Throwing darts at the board to find shorts!!!

 Not really, but I want to short every stock, except for those with earnings due in the next 3 sessions. Back in October every stock was oversold. Now, every stock is overbought. I see too many stocks for which I can sell the bear call spreads, and finding it hard to choose from.

 For the Feb options cycle, I am selling bear call spreads for the following:

LinkedIn (LNKD): I lucked out, in liquidating my puts before earnings, but I will be a bear on this stock, until it gets below $60. I am selling $87.50 calls for Feb and buying $92.50 calls for a credit of $1.40.

Regeneron Pharmaceuticals (REGN): Sure enough the best estimates for sale of Eylea have doubled from $160 million to $300 million, but it is ridiculous that stock has doubled in the last 40 days, raising the market cap by $5 billion. I am selling $110 Feb calls and buying $120 calls for a credit of $2.80.

Intuitive Surgical (ISRG): I love this stock, but it has gained almost 15 %( more than $60) in last 2 weeks. I am only betting that its rise will stall for the next few days, 3 days to be more precise. I am selling $515 Feb calls and buying $525 calls for a credit of $2.30.

 With only 3 days left in this options cycle, I feel the best way to trade is to sell bear call spreads, for that stocks that had extraordinary runs.

Going long on GameStop (GME)

   I have cashed out my LNKD puts today, ahead of tomorrows earnings. I did not want to take chance especially after my trade gained better than 50% in 3 sessions. I will be holding my NFLX short options until next weeks options expirations to realize full gains.

    GameStop Corp (GME) is trading higher today after the company announced dividend for the first time. I see several positives for the stock and I am going long on GME today. GME is a very profitable company adding more than $400 million to bottom line every year.

Stock chart pattern has completed a triangle, in the last three months and stock will break either to the upside or the downside. There could be a quick move in the stock price once it breaks out.

     My guess is that, it will break to the upside because of the following reasons:

1. Stock is very cheap, trading at 7.75 times forward earning, 1.1 times book value and no debt. In a world where investors are paying 1000 PE for a social media company and valuing a gaming company with couple of thousand paid subscribers as a $10B company, it makes more sense to invest in GME. 
2.  Dividend announcement will bring new class of investors, into the stock.Yield is better than the US treasury and the payout ratio is very low, still leaving room for company to make investments or buyout shares.
3.  There is too much, short interest in the stock. 34.8% of total floating stock is shorted. After the company has tripled its earnings in past 5 years and the stock has stayed flat, its time for GME to move and short covering will fuel a nice rally.

Courtesy: Yahoo Finance

    While, my reasons for trading the stock the stock are purely technical, its gives great comfort in knowing that the company is doing great fundamentally. I found a bullish article written by Paul Franke and here is the link: http://beta.fool.com/quantemonics/2012/01/29/why-ben-graham-would-love-gamestop/1393/?source=eogyholnk0000001

  

      Factors standing in the way for upside are:

1. Significant resistance around $25 and
2. Disintegration of Europe that might take the entire market down.

February, 2012 option trades for NFLX and LNKD

  Looks like, I got off the train too early. I wish, I held my bullish portfolio for few more days than I did. Markets seem to be jubilant this morning, with good news from all sides. They have come a long way, in last three months. Stocks are not cheap any more and in most cases, reached the price targets for the year. It makes more sense to be a bear now. I will remain bearish on the markets until there is a 3 to 5% correction.

    For February options cycle, I am placing bearish trades on Netflix (NFLX) and LinkedIn (LNKD).

Netflix: There was no reason to celebrate the 600000 new subscribers added by the company in last quarter, especially after the company lowered its forward earnings. It only makes sense, to use a free subscription offered by NFLX for a month during holidays. NFLX was the most hyped company and now a broken one. It is only a matter of time before Amazon starts subscription streaming with its cloud and Kindle fire, and do it more efficiently.

  NFLX has almost doubled from its November bottom and trading today at $126. Price targets range from $90 to $110. Stock is due for a pull back and also faces resistance at $130. I am selling credit spread by buying February $140 calls and selling $130 calls. Net credit for the spread is $2.40. If the trade moves against me, I could have a max loss of $7.60. It seems stupid, to risk $7.60 for $2.40, but it makes sense to me today.

LinkedIn: This is probably the most overpriced stock in the continent, trading at 140 times forward earning. It’s almost a gift that stock has gained $8 in two days. Stock is trading today above $80. I am buying a put spread by buying February, $77.50 calls and selling $70 calls for net debit of $1.90. My max loss will be $1.90 and max profit will be $5.60.  Earnings are due on February 9^th. Stock had an excellent run and I don’t see upside potential even if there is a positive earnings surprise. Stock is in a down ward channel and has reached the resistance line.

                                      Chart courtesy: Finviz.com

  

Is it time to short Plum Creek Timber (PCL)?

 Plum Creek timber, a timberland management company is down today, following earnings report and downgrades to sell by analysts. In my opinion, the down grade was well deserved. In yesterday’s earnings report, company lowered its outlook for 2012, sighting weak timber demand. While the street was expecting earnings to be around $1.35, company now estimate the earnings to be between $1 and 1.25 for 2012.

