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  • Get The Biggest Upside In The Stock Market

    (Author's note: working title was "Call Options, Then Email Derivatives and Text Leverage")

    Our last article on Tonix Pharmaceuticals (NASDAQ:TNXP) led to some conversations about using call options, and we wanted to humbly offer our thoughts in the royal third person.

    Common Stock is Probably Best

    In order to get an informational edge in the market, you have to stick to the smaller stocks, the ones that can't interest big money. Our time is not well spent trying to know Coca-Cola better than the hundreds of analysts covering it.

    But the small stocks usually have no options trading at all, and if they do, they are probably illiquid. So usually the common stock is the way to go.

    How Liquid?

    One question we got is "how liquid do the call options need to be?" Our answer was "hold out for your price, if you get it that is liquid enough."

    Which begs the question "what is my price?"

    So here is our Holy Trinity Strategy for buying call options.

    Holy Trinity Strategy

    If you do not have a catalyst looming but you like a stock, the common stock is the much better choice. Options lose value with each passing day, everything else being equal, and you do not want to stay long in that situation.

    So the first part of the trinity is:

    1) Have a catalyst

    But not just any catalyst, one that is in the near term. You do not want to stay long in an asset class that loses value every day, so the rule of thumb here, and the second part of the trinity, is:

    2) Sell within a single digit number of days

    So this can put you there for the action, and time decay does not bite you too much. You still should probably buy the common stock instead of the call options. But you have permission to buy if you:

    3) Pay nothing or next to nothing for options

    Sound too good to be true? It usually is, and you should usually buy the common stock.

    But when options are approaching expiration, you can sometimes get them very cheaply. And if that coincides with your catalyst, and you are right about that catalyst, there is no bigger upside in the stock market.


    We have been lucky, and we know we have been lucky, but we have employed this strategy several times, always with bonanza results.

    We noted in the comments section of the Tonix article that we did this with MannKind (NASDAQ:MNKD). We were in the common stock, anxiously anticipating a catalyst, and someone started unloading out-of-the-money call options that were expiring in two weeks. They were looking to sell for 2 cents each, just looking to get anything for something that would likely be completely worthless in 10 days. We (foolishly/brilliantly) bought all of them we could, selling out all of our common stock. Within a week those calls were in the money by 35 cents, and we netted more than 1,000%.

    The key was that we were not looking to force our way into the options, we assumed they were a bad deal until a motivated seller gave them to us for next to nothing.

    But you can actually do better than next to nothing.

    On June 28, 2012 we published an article boldly titled: "Get Long Right Now, Market Is Low Risk And High Reward For 30 Hours." Two days later we published an article titled: "30 Hours Later Up 23.2%."

    What did we see? In addition to predicting one of Bank of America's biggest one day gains (thank you), we found FREE LEVERAGE in the form of costless call options, call options that had not expired but literally had a time premium of zero. See the articles for more info. And keep this one in mind too, that is the strategy.

    Stick with the Common

    What to do? Stick with the common stock, keep an eye on the options to see if the stars align, and pounce if they do.

    Disclosure: The author is long TNXP.

    Tags: TNXP
    Jul 07 6:59 PM | Link | 16 Comments
  • What Would You Do?

    I had an email:

    I was really looking forward to the VO article because I'm finding myself with some cash right now and not sure where to park it. However that's really for retirees and that's not me just yet. If you don't mind I'll give you a quick rundown of my situation.

    Income:80-90k, 29 years old
    Just sold house about a month ago and have about 150k liquid from equity (way too much I know, but it scary to really do something with it). Stock are very expensive right now etc etc...
    I have about 100k invested. (mixed: safer oil and some more speculative positions...tnxp)

    Happy to answer!

    150K liquid and you are 29, you are ahead of the game my friend. I'll give you some standard answers and my own fearless answers.

    "Stock are very expensive right now etc"

    The great value investors will generally tell you that when it looks like cash is the best bet, usually a mixture of cash and stocks does better. Bull markets historically go on longer and stronger than their value metrics would prescribe (this is mostly Bruce Greenwald and Ken Fisher I'm channeling here).

    I think you should be 100% invested in stocks at your age, it's hard to time the macro moves, and there is evidence that the greater risk is missing the upside. I also think that a PE of around 20 for the S&P is going to be a bit of the "new normal," with bonds yielding so little money has to go somewhere, you could even argue that stocks are pretty undervalued relative to fixed income.

    So understanding that you (1) have a long time horizon but (2) see the markets as expensive, I would:

    -Pick stocks - You have a position in TNXP, this is a stock with it's own trajectory, what the broad markets do will not be this stock's fate. I would pick your very favorites, six or less like a good Buffett disciple, and see what kind of diversified portfolio you can make of stocks that have their own trajectory.

    -Balance cash and extreme diversification for the rest. You know I like VO for a US index fund, but you could spread some around in Vanguard's VXUS and BNDX - the total international stock market and bond market. Very cheap extreme diversification.

    Some form of that should give you the upside a 29 year old needs, but enough safety to not take too much of a hit whatever happens.

