes would have been this last year without that! And I keep harping on it – but taxes in general will be going up in the future!
Okay, so you're still looking at much more disposable income once the mortgage is gone. Recall my other point; once you are not spending 8+ hours a day at a job, you will want to DO something with that time. Recreational activities will become a larger percentage of your expenses – maybe not 30% but a good chunk of it. Will you enjoy dining out more? Travel? That hobby you always wanted to try your hand at?
Finally, as you get older, and assuming you stay in your house, will you need to spend some money to remodel your house to make it more comfortable and safer?
On #2, there are two points worth mentioning.
The first relates back to your mortgage – now you're selling your house here. When you buy your retirement home, is it a small condo in North Dakota? Or somewhere really nice, with lots of amenities and by the coast in a place where you still pay a “sunshine tax”? If you opt for luxury, you may end up, if not with a new mortgage, then perhaps with not quite the nest egg you thought you had in home equity.
The second is that there really is no such thing as a free lunch. If you move to a state with no income tax, then property taxes or rent is going to kill you. If there is no sales tax, then odds are that you'll see a hefty income tax.
Yes, if you are spending a good percentage now on your mortgage, then you may not need to replace all your income when you retire. But let's shift our focus to instead talk about that retirement and the "bucket" concept.
Ideally you will have multiple “buckets” to dip money out of at retirement. Having different income streams allows you some flexibility in managing income, taxes, and even inheritance issues.
- First, looking at social security, benefits are taxable at 50, 85, or 100% of your payments, depending on your filing status and other taxable income. Given the size of the deficit and the disregard we've paid the trust fund, I think you have to plan on having payments highly means-tested and overall benefits reduced within the next twenty years or so.
- Most people will have some sort of funds within either traditional IRAs or 401(k)s. This too will be counted as taxable income – and again I think you have to at least plan for higher tax rates in the future. However, this portion of your funds is at least to a large degree under your control (most people do not fully fund their 401(k) or IRA at the legal limits). This portion may be one of the largest percentages of your assets at retirement.
- Roth IRA / 401(k)s – the golden goose. PLEASE fund this at the maximum allowed. I truly expect Congress to stop allowing these at some point when they realize they've given away the farm – I only hope they grandfather in existing balances.
- Pensions or other defined benefit plans seem to be going by the wayside. Too many seem to be slashing expected benefits, or coverages for me to be confident in them for the long term.
- Finally, if you have a large amount stashed away on non-retirements funds, congratulations! Being able to cash in a $20,000 CD every year to aid in your expenses, or sell some stocks from your brokerage account to help a child's down payment on their first home is wonderful. Again, I unfortunately just don't see most people having this option, as saving and investing INSTEAD of consuming doesn't seem to come naturally to most of us.
Some of these are beyond our control, such as Social Security. Some, such as brokerage accounts or CDs, are up to you to take the first step. The old saw "He didn't plan to fail -- he just failed to plan" comes to mind. Take the time now to review your budget and decide where you can free up money to invest in your future -- because it will only be as good as YOU make it.
Regards,
Trond
Thursday, June 5, 2008
Rebuttal on Sangamo (SGMO)
On May 29 I posted about Sangamo Biosciences. A comment on that post alluded to an analyst (Jonathan Aschoff) who issued a Sell rating and several negative comments about the company.
I pointed out that JA works for a botique analyst firm that seems to specialize in hatchet jobs. He was actually fined and fired (oh ,sorry, left the firm) from a prior job for impersonating a doctor when trying to get information on a clinical trial.
Further, that analyst issued the reccommendation without having even talked to anyone at Sangamo -- and a careful reading of the article shows it is nearly all opinion and scarce on fact.
Today I see an update from GARP research that refutes JA. It reads in part:
"Last week, an analyst initiated coverage on SGMO with a Sell rating in a report that we feel offers inaccurate conclusions.
Key points:
• After reviewing the scientific literature and discussing the questions raised a practicing diabetologist and others, we do not concur with these pessimistic ideas. We detail our case with (somewhat technical) point-by-point rebuttals, offer our own perspective, and maintain our Buy rating on SGMO shares. "
...