 Does Plum Creek Timber deserve its rich multiple of 34 times earning?

 PCL earned $1.31 per share for 2010 and $1.19 per share for 2011. Like the company said, 2012 earnings could come in lower than 2012 because housing market doesn't seem to be rebounding any time soon.

 Only thing saving the stock price is its dividend. Stock has a current dividend of $1.68 yielding better than 4%. That is pay out of more than $270 million in dividends by a company that expects to earn around $170 million for 2012. PCL assured that dividends will be intact because it plans on selling real estate worth $275 to $325 million in 2012.

  This stock is worth no more than $35 and will test its December lows in the next 4 weeks, in my opinion. I am buying March, 2012 $38 puts, to test my theory. 

Courtesy: Yahoo Finance

“Enjoyed the ride my love, but……”

‘My Dear Love,

   I am always fascinated by your beauty, your wildness and the pleasures you offer. We had great times together and we partied hard several times.  The parties were great but the hangover and after effects were terrible. I am still nursing the injuries sustained from last year’s after party crashing.

  Your manager, Bernanke is trying his best to continue the party by offering free alcohol and free Viagra (low interest rates and more stimulus), and keeping every ones attention away from the smoke, coming from the European block down the road. The music is getting louder and party is getting is wilder. All the alarms, in form of overbought indicators are going off, warning me to exit. I fully understand, the party can go on for extended period, but I enjoyed the ride, had enough fun, and don’t want to crash after the party.

  Please understand that this is only a temporary separation and I can resist your temptation only for so long. I will find my way back as soon as Relative Strength Index drops below 30. Wish you all the best and don’t worry about the house because I am buying insurance with puts.

Your lover in separation …RK’

  

  Oooh! I am glad; I got that off my chestJ. I feel the markets are too hot to stay invested as a trader in short term. I have liquidated most of my positions, to move 85% of portfolio into cash. I plan to buy put spreads or put ratio spreads if the markets continue to stay overbought in near future.

Do the market indicators really work?

  Recently, a friend of mine was questioning, how can a stock not follow the performance of the company and follow a market indicator. I, myself have asked this question at one time.

  Yes, if you are a long term investor in a stock and your company performs well, your stock will perform well, most of the time and yes, market indicators will predict direction for the short term. Any time you open a position, you will be questioning yourself if the entry point is good. If the stock has been on down trend for the last few days, there is good chance you are buying for a bargain and conversely if the stock has been on uptrend for few days you might be paying premium. So, why not use an indicator if one is available to predict this condition.

  Over bought/over sold indicator are tools used by traders to find buying or shorting opportunities or to predict the market direction.

Williams % R and Relative Strength Index  are couple of technical indicators you can find on many stock charts and are very easy to understand. They oscillate between 0 and 100. While 80 to 100 indicate the underlying equity is overbought, 20 to 0 indicate oversold condition. These are based on most recent trading days, usually set for past 14 days and can be changed as you want. Following is a 6 month chart of Caterpillar with Williams % R, courtesy of stock charts:

\                                                 Source: stockcharts.com

  The above picture shows that indicator predicted right most of the times. But you can also see that the indicator hit over bought condition around December 30^th and stayed there for past 17 days, and during that period, stock has appreciated more than 10%. So it simply tells you to be on look out for buying and selling opportunities. It can’t predict exact buy and sell points because markets can stay overbought and oversold for a while.

Conclusion: If you like a stock and want to buy, it’s not a bad idea to buy the stock in phases during oversold conditions and to sell the stock in phases in overbought conditions, if you are thinking of selling your stock. Besides, if millions of traders or programs try to buy and sell the stock using this indicator, it is bound to work even betterJ.

IOC January options Iron condor looks attractive

 InterOil Corporation (IOC) an energy company had an excellent run in the past 20 days gaining more 30% from Dec 19^th low of $45. Stock is currently trading at $58.48 at close of today’s market.

 IOC has crossed both the 50 day and 200 day moving averages in the last few days. 200 day moving average is at $54.23 and might provide support level in the short term. Stock is likely to face resistance around $60 based on trading patterns from July 1^st to September 20^th.

  Iron Condor: This is a combination of credit option spread and credit put spread. Following trade was selling for a credit of $4 towards today’s close.

Buy 1 January,2012 $50 put

Sell 1 January, 2012 $57.50 put

Sell 1 January, 2012 $60 call

Buy 1 January, 2012 $67.50 call

 

If the stock is trading between the inner strikes of $57.50 and $60 on options expiration date, this trade will make a profit of $4. If the stock crosses the outer strikes of $50 and $67.50 maximum loss will be $3.50.  Since 1 contract is 100 shares, max profit is $400 and max loss is $350. Break even for the trade is $64 on high side and $53.50 on low side.

 I do not expect to collect the entire $4, but if the stock trades between the support and resistance levels in the next 7 trading sessions, this trade can be closed for profit on or before January 20^th options expiration.

 The graph below illustrates profit and loss for this trade:

 Source: Yahoo finance.

