Author Topic: How to think about options?  (Read 13593 times)

plato1976

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Re: How to think about options?
« Reply #20 on: April 21, 2013, 12:08:01 AM »
The question is really, if they can maintain a high margin (not as high as now, but still higher than other competitors, for which the answer I think is yes), and maintain their current revenue stream.
I would like to think they will face pressure to the keep the market share - but somehow the pie is still growing.
The bad news is that the major growth for mobile devices will be mainly from EM market and low tier - it's not exactly good news for apple.
I still think there will be lots of innovation ahead about human-computer interfaces - but there is no certainty that Apple will grab/dominate the next hotspot

all after all, I decide to establish a small position on Monday, just before the ER

Quote
How many of these devices do folks need and as the competitors catch-up with functionality they will compete on price and revenue will drop off as competitor take share.

I too am not an apple fanboy and I don't want to say that Apple will necessarily maintain their revenue and earnings, it's very hard to say.  I would say that there are historical precedents with apple for maintaining their revenue in different segments.  Mac prices are significantly higher than comparable windows based PCs and they continue to sell well.  I would say there is generally a 50% price premium if not more.   There is also a precedent with the IPOD where they continue to charge premium pricing a decade after the product was released and despite numerous competitors in the market.  Will the same happen with Iphone / Ipad sales, too hard to call but certainly possible.


Uccmal

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Re: How to think about options?
« Reply #21 on: April 21, 2013, 05:58:47 AM »
You guys are debating the stock/company again, not discussing using options.

I have some experience with options and have thought a bit about the Apple situation in this regard.

Some thoughts and experiences:

Successes:
a)FFH leaps - We, collective we (this message board) knew the issues with FFH as much as anyone.  We knew that the issues were getting behind them when we first initiated Leap positions.  The Leaps were a way to lever the return to value.  It was not based on FFh actually growing but surviving.
b) AMEX, SB, GE, WFC - all Longest Leaps - As above - a survival story or return to value.  If these turned against me I would have had my house, a little cash, a job, in a severe depression.
c) BAC, WFC, JPM, AIG - return to value in all cases.  Proxy for common to add leverage

Failures:
1) Trying to duplicate FFh success with smaller companies - I have done it enough times to know to stay away.
2) Rim - Buying Leaps, Selling puts - I got hammered.  In this case I would call it fighting the tape. 
3) Buying puts in general.  This never seems to work very well.  I still use them, strictly as insurance, accepting ahead of time that I will probably lose, but they serve a purpose.
4) Selling puts.  There are better ways to earn income - buy WFC, or SSW instead.  Unless you really want the stock at the lower price.
5) Buy and hold, either on purpose, or through forced holding (liquidity dries up).  example: MFC options.  Options are for trading.  The only time I have ever exercised them is with FFH.

So what can I learn from all this. 
1)Return to value situations work best
2) If an option hasn't moved into the money when the next Leap cycle ensues I get rid of it completely.  For US investors, this will mean waiting your one day plus a year to get your tax loss.  Revisit your situation and buy more leaps or take your losses and stay away. 
3) Lock in my gains as soon as The next cycle comes out, subject to tax issues.  Basically, get rid of buy and hold mentality.  Buy more at the time limit Leaps if upside still exisits on stock. 
4) Dont sell puts unless I want the stock at a new improved price.
5) Only buy puts as insurance, not to make money.

To the Apple situation directly:

Ask yourself how many times in history you have seen a high flyer regain its value quick enough to make money on your Leaps?  If Apple reports weaker than expected earnings, meets expectations, or even slightly exceeds them the stock will stay down.  What is the chance something will materialize to take it back up to $500.  To get to $500 in 1.6 years you need something big.  Will this happen in that time period?  Are you willing to eat %100 on your position?  If these are all acceptable to you then by all means go ahead.  Otherwise stay with the common, or in my case none at all.  I am not willing to fight the tape, Yet!
« Last Edit: April 21, 2013, 06:07:35 AM by Uccmal »
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GrizzlyRock

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Re: How to think about options?
« Reply #22 on: April 21, 2013, 07:34:02 AM »
WRT to my comments regarding DirectTV the thesis is as follows:

Black-Scholes option pricing is based on 5 factors: current price of underlying, strike price of underlying, time, risk free interest rate, and implied volatility. Of these - 4 factors are knows so the guys that price options rely on guessing what the implied vol of the underlying will be in pricing the option.

My point is that massive share repurchases dramatically increase per share value on a level that is wholly unaccounted for by route option pricing and especially stabbing at implied vol for multiple years.

In DTV's cash massive share repurchases is an understatement: "As of December 31, 2012, we have repurchased approximately $25.7 billion of our common stock over the last seven years, retiring approximately 60% of our then-outstanding shares, and have announced a new $4 billion share repurchase program."

So LEAP options on the cannibals is a highly interesting strategy as option pricing simply doesn't account for dilution / share repurchases.

twacowfca

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Re: How to think about options?
« Reply #23 on: April 21, 2013, 07:35:45 AM »
You guys are debating the stock/company again, not discussing using options.

