Monthly Archives: April 2014

Intuitive Surgical (ISRG)

Intuitive Surgical manufactures robots that allow surgeons to perform more precise surgeries. It has a wide moat.

 

Last year, I wanted to buy the stock at $350, but the stock never went below the $351 and instead surged to about $540. The company announced earnings on 22 Apr after the market closed, that was very disappointing. EPS was $2.67 instead of consensus of $3.34. As a result, many analysts slashed their estimates. Consensus earnings estimates for the year were lowered from $16.70/share to $14.01/share. Applying a P/E of 15 and you get a price of $210. P/E of 20 gives $300. I think estimates have gone too far down, and whatever bad news has been factored in. After earnings, the stock price plunged to below $380 and I entered a buy limit order at $355 which is about where the support level is. This order was today filled. The size of the position is small, a little over 1% of the portfolio, and I will look to add to the position if there is a further price decline, which I totally expect in the wake of the lower earnings, especially if the price drops below the support.

Also, the position has the added benefit of allowing me to have exposure to the healthcare sector, which my portfolio currently lacks.

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SPY Index Puts

With the S&P500 at ~1880, which is near its high, I decided to add to my index puts. I bought 9 SPY May16’14 puts with 184 strike at $1.10. This helps me average down the 8 puts that I had bought previously at $1.40. I wonder if “Sell in May and Go Away” will be effective this year.

Build-a-Bear Workshop Put-Write

Build-a-Bear Workshop was in a terrible state especially since the 2009 financial crisis. However, a new CEO was appointed in June 2013 and launched a new strategy to raise prices, reduce expenses, and close stores, and so increase FCF and EPS. In 2013, the company turned profitable. I believe that the turnaround will be successful.

With Phil’s help, I’ve derived a FVE for Build-a-Bear Workshop of ~$20. Revenues for 2013 was $379 million. Assuming a 10% increase of revenues over 3 years, and a net margin of 5%, and a P/E multiple of 15, the FV is $19.54. Revenues was above $400 million in 2006, 2007, 2008 and 2010, highest of which was $474 million in 2007 so I believe a 10% increase in revenues is a conservative number.

I sold 2 BBW Jun20’14 12.5 Puts @ $1 premium. This means I sold the puts at a IV of ~35% and an effective buy price of $11.5. Given that I get a potential return of 8.7% if the puts expire worthless in such a short time frame of about 2 months, I think thats a very good deal. Otherwise, I’m happy to buy the stock at $11.50. If the puts expire worthless, I’ll look to write more puts. Also, since I am already long a small position in the stock, I’m happy to structure a different position that allows me to participate in the upside in another way, instead of longing more stock,

JJ FVE – $20

Fair Value Uncertainty – High

Economic Moat – None

Consider Buy Price – $12

Stock – $11.90

Strike – $12.50

IV – ~30.44%

Premium received – $1

Effective Buy Price – $11.50

Return of cash-secured put that expires worthless – 8.7%

Note to self, once again I accidentally bought 2 puts instead of sold them, resulting in a loss of $80. I really can’t afford to be so careless and lose money this way.

JAKKS Pacific, Inc.

On 14th Apr, a sell limit order for JAKK was filled at $8.50. That certainly got my attention and as you can see in the chart below, JAKK’s price movement was start of a breakout. I wonder if the stock will be able to fill the gap.

Since my stock was sold at a 70% profit, I was wondering what would be the best way to continue participating in the upside of the stock. I decided to sell 6 JAKK Jun20’14 10 PUT for $1.90 premium. If the stock doesn’t close above $10, I would be buying back my JAKK stock at an effective buy price of $8.10, which is lower than the price I sold my stock for. If the stock closes above $10, I would make another 23.4%. If the stock closes above $10.489, then I would have been better of holding my original long stock position. 

I’m not sure if JAKK can maintain its momentum. Since I think the stock is still undervalued, I am comfortable with this way of participating in the upside. Also, the put options had an implied volatility of ~62% which I feel is high enough to make short puts a better position than long stock.

Assuming the company can improve its margins back to 2010 levels, the stock is easily a double. Thus, I actually hope that I get put the stock.

Side note: I stupidly entered a buy put order instead of sell put order. It cost me $0.20 per contract or $120. I really don’t need such stupidity to cost me further.

