Kevin Stecyk

Cfa, independent consultant, energy
Kevin Stecyk
CFA, independent consultant, energy
Contributor since: 2006
Thank you for commenting Michael. Please allow me to respond to some of your points.
1) 20% increase in production is not business as usual.
First, I didn't pick the title. And second, while 20% increase in production is not typical, the results for the combined companies of XTO and ExxonMobil were strong, business as usual. There was no unusual activity--either a decrease or decrease. So, it's business as usual.
2) Natural Gas as Transportation Fuel.
ExxonMobil addressed this point during its March analyst meeting. I discussed that point in my blog:
Long Link:
speciousargument.com/b...
Short Link: goo.gl/oOuA
As you'll see when you read the article, natural gas as a transportation fuel is not so easy.
3) Bernanke and other stuff. I largely agree with your comments.
Again, thank you for commenting.
Financial Times Article: Oil surges amid maintenance in North Sea
www.ft.com/cms/s/0/1d1...
Quote=========
Published: August 3 2010 11:42 | Last updated: August 3 2010 23:07
Oil prices surged to a three-month high above $82 a barrel on Tuesday as European benchmark Brent oil moved higher lifted by lower production in the North Sea fields due to maintenance.
Oil companies such as Nexen have delayed supply of some cargoes of physical Brent blend crude as many of the North Sea’s 50 or so fields undergo planned seasonal maintenance and production in others stops due to unplanned outages, analysts said.
========
Jimmy46 wrote, "Private companies play a minor role now. "
How about that, maintenance on *one* field causes oil prices to rise. Now, just imagine if that same trend of reduced production were to happen worldwide because of underinvestment. What would happen to prices then?
Jimmy46, What are the operating costs for an oil sand company? Remember, ExxonMobil has partial interest in Syncrude and owns Kearl.
What is the breakeven oil price required for new projects? What is the decline rate of conventional oil? After five years of underinvestment, how much would non-Opec production fall?
What is the elasticity of demand? Supply? In other words, if even just a few of the major producers are unable to maintain production, what happens?
All you have offered Jimmy46 is rhetoric supported by nothing.
:::Kevin, I responded to your post line by line.
Then you question of, "US Oil consumption Peaked in 2005, and has gone down 4 years in a row. So would you consider 4 years a prolonged period of decreased oil demand? " is a non-sequitur. I already stated that consumption for OECD countries has peaked. So why ask something that was already addressed?
If you think oil is about to go down for a prolonged period, short it. It's a free country. And that's what makes markets.
>>- US Oil consumption Peaked in 2005, and has gone down 4 years in a row. So would you consider 4 years a prolonged period of decreased oil demand?

The U.S. is part of the of the OECD, no? Perhaps read my response before responding yourself.
>>So oil prices can't go down because if they do it's going to hurt producers? I disagree with that logic. Commodities don't have feelings and don't care if overleverages producers go bankrupt or not.
When producers go bankrupt because prices are insufficient, there is less production. My key thesis is that demand for oil will never go down substantially for a prolonged period. So with less production and current demand, prices will resume. ~No feelings required.~
And yes, oil demand for OECD countries has likely peaked. But OECD countries are not all the countries.
And as far as Chanos's thoughts on China are concerned, I'd rather listen to Jim Rogers. For those not familiar with Jim Rogers's view on China, Google is your friend.
I never said I ignored valuation. Rather, my point was and is that current concerns about global economies are going to drive the stock. If the world economies begin to recover in earnest, then the stock will move higher. Conversely, if world economies take a hard fall, NILE won't escape the carnage.
NILE has always traded above a 2 PEG ratio, which is fine. The current five year PEG ratio is only 2.37. For a stock that has lots of potential growth, that isn't an outrageous value. It's higher than the bears believe it should be. But *I* am not concerned.
If you want to perform a discounted cash flow analysis, you have to make some *guesses* about growth rates and margins and such. If I were to do that, my error bars around my key inputs would be so large that I could arrive at almost any valuation you or I wanted.