I have some experience with options and have thought a bit about the Apple situation in this regard.

Some thoughts and experiences:

Successes:
a)FFH leaps - We, collective we (this message board) knew the issues with FFH as much as anyone.  We knew that the issues were getting behind them when we first initiated Leap positions.  The Leaps were a way to lever the return to value.  It was not based on FFh actually growing but surviving.
b) AMEX, SB, GE, WFC - all Longest Leaps - As above - a survival story or return to value.  If these turned against me I would have had my house, a little cash, a job, in a severe depression.
c) BAC, WFC, JPM, AIG - return to value in all cases.  Proxy for common to add leverage

Failures:
1) Trying to duplicate FFh success with smaller companies - I have done it enough times to know to stay away.
2) Rim - Buying Leaps, Selling puts - I got hammered.  In this case I would call it fighting the tape. 
3) Buying puts in general.  This never seems to work very well.  I still use them, strictly as insurance, accepting ahead of time that I will probably lose, but they serve a purpose.
4) Selling puts.  There are better ways to earn income - buy WFC, or SSW instead.  Unless you really want the stock at the lower price.
5) Buy and hold, either on purpose, or through forced holding (liquidity dries up).  example: MFC options.  Options are for trading.  The only time I have ever exercised them is with FFH.

So what can I learn from all this. 
1)Return to value situations work best
2) If an option hasn't moved into the money when the next Leap cycle ensues I get rid of it completely.  For US investors, this will mean waiting your one day plus a year to get your tax loss.  Revisit your situation and buy more leaps or take your losses and stay away. 
3) Lock in my gains as soon as The next cycle comes out, subject to tax issues.  Basically, get rid of buy and hold mentality.  Buy more at the time limit Leaps if upside still exisits on stock. 
4) Dont sell puts unless I want the stock at a new improved price.
5) Only buy puts as insurance, not to make money.

To the Apple situation directly:

Ask yourself how many times in history you have seen a high flyer regain its value quick enough to make money on your Leaps?  If Apple reports weaker than expected earnings, meets expectations, or even slightly exceeds them the stock will stay down.  What is the chance something will materialize to take it back up to $500.  To get to $500 in 1.6 years you need something big.  Will this happen in that time period?  Are you willing to eat %100 on your position?  If these are all acceptable to you then by all means go ahead.  Otherwise stay with the common, or in my case none at all.  I am not willing to fight the tape, Yet!

Great perspective.  :)

stahleyp

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Re: How to think about options?
« Reply #24 on: April 21, 2013, 07:37:18 AM »
You guys have to remember that Apple has a great history under Jobs. Does anyone know of a time that Apple was a great company without Jobs??? Yes, the stock is pretty cheap and intriguing. Nokia and BBRY were cool at one time too. Remember when BBRY (RIMM) was at $30 and it looked like a steal? There is a reason the market prices these things so cheap sometimes. Things that are cheap can get much cheaper...especially in technology.  However, Jobs had a huge influence of that company. In my view, much, much bigger than virtually any other super large company. When your visionary leader is no longer there...well, I suppose we'll see what happens. We may have already seen round 1 back 25 years or so ago. Apple might turn out to be a great investment, but you have to have a bigger margin of safety than normal because of the industry it's in. With all that being said, I've been wrong about Apple more than I've been right. haha Good luck to the longs.
Paul

ItsAValueTrap

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Re: How to think about options?
« Reply #25 on: April 21, 2013, 07:58:12 AM »
Quote
My point is that massive share repurchases dramatically increase per share value on a level that is wholly unaccounted for by route option pricing and especially stabbing at implied vol for multiple years.

I'm not sure that repurchases should affect the options pricing that much.

A company can do a few things with its profits:
A- Buy back shares.
B- Re-invest the capital.
C- Issue dividends.
D- Pull an Apple and sit on a big stack of cash.  (Apple is essentially the world's biggest hedge fund.)

A and B will cause more volatility in the business than D.  C will reduce the value of the call options, unless the company dividends it out all at once and the options get adjusted (in which case C is almost the same as D).

I think the big picture is that 1-2 years of profits don't make that big a difference.

Where DTV is unique is that it takes on very high amounts of leverage (and continues to increase it).  Lots of leverage should make the business highly volatile.  If you think that stock prices will track fundamentals over time, then high leverage should make the stock volatile.
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compoundinglife

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Re: How to think about options?
« Reply #26 on: April 21, 2013, 08:37:43 AM »
You guys are debating the stock/company again, not discussing using options.

Thanks for bringing this up. I started this thread so the discussion of options did not consume the AAPL thread, but the AAPL debate has manifested over here. Perhaps we can swing it back over to the AAPL thread.


I have some experience with options and have thought a bit about the Apple situation in this regard.

Some thoughts and experiences:

Successes:
a)FFH leaps - We, collective we (this message board) knew the issues with FFH as much as anyone.  We knew that the issues were getting behind them when we first initiated Leap positions.  The Leaps were a way to lever the return to value.  It was not based on FFh actually growing but surviving.
b) AMEX, SB, GE, WFC - all Longest Leaps - As above - a survival story or return to value.  If these turned against me I would have had my house, a little cash, a job, in a severe depression.
c) BAC, WFC, JPM, AIG - return to value in all cases.  Proxy for common to add leverage

Failures:
1) Trying to duplicate FFh success with smaller companies - I have done it enough times to know to stay away.
2) Rim - Buying Leaps, Selling puts - I got hammered.  In this case I would call it fighting the tape. 
3) Buying puts in general.  This never seems to work very well.  I still use them, strictly as insurance, accepting ahead of time that I will probably lose, but they serve a purpose.
4) Selling puts.  There are better ways to earn income - buy WFC, or SSW instead.  Unless you really want the stock at the lower price.
5) Buy and hold, either on purpose, or through forced holding (liquidity dries up).  example: MFC options.  Options are for trading.  The only time I have ever exercised them is with FFH.

So what can I learn from all this. 
1)Return to value situations work best
2) If an option hasn't moved into the money when the next Leap cycle ensues I get rid of it completely.  For US investors, this will mean waiting your one day plus a year to get your tax loss.  Revisit your situation and buy more leaps or take your losses and stay away. 
3) Lock in my gains as soon as The next cycle comes out, subject to tax issues.  Basically, get rid of buy and hold mentality.  Buy more at the time limit Leaps if upside still exisits on stock. 
4) Dont sell puts unless I want the stock at a new improved price.
5) Only buy puts as insurance, not to make money.

To the Apple situation directly:

Ask yourself how many times in history you have seen a high flyer regain its value quick enough to make money on your Leaps?  If Apple reports weaker than expected earnings, meets expectations, or even slightly exceeds them the stock will stay down.  What is the chance something will materialize to take it back up to $500.  To get to $500 in 1.6 years you need something big.  Will this happen in that time period?  Are you willing to eat %100 on your position?  If these are all acceptable to you then by all means go ahead.  Otherwise stay with the common, or in my case none at all.  I am not willing to fight the tape, Yet!

Thanks. Your perspective makes alot of sense.

Cardboard

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Re: How to think about options?
« Reply #27 on: April 21, 2013, 09:01:28 AM »
Regarding options, buy long term ones. I have been tempted and did buy shorter term options so many times only to see the stock finally go up (and sometimes in a major way) after my options had expired or was fed up to renew them. The leverage and low price of short term options along with the thinking of what could go right is like a drug. I have won a few times, but in the majority of cases I was disappointed and it caused me a lot of anguish.

On Apple, I think that a major rebound in the short term is a strong possibility. It has been going down for 7 months in a row now in a very defined channel as technicians would say. It is setup almost perfectly for some kind of short squeeze or renewed buying interest on any positive news. I would not bet against a company that has 37% of its market cap in cash, looking to do something positive with this cash and still generating large profits. It is trading at 8.9 times earnings and 5.6 times excluding cash. Despite this, I would still buy 2015 Leaps and maybe sell a higher priced call to lower your premium. You can possibly leverage more this way so that what you lose on the upside is gained from holding more Leaps.

However for perspective, it is still $230 billion that has to be justified via their earning power. It is a really big number when you consider what has happened over time to companies like Nokia and BlackBerry who both once dominated this field. Although, as long as they keep their products as good as the competition, which I think they can, they will retain higher margins than the rest. I know many who own IPhones and they won't switch to anything else. The difference in cost, especially when you sign up for 3 years with your phone company, makes it not worthwhile to learn a new system even if I know that they are almost identical. The question is that enough to keep sales and profits around current levels for years to come?

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no_free_lunch

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Re: How to think about options?
« Reply #28 on: April 21, 2013, 09:08:23 AM »
Since we are telling option stories, I did have some success with puts on goldman sachs in 2008.  I don't recall the exact numbers, I think they were around $130 for $3-4 but I could be mistaken.   I ended up selling them way too soon after they tripled in price, seemed like a good return at the time.  That was end of august 2008, had I held to expiry I would have made something like 15x my money.  Had I sold in the november trough, I think it would have been 25x.  Oh well.

Uccmal

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Re: How to think about options?
« Reply #29 on: April 21, 2013, 09:52:50 AM »
Since we are telling option stories, I did have some success with puts on goldman sachs in 2008.  I don't recall the exact numbers, I think they were around $130 for $3-4 but I could be mistaken.   I ended up selling them way too soon after they tripled in price, seemed like a good return at the time.  That was end of august 2008, had I held to expiry I would have made something like 15x my money.  Had I sold in the november trough, I think it would have been 25x.  Oh well.

Therein lies the problem I have with puts.  I entered August 2008 with some SPY puts.  Shortly after they came in the money I sold them, and lost out on the vast amount of gains to be had two months later.  Shorting stocks is extremely difficult to do well and consistently, and becomes even tougher when you handicap yourself with expiry dates. 
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