and ends with:
"Risks
As a development-stage biotechnology company, Sangamo Biosciences is a risky investment. This is partly mitigated by management’s careful monitoring of the company’s spending, by the utility of the technology for many non-therapeutic purposes, and by the attractiveness to potential partners of the ZFP and ZFN approaches to genetic engineering. Assuming certain milestone payments are earned, GARP estimates Sangamo’s burn rate for 2008-2010 at about $28 million per year. With about $73 million of net cash in the bank at the close of 1Q08, Sangamo has the resources to operate for nearly three years without additional financing, according to our estimate. However, ambitious clinical trial plans may deplete this hoard more rapidly. As with all early-stage clinical therapies, unforeseen problems could delay any of Sangamo’s programs. If patients experience severe adverse events that are related to ZFP therapy itself, this approach to gene therapy could be crippled. Sangamo’s capitalization is too low to enable it to take any of its clinical programs through expensive Phase III trials by itself. Meanwhile, doubts about ZFPs could hamstring the search for suitable pharma partners. Through 2011, revenues will spring from partners’ licensing, milestone, and royalty payments, rather than from sales of therapeutic products. "
If anyone would like the full article, please email me at Trond24@gmail.com
The company is presenting tomorrow at the Canaccord Adams Diabetes and Obesity Conference and throughout the weekend at the American Diabetes Association 68th Annual Scientific Sessions, both in San Francisco. Today the share price is up about 6% -- I expect to see it very volatile but up to $16 - $20 by year's end.
Regards,
Trond
I pointed out that JA works for a botique analyst firm that seems to specialize in hatchet jobs. He was actually fined and fired (oh ,sorry, left the firm) from a prior job for impersonating a doctor when trying to get information on a clinical trial.
Further, that analyst issued the reccommendation without having even talked to anyone at Sangamo -- and a careful reading of the article shows it is nearly all opinion and scarce on fact.
Today I see an update from GARP research that refutes JA. It reads in part:
"Last week, an analyst initiated coverage on SGMO with a Sell rating in a report that we feel offers inaccurate conclusions.
Key points:
• After reviewing the scientific literature and discussing the questions raised a practicing diabetologist and others, we do not concur with these pessimistic ideas. We detail our case with (somewhat technical) point-by-point rebuttals, offer our own perspective, and maintain our Buy rating on SGMO shares. "
...
and ends with:
"Risks
As a development-stage biotechnology company, Sangamo Biosciences is a risky investment. This is partly mitigated by management’s careful monitoring of the company’s spending, by the utility of the technology for many non-therapeutic purposes, and by the attractiveness to potential partners of the ZFP and ZFN approaches to genetic engineering. Assuming certain milestone payments are earned, GARP estimates Sangamo’s burn rate for 2008-2010 at about $28 million per year. With about $73 million of net cash in the bank at the close of 1Q08, Sangamo has the resources to operate for nearly three years without additional financing, according to our estimate. However, ambitious clinical trial plans may deplete this hoard more rapidly. As with all early-stage clinical therapies, unforeseen problems could delay any of Sangamo’s programs. If patients experience severe adverse events that are related to ZFP therapy itself, this approach to gene therapy could be crippled. Sangamo’s capitalization is too low to enable it to take any of its clinical programs through expensive Phase III trials by itself. Meanwhile, doubts about ZFPs could hamstring the search for suitable pharma partners. Through 2011, revenues will spring from partners’ licensing, milestone, and royalty payments, rather than from sales of therapeutic products. "
If anyone would like the full article, please email me at Trond24@gmail.com
The company is presenting tomorrow at the Canaccord Adams Diabetes and Obesity Conference and throughout the weekend at the American Diabetes Association 68th Annual Scientific Sessions, both in San Francisco. Today the share price is up about 6% -- I expect to see it very volatile but up to $16 - $20 by year's end.
Regards,
Trond
Tuesday, June 3, 2008
401(k) investing for dummies
People talk about the stock market being risky. I see risk as running out of money halfway through your retirement!
If you withdraw $50,000 per year starting at 65, at only 3% inflation you would need to withdraw $75,600 at age 80 to maintain your standard of living. At 90 you are looking at taking out $101,600! Are you going to have enough to comfortably live in retirement? Or are you going to spend your golden years working part time under the Golden Arches to supplement your income?
An argument I've heard is that you need much less income to live on once you retire -- 70% to 80% of what you earned will be enough.
I say, ummm, no.
You will likely not have a company health plan to subsidize your costs. Taxes will almost certainly be higher in the future (remember that lovely economic stimulus check you received a month ago? Guess how long we'll be paying off those billions of dollars?).
And guess what? You're retired – no job to suck up 8 hours a day. What will you DO in those hours and days and weeks? Travel? Hello expenses! Golf lessons? I hope you are friends with the local pro. Nearly anything you do will involve higher leisure expenses
To combat all this, how would you like to add a couple percentage points of annual return to your 401(k) investments? Read on!