So, in effect, I am saying that the valuation appears to be within historical norms for this company. We note too that management is buying back shares at around $50. (Many of the bears didn't believe NILE would buy back shares for a long, long time.) Moreover, it is showing strong growth in an exceptionally difficult economy, one in which many investors are shunning consumer related stocks.
I hope that sheds some light.
"The problem is that they only grew 20% in q1 vs q1 2009 (when we were almost in a depression.)"
In the conference call section, the company provided guidance: Maintaining sales growth at 15% or greater and diluted earnings per share at 20% or greater.
With regard to unemployment and recession, please refer to these two government sites:
www.bls.gov/news.relea...
Compare April 2009 with April 2010. Look durations of unemployment.
www.bls.gov/lau/stalt.htm
Here you'll note that the U-6 (unemployed, underemployed, and discouraged) is 16.7%. During the depths of the recession, it was at 17.5%. In other words, we haven't moved too far from the lows. And to be growing at 20% during these hard economic times is pretty darn good.
Thank you for your balanced comment.
"Exactly. If you ignore the valuation on the stock, it's a great buy. If you worry that a company that might grow at 20% is trading at 50 times earnings, then it's a short."
Problem is, many have believed it was a great short since it was at $20 two years ago in February 2009. Others commented back then too about the excessive valuation. And here we are at more than 2.5 times that value. At least if you're long, you can only lose your original investment.
We can all point to companies that have crashed and burned. It's easy to do.
How many companies can say that they are enjoying strong growth during an extraordinarily difficult environment and are prospering while their competition are floundering in disarray?
As I write this message to you, the S&P 500 is up 9.63 or 0.84% while NILE is up $0.79 or 1.55%.
In any event, I thank you for your comment. People have different views and that's what makes markets.
<img class="authors_reply" src="static.seekingalpha.co...">

<img class="authors_reply" src="static.seekingalp...

On Nov 16 08:28 AM bdrose wrote:
> Do you think they are actually going to grow year-over-year, rather than sequentially, for the 4th quarter?
Last year, "Blue Nile reported net sales for the 14-week fourth quarter of $85.8 million..."
investor.bluenile.com/...=
According to their 3Q press release,
>>We are projecting fourth quarter net sales between $100 million and $109 million, and diluted earnings per share in the range of $0.35 to $0.39.
(See my quote and link in the published article above.)
Because they are forecasting year on year sales increase for the fourth quarter, the answer to your question is "yes."
<img class="authors_reply" src="static.seekingalpha.co...">

On Nov 12 08:59 PM Michael Shulman wrote:
> Your note was amusing since it relied on data and numbers rather
> than hope and hype -- but how can you be bullish on a company so
> grossly overvalued facing 2% growth?
Odd, I received the same negative comments back when NILE was $20.
> They have experienced margin
> expansion due to cost controls and reductions -- a one time event
Did you listen to the conference call? Margins are expanding for two reasons: 1) Product mix and 2) Better sourcing. And product mix will be an increasing benefit. In other words, it ain't over yet.
> -- and sales are essentially stagnant. They are selling for 80 times earnings -- if they grew profits 20% a year it would still take them four years to grow into the premium the market is assigning to them.
Earnings in the depths of a huge recession, one of the worst since the Great Depression, one where the U-6 Unemployment rate is 17.5%. Hey, I am happy they have profits at all.
But not only do they have profits, they have growing profits and growing cash flow. And they might even be buying back shares soon. As any investor knows, next year's earnings in the depths of a recession are not that important. Often companies will have extremely high p/e during the depths of a recession. So what?
But more importantly, while Blue Nile is growing its profits and cash flow and gaining market share, it's competition is struggling just to survive. Or put differently, Blue Nile is profitably increasing market share. And that's a good thing.
Be sure to read part II of this article:
seekingalpha.com/artic...
