Archive for September, 2012

Butterfly Option on Apple for Oct 2012

I believe Apple is destined to head back to $700 or even above very soon. But boy look at those option chains, so expensive.

What a perfect time for a butterfly option.

What are butterfly options? Well let me give you an example.

Buy 1 – $10 Call @ expiration date ($-1.79)
Sell 2 – $12 Call @ expiration date ($1.86)
Buy 1 – $14 call @ expiration date ($-.25)

Net Cost: $.18 per “butterfly option contract.”

Now think about this, if the stock finishes at $12, the $12 call you sold and the $14 call you bought is worthless, but your $10 call is worth $2.00 and you only paid a net price of $.18. That means you made $2.00 / $.18 = 1011% return minus commissions.

Why Buy that last $14 contract?

If the stock finishes at $14 a share, you are even (Your $10 is worth $4 and the 2 $12 calls are worth -$4). If the stock continues to go up, the $14 will cover the rest (result is break even)

So what butterfly option did I buy on Apple (Symbol AAPL)?

Bought 1 Call at $670 expiration Oct 2012
Sold 2 Calls at $700 expiration Oct 2012
Bought $1 call at $730 expiration Oct 2012

Net cost? $7.20 per butterfly option contract.


If the stock finished at $700 I would walk with a cool $3,000 on my $720 (316% return).

Doesn’t have to finish exact at $700 either. If the stock finished $10 above or below $700, I would still make $2000 on my $730.

Where is my break even?

$677.20 or $722.80. Anything closer to $700 is all gravy.

Why not just buy a $670 call?

Because I think it will end somewhere around $700 (and if it does I get a much larger return by only spending $730 upfront vs $2500). Not to mention if it goes down instead, I’m out less than 1/3 of the money.

LEAP Options over Stocks

I was up over 10% this month, keyword of course being was. For those who follow my blog, you will see on a monthly basis I update with a “personal portfolio update,” letting my readers see where I stand in performance.

July +11.8%
August +12.88%
Sept: +4.54% (as of 9/20/12)

If you are a familiar with investing, odds are you will take a look at that recap and immediately identify that I am operating on a very leveraged scale. I mean 12% in a month? My account must be moving like a pinball, and honestly it really is.

But despite having up to 4-5% move on a daily basis, I still prefer trading with LEAP options over stocks. You may say that I’m playing with fire, but I see it as trying to get a fire going.

I have roughly $15,000 in my account as of today, a big step up from what I was working with at the start of this year, but relatively a small drop in the bucket when it comes to trading.

I believe that I can fairly easily hit a 10% a year return, but 10% on $15,000 ($1500) is immaterial in my eyes.

Because I am so confident that I can hit 10% a year, I want to amplify my return through leverage. With discipline I believe that LEAP options are the perfect vehicle. Highly leveraged securities but retaining a finite loss possibility.

If I had a bigger bank role, then 10% would be just fine, but I simply need to grow my account at a pace greater than 10% a year. As an FYI, Year to date I’m up 63.26%, which is insane.

The bottom-line is that to obtain such a crazy percentage, like all investments, I must take massive calculated risk.

Why am I being so Aggressive if it could turn against me?

  • I still believe I can outpace what I could do with traditional stocks
  • All investments have risk, you make the investment because you think the risks are worth it (article to follow about this)
  • My account balance is still small enough that I am comfortable taking this risk

Your “account balance is still small enough,” when will it be too large?

I believe that I will always have some port of my portfolio invested in the strategy I’m currently implementing. That being said, if I had for instances 100k in this account, a portion of my account would probably be in cover calls to take the edge off the volatility. I know this would hurt the return, but once I get myself established a little more, it will be best to mix up my portfolio into low risk/reward and higher risk/reward portions.

Why wouldn’t you just implement the strategy for the entire portfolio if you are so confident you can beat 10%?

I see cover call writing as the way the truly rich can obtain consistent lower risk returns. If my account was say $5 million, 6-10% return a year with lower risk would be the logical choice. I want to slowly work myself into a position where cover calls are obtaining a respectable return, so I will be able to ween off the high volatility. You never know when the next big crash is coming, it could be this year or 15 years from now and unless you are perfectly hedged (which tends to be a little tricky) you stand to destroyed. I would much rather lose 15% off a large amount than potentially 30+%.