SPY Index Puts Follow-up

After 2 days of gains, the S&P500 closed up almost 30 points from the recent low. It appeared that my decision to lighten up on my portfolio hedges on April 8 was a good one and I should have even been more aggressive. However, last night, the S&P500 erased the 2 days of gains and closed down 39.1 points or 2.09% to 1833.. This takes the S&P500 even lower than the close of April 7 which was 1845.

Before the market started plunging, I had placed a limit order on the 6 SPY Apr17 14 181 Puts that I had not liquidated. Seeing the the puts were decaying due to time and price action so quickly (from 90 cents to 16 cents in 2 days), and with the market not opening lower, I decided to close the position. I placed a limit order at 20 cents versus a then market price of 16 cents.

When I woke up the next morning, the puts were trading a back at 90 cents! I can’t believe my folly. However, I still stand by my decision. With barely 7 trading days remaining, my puts were decaying rapidly and I was uncertain if the market would fall by a wide margin in such a short period of time. Thus, I still think I did the right thing by cutting the “loss”.

Thankfully, I still have my 10 contracts of SPY May16 14 179 puts.

GM Puts

Since February, GM’s stock has been falling due to a ignition recall. It has garnered a lot of negative press because it turns out that GM actually knew of the problem. GM has also expanded the recall twice.

I believe that this has opened up an opportunity to create a long position. During my time at Morningstar, I learnt that there is a huge pent-up demand for cars as old cars get scrapped. Since then, the number of new car sales has steadily increased. However, we were too early on our thesis and my many long call options expired worthless.Currently, my portfolio has some GM Warrants and a small long stock position in Ford. Having seen new car sales steadily increasing the past 1-2 years, I’ve regretted not building my longs up more aggressively. As such, I do not wish to miss this chance. However, my failed long call positions in F are still vivid in my mind and so I’m a bit more cautious this time, deciding to express my bullish view via short puts instead.

 

 

Morningstar FVE – $57

Fair Value Uncertainty – High

Economic Moat – None

Consider Buy Price – $34.20

Stock – $33.76

Strike – $35

IV – ~30.44%

Premium received – $4.40

Effective Buy Price – $30.60

Return of cash-secured put that expires worthless – 14.38%

While the IV of 30% is lower than the 40% IV FVE implied by Morningstar’s uncertainty rating, I am comfortable with that given that the effective buy price is almost 10% below the Consider Buy Price. I am also initiating the position at a time when the stock is trading below the Consider Buy Price.

I would personally prefer to add to my long positions in GM-A and GM-B warrants. However, these warrants do not offer dividend protection which is unfortunate since GM now has a $1.20 yearly dividend. I would certainly do so if the warrants significantly drop in value due to some freak accident.

Lets hope this position fares much better than my previous positions in the USA automobile industry.

SPY Index Puts

With the S&P500 having fallen 40 points over two days (2.1%), I decided to take some profit on my portfolio hedges. Here are the trades that were filled:

5 SPY Apr17 14 183 @ $1.45

10 SPY Apr17 14 184 @ $1.80

17 SPY Apr17 14 185 @ $2.30

My average cost prices were $1.3, $1, and $0.60. The reason why my cost prices for the lower strikes were higher than the higher strikes was because I had bought them when the market was lower.

I was also long another contract, 6, SPY Apr17 14 181 at average cost of $1,33. Shortly after the market opened, I had entered a sell limit order at about $0.90. However, after my other positions were closed, I raised the limit order to $0.97. Unfortunately, my order was never filled.

I also went long another contract, 10 SPY May16 14 179 @ $1.80.

Usually, I’d have said that 40 points was not a large enough move for me to liquidate the hedges. After all, the market could fall much further. However, I wasn’t too sure why the market was correcting in the first place. Jim Reid said it was something to do with the Ukraine issue. I had initiated my portfolio hedges because momentum stocks had been falling for a while, which could presage a general market downturn. But there wasn’t any fundamental news to make me think the market would correct. As such, I decided discretion was the better part of valor. Moreover, my puts were losing time value and also were going to expire 8 trading days later. The SPY was already at approximately 184 so my puts were either ITM or just OTM. Thus, it made it easier for me to close the position.

By initiating the long at the next expiration and a lower strike, I was in fact hedging my decision to close my long puts. But, the position was of a much smaller size and value, allowing me to average down later.

However, the market closed up ~6 points. As such, I shouldn’t have been so cautious to raise my sell limit order and to open the long put position. By doing so, I’ve lost some additional money. In particular, I regret not closing the long put position given the time decay.