Please ignore the second last paragraph where the article mentions my Fish Creek Park photograph. On my blog, where Seeking Alpha found my article, I usually have a random photograph to begin my posts. At the end of the article, I usually write a brief blurb. Unfortunately, the photograph stuff was captured in this Seeking Alpha post. The editors might have removed the offending paragraph by the time you read this note.
Thank you for your well written article Eric. I was hoping to write my own positive article when Seeking Alpha released the transcript from the latest conference call. Perhaps SA is just late, in which case I will write my article in the near future.
Anyway, for those who didn't listen to the conference call, I urge you to do so. It wasn't a barn burner, but it was better than I expected.
On Mar 26 04:50 AM limps wrote:
> Kevin, your advise is completely flawed. Your comment is just an
> explanation of how maths work.
And it's all about math. If you read the article carefully, you'll note that ProShares walks you through the same math. Again, it's just math, and rather simple math at that.
Thanks for the article Eric.
On Mar 25 03:11 AM aarc wrote:
> There is something wrong with the author's analysis. He made his
> conclusion based on a non-trending market with daily ups followed
> by daily downs. Markets don't stay in consolidation forever. They
> do trend too. Make another computation based on trending markets
> with more up days than down day during the upturn and the inverse
> during downturns.
Markets are never linear forever. If you buy and hold, you will NOT achieve 2X or 3X. If the markets trend for a period, buying a 2X or 3X will give you more gain, obviously, then just holding the underlying asset.
Earlier you wrote, "We don't have historical data yet of the xETF to the upside." You don't need historical data on the upside. You can create your own proxy data. You will be missing the expense and tracking errors; however, you will have all the data you require to see the erosion of the 2X or 3X ETFs.
You can look at crude oil or S&P 500 or whatever. There's lots of historical data to play with.
Just use the methodology provided in my table with actual data. And then run it out for a year's period.
In my previous reply to David Hollinbeck, I provided two links to Yahoo. Unfortunately, they didn't work out. So here they are again.
-----
David, by looking at SPY and SSO for the three month period, we note that the effect is not pronounced.
See here: bit.ly/18E832 (spy, sso, sds ... fixed link)
Let's look at six months: bit.ly/12wajJ... (spy, sso, sds ... fixed link)
------
Continue with my prior response to David. It's about nine or ten responses up.
On Mar 24 08:59 PM Vanderpool wrote:
> This is the best article about these funds I have read yet... Thanks
> Kevin for the effort.
My pleasure.
Still I have some questions...
> What I do not understand is what effect do they have on your holdings
> if you stay in them overnight. Do they open up the next morning compensating
> for any plus or minus action that occurred since closing the previous
> day?
My understanding is that they do compensate for any plus or minus action that occurred since the previous day. So in other words, if the markets open up big the following day, your 2x ETF should reflect that when trading begins.
You would have to read the prospectus of the ETF in question, but my *guess* is that most of these ETFs use a few stocks/futures/options during the day to keep the ETF tracking the underlying asset. And then toward the end of the trading day, they attempt to "true up" the ETF by using a more comprehensive suite of assets.
Some speculate that the wild trading that often occurs in the last hour is attributable to these ETFs.
> Can they be used at all to protect you from overnight swings in the
> market?
I suppose if your portfolio had a beta of 1.0 (or pick any value) and you went with a negative 2X (or whatever value) S&P ETF, it would help flatten your exposure.
That said, these ETFs do experience tracking errors.
> If not, how do you trade in these if you have a long term perspective
> on where the market is headed? (In them in the AM and close out
> in the PM? Everyday until your market expectations change?) How
> do you capitalize on their potential to out perform?
If you believe that the market is headed up (or down), go ahead and buy a triple ETF. Just recognize that volatility will eat away at your returns. So if you have a strong few days and expect the next week to be choppy, sell.
Or buy the ETF in the AM. Ride the ETF throughout the day and sell before closing. In the morning, assess whether you believe that the day will be another winner. If so, buy again. If not, stand aside.
