Sunday, September 20, 2009

The CAT Jumped! - Sept Trade Results

Last Friday was options expiration day and our option premium collection strategy which generates monthly income worked flawlessly. We wanted CAT to stay above $42 by Friday Sept 18 and boy did it ever! CAT jumped 12 points since we traded our option closed at $53.42 Friday well above our strike price.

The big jump reminds me of the day I bought some piping hot Kentucky Fried Chicken for lunch, you know the 3 piece lunch box with mashed potato's and gravy, coleslaw and a biscuit with butter and honey. I took my lunch over to my Sisters house to eat and visit with my nephews. The second I sat down to eat my Sister's cat caught a whiff of the Colonel's 11 herbs and spices original secret recipe steaming hot chicken and went MAD! It screamed with one of those famous cat screechy Rrreeeeeeooww calls and thrashed wildly at me scratching me with its claws! I made a reflexive move to half stand up in my chair and quickly grabbed my box of chicken as it started to fall toward the floor with the cat tearing at my arms. Without hurting the crazed cat I quickly flexed my arms straight and the cat popped off of me when my elbows snapped.

Seeing the cat turn towards me I sensed it would strike again! At that very moment (and not a second before) I decided the sacrifice of one piece of chicken would be worth keeping the cat a bay, so I quickly reached in the box and grabbed the first piece that my hands touched flipped it backhand out of the box aiming for it to go over the cats head so that it would see the chicken and retreat away from me. My throw was dead on and the cat did a 180 turn away from me and headed for the chicken. (Thank heavens I grabbed only a drumstick.) The cat now chomping on my drumstick was appeased and I sat back down, let out a huge sigh of relief and gave my Sister a "what the hell is going on here" look.

Apparently my Sister was trying to teach her Son's a lesson. She told them that they had the responsibility to feed the cat, because it was their cat and she was no longer going to feed it. Oh yes, then she yelled at the boys "I told you last week you had to feed the cat, you feed her right now!"

Okay with that fun little cat jumping story off my chest (and arms) back to this months trade results...

If you recall my September 1st post 'Shooting the CAT' when CAT dipped below -80 on the Williams %R indicator which signaled the stock was oversold; I sold a Put
on the $42 strike price option at 95 cents per share ($95/option contract) for a 2.26% return. With the objective to have CAT close above $42 eighteen days later on expiration day, so I don't have to purchase (assigned to me) any stock.

Before - 9/1 Trade Entry Date to 9/12:

After - 9/18 Expiration Day:

As you can see this CAT really jumped
during the 18 days that we held the option it broke through the $49 resistance level to close at $53.42 on expiration day. This was 12 point higher then our strike price and 10 higher then when we entered our trade. A huge margin of safety, so the lesson here is about timing and how using the Williams R% indicator to buy when the underlying asset is deeply oversold helps us stay above the strike price and reduce the risk of being assigned the stock. Now are account in safely back in all cash and we can rent out our money for more income next month!

Related links of interest see: Timeline History of KFC

Monday, September 14, 2009

Barron's Bearish on Realty Income

Well I guess everyone is entitled to their opinion. This explains why the sudden sell off early this morning...

Barron's released a bearish article about Realty Income. Interesting how the stock was bought back strongly at the end of the day by the institutional buyers. Apparently they (the smart money) were not fooled by Barron's Bearish take on 'O'. I wouldn't be surprised if they had some short action in on O this morning. By the looks of the short squeeze (run up back on the price during the day) they created when shorts were covered during the day.

Ah, but that is mere speculation. Let's look at the fundamentals and facts - where in my opinion I respectfully disagree with Barron's article:
  1. Realty Income has a 40-year track record of level or rising dividends. Two words: Impressive and experience.
  2. Realty Income builds in a margin of safety as taught by investing greats Benjamin Graham and Warren Buffett in two ways: First, into its sale-leaseback transactions with retailers by purchasing its tenants' most profitable stores. This ensures that they will still be able to cover rent payments with cash, even if store performance deteriorates. Second, they carry a large buffer of cash to make dividend payments if a short-term cash flow problem ever did arise.
  3. Unlike their competitors (who derive property values from store profitability) Realty Income takes care to pay no more for real estate than those individual properties are worth, so if a property does go vacant they can re-lease or sell it without taking a big hit.
  4. Realty Income has an average of 4% of its total rental revenue up for renewal annually over the next five years, which should provide some protection if rents fall over the near term. The other 96% has built-in rent bump increases tied to inflation.
  5. Realty Income is overvalued? Maybe, or maybe not that's a tough call. Historically it has commanded a higher P/E ratio value over other comparable REIT's due to the quality of the company.
  6. Insiders get paid from the sale of company stock and stock options all the time. The CEO selling 20% of his stake is more likely due to the overall market coming back 48% from the March lows. He's probably worried the market will correct (and take 'O' down with it and so he's taking some off the table.
Near Term Trading Outlook
We might see increased volatility and selling that pushes the price back down to the $24 suport range in the next few days. In my mind that would be a good opportunity to sell Oct $22.50 Puts which would be out of the money and well below support.

