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Clayton Rulli's  Instablog

Clayton Rulli
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Has 14 years of investment experience. Holds Bachelors Degree in Business and minor in Economics. Holds special interest in options trading and hedging strategies utilizing options. The best way to contact Clay is here at SA messaging.
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  • Protecting Your IRA's Gains: Sleeping Easy In 2014

    With the close of a very successful 2013 right around the corner, it could be time to safeguard your holdings and lock in some profits you so valiantly earned this year. The closing of the year could be risky, as sometimes ETF's and money managers rebalance holdings or take advantage of tax advantages. Not only that, but 2014 is certainly a blank canvas in regards to Fed policy, and there are some that claim the market is due for a correction.

    So I ask, why be greedy? And no, I'm not proclaiming to "sell sell sell" your gloriously green holdings. I'm not even saying "take half off the table", as I think the market could continue running higher. You know what they say, don't fight the tape! All I'm simply saying is take a small part of your juicy and relatively abnormal gains you hopefully earned this year, and apply them towards guaranteeing a relatively risk averse 2014.

    Take your IRA for example. You probably have one or two dividend ETF's in there, right? For example, imagine you've owned 100 shares of the Schwab U.S. Dividend Equity ETF, (NYSEARCA:SCHD) for all of 2013; you'd be up say 20% year to date, or roughly $600 on your initial $3,000 investment, without dividends. This is a nice gain, but why risk losing it in 2014? Moreover, why sell out now and risk additional gains? A simple solution is buy a long term put option to "lock in" a large portion of that hard earned money. For example, take a look at the July 2014 option chain to the right.

    If you took only $100 of your $600 in gains from 2013, you could easily purchase the 33 strike for $100 or so, which would serve to offset a fall in SCHD in the case of near term correction. Also, it would cap your max loss @ $33/share through July. This means absolute worst case scenario, you would lose only about half your gains earned this year through July 2014 expiration or the next 231 days, even if the market totally tanked down to totally unimaginable black swan levels.

    The market is at all time highs, and what goes up must come down, eventually. With 2014 approaching and much mystery set regarding Fed policy, ask yourself one thing: how much is 231 nights of solid sleep worth to you?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Dec 02 11:47 AM | Link | Comment!
  • Richard Kinder Puts Hedgeye Short To Bed

    Richard Kinder, CEO and Founder of the Kinder Morgan entities, which include Kinder Morgan Inc (NYSE:KMI) Kinder Morgan Energy Partners (NYSE:KMP) Kinder Morgan Management (NYSE:KMR), and El Paso Pipeline Partners (NYSE:EPB), aired an exciting webcast aimed to refute some of the various claims made by Hedgeye which aimed to drive down the share price due to their short position.

    Most notably, Hedgeye claimed Kinder's strategy is to "starve its pipelines and related infrastructure of routine maintenance spending" so that it can artificially inflate distributable cash flow and therefore increase payments to the GP, KMI; the entity Richard Kinder happens to own 230,759,786 shares of. The allegation basically accused Kinder Morgan of juicing payouts in the present, while deferring these maintenance costs to the future. However, Richard Kinder seemed to adequately dispute this short selling hedge fund's claims.

    Key Points From The Call:

    • For starters, Kinder explained the reductions in capex did not threaten any safety standards or performance of any pipeline assets.
    • "Most costs of real pipeline integrity are not in sustaining capex at all-they are in the expense category." Kinder explained "Ili tools", (or in-line-inspection tools) like "smart pigs" and the affiliated repairs that occur because of those scans are also considered expense items. Kinder continued, "sustaining capex...is a misleading indicator of how well you maintain your system.".
    • Under roughly 31 safety metrics, including spills per mile etc, the entire kinder network is safer than industry average. These incident measures are accurate ways to measure the vigor in which an MLP maintenances infrastructure. This is partly due to the varying size and scope of different assets, as well as their locations or their exposure to climates. For instance, submerged pipes in the Gulf may require more costs than those in moderate, consistent climates. This seemed to be reasonable logic to me.
    • Next, Kinder mentioned Goldman's Sept 9th 2013 attempt to compare the Sustaining Capex as % of EBITDA of multiple large MLP's. In the report, Kinder Morgan spent 11.1% of EBITDA on sustaining capex vs. the industry average of 9.8% for 2012. For 2013 estimates, Kinder Morgan spent 9.8% vs 8.9% industry average. Therefore, Kinder Morgan spent more under this metric than industry comparisons, which seems to refute Hedgeye's claim.

    There is much detail in the 57 minute webcast, and I highly suggest shareholders listen to the full audio; I found it truly enlightening. More importantly though, Richard Kinder's main points as well as answers to analyst questions adequately disputed most of Hedgeye's claims. Kinder explained the often unreliable nature of capex in regard to measuring infrastructure maintenance and repair, errors in some of Hedgeye's research, as well as Kinder Morgan's capex comparisons to industry peers.

    Sleep tight Hedgeye, time to put your short position to bed.

    Disclosure: I am long KMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: EPB, KMP, KMR, KMI, long-ideas
    Sep 18 2:37 PM | Link | Comment!
  • Mini Options: Finally An Affordable Derivative For Average Investors

    On March 18th 2013, the US stock exchange will launch a new breed of option products, primarily aimed to please the small investor who cannot afford regularly priced option contracts. The "minis", which will be valued at 1/10th the size of a standard option contract, will initially be available for Apple Inc (OTC:APPL), Amazon.com Inc (NASDAQ:AMZN), Google Inc (NASDAQ:GOOG), SPDR Gold Trust (NYSEARCA:GLD), and the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

    This new class of options increases the opportunity for small time investors who simply cannot afford 100 shares of these high profile names, or simply want to invest in outright calls or puts that do not quantify as hedging for the 100 shares. Instead of controlling 100 shares of equity, the minis will control just 10, allowing for greater affordability by the average investor without a huge bankroll.

    Many investors often hold a relatively small number of shares in these stocks, and minis provide them with the ability to both hedge and write options on their holdings, said Andy Nybo, head of derivatives at research firm TABB Group.

    My Take:

    I am excited about these products as it makes utilizing popular strategies as "in the money bull calls", or the popular "covered call" finally "doable" for small time investors such as myself. For example, look at the AAPL July 400 Strike Call, which just several weeks ago I was considering buying in hopes of playing an AAPL bounce, due to the fact that it's strike price is in the money and has plenty of time until expiration.

    Currently, this contract is priced at 55.06, which would mean it costs $5,506 to get long this contract ( 55.06 x 100 shares ). I decided this 5 k is way too much for me, since such a high percentage allocation would be committed to just this one, risky position. However, the mini version would be priced very similarly, but would probably cost in the neighborhood of $505 instead, since it would harness just 10 shares, not 100. ( 55.06 x 10).

    This $500 is much more appropriate for someone looking to mitigate risk through proper investment allocating, such as myself. Similarly, covered calls are finally considerable for these high priced stocks. I would never dream of owning 100 shares of GOOG @ 800/share, or $80,000 worth. But now, $8,000 @ 10 shares seems to fit the bill for an investor with minimal capital.

    These option minis are like a dream come true for many investors, and it will be interesting to see how these contracts trade starting Monday. Also, it will be noteworthy which equities are additionally included into this class of mini options going forward. For more information, visit CBOE/MINIS, their site is excellent.

    Disclosure: I am long AAPL, SLW, SAN, GE, EPD, CCI, VZ, SLRC, OXY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I man initiate mini option positions in any of the stocks mentioned in this article at any time.

    Mar 18 3:15 PM | Link | Comment!
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