It's the volatility that will eat away at your returns. If you believe that you are about to enjoy several days in a trend, go ahead and try to capitalize on that.
On Mar 24 08:21 PM Nic Horns wrote:
> Kevin,
>
> I understand performance drift, I trade the BGU and it is down 50%
> since inception on 11/5 and the Russell 1000 is down 12.9%. At 3X
> that should be a 38.7% decline in the BGU. In order to combat the
> negative volatility effects, do you think coupling the levered ETF
> with a long VIX ETF or option would be a good idea?
To be honest, I don't know. One person who knows these ETFs, VIX products and options well is my friend Adam Warner. I encourage you to follow his blog Daily Options Report at:
adamsoptions.blogspot.com/
He might be able to provide a better and more informative answer.
Shaun wrote:
> My bad... I plugged in wrong numbers for +1X. But what about -1X
> ETF. It seems -1X will be same as +2X on even days.
> Day Price +1X -1X
Yes, your math works. Again, my example is quirky in that we have +25%, -20% alternating back and forth.
The key takeaway from this entire exercise is that using a levered ETF, your actual return will differ from an "intuitive expected return," where the intuitive expected return is the ETF multiplier times the actual realized return of the underlying asset. This difference is magnified by both volatility and time.
Shaun wrote:
> This implies that even 1X ETFs that simply move based on daily performance
> of the underlying will be off by about 51% on the 10th day (+1X)
> and by about 75% (-1X) when the underlying would be exactly at the
> same price as on Day 0. Does this suggest we only invest in stocks
> and forget about ETFs?
Sorry Shaun, but I don't follow your 1X ETF will be off statement. A 1X ETF should be very close. That is SPY should be very close the S&P 500. SPY is an ETF.
David Hollinbeck wrote:
> I have charted the SPY vs. SSO over a 3 month period and don't see
> the effect you are saying will happen. During this past 3 month period
> the SPY has gone down but recovered to the starting value on two
> occasions. On those occasions the SSO has also recovered to its starting
> value. So, I don't see the behavior you are predicting.
David, by looking at SPY and SSO for the three month period, we note that the effect is not pronounced.
See here:preview.tinyurl.com/4d... (spy, sso, sds)
Let's look at six months: preview.tinyurl.com/4d... (spy, sso, sds)
Again, SPY and SSO actually look as though they are performing reasonably well. That is, SSO has fallen roughly 2x as much as SPY. Looking at SPY, though, shows that it is reasonably straight. It has gone down consistently.
However, look at SDS and SSO. Both added together should equal 0. 2X + -2X = 0. On my screen ~+10 + ~-60 doesn't equal 0.
The key to understanding how much these levered ETFs will deviate away from 2X (or -2X or 3X or -3X or whatever) is look at the volatility of the underlying asset and length of time. And, as an additional spot check, add the mirror (if you using +2X, look at -2X) ETF to see if you get 0.
Look at FAS and FAZ. When added together, even over a three month period, you'll note that the two ETFs don't come close to 0. The financials have been much more volatile.
Again, the two main keys are volatility of underlying asset and length of time held.
> ...IF you hold them long-term, across a volatile period with many
> up and down days. Caveat, caveat, caveat!
Good, we agree with the caveats.

> However, if you follow trend &amp; buy the rallies and declines,
> you add alpha on both sides, plus downside protection with these
> investments. In the Bear Mkt, longer term and with a number of smaller
> up periods, SOME Ultra value was eroded from my Bear Model (total
> 8-10% allocation) in the 9 months these investments were IN. But
> those 2x Inverse ETF reduced losses considerably, and then the 2x
> Bull EFTs provided great upside after Nov 20th. How many managers
> with a 50/50 > 65/35 > 50/50 allocation suffered a max loss of -10%,
> before gaining back and ending +15% for 2008?
