TIB: Today I Bought (and Sold) - An Investors Journal #20 - Insurance, Apple, JP Morgan, Gold

The weekend of expiring options is always a challenge. Disappointment at the losers and planning for exercise on the winners. This was no exception with cash needed to meet some exercise choices

Bought

American International Group (AIG). AIG has been a solid recovery story since it was bailed out after the GFC. Share price has risen over 600% since the bottom in March 2009. I have been pursuing this recovery using options. This weekend was expiry of the January 2017 Call 65's which were in the money [means: share price was higher than the $65 strike price]. I felt the January 2018 and 2019 options were expensive compared to European Insurance companies. While the options were "in the money", they had not covered the premium. Choices then are to sell and take the loss, roll up or exercise. I decided to exercise as I feel there is still profit potential. [Maybe there is a problem of falling in love with an investing idea - I will dig into this a little more. The test is: Would you invest in this stock at this level for the first time?]. This is one of the challenges of investing using options - no dividends and knowing when to step off the train. The chart shows the AIG story in one of my portfolios (I have it in all my portfolios).

I identified the breakout from the 2011 lows and bought January 2014 Call 40's in September 2012. I rolled these up progressively to higher strikes and further out in time up to January 2017 Call 65. I also added to positions to be holding 3 contracts (equivalent to 300 shares). On the chart, each blue ray shows the starting point for new contracts and the strike price (going up from 40 to 42, 50, 55, 60, 65). The last action was to take delivery of the stock at $65 - to recover the premium price needs to pass $71.12. Now if I had bought the stock instead of the options I would have made an 87% return to date. So why did I use options? The next table goes through the actual transactions.

On each line you can see the expiry and the strike price, date bought and date sold and the cost. I have added in a net cost column to show where I paid extra or added new contracts. The important column to focus on is the Cumulative Cost column as this shows how much I invested ($2,059) for 3 contracts (i.e., for 300 shares). To buy 300 shares in September 2012, I would have needed to invest $10,200. By using options I have leveraged up my exposure by 5 times - i.e., invested $2,059 to get exposure to $10,200. The last column shows my net % returns at each rollup. Until the last action, I had racked up returns of 67% (these are realised returns) based on investing only $2,059. I am not yet out of the game as I have now bought 300 shares at $65. Breakeven is $65 plus the last option premium of $6.12. My plan is to clear breakeven and then reassess whether I will continue to hold. For each dividend I receive on the way, I will reduce the breakeven.

Exercise price $65. Breakeven $71.12 Jan 23 close: $65.49

HCA Holdings (HCA): I exercised the options. Healthcare stocks have taken something of a knock since the Trump win, though HCA has got back to the levels it had reached before the election. HCA is $15 below its mid-2015 highs. I see no reason for this not to get back there.

Exercise price $75. Breakeven $82.77 Jan 23 close: $79.84

Sony Corproration (SNE) I exercised the options. I had bought options on a breakout when the Yen (JPY) first weakened against the USD. I continue to hold Japanese Equities. Sony will benefit as much as any Japanese exporter from a weak JPY. And it has some interesting possibilities in virtual reality.

Exercise price $30. Breakeven $33.80 Jan 23 close: $30.43

Zurich Insurance (ZURN.VX) December 2021 Call 280: Zurich share price pulled back away from the 280 level it has been testing. This gave me a chance to add to the December 2021 Call 280's I hold. My plan will be sell the December 2020 Call 280's as soon as strike price passes 280. I might then add to the next strike price up (December 2021 Call 320 - which I already hold)

Newcrest Mining* (NCM.AX): Newcrest is the largest Australian gold producer. With the US Dollar weakness over the last days of last week and the weekend, the gold price jumped. This trade is based on a breakout and retest from a medium term downtrend. The trade is also something of a hedge against untoward action on the rest of the portfolio. Gold acts as a safe haven when other equity markets go down.

Sold

I did need to raise some cash to fund the options exercises.

Apple (AAPL) 151% profit since transferring into this portfolio in June 2011. I have reduced my holding to a standard position size. Apple has been a core holding in my portfolios since 2007 and has delivered phenomenal returns (over 1000%). There is still good value in Apple - however there is better value elsewhere. Would I be shorting Apple at this point? NO.

JP Morgan (JPM) 128% profit since January 2012 - thanks fund manager for getting me in on this. I have trimmed this back to standard position size and taken some profits.

Expiring Options

I will present a discussion for each of my 3 portfolios separately. This is the smallest one where I had taken action to rollup to January 2018 and 2019 earlier on the other positions. This is a salutary lesson - successful options trading is about not running out of time. The skill is to sell out or rollup when there is still time value in the options. Time value begins to decay about 3 months from expiry and falls away dramatically from a month out.

Gold Fields International (GFI)

PowerShares DB US Dollar Bullish ETF (UUP)

Vanguard Europe ETF (VGK)

The table shows that each of these options was rolled up at least once. That tells me that the initial idea was right. Of the 3 contracts, UUP was profitable over the whole series. US Dollar strength was the right theme - just needed more time to play it out fully. GFI was neutral - this was a change of trend which I could have acted on earlier. As US Dollar was getting strong, Gold was getting weaker - it almost always does. And VGK is the frustrating story of Europe - the markets just do not believe that the required actions to get Europe going are happening (at all or) fast enough. More time needed - that is why I am favouring long dated European options on ESTX50 going out to 2024. They will have got things working by then (says he, holding thumbs)!!

See http://mymark.mx/TIB9 for a discussion on Europe and ESTX50

Currency Trades

Silver The short trade from late last week held the stop loss lines and is now reversing - still hanging in there. [Note: the Newcrest Mining position contradicts this trade - it is meant to as it is a hedging trade]

AUDUSD: Sold US Dollars to pay my bills - these are all in Australian Dollars. I do need cash every now and then.

Cautions: This is not financial advice. You need to consider your own financial position and take your own advice before you follow any of my ideas. I do participate in an investing group - some of the ideas flow from there.

Images: I own the rights to use and edit the Buy Sell image. All other images are created using my various trading and charting platforms. They are all my own work

Tickers: I monitor my portfolios using Yahoo Finance. the ticker symbols used are Yahoo Finance tickers

Australian stock ideas come from http://australianstockreport.com.au - a paid service.

Edited: Add in Breakeven prices for options exercised.

January 23, 2017