Monday, September 7, 2009

How are we doing?

Before we take a look at our year-to-date performance let’s look at the track record of some of the greatest investors and speculators of our time. Here are their annualized returns and length of time that it was achieved:

Warren Buffett 21% - 42-years
George Soros 30% - 30 years
Benjamin Graham 20% – 20 years
Peter Lynch 29% - 12 years

That’s right the all time greats are in the 20%-30% range! Frankly a few years ago when I was looking into this I was surprised. I thought the returns would have been higher probably because of all the people selling gimmicks claiming to get 50-100% returns. The reality is that over 80% of mutual fund managers cannot beat the S&P 500, which is the benchmark that all money managers and funds are measured against. The S&P 500 has a 25 year annualized return record of 9.6%. Therefore a 20-30% annual return average over a minimum 10 year period of time is phenomenal! The long track record is the key component that establishes legitimacy - the longer the period, the stronger the credibility of the record - it also weeds out the one-hit wonders.

Okay here’s our results - drum roll please…

Year to date we are up 20.2% (31% annual) assuming we can keep up the same pace for the rest of the year. We might be even higher if I had not gotten a late start by missing January and February trades.

What does this say about the Option Income system and its early results? Well we certainly have not yet stood the test of time, however the early results are promising and on track. Each successful year will bring added credibility to the system. To me it says that this system is right in the sweet spot. That 20-30% range that has been and can be achieved. Any higher has not been proven to be sustainable and is subject to too much risk, and any less would not be maximizing our capital’s potential. Oh and did I mention doubling our money every 3 to 4 years!

Tuesday, September 1, 2009

Shooting the CAT

I would never shoot a cat. When I was a kid I did shoot our dog with my BB gun. Don't worry, it was one of those weak air-pistol types. Heck, I could shoot it into my hand and it barely stung.

The funniest thing I ever saw a cat do was take a swim in the neighbor's pool. Hmmm... I better explain (cat lovers this is your fair warning not to read the next two paragraphs). You see a funny thing happened once when the neighbors were on vacation and we were watching over their yard. We came up with this great idea. We wondered what would happen if we brought my dog (a beautiful, lightning fast Australian Shepherd) into the neighbors' back yard, closed the gate and then put the cat in the pool for a little swim. Cats do love to swim don't they?

We really didn't know what to expect, but we sensed it would be a good show. Our expectations were exceeded beyond all measure. The dog immediately charged toward the cat (which was now in the pool) and abruptly put the skids on and stopped at the pool's edge. The cat seeing (and hearing) the dog did a wide, slightly banked 180 turn in a full cat-paddle
swim to the opposite side of the pool to make its escape from both the dog and pool.

However, the dog seeing the cat advance to the far side of the pool, ran around to the other side at full tilt to meet the cat. You know what's next don't you? Right! The cat did a 180 slow turn in the pool and headed back to the other side, and the dog? Yep. It ran around the pool to meet the cat on the other side.

This cat-and-mouse dog game, was a sight to behold for us kids and put us all on our knees, our sides aching with laughter. We finally got the dog back out through the gate, which allowed the cat to climb out of the pool. No harm in the end, just some well-exercised pets and a unforgettable childhood memory made.

Today I did however, pull a trigger on CAT
(Caterpillar) and purchased (sold) a minor position on the $42 Put option (CATUC). The steep $1.47 pullback to $43.84 in CAT today sent the Williams %R indicator above 80 (oversold) signaling a green light to place a trade. The premium for the $42 option was 95 cents for a 2.26% return (0.95/42=2.26%) which was above our 2% profit target. At the time of the trade I ran the probability calculator and it came in a little above 70% success rate, so all indicators flashed the green light!

The big price swing today raised CAT's implied volatility, so at the close of the day with the higher volatility % my probability is now a little lower at 65.2%. That's okay it's normal for the volatility % to go up when the underlying stock price swings more than usual.

I'll wait and see if the market will drop some more before committing more capital. Both the S&P500 and DOW Williams %R are only at 68 and 62 which is just slightly oversold. I would prefer above 80 on the overall market as well, if we can get it.

Go CAT! Swim, baby, swim!