I am not going to attempt to follow all you precise timings of the market. If you are an exceptional market timer, then to really juice your returns, you could use options and futures. That'll give you some alpha.
Speaking of which, Google Daily Options Report, a blog written by my friend Adam Warner. In his blog articles, he discusses these ETFs and options gamma.
To save you the search, you can find his blog here:
adamsoptions.blogspot.com/
The point of my article--and many similar articles--is that investors/speculators should *NOT* think they can *buy-and-hold* these leveraged ETFs and expect to maintain their 2X or 3X leveraged results. As we agreed on the caveats, that won't happen.

> Since anticipating &amp; reallocating for a Bear Rally on 3/9/09,
> the weighted US equity return in my model is UP +36% with four 2xleveraged
> Bull ETFs; the SPY is UP +17.7%. When the Rally fades, Bull ETFs
> go bub-bye. What's so complicated about that?
Yes, if you are using these leveraged ETFs for short-terms directional moves, then great--you're using them as you should. Again, the point of my article was aimed at long term buy-and-holds.
> In small measure these are a market timing godsend - or PITA, if
> you time poorly. The triple 3x leveraged ETFs are probably far too
> risky for the vast majority of investors, but for diversified allocators
> a10-20% Bullish or Bearish stake can significantly improve performance
> in period rallies &amp; declines. You're only as good as your calls,
> same as it ever was!
>
> The mutual fund industry HATES the attention these leveraged ETFs
> are getting, as little financial advisors learn how to outperform
> $$$ fund managers. Also wonder if State Street Global Advisors resents
> the billions now flowing to ProShare Advisors LLC.
>
> Shilly blogs are a good way to attack the competition, obv.
Not sure what you're referring to with regard to "the competition." I don't compete in any fashion with ProShares. In fact, I even gave it kudos for its disclosure that its leveraged ETFs should NOT be used for longer term buy-and-hold investors. Instead, leveraged ETFs are meant for daily or very short-term holding periods.
Even though you seemed to have taken exception to parts or all of my article, I am glad you took the time and effort to post your response. All comments help to clarify this topic for others.
> hi kevin, how come add another article warning investors to be careful
> with leveraged etfs? there's been an overabundance of these warnings
> posted here already. -cheers
I agree, there's a lot of articles already highlighting this information. So my article is NOT breaking new ground. But, as mentioned in my article, friends and acquaintances are still under the wrong impression. It was for them that I wrote this article. Now, when I meet those people, I can provide a verbal explanation and point them to an article on my blog.
:::"As far as having little physical assets, would you prefer that Blue Nile be saddled with a lot of unproductive leases in various malls across the world that are unable to turn a profit? Capital light is a beautiful thing."
I wrote the above paragraph in my earlier response. A lease is an operating cost (operating lease).
So I should have written, "As far as having little physical assets, would you prefer that Blue Nile be saddled with a lot of physical infrastructure (Property Plant and Equipment) with large buckets of local inventory as each location?"
::: 1. They withdrew guidance. A clear indication that they believe that trends are worsening. The retail environment is terrible, and Nile is not immune to the economic reality of the moment.
Agreed, but so what. That's already known. Moreover, would any guidance by any jeweler be credible?
:::2. They indicated in the cc that sales in the currnet quarter are trending off 15% already, and in my view they are likely to get worse before we see any improvement. In the first q of 2008 their gross revenues were 70M. That would indicate they are trending towards gross revenues of approx 59.5M for this quarter.
Only 15% down is darn good, no? How are their competitors fairing?
::: 3. Their gross margins for the last quarter and the last year are about 21%, resulting in expected gross profits for the current q of about 12.4M.
And what's the gross margins for their competitors? Not even close to 21% Just a guess, Blue Nile will become a stronger competitor.
4. S G and A last quarter was 12.4M, and that should be very close to the current overhead run rate.
12.4M is correct for SG&A for the last quarter. Could SG&A be reduced if sales were reduced? Absolutely, just look back to 2006. Then Revenue was $203M, SG&A was $27.1M or $7M per quarter. So we know that SG&A is not fixed.
