Thursday, August 13, 2009

Starting To Get That Itch Again... [UPDATED]

Warning: This may be a tough one to get through...

No, not that itch, you dirty-minded gutter snipes. I'm starting to feel like I need to spend my days doing something productive, instead of sleeping, reading, and doing housework all the time. Lately I find myself skipping ESPN and the Military Channel when I watch TV, and instead flipping back and forth between CNBC and Bloomberg.

I want to get to the point where my money is working harder than I do (which wouldn't be too tough, some would say...), or at least where I'm pulling down enough money from the market each month to cover expenses. That's not gonna happen overnight, but at least now I can see a way to do it.

Back in the day, my approach to the market was little different than the way a slightly drunken tourist approaches a dice table--throw some money down, follow a hunch or two, roll the dice, and hope for a big payoff. Sometimes it worked, sometimes, not so much. But even so, by Friday there was always more money to put into play.

It wasn't all a crapshoot--I managed to do pretty well for myself in the go-go years of 1998-2000, but when the bubble burst in 2001, I not only lost my job and my truck, but the entire $80,000 I had in my meager portfolio, and damn near my house, too. (If I recall correctly, I think I sold my condo for a tidy $1000 profit about three weeks before it got foreclosed on. I took that money to Vegas with Eddie B, and after an epic bender of a weekend, I more than tripled it). And eleven months of unemployment put me about as close to bankruptcy as you can get without actually calling one of those lawyers you see on the late-night tv commercials.

Anyhow, that journey has been well documented in these pages, but in the end, it contributed to bringing me out here to Vegas, doing what I do now. It took over seven years, but the burden of that debt is now a distant memory, and I'm back to square one--almost where I was back in 1997. Ok, maybe I'm actually at square two or three--since I have a growing nest egg that I refuse to touch until I'm either old and retired or on the verge of living under a bridge, collecting cans and donating plasma to make ends meet. And the experience has bought me a little wisdom, too, something I didn't have twelve years ago. So 'square one' may be oversimplifying it a tad...

Just this morning, I was on the phone with the folks at E*Trade, getting my account squared away--well, actually, finding out how to get my account squared away, and I found myself chomping at the bit, ready to dive back in headfirst.

One of the small obstacles in my way, is the fact that I need to fax in a copy of a current utility bill, so that they can verify my home address. I asked them if I could just scan a copy and email it, but they said they're not equipped to accept forms submitted in that medium. Fair enough, but now that I'm no longer a prairie dog in a cube farm, I don't have access to a fax machine. All those years working in offices, I took for granted that I could just step ten feet away from my desk and send a fax--sometimes for business needs, but more often for personal use. And I don't even have a land-line telephone anymore, so even if my printer/scanner/copier thingy could be used as a fax machine, I'd have no way to send one.

So the first step in this journey of a thousand miles is to hike my ass down to Kinko's and send my documentation in. No problemo--and for my situation, it's like crossing the Rubicon--I'll be on my way, and no excuses will do.

Back when I first moved to Vegas and didn't know a damn thing about how this town worked, I told everyone who would listen that my plan was to work at night full time, and then spend my days at the computer, trading, following the market, looking for trends, blah blah blah... Didn't turn out quite the way I planned. Full time? Please...

Anyhow, if these first furtive steps in the economic recovery keep up, and I somehow manage to keep getting scheduled four days a week, income certainly won't be a problem (at least the feast-or-famine cycle will level out a bit). And my schedule is just about perfect the way it is now, so spending my days at the computer doing a few trades here and there after I come home from work won't be a problem, either. Hell, I'm even going to bring back the old TV before football season starts--the idea was to be able to watch two games at once, but now, during the week, I can watch both CNBC and Bloomberg at the same time, while I sit on my soon-to-be-purchased couch with my laptop, trying to stay one step ahead of the pack.

That's the plan, at least...

Some of you folks have expressed interest in my views of the financial world, especially when it comes to picking stocks. I'm sorry to say, however, that if you're looking to me for stock picks, you're probably better off buying a lottery ticket. I have a few favorites, but I don't have the acumen y'all give me credit for. Seriously, if I were a genius stock-picker, I'd be updating this blog from beach bar in the Caribbean, with sand between my toes and an umbrella drink sitting next to my mouse.

But there are other ways to make money in the market, besides just buying stocks. Me, I prefer options, but that's just because it's my background, and I do have a bit of a gambling streak in me. As far as I'm concerned, one of the best ways to make money (and remember, I'm an optimist, a Bull by nature--hell, I'm a Taurus fer cryin' out loud), is to sell naked Put options. But that requires a whole lot of equity and a strong constitution, and it's not for the risk-adverse. Dialing it down a bit, the next best thing in my book is credit spreads...