    Hope this helps, all the best!



    I'm going to be so bold as to suggest two more equities that I've had my eye on.

    I've been slurping up David Merkel's Alephblog, he's a value manager and one of the most qualified voices in the insurance industry, and he likes National Western Life (NASDAQ:NWLI) and Reinsurance Group (NYSE:RGA).

    His thoughts:

    National Western Life

    Reinsurance Group

    Basically he likes NWLI as a conservative life insurer that has a long record of taking appropriate risks. They trade about two thirds of book value and PE of under 10. Life insurers have to sit on a ton of bonds, that's why so many trade below book, but this is a well managed and quite profitable company. It's also closely held by insiders and unfollowed. One additional point is that different lines of insurance don't mix well with certain other insurance lines, and this is a pure life insurerer with simple products.

    Then with RGA - reinsurance is actually the business that trades more like life insurance. Life insurance company values are generally heavily influenced by the future returns projected for their vast holdings (mostly bonds). These days with bonds paying so little that value is down. But a great fixed income game is providing life insurance - collecting more in premium value vs expected payouts to policy holders. Reinsurers are actually the companies that most resemble this model, and Merkel's favorite is RGA.

    Am I long these companies? No, I'm too active and they are too boring, but they look like excellent long term holdings.

    They both will trade with financials, you could combine the two for your financials position, and consider it advantaged bond exposure as well..


    Might as well mention the other insurer on my list, also from Mr. Merkel, Endurance Specialty Holdings (NYSE:ENH).

    His thoughts.

    He tells a story about when he first started in the insurance industry someone told him that Property & Casualty insurance is not "real" insurance - if the companies lose money they just raise prices. The implication being that rather than being able to accurately forecast outcomes, they charge a number and just raise it if they are losing money.

    He says that while that's not completely true, the best money is in P&C.

    ENH for example provides crop insurance. How do you insure that? Basically you have to err on the side of favoring yourself and charging too much.

    So there's a P&C insurer to go with a Life Insurer and Life Reinsurer, each with different risks - interest rate (Life), mortality (Life Reinsurer), and crops (P&C).

    Not a bad little self-constructed insurance company..

    Disclosure: The author is long TNXP.

    Tags: VO, TNXP, NWLI, RGA, ENH, Insurance
    Jun 28 1:22 AM | Link | 1 Comment
  • Mathematica, What Is The Area For Circle Of Competence?

    One of our core corporate enterprise business value ethics here at Joe Springer is to have an immeasurable circle of competence - not infinite, but always expanding.

    So when erudite commenter JasonC suggested Mathematica to check our retirement strategy we said - "let's learn this thing."

    Is that really what happened?

    No, we actually sent out a tweet hoping someone would do it for us.

    Alas, that has not worked, so we looked up Mathematica, saw that it is free to download a trial of the software, which you can do here, and we are off and running.

    Mathematica is installed, and after Googling some free info and diving in we have run our first ever function:

    We will use the comments here to track our progress...install and learn with us (and get ahead of us and teach us!)!


    First got to figure out what we're trying to model. What we need is sort of out there, this gets close but annoyingly does not give full control of all the variables. No matter, we were able to model 3.5% real return with annual $60,000 payouts:

    (click to enlarge)

    (click to enlarge)

    As you can see, there is about a 20% chance that retirees will either fall short of their 95th birthday by more than a decade, or become richer than when they retired.

    This is helpful, some commenters suggested rebalancing which we initially resisted, but it seems that we can trade some upside for an initial extra year or two position in liquid CDs. If the market goes up in the beginning, great, lock some in, we are not trying to get rich, just not die poor. If it sinks then the cash can be put to use...


    We are proud of ourselves - Jason C said:

    The right way to test the proposed system is the following.

    Use the past 10 years of daily total returns from the VO fund to create a distribution. Randomly draw 252 returns from that distribution and multiply them together to get an annual return. Do this over and over to create a distribution of annual returns to expect from VO. Basically we are creating a larger bootstrap sample using the assumption that the returns are not serially correlated (plus or minus), which is close enough for government work - we are not using any assumption that they are lognormally distributed etc...

    We (think we) have accomplished compiling "the past 10 years of daily total returns from the VO fund":

    (click to enlarge)

    Now to "Randomly draw 252 returns from that distribution and multiply them together to get an annual return," hmmmm...


    Random drawing, we are starting to like this:

    (click to enlarge)

    Update: We have been having the darndest time pulling just the daily change data out and leaving the dates in, but we had a small victory in plotting all the data, and we needed it, there is not sufficiently foul enough language for coding frustrations:

    (click to enlarge)

    Update: We are flustered, but we have a plan:

    (click to enlarge)



    You may question my methods, but look at this:

    (click to enlarge)

    "Sorority Simulator" got 8 views in 16 minutes, "S&P 500 Historical Data" got 1 view in 42 minutes. Clockwork.


    Ask and ye shall receive! We got a brilliant answer to our forum question, and JasonC posted help as well, love the internet!

    Tags: VO
    Jun 26 8:14 PM | Link | 4 Comments
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