::: 5. At a revenue run rate of 59-60M they break even! That is what the facts provided during the cc would indicate.
A quote from the conference call relating to break-even cash flow (as opposed to earnings):
Diane Irving...
"And I would say, while it’s difficult to give a number, I think you would be looking at positive free cash flow for the year if the sales are north of say $230 million something like that."
So your numbers are not far off the mark.
The question you have to ask yourself is, if Blue Nile has a large drop-off in sales, what happens to its competition? Won't they be in even worse condition? And does that leave the Blue Nile stronger relative to its competition when the economy does improve?
:::6. Any deterioration from a revenue run rate of at least 60M/q will result in losses.
That's the definition of break-even as you expressed in point five?
:::1. Although they ended the December q with 54M in cash, they also had 63M in trade payables!!
At Dec 30, 2007, the company had about $123M in cash and cash equivalents, and $86M in Accounts Payable.
At Jan 4, 2008, the company had about $54M in cash and cash equivalents, and $62M in Accounts Payable.
Quote from Marc Stolzman during the conference call:
:::For the full year 2008, we purchased 1.6 million shares for $66.5 million representing approximately 10% of outstanding shares at the beginning of 2008.
So what's the problem? A/P has gone down along with sales. If you were to add back the share buyback to the cash position, the company would have about $120 million in cash again. The company decided to spend some of its cash on shares.
:::2. In addition, their inventories were 19M at the end of the q, a decline of about 10% from the prior year, though revenues for the q were down 20%.
Their inventories are rather lean compared to traditional brick and mortar retailers? And Blue Nile can simply hold back on reordering to bring inventory back in line?
:::3. Current assets exceeded Current liabilites at the end of the quarter by only 8M. They don't have much on the balance sheet other than current assets and libailbities. Book Value, if you accept all values as accurate was 19M at the end of the quarter.
First, I place little value on book value, pun intended. Book value has many issues associated with it. I encourage you to read "The Essays of Warren Buffett: Lessons for Corporate America."
With regard to current assets and current liabilities, the company could have chosen to not buy back its shares, which in hindsight would have been a better choice, and had even more current assets. However, it chose a different path.
As far as having little physical assets, would you prefer that Blue Nile be saddled with a lot of unproductive leases in various malls across the world that are unable to turn a profit? Capital light is a beautiful thing.
:::4. There are just under 15M diluted shares outstanding, resulting in a stated book value of 1.26/share. Any write down of inventory or fixed assets would reduce that number further.
As we discussed, its inventory is light compared brick and mortar. The company's inventory doesn't age like that of its competitors. What's the turn rate on its inventory? Do you think it is over 12, implying that inventory lasts less than month? Do you really think its inventory will suffer a massive devaluation when it enjoys a rapid turnover?
And we just finished discussing fixed assets. There are few fixed assets, a wonderful thing in this environment.
:::At current trading levels the stock is trading at almost 17 x book!
Again, don't care about book value. So what?
:::At current trading levels, the stock is trading at an infinte p/e. there is no "e".
We will see about the no "e." Riddle me this: would you prefer to be leading Blue Nile or one of its traditional brick and mortar competitors? Who do you think will emerge from this recession in a relatively stronger position?
:::Management will not have the cash resources to support the stock price for much longer. Note they used their cash to buy back 66M worth of stock in 2008 (it appears they reduced the diluted share count by 2M shares for an average of about 33/share). Without the management bid in the market, the only other logical source of support is short buy backs. Once they dissipate, the stock should descend.
As I write this message to you, I note that it is another brutal day in the markets, with the S&P down 3.3% and Blue Nile up 3.9% to about $22.05.
I am comfortable with my long position, are you comfortable with your (short) position?
:::Given these facts, it is very hard to understand how anyone, let alone someone who is employed as an analyst could recommend this stock.
Who said I was recommending it? Go back and read my two recent articles. I merely stated that I believe Blue Nile will hover around $20-$25 so long as the S&P remains in the range of 800-950. At present, the S&P is about 744, and Blue Nile is still north of $20. So far, I think I've done rather well. The bears, on the other hand, were hoping for a plunge after the latest earnings release.
Thank you for your comment, and I wish you happy trading or investing.
<i>What are you swayed by then? Doesn't this allow you to justify any price?</i>
You're right in the sense that the stock price is highly dependent upon key assumptions, which in Blue Nile's case can vary widely.
I am swayed by Blue Nile's competitive strengths; it's ability NOT to lose money, even though most of its competitors are; and my belief that it will do much better than the market and its competitors when the economy recovers.
Regarding share buybacks, you might wish to consult the prior transcript:
seekingalpha.com/artic...
<i>Over the past 12 months we have been very active in repurchasing shares. At the end of September, 2008 our shares outstanding totaled 14.5 million compared to 16.0 million a year ago. Since the inception of the buyback program in the first quarter of 2005, we have repurchased 4.4 million shares for a total of $160.0 million. This amount represents 25% of the shares outstanding at the inception of the program. <b>Our share repurchase program continues to be a priority for our uses of cash and we will look for opportunities to strategically execute our repurchase program.</b><... [emphasis added)
<i> NILE should trade around 8x earnings until it can both prove that it's industry will have meaningful results and it can be a meaningful player in it. </i>
If we were to accept your valuation and accept analysts' forecasts of roughly $0.90 per share for the year 2008, the you believe that Blue Nile should trade for $7.20 per share.
You and I obviously disagree. Your value is less than one-half of the "Low Target" on Yahoo!: finance.yahoo.com/q/ao....
Note that my range of $20-$25 is less than the Median Target of $28. So I am hardly a raging bull. But nor am I a raging pessimist.
>>They have the cash flow to keep buying their shares which would scare anyone dumb enough to try and short them.
To some degree, offsetting the share repurchase programs is falling production. Compare current production with that from one year ago. It's about nine percent lower.
Moreover, if you look at the last four months in the last graph, the red squares show that Exxon is reasonably insensitive to oil price movements. Oil price has fallen from over $100 to about $40. Share repurchases have not compensated for that change in oil prices.
> Discussion of the potential returns and margins would have benefitted
> the article.
>
Agreed, and you've done a great job filling in some of the details.
> In the example given, margin of $6990 would have been needed for
> each short position. If AAPL remains above the strike of $75 through
> expiration the position would yield $510/$6990 or 7.3% over the life
> of the option (one month in the example) ignoring commissions.
>
>
> One can also limit the risk of the third type by posting full purchase
> price as margin for each option sold. Account cash balance/strike
> price/100 will tell you the largest number of options you can sell
> and be able to purchase shares if exercised. For an account with
> $50,000 cash you could establish
>
> 50,000/75/100 = 6.6 short option positions (round down to 6) and
> collect $3,060 in premium in one month. You could take as many as
> 12 positions if you were willing to purchase the shares on margin
> when exercised, but that would be a big risk for the extra $3,060
> in premium.
I should have mentioned that one should sufficient cash in the account to make the complete purchase (no margin) at the strike. If you want to be more adventurous, then you ought to have a strong command of this strategy with its risks and rewards.
> Good post otherwise. Selling naked puts can be very rewarding if
> combined with sensible market timing/analysis to enter the position
> when further price declines are less likely.
Agreed.
> Given we are in a bear market, this strategy should be used with
> care. It can be costly to have the stock price collapse as Tom Armistead
> noted above.
Agreed. You need to be vigilant to monitor your trade. And you need to be comfortable owning the security at the strike price.
Thank you for your comments.
Link has been fixed now. :)
The correct link for the Daily Options Report is located here:
adamsoptions.blogspot..../