I've talked about 'em before, and fundamentals, sentiment, and technical indicators aside, one of my favorite stocks to use in this endeavor is Google (symbol GOOG). It's volatile and expensive, and that means good premiums on the option contracts.

I'll do a whole Options 101 post over the weekend so that I'm not speaking an entirely foreign language, but let me toss out the trade I might be doing if my account was up, running, and funded... (actually, I'd wait to make this trade on a day when the price of the stock was down, but for sake of having an example, here we are).

This here is what we call a 'Credit Spread':

SPO 10 GOPUB @ $1.45
BPO 10 GGDUN @ $ .45

In semi-plain English, what I'm doing is selling ten contracts of the Google September $410 puts, and at the same time buying ten contracts of the September $370's. (SPO is 'selling puts to open' and BPO is 'buying puts to open')

Google closed today at $462.28, up almost four bucks. Being an optimist, I believe that the price of Google will continue to rise, or at least, not fall below $410 between now and the third Friday in September (that's when the contracts expire). If that happens, then we make money.

How do we do that?

Well, if we're selling a contract @ $1.45, that means that we bring in $145 for each one (each contract represents a 'round lot' of 100 shares, so you multiply the premium by a hundred). If, as in the example, we sell ten contracts, then you collect premiums of $1450. With me so far? If not, re-read this paragraph.


But, we can't just sell these contracts 'naked'--if you did, then you're obligated to buy a thousand shares of Google at $410 per share if the market tanks and the share price drops off the table. Do you have $410,000 lying around? Me neither. So you have to hedge, and buy some lower-priced contracts.

So we buy the September $370 contracts, which gives us the right to turn around and 'put' those shares to some other unfortunate mope for $370 each. So if the world turns to complete shiat and you wake up one morning and Google is trading at two hundred bucks, you're on the hook for $410,000, but then again, you can force somebody else to take 'em off your hands and recoup $370,000. But that's just theoretical. It doesn't usually happen that way... (Stocks rarely drop from $400+ down to zero--unless your name is Enron--and even then, it doesn't happen overnight, so you have to be a real moron to lose forty-odd stacks of High Society that way).


So you sold those contracts and collected $1450, but to hedge, you have to buy the other side, and those contracts cost forty-five cents, which is actually (times a hundred) $45, and since you're buying ten of them, that's $450.

You collected $1450, you spent $450, and now there's a thousand bucks in your account. (Minus, of course, a reasonable and customary brokerage commission). You don't get that money right away--it's not free and clear until you close the contracts or they expire. But if Google stays above that magical $410 mark for the next five weeks or so, then you keep the cash.

However... there is a downside. When you do these credit spreads, your maximum gain is the premium received, in this case, a thousand bucks. Your maximum possible loss is the difference between the strike prices-- $410 minus $370 ($40, which in our case extrapolates out to $4000) minus the premium received. So if Google tanks you could lose three grand.

The bottom line:

Max possible gain -- $1000
Max possible loss -- $3000 <--- [updated] WRONG! It's $39,000, so it makes the whole exercise moot. Off by a factor of 10, so ignore all of this... we'll do a different one later. (Told ya I was rusty--I'm used to doing this with lower priced underlying stocks, back when the market was more volatile. My bad!) If it starts to move against you, you could still get out and close those contracts at a loss--you don't have to take the maximum loss by waiting.

At most brokerages, in order to do a credit spreads, you'll need to have the maximum loss amount available, so while those contracts are active, you've basically got three grand on the table.

If everything works out and the price stays above $410 upon expiration of the contracts, then you keep the cash and get to do it all over again. You can easily do this kind trade six times a year, or if you're savvy and don't take unnecessary risks, you use those premiums you pocketed to allow you to do the same type of trade with more contracts each time--all with just three grand at risk. (The problem I ran into over and over again with clients is greed--folks always seem to kill the geese that's laying the golden eggs, and I'll explain more about that in another post).

Anyhow, that's the kind of stuff I'm looking at doing, and granted, you don't need to watch the market obsessively, but there is some babysitting involved--anytime I've got at least $500 out there on something that could expire worthless, I'm never far from a computer.

Once I get some real money in the account, I'll start doing index credit spreads--but that's a whole new can of worms and not for the faint of heart. And we're a long way from there. But that's my road map.

Of course, just like my poker stories, once I start making some real trades, I'll post 'em here so that y'all can follow along and celebrate my successes and poke fun any time I crash and burn.


No comments: