Life imitates the Simpsons

Liberals often accuse conservatives of doing the same things that they themselves do (see my comment here).  Compare this news report with Homer Simpson’s attempt to vote for Barack Obama:

The Tuesday election is an important crossroads for America, as Thomas Sowell writes in his most recent column.  Liberty itself is at stake.  If there is mass voter fraud like this, then there will be a ground swell of anger.

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I have a PhD in Theology: Would you like fries with that? (The education bubble V)

Well, I’ve never waited on tables.  But I have driven a delivery truck all around the provinces of Ontario (Nakina, Geraldton, North Bay, Ottawa) and Quebec, (Quebec City, Montreal, Amos, Maniwaki), and as far south as Piqua, Ohio.  So far my total gross pay for work related to my field of study, theology, has been $21,600–or less than the cost of my first-year at Cambridge.

The Chronicle of Higher Education has an article about how 17 million people with a college education are doing menial jobs.  An astounding 8,000 PhDs in the US are are working as waiters and waitresses.

Hattip:  The Business Insider

Rolling over puts: when to buy to close a put option

I use the following spread sheet to determine when and whether to buy back a put option (please note that commissions are calculated into the costs and original premium):

expiry symbol market strike # Current
premium
comm cost original
premium
gain/
loss
% gain/
loss
days at
start
days
remaing
time
remaining
composite
Jan 2012 abx $47.02 $45.00 3 $5.95 $13.74 $1,798.74 $2,656.21 $8.85 $857.47 32.28% 620 446 71.94% 104.22%

The number in red is the price to buy back the option, and $857.47 is the difference between the original premium and the cost to close.  The composite number in the last column is the percent gain or loss plus the percent of time remaining.  When that number is at 100% the buy back is neutral.  You neither win nor lose on the contract.  If the number is negative, I would normally not buy back the option for I would sooner take possession of the underlying upon expiry–I should be comfortable owning the position in the underlying or I wouldn’t be selling the put option in the first place.  If the final number is above 100% then buying back the put can be done without disadvantage, because the time decay and percent of gain still add up to 100% as on the day the put was sold.  Here are the circumstances I use to buy to close:

(1) Buy to close a put if the composite number adds up to over about 135%.  This means that the premium has plummeted because the underlying has increased rapidly in market price.  At this point it becomes interesting to buy back and realize fast gains and then use the margin value to sell another put.  Gains can be multiplied by doing this.  So for example, I sold 2 puts on RY and bought it back 8 days later as such:

apr 2011 ry $45.00 2 $2.55 $12.49 $522.49 $827.49 $4.14 $305.00 36.86% 233 225 96.57% 133.42%

Less than four percent of the time had passedt, and yet there was 36.9% gain on the position.  The composite was at a very nice 133% and I didn’t have to wait another 225 days to re-risk the capital, which I used in turn to sell a put on PWE:

Mar 2011 pwe $21.43 $19.00 5 $0.70 $16.24 $366.24 983.74 $1.97 $617.50 62.77% 197 161 81.73% 144.50%

The composite number was an astounding 144.5% after only 36 days.  I repurchased the put.  Thus, the total realized gain over $305 + 617.50 = $922.50/$9500 (captial at risk)= 9.7% gain in a period of 44 days, which represents a 80% annualized gain.  This shows how it can be lucrative to buy back a put option.

(2) Buy to close a put when it only costs about $50 and there is more than about 60 days remaining.  Since most of the original premiums for me are in the $700 – $1000 range, it makes sense to buy back something that has so much time left on it but costs so little to buy back–less than $1 per day.  When its more than $1 per day, it’s probably better to let it expire worthless.

(3) Buy to close a put after losing confidence in the underlying.  TA was downgraded at TD Waterhouse and Scotia Capital.  I bought back the position as follows:

dec 2010 ta $21.00 $20.00 5 $0.26 $16.24 $146.24 $508.76 $1.02 $362.52 71.26% 232 88 37.93% 109.19%

The composite number was still at an advantage to me, but I had lost confidence in the underlying and did not want to take the position if the put expired in the money.  I still came out ahead on this one by $362.52.

So far these are the guidelines that I use to buy to close put options and would appreciate any pointers or questions that people might have to make in the comments.

Dennis Gartman’s Third Rule of Trading: A commentary

Dennis Gartman’s Third Rule of Trading:  “Learn to trade like a mercenary guerrilla.”

A guerilla is a warrior.  A mercenary is a warrior who fights not out of loyalty or patriotism but for money and profit.  So one would assume that Gartman is saying not to stand by a company that you like, nor a trading strategy, if its not working.  Be flexible, because you’re in it not to prove a point but simply to make money.  So he writes, “We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.”

I’ve read other financial writers that say that people are often irrationally loyal to a company whose stock they invested in.  My mother-in-law told me once that she thought it was basically immoral to short a stock, like you were betting for the downfall of a company or something.  Regent College professor Paul Williams feels that one of the main problems of the market place today is the disconnection between the people–creditors, companies and clients alike; indeed, the stock market is one big anonymous place where traders can determine the ultimate fate of a company, sometimes in a matter of minutes, and that is all done outside of relationships with the other stakeholders, the workers and the management that may be ruined in the process.  And yet that is the system.  So I suggest that Gartman is correct.  The anonymity of the market means that I can make the decisions that support my own solvency as opposed to what is going to help the companies whose stock I decide to buy or sell.  I am indeed a mercenary ready to switch sides.  This anonymity leads to the greater efficiency–and yes, perhaps, the brutality–of the market; decisions can be made not out of emotion, personal relationships, tribal loyalties, politics, patriotism or idealism, but simply because they are financially viable.  This means that if Nortel, Enron, or BreX go down the tubes, I don’t have to go down with them, but I sell them and find something better to invest in–and hopefully, I do it before it is too late.  This efficiency ultimately is good, in my view, and leads to great prosperity because the winners are the best companies and the losers are not viable.  If you want a road to mediocrity and poverty, then create a system that rewards losers and punishes the successful (such as socialism or bailouts).

I made the decision in 2008 to sell my shares of Microsoft.  Yet my sister works for Microsoft.  I didn’t tell her about my decision to sell, and we are still talking to one another.  Isn’t the anonymity of the market wonderful?