Disclaimer: I am not an investment advisor. When I describe my own trading activities, it is not intended as advice or solicitation of any kind.

16 December 2010

Predestined for Failure

Old Business
As I have noted recently, I am running about two to three days behind posting my trading activity.  There are a number of excuses for this, of course, and none of them all that valid.  I have also lagged behind in reading the blogs of others, and this morning I read an excellent post from one of my favorite options bloggers, Mark Wolfinger.  Unfortunately for my Iron Condor trade, I read it 11 days late. 

In this post he discusses the correct strike-pricing for protective debit spread adjustments.  He states several times that one should never buy farther OTM options than the iron condor itself, and that's exactly what I did.  Over the next few months, I need to reflect on this and tweak my adjustment strategy.  I'm hoping using this advice will help flatten out my returns, because I'm experiencing somewhat more volatility and stress than I would like, given the low income potential of this trade.

The AAII Sentiment Survey for 12/15/2010 still shows some very bullish investors out there, although slightly fewer than last week: 50% are bullish, down from 53% on 12/8/2010.  As expected, this results in a continued no-position for CS|MACO, which doesn't participate in trends that are fueled by investor mania.

New Business
I bought some Research in Motion (RIMM) puts this morning at the last minute.  I generally like to buy these a week or two before the earnings release, but I wasn't paying close attention and missed out.  RIMM has always been one of my favorite shorts during earnings season, and I personally think that they have no future without a major retooling of their business.  Nobody talks about "Crackberry" anymore, now it's Android this and Android that, with the occasional fan-boy crowing about iPhone coming to Verizon (still).  I was expecting RIMM to admit a further reduction in its market share, disappoint on earnings numbers, and guide lower for next quarter.  But that didn't happen, and when I left the office in disgust, RIMM was up 5%.  So tomorrow I'll unload the put for a 50% loss and move on.

Another put position I entered today was Kinder Morgan Energy Partners (KMP).  KMP owns and manages energy transportation and storage facilities in North America.  It has a positive correlation to natural gas prices, but not a dramatically high one because its income is fee-based.  Thus KMP's income fluctuates more with demand for natural gas than with natural gas itself.  KMP has a big dividend yield: 6.3%  So why short it?  Oh let me count the ways:

1. Jim Cramer loves it, and he usually loves at the top and hates at the bottom.
2. They have a $22B market cap, revenue of $8B, $192M in cash, and $13B in debt.  Debt is more than 50% of the market cap, and nearly 68x higher than cash reserves.  That means they're using debt to finance their dividends.
3. Quarterly earnings have declined 10.8% since this time last year, to $1.25/share.  Dividends are $4.44 per share, so they're also paying more in dividends than they're earning in profits.
4. They need to quadruple their profits in order to cover those dividends, but the highest praise that Cramer can come up with is that high dividend stocks are good in a rising interest rate environment.  Yes, true.  But that doesn't solve KMP's internal fiscal problems.

This stock needs to fall.  I bought some March 2011 puts on it, and I'm working orders to buy some more on a rally.  I don't know when it will fall or how far, but my puts are there to profit when it does.

Last but not least, I bought some calls on GLD (Gold ETF) today, expiring in March.  If the current short-term sell-off continues, I'll buy some more.  I'm looking for a GLD price above 150 by expiry.  That would be a massive return on the call investment.

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