Let's get a few facts straight about 401(k)s, mutual funds, and market tendencies before getting to the meat of the post.
401(k):
If you withdraw $50,000 per year starting at 65, at only 3% inflation you would need to withdraw $75,600 at age 80 to maintain your standard of living. At 90 you are looking at taking out $101,600! Are you going to have enough to comfortably live in retirement? Or are you going to spend your golden years working part time under the Golden Arches to supplement your income?
An argument I've heard is that you need much less income to live on once you retire -- 70% to 80% of what you earned will be enough.
I say, ummm, no.
You will likely not have a company health plan to subsidize your costs. Taxes will almost certainly be higher in the future (remember that lovely economic stimulus check you received a month ago? Guess how long we'll be paying off those billions of dollars?).
And guess what? You're retired – no job to suck up 8 hours a day. What will you DO in those hours and days and weeks? Travel? Hello expenses! Golf lessons? I hope you are friends with the local pro. Nearly anything you do will involve higher leisure expenses
To combat all this, how would you like to add a couple percentage points of annual return to your 401(k) investments? Read on!
Let's get a few facts straight about 401(k)s, mutual funds, and market tendencies before getting to the meat of the post.
401(k):
- In your 401(k), you have a select group of mutual funds that you can contribute to.
- You may also have the option to buy your company's stock. (This post will deal with only the mutual fund option)
- You can change how you want future contributions allocated across the various funds (you may have conditions on this; once a month, once per year, etc.)
- You can also transfer existing money between funds. There may be conditions on this option too – recently many funds have started charging fees if you transfer money out within a month or two of having moved the money into the fund.
Mutual Funds:
- Mutual funds are basically group investments. A group of investors pool their money and it is professionally managed. The positives for the group is that they do not have to micro-manage their investments, costs are shared amongst everyone, and the professional money manager has greater information (usually!) and resources available to find potential investments. The negatives are that most funds tend to NOT do quite as well as whatever base or index it is measured against, and that fees can sometimes be quite high.
- Funds have rules about not putting all their eggs in one basket – they have to be diversified.
- Most mutual funds available through 401(k)s are grouped by whether they are stock funds, bond funds, or cash (money market) funds.
- Money market funds (also known as cash or GIC funds) keep all money liquid and available, and only earn whatever the prevailing interest rate is.
- Bond funds are divided into the duration of the bonds bought and by the relative safety of the bonds. Typical durations are short, medium, and long term, while safety ranges from government insured to corporate paper to municipal (or general obligation), to high yield (or junk) bonds.
- Stock funds are divided into large, middle, or small cap depending on the size of the companies they invest in. They can be domestic, regional, or worldwide. They are also typically segregated by the style they exhibit – value (under priced to what they should be worth), growth (strong earners), or mixed.
- Some funds are specialty – they deal with an index, real estate, technology, health care, or dividend stocks exclusively.
Tendencies:
- Stocks tends to be cyclic, like waves. However, the general tendency is for each succeeding crest to be higher than the prior wave.
- Over time, the stock market tends to return the highest returns. Bonds are next, and then money markets.
- These higher returns are over the long term – usually periods of 10 years or more.
- Inflation averages around 3% -- and this government-stated rate is less than the real rate experienced by people living normal lives. Housing and college costs, for example, were taken out of the calculation back in the 1980s! I would submit the real rate people face is closer to 4%, when the recent increases in energy and health care are factored in.
- If bonds return around 6% on average, after inflation you only see a 2 or 3% real return!
With increasing life expectancies and better health care, a worker retiring at age 65 in good health needs to plan to have retirement income for at least 30 years!
Since over time, stocks give you the highest returns, and you need to have your money working for longer than ever, I don't see why most people should not be nearly 100% in stocks.
The standard argument for diversifying over different classes is that as one type under performs, other types over perform, and thus the risk is reduced. I think I covered my point of view on risk at the beginning of this article!
The other argument I've heard as to the benefits of diversification is the psychological one. People are not good investors – they see their holdings going down in value and they sell. In essence, they have bought high and sold low. Then when the market starts booming, Johnny-come-lately plows his money back into the latest technology fund to start the cycle all over again. My response to this argument is 1) the person reading this is hopefully not the average person, and 2) a little willpower and a plan helps to inure oneself against temporary losses.
So, point number one to add sizzle to your annual returns is to be invested almost totally in stock mutual funds. Remember – this is advice only for 401(k)s, where you have only mutual funds available to you, and you are by definition “in it” for the long term. My target is 90% for everyone that is more than 10 year away from retirement, and 80% for those within that 10 year span.
