Just over a month into 2012 and, with few exceptions, I'm focused on long-term investing, mitigating risk and developing a better understanding of the strategy, processes and mechanics involved in trading and investing.
That said, most investors leave room in their portfolios for speculation. Not only does considerable upside exist via a riskier approach, but, let's face it, it can be fun to move away from the basics. As long as most of what you do is boring, you're probably setting yourself up just fine.
In this article, I explore trades you can put on today that involve a bit more risk than what I normally discuss. For each trade, however, I consider the risk and long-term perspectives, where applicable.
Investors in Coinstar will be able to buy a lot of movie tickets (and more) if Coinstar's short sellers start to get nervous ...
... a very strong storm may be just over the horizon for short sellers. Short interest has doubled since right before the gap down in price in late October, and now the price has nearly recovered. Many short sellers are likely underwater or close to it, which also likely means stop losses are near to be triggered, causing the classic short squeeze.
What may light the fuse on this one is Monday's earnings release. While earnings will be very important, guidance - and how the market interprets the guidance - is what I will be most closely watching. With the combination of a big beat with higher than expected guidance, investors could be celebrating.
It doesn't get much better than that. But, you've made your money going long CSTR, so now what?
I'm not sure about you, but, as the biggest Netflix (NFLX) bear this side of Culver City, I've never been a big fan of Coinstar. I wish I could have rallied around the company. For the last couple of years, it could have served as the perfect answer to Netflix. But it never really was.
This just-announced partnership with Verizon (VZ) - it feels like it's been an eternity in the making. I don't think it's a case of Coinstar moving forward with streaming cautiously and prudently. Rather I don't think the company has ever had a very solid handle on itself. Just think back to last year when the company botched guidance.
And now here's Coinstar telling us it's about to take over the world. I'll believe it when I see it. I know what I saw happen on Tuesday, though. As Weinstein predicted, it was a classic short squeeze. And, if I know Bob like I think I do, he will take his profits and turn around and sell a few calls.
If you're long and you want to go the safe route, hang on to a few hundred shares and write the CSTR March $60 call against them. For each one you sell, you bring about $2.25 in premium income. For the less risk-averse investor, consider going naked and selling the calls backed by your account equity. But, clearly realize, that this is less of a long-term strategy - and much more dangerous - than writing a covered call.
On the covered call, you keep your income and if CSTR drops, you keep your shares. You're still in the game and likely will not get hurt too badly (hopefully) over time. If the stock keeps running, no harm and no foul, you could get your shares called away above $60 and you bank profits on both the option sale and stock trade.
If you support the trade with margin, it's another story. You need the stock to go down. If it drops and does not flirt with the $60 strike between now and mid-March, you breathe easy with premium income in your hand and just a little margin interest deducted from your account. If, however, the stock runs and the party you sold the call to exercises his or her option to buy CSTR at $60, you'll be selling it to them for $60 a share, even if you have to buy it at $70, or whatever the market price is at the time of assignment, to do it. Not pretty.
Sirius XM (SIRI). Whenever I try to get along with SIRI bulls, I feel like I'm about to give up my life, take residence in a bunker and prepare for the end of days. There's just something about the whole SIRI cult that's unsettling. When you attempt to rationally consider what might happen with the company's forthcoming earnings report and decide how to prepare for it, you get taken to task.
Sirius XM might blow earnings out the door on Thursday. It might raise guidance on some metric or another on the call. It may even announce an ill-advised share buyback. Fellow Seeking Alpha contributor Crunching Numbers summed things up quite cogently in a recent article:
A share buyback often sends a message that a company has no better internal uses for cash. Those investors looking for capital appreciation and growth in the share price, are being told that there are limited growth opportunities. Those investors looking for dividend income and increasing dividends to keep up with inflation won't be satisfied. Sirius investors hoping for a share buyback should be careful about what they wish for.
Well-stated. If Sirius XM buys back shares, I would not be surprised to see investors actually run for the exits. As Crunching implied, and as I pointed out the other day, the big money wants growth and it wants innovation. At this stage of the game, Mel Karmazin should hire a young gun from tech or new media to take over and head into hyper-growth mode. Karmazin can mind the core business that brought his company to the dance.
That said, it's a risky short and nothing looks all that attractive options-wise right now to follow bearish conviction. On the upside, as I showed in a recent article, SIRI usually gives you plenty of time to react and follow the momentum:
Unlike many stocks that do their post-earnings popping, dropping and recovering all in the span of one day, SIRI makes pretty sharp breaks, which become, relatively reliable trends, lasting, at least, several days. In other words, if the stock moves one way or the other post-earnings, you can reasonably expect the trend to stay intact for a long enough time for you to make money.
Amazon.com (AMZN). In the same article, I stated that the post-earnings swoon provides a nice entry opportunity for AMZN. With the stock up about $5.00 since February 1st, when Seeking Alpha published that article, I feel pretty confident in my bullishness.
For a while, it was not the time to enter AMZN. Too many headwinds existed ahead of earnings. But, now that the dust settled and management calmly and coolly addressed analysts and investors, those worries remain in the rear-view mirror for now.
If you're an aggressive investor with the cash ready to send AMZN's way, selling a put could represent one of the best ways to get long. As of Tuesday's close, you could sell the AMZN March $180 put and receive a credit of $5.25. If AMZN pulls back below $180, you might get put the shares at that price. Factor in the premium income and you effectively buy AMZN for $174.75.
Two points to consider. If AMZN runs, you could miss out on getting long, particularly at these prices. If it tanks, you're stuck with the shares at $180, regardless of market price. Be incredibly selective about the strike you select to sell a put at. Be true to yourself when you ask, "will I be alright buying this stock and possibly having to hold it, maybe for a long-time (or forever) at this price?" Or, even more importantly, "I am prepared to take a considerable loss if things really go south?" No matter what happens, you keep the income you receive from selling the put.
Additional disclosure: I am long NFLX June $40 put options.