Why are you writing this article?

To reaffirm myself. I am confident in my strategy, but I tend to get too caught up in the “Monthly Performance” number. As I said before, I was up a little over 10% and now I’m only up 4.54% for the month. So after taking this hit, I look at my investments and thought “I’m happy with my positions.” I still had the overwhelming desire to act, even though I don’t need to. I can’t say that each month will fall in the positive, but I still believe that my options (most of which expire in Jan 2014) will be good investments long-term.

Final Thoughts:

I plan on selling my house (Should net about $25-30k, hopefully), and I hope to have my account to roughly $50,000 by the end of 2013. If I can grow my account at a rate of 30% for 5 years, 20% for 5 years, and ultimately 10% for 10 more years, my account would grow as follows:

After 5 years – $185,646 (pre-tax and inflation)
After 10 years – $461,811. (pre-tax and inflation)
After 20 Years – $1,198,173 (pre-tax and inflation)

This implements my idea of “slowly weening off the volatility.” These calculations of course assume that I do not add any money into the account as well.

And to add contrast and really hit my idea of “trying starting a fire,” if I was just to aim at getting 10% a year:

After 20 years – $336,374 (pre tax and inflation)

Not bad, but not good enough.


Don’t Buy Rental Property, It’s Not Worth It.

Buying rental property, it’s like playing a real life version of monopoly! I put the houses on the board and when the Scottie dog lands, I get big money!

The realty of being a landlord and owning rentals, not so much. There might be a Scottie dog involved, but it probably will be be an unapproved pet in one of your rentals that keeps the other tenants up every night with its yapping. Added bonus, odds are as a landlord, you can’t do anything about that unapproved dog. The tenant has rights you know, and you’ll probably have to cut off your nose to spite your face to get it resolved.

Being a landlord is filled with problems both with people and potentially financial. The bottom-line is that rentals almost are never worth the effort, especially if you don’t put a lot of money down.

I have often considered buying a rental myself in fact, but I just have no faith in people. I cannot trust people with my finances.

Do not be tempted by low interest rates. If anything, low interest rates should scare you, because if interest rates ultimately go back up 10 or 15 years from now, the equity in your property might be drained.

I’m from a family with rental experience. Everything from “My garbage disposal doesn’t work because my kid sticks his toys down there” to “the buildings on fire so I called you … not the fire department.” Even though it was my parents who owned them, the imagery of what people will do to your property is forever burned into my memory. I remember cleaning up a rental house where the children had stacked trash so high on the counter that they ended up flipping over the drawers to walk up them like steps to toss more trash on top.

Cincinnati is filled with neighborhoods (some good and some bad), and honestly I wouldn’t own a rental where I was personally willing to live. Far too often though, I find that those areas I would live in have high taxes and not high enough returns to justify getting involved. Trust me when I say, I’m the guy who runs the numbers. I have calculators, spreadsheets, and dozens of pages of paper filled with scribbles of numbers.

I think with most rentals in good areas of Cincinnati, it would be optimistic to get a 7% return with 20% down. I would also argue that there is much more give than take in that optimistic estimate.


  • Over-estimated what they make
  • Under-estimated their costs
  • Under-estimate how much time is spend on their rentals
  • Over-estimate their tax benefits
  • Usually forget that houses and apartments are “used up” every single year (roof, windows, furnace, etc.)
  • Usually only have major gains if the housing market is appreciating
  • Downplay that taxes, insurance, and maintenance costs increase every year
  • Commonly downplay how much opportunity cost they are losing with the equity/money they have in the rental

Let’s also not forget some of the other problems

  • You buy a $500,000 complex? If you bought it through a realtor or broker and it is the fair market value (through a realtor), you just lost $30,000 instantly (6% exit)
  • You are legally obligated and legally responsible to/for those tenants
  • If you get a bad tenant, they can wipe entire years of profitably out (and then some)
  • You are counting on appreciation, but housing could easily depreciate
  • That 3 a.m. phone call that there is no hot water (or that the roof fell in)
  • You want to avoid people? Going to have to pony up some serious dough for a good management company, that might wipe out your margins
  • You may receive worse financing if it is not owner-occupied
  • You should establish an LLC, that might not be insurable (check with your insurer)
  • You probably will need a lawyer and potentially an accountant
  • Rising interest rates = hurt your equity and overall profitability

I’m here to say, if you are young and don’t have more than 20% to put down on a rental, don’t do it. If you are determined to do it anyhow, run the numbers assuming the following.

