Put Options – Jeff Fischer
· Options another way to profit on companies you know very well – you just get cash up front
· Rate of success in writing options is phenomenal compared to stocks
· Investing on your own forces one to curve emotions
· To invest on your own you need confidence, but also enough humility to admit you may be wrong
· Capitalism is becoming the dominant financial system in the world
· In investing don’t speak in absolutes; put into context of each individual
· Business-Focused investor, only absolute
§ Know business you are buying and price you are paying
· Options are like insurance: people use them to insure their right to buy or sell a set stock at a set date
· Seller of option contract paid premium by buyer
· If stock gains 5% the correct option could gain >= 20%
· Sell to Open
§ Stock at $30
§ Sell Option contract if the stock falls below $25 before option expires I’ll buy it from you
§ He pays you for this insurance
§ If it doesn’t fall below $25 you keep the money contract expires
§ If it does fall below you buy the stock
§ 92% of cases at CGI; 80% of cases in last seven years options just expire – keep income
§ On average 15% annual returns with put options
§ Also own equities
§ People don’t use because relatively new and can be difficult
§ Sellers of options have odds in their favor
§ Rules:
1. Must understand underlying business
2. Must be ready, and happy, to buy and hold the underlying stock
3. No more than 30% of portfolios value should be used on margin – keep cash to help pay for stock purchase
4. When writing options on different companies have them expire in different months
5. Avoid writing around earnings announcements
6. Write at below, often well below, stocks current price
· Writing puts month by month pays more than just writing a few long-term contracts each year
· Guide on member website, with many more specifics
· Comprehensive Options guide will come within the month
· Intially potential return limited to premium; we frequently own the companies we are writing puts on
· This doesn’t happen when it declines enough that you buy it
· When it works against you it does so quickly
· Has owned some that go down 900% in a week or two then came back
· If you change mind closing position can be costly
· All gain are considered ST
· Never should be 100% invested if writing put options
· Really want to own and only a few dollars above ideal price just buy it don’t sell puts
· Advantages:
§ Cash Income (can be quite steady and can change your life)
§ Strategy works perfectly in flat markets
§ Pretty stress free in up markets
§ Can work well in down markets (usually get higher premiums)
§ Can write puts again and again and again, keep making money
§ Requires no cash upfront
§ For a $20,000 stock purchase only need $5,000 in buying power
· Do not let leverage get the best of you don’t become greedy
· Couple this strategy with a portfolio of stocks and get steady income month to month and stocks still appreciate over time.
Q&A
Q: How do you measure success?
A: On closed positions. We don’t track on options that become shares that we then sell.
Q: If you are put the shares do you record a loss on the option trade and later record gain on stock?
A: Always keep premium for the shares, becomes factored into new cost basis, option trade wiped off the map.
Q: Is there a requirement for cash in an account when writing options?
A: It’s just required that you have a margin account. A Portfolio is a living breathing thing you’ll have time to see problems unfolding and have time to sell other things. There a re a lot of levers you can push and pull in a portfolio.
Q: Can companies use puts as a strategy to buy shares?
A: Yes, Dell lost a lot of money doing this.
Q: Do you have to report premium as income if you end up buying stock?
A: Don’t have to report as ST just lowers cost basis on stock.
A Value Based Approach to Covered Calls – Matthew Richey
· Have written call options on 36 different companies over the past four years
· With covered calls willingness to forego max profits to get highest probability profits
· Covered Calls allow one to created his own dividends
· Advantages over traditional dividends
1. North of 10% yield possible
2. Receive cash right away – not just every quarter
· Protection against losses on stock
· Better odds of a profitable outcome
· 5 Key Principles
1. Business first
§ Must understand risk profile and intrinsic value range
§ You cap upside potential while maintain full downside risk
§ Not suited to high-risk, high-reward stocks
2. Volatile Stock, Non-Volatile Business
§ Stock rice volatility for attractive call premiums
§ Non-volatile business provides margin of safety to protect downside risk
§ Option market pricing based on historical volatility this can be exploited
3. Sell Within Stock’s IV Range
§ Covered Calls: pre-arrange to sell your stock at intrinsic value – all while earning income if stock is not called
§ If called, your Effective Sell Price = Strike Price + Call Premium
§ Choose a covered call that offers a strike price and premium that together allow one to sell within the IV range
4. Premium Yield > 5% (in 4-9 months)
§ Premium Yield = Call Premium/Stock Price
§ WFMI Example: $3.20 premium/$49.70 stock price = 6.5% notional (12.8% annual)
§ High notional premium offers better protection against loss if you stock declines
5. Total Return Potential > 15%
§ Total Return Potential = (Strike Price + Premium)/ Stock Price
§ Total Return Potential is what you make if the stock gets called to you – i.e., mas potential gain
§ WFMI example: Total Return Potential = ($55 + $3.2)/$49.70 = 17.1%, if called
· Whenever you earn 80% of premium early in contract life close wait for stock to return then write new contract
· Idea: Southwestern Energy (NYSE: SWN) (Huge potential reserves, Wall St. ignores this) (IV estimate could be from $55-$90 depending on how things ‘break’)
Ben Graham and the Growth Investor – Hewitt Heiserman
· Three obstacles confronting growth investors
1. Poor Earnings Quality
2. Competitive Advantages beginning to wan
3. Investors overpay
· Most companies follow GAAP, but has limitations
· With GAAP you can find different earnings, using different assumptions
· GAAP a lot more fluid than people realize
· ally realize
· Four limitations
1. Investment I fixed capital is ignored
2. Omits investment in working capital
3. Intangibles like R&D are expenses, but should be depreciated
4. Stockholder’s Equity is free – even though there is an opportunity cost
· Two Alternate Income Statements to fix this
· FCF – Expenses changes in fixed capital and working capital
· EVA – Intangibles depreciated over life and Stockholder’s Equity is an expense
· When do you use FCF when do you use EVA income statement?
· Answer came from Benjamin Graham
· Two types of investors
1. Defensive – chief emphasis on avoiding loss
2. Enterprising – willingness to devote time and care to selection of securities that are both sound and more attractive than the average
· GAAP is to defensive for enterprising investor and too enterprising for the defensive investor
· Use Earnings Power chart in five ways:
1. Find New Ideas – long in upper right, short lower left
2. Monitor current Portfolio
3. Competitors (if weakening is company next?)
4. Customers
5. Test Management Candor, realism
· Use disciplined approach and buy staircase companies
· Idea: AEOS
· Multiple Margins of Safety
The Entreprenurial Investor- Atticus Lowe
· Founded with Kinko’s founder instilled entrepreneurial spirit
· Concentrated portfolio in 10-15 stocks
· Not bound by style boxes
· Embrace volatility as a chance to buy or sell stocks when the market creates a good opportunity
· Every principle has significant amount of net worth
· “Your eyes believe what they see. Your ears believe others.”
· Intrinsic Value is ultimately a mosaic of many pieces and the picture must always be evaluated as a whole
· Look for recurring revenues
· Ability of a manager to create value is incredible
· Visit all companies they invest in
· Idea: QLTI
· Prioritize margin of safety – What’s the worst that could happen?
· Great Ideas are Rare – Bet big when the odds are in your favor