Which funds? We'll address that in a future post – but in general a breakdown of 30% foreign stocks, 30% “total stock market” indexes, and 20 – 30% mid-cap or value funds is sufficient. If you have a choice between similar funds, make sure you invest in the one with lower annual fees!
The remainder (10 – 20%) of your contributions should be into medium term, medium risk bond funds. You want something that will beat inflation but not (again, over time) run too much risk of negative returns.
Now for the second ingredient for red-hot returns: remember how the stock market goes up and down over time? We are going to modify the old bromide “buy low and sell high” to simply, “buy stock funds low.”
As a general rule, look at the charts of the S&P and the NASDAQ 4 times a year, in Feb, May, Aug, and Nov. If either index is down 10% from where it was one year prior, then put in an order in your 401(k) to transfer 10% to 20% from the bond fund into the stock funds. (If you have less than 10 years until retirement, move 10%, otherwise move 20%.)
And that is it! You are taking advantage of the cycles and also taking emotions out of the process. When the stock market is doing well, you're hoarding some money in reserve – and when it tanks, you're buying low. Call me in 30 years and thank me.
Regards,
Trond
Portfolio 24 - fully invested!
I am shortcutting this a little bit, in the interest of my personal time. This first month I've had little time to research new opportunities, so I am taking the quick way out.
Here's the problem. In order to make my goal of 2% for this month, I really need to be nearly fully invested. I also do not want to just invest in anything, just to be invested.
Now, I will say that I have nothing against my holdings being concentrated -- but I dislike being more than 10% in any one stock for the Port 24. That is because I want this to be something that anyone could follow and be able to sleep at night holding real money in their accounts. In the future I will make all attempts to be diversified in at least 10 stocks, but for the remainder of this month I am pouring the remainder of my uninvested cash into Elan.
On the plus side, this is my currently most-favored stock, both short and long term (Dendreon is a close second). And, although I could probably make a better return by selling $24 calls, I am hedging a bit by selling June calls at $23.
When I "bought" Elan today, it was at $24.62. The June $23s were selling at $2.30 each and the $24s were at $1.65. So, if by June 20 Elan is above $23, I make $23.00 + 2.30 -24.62 = $.68 per share -- minus all transactions costs I make about 2.5% for the next 17 days.
If I had gone for the $24s (which I probably would have done in real life, IF I were selling calls against Elan in real life, which I don't think I would!!) then I'd make $24 + 1.65 - 24.65 = $1.03 per share -- or 4% after transaction costs.
So, we're at:
Cash = $2547
Positions = 2000 SUPG (-20), 2000 NBIX (-10), 1400 ELN (-12), 2000 DNDN (-10), 1200 TASR (-12), 2000 ARNA (-20), 300 WYE (-3), 1000 SGMO (-10)
Total Port = $102,081, after taking into account that stocks above their exercise price have no intrinsic value. I'm at my 2%!!
Regards,
Trond
Here's the problem. In order to make my goal of 2% for this month, I really need to be nearly fully invested. I also do not want to just invest in anything, just to be invested.
Now, I will say that I have nothing against my holdings being concentrated -- but I dislike being more than 10% in any one stock for the Port 24. That is because I want this to be something that anyone could follow and be able to sleep at night holding real money in their accounts. In the future I will make all attempts to be diversified in at least 10 stocks, but for the remainder of this month I am pouring the remainder of my uninvested cash into Elan.
On the plus side, this is my currently most-favored stock, both short and long term (Dendreon is a close second). And, although I could probably make a better return by selling $24 calls, I am hedging a bit by selling June calls at $23.
When I "bought" Elan today, it was at $24.62. The June $23s were selling at $2.30 each and the $24s were at $1.65. So, if by June 20 Elan is above $23, I make $23.00 + 2.30 -24.62 = $.68 per share -- minus all transactions costs I make about 2.5% for the next 17 days.
If I had gone for the $24s (which I probably would have done in real life, IF I were selling calls against Elan in real life, which I don't think I would!!) then I'd make $24 + 1.65 - 24.65 = $1.03 per share -- or 4% after transaction costs.
So, we're at:
Cash = $2547
Positions = 2000 SUPG (-20), 2000 NBIX (-10), 1400 ELN (-12), 2000 DNDN (-10), 1200 TASR (-12), 2000 ARNA (-20), 300 WYE (-3), 1000 SGMO (-10)
Total Port = $102,081, after taking into account that stocks above their exercise price have no intrinsic value. I'm at my 2%!!
Regards,
Trond
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