  • Reasonable vacancy rates (be conservative)
  • Conservative maintenance costs
  • Factor in the cost of property management (this is a worst case scenario, but run the number anyhow)
  • Run the numbers assuming absolutely no appreciation
  • Factor in opportunity cost of your down payment (if you think you can get 5% return and you put down $20k, it costs you $1k a year)

Here is my view. The only way to get a good return is to own in places that landlords are hesitant to own, and praying for appreciation on your properties. That’s a lot of risk and creates a lot of “what-ifs.”

Odds are you will run the numbers and you will see only a tiny 4-10% return. I was up 12% last month and I’m currently up 10+% this month without toilets and tenants. Without transaction fees, apartment showings, LLCs, lawyers, without phone calls in the middle of the night, and without the overall headache.

If you are putting down 20% or less (and not buying in a bad neighborhood), I am confident you could beat that return in the stock market with just a little bit of knowledge.

Consider learning about writing cover calls, a conservative stock position that can easily net 10%+ a year.

In fact, cover calls are extremely similar to rentals without as much hassle. Buy 100 shares of a stock, sell a cover call and get “paid rent” every month (article to follow).

Just think twice before taking the rental plunge.






QE3 Comes And the Market Pops, Now What?

If you were like many investors, you were waiting to see if Big old Ben Bernanke would release QE3. Sure enough the Fed agreed to buy $40,000,000,000 a month in mortgage securities.  Interest rates fall, securities go sky high, and all is well.. for today.

QE3 is a done deal, but how long will this rally last?

With the Dow Jones closing at 13,539 (around 2007 highs), it’s easy to think this rally has to give out sometime soon. In fact, if the rally continues, I’m going to be worried about some other macro picture things in my life (inflation).

I personally am under the opinion that if you want to be bullish pm about anything right now, it should be commodities due to threat of inflation. I personally invested in Silver (Symbol: SLV) and it has panned out nicely.

As of today, I am completely mixed on which way the market is going.

So I explore my options of straddling an index fund (taking options both up and down, hoping for extremely high volatility that will make 1 option worth enough to cover both options costs and profit.)

DIA (1/100th Dow Jones ETF) really seems to be fairly priced in it’s options risk/reward. A straddle expiring 8 days from now would run about $2, a straddle expiring 36 days more in the $4 range.

Translation to me: Do I think the Dow will go up or down more than 200 points in the next 8 days, and do I think the Dow Jones will go up or down more than 400 points in the next 36 days. Remember that with a straddle it doesn’t matter which way it moves, it just has to move a lot for gains.

When it comes to the Dow Jones, I’m completely split. All I do know is that I expect there to be a good deal of volatility from now till the end of the year, and I suspect very high resistance at 13,000 and at 14,000 (but that isn’t exactly a lot of oracle insight).

Look, my personal opinion? The Dow Jones is destine to go above and beyond 14,000, but I just plan on having a few corrections before a long-term growth above the 14k mark.

What am I in right now?

  • Short on JCP
  • Short on BBY
  • Short on GE
  • Short on FB
  • Long on F
  • Long on Dow
  • Long on Cat
  • Long on ESI (very small position)
  • Long on SWY (very small position)
  • Long on QQQ
  • Long on SLV

What am I eyeballing?


  • Seagate Technology PLC (STX) – Low P/E and growing revenues.
  • More Commodities
  • MetLife (Symbol: MET)
  • Citigroup (Symbol C)


  • Potentially how the market moves, DIA (Dow Jones Index)
  • Bank of America (But Odds are will just avoid)



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