  Disclosure: I own the above trade.

Alternative investment yielding 10% +

  Real estate investing is some thing that would turn off most people in current times, but there are some opportunities in commercial real estate that every investor should consider. In this article, I will try to explain how any investor can take advantage of investing in triple net properties, possible limitations and dangerous involved.

  If you buy a property for $100,000 and rent it out for $700 a month, it produces income of $8400 per year, returning 8.4% and is called 8.4 cap. If this property is bought with $40000 down payment and borrowed the rest for 6% interest, it would yield 12 % ($8400rent - $3600 interest).

  With one exception, the above statement is deceiving and frankly offensive to anyone even with slightest idea about real estate investing for following reasons and more:

1. There are several expenses like real estate taxes, insurance, repairs and maintenance.
2. If the property is vacant, landlord is not only stuck with mortgage but also expenses.
3. It is not only difficult to find a decent tenant, but a mess to deal with, if the tenant defaults.
4. Since the banks are dealing with real estate losses, it is not quiet easy to get loan for investment properties.

 Exception: In case of absolute triple net lease, the above statement about yield is completely true.

Triple Net lease: Net-Net-Net lease is commercial real estate lease in which, tenant pays for all taxes, insurance and maintenance. So, almost, all of the expenses are passed on to the tenant. The property is already occupied by a tenant with long term lease in place. Tenants can vary from stand alone business like a single unit restaurant to a corporation with few thousand locations.  Several NNN properties, backed by corporate guarantee with 8% cap rate can easily be found in the market.

 These properties are expensive and mostly start around one million dollars and go up to several millions. But the price of the property should not discourage you, because you can partner with a group of friends or find firms that offer Tenants In Common. Following are couple of links where you can find TIC properties:

http://www.tm1031exchange.com/property/tic1-0404a.html#item

http://www.cornerstoneexchange.com/

   If you like greater control in making decisions, you can find your own group of friends interested in investing, form a company such as LLC, find property that every one likes and buy the property.

Where to find triple net properties?

There are several online sites that show the database of NNN properties available for sale. Some of the sites are listed below:

http://www.nnnex.com/

http://nnnpro.com/content/

http://www.nnn-properties.com

http://www.nnnsales.com/

http://www.loopnet.com/NNN-Properties-For-Sale/

Triple net lease vs Absolute triple net lease: While triple net lease covers some maintenance of the property, might exclude some like structure and roof. But absolute triple net lease is true triple net lease, covering all maintenance.

Purchasing the property:

Once you found the right property and have a purchase contract, do your due diligence and apply for the loan. Loan approval requires some patience and hard work as most banks will offer to finance the second loan for your company, but not the first loan and will only finance for a maximum of 65% loan to purchase price. All partners will be required to provide their financial statement and last three years of tax documents. A corporate backed lease, by a corporation with a good credit rating will come in handy for the loan approval.

Drawbacks:

     The value of these properties is mostly based on weight of the lease signed by tenant and is not worth whole lot if tenant defaults. This is why it is extremely important to look for lease backed by corporation with good credit rating. It is also important to diversify your portfolio, if you are going to invest in more than one property.

      This is long term investment and investment in these properties is not as liquid as a CD in the bank. It might take several months for the property to be disposed and if it is only one partner trying to cash out, must convince other partners to buy out their share.

Disclaimer: This article is for information and not an investment advice. It is responsibility of the reader to cross check this information against other sources and take help of an accountant and attorney in the process.

Will 30 year Treasury bond fund, TLT continue its uptrend in 2012?

 Investors chasing performance, tend to push an expensive stock or asset even higher and in fear of even loosing more, tend to push a cheaper stock or asset even lower. It is like mass hysteria.  This mass hysteria coupled with investors trying to find safe haven in dollar from euro mess, global recession and currency devaluations in emerging markets, has pushed TLT to new heights. TLT had a phenomenal run in 2011, returning almost 30% and is trading today at $119.50.

   Past performance of TLT shows that it mostly found the floor at $85 and topped around $95 for several years, with only exception being 2008. It broke the upper range in 2008 and returned almost 25% only to give up all the gains next year.

   If global economy led by china does not go into recession, or euro does not blow up as expected or US economy shows growth, investors will flee this bond fund pushing it back to normal levels. It would hurt loosing more than 15% trying to chase a 3.38% yield.

How to trade?

   For those wanting to bet on the downside of TLT can look into buying put spreads or butterfly for cheaper trade.  Following is an example of TLT butterfly put spread costing today around $1.50.

Buy 1 Jan 2013 105 put

Sell 2 Jan 2013 95 puts

Buy 1 Jan 2013 85 put

  In the above trade, if TLT is trading between $86.50 and $103.50 by options expiration date, trade will be profitable. Maximum possible profit is $10.00 if TLT is trading at $95. Maximum loss on trade is $1.50 if TLT is trading outside the range of $85 and $105 on options expiration date.

Disclaimer: This article is not an individual investment advice, it is only for entertainment.

Source: Yahoo Finance.

Disclosure: I do not own any position in TLT. Do not plan on initiating any position in the next 72 hours