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Hari Swaminathan
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OptionTiger.com is founded by Hari Swaminathan, an entrepreneur, everyday person and a self-taught Options trader for over 5 years. Hari also writes the blog at OptionTiger.com, an insightful commentary of the most important issues in macroeconomics, investing, trading, Option strategies, Index... More
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  • GOOG Bear Call Gone Awfully Bad…

    This post was originally written on March 5, 2013 at http://www.optiontiger.com/goog-bear-call/

    Awesome GOOG Bear Call

    Okay which one is it ??

    In the Trading Ideas service, we put this GOOG Bear Call at 820 / 830 two weeks ago when GOOG was at around 785.

    It moved up steadily, and we did 2 adjustments.

    1) We bought 2 contracts of the ITM Call at 780 about a week ago when GOOG was at 800.

    2) Yesterday, we took off 1 contract of the 820 short call for a loss of $400. So we were left with -9 of the 820 and +10 of the 830.

    Today GOOG blasts off to 835. But look at how the adjustments worked out, even though the Bear Call went awfully bad. The 2 contracts of the ITM 780 Call produced profits of $4200 completely overcoming the Bear call.

    (click to enlarge)GOOG-PL

    We closed the position for a total profit of $1500. Amazing trade !!

    Get Trades and adjustments like this on the Trading Ideas service…

    Check below.

    (click to enlarge)GOOG-chart

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 16 6:08 AM | Link | Comment!
  • Mini Options Contracts Introduced Today

    This post was originally written on March 18, 2013 at http://www.optiontiger.com/mini-options-contracts/

    Mini Options Contracts

    There is an important addition today to Options trading instruments. CBOE is introducing "Mini" Options with a base of 10 shares per contract as opposed to the standard 100 shares per contract.

    You will notice these Options that have a (10) number and on the Thinkorswim platform, they are also denoted with the word "Mini".

    Advantages of Mini Options -

    1) Now if you owned 40 shares of a stock, then you can hedge it with 4 contracts of the Mini. Previously the minimum you could buy was 1 contract which would be equivalent to 100 shares. Obviously you were over-hedging at that point.

    2) And on the flip side, you could design a "covered call" strategy that precisely matches your holdings.

    3) Of course, you can deal in much less size, especially on high priced stocks like AAPL or GOOG.

    Not all stocks have Mini contracts yet. They're in fact starting out only with a few. The list is provided here on the CBOE website. Over time, they expect to add more.

    http://ir.cboe.com/releasedetail.cfm?ReleaseID=745371

    Please see image below on the Thinkorswim platform for AMZN.

    (click to enlarge)Minis

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 16 5:53 AM | Link | Comment!
  • What Do Share Buybacks Tell Us

    This post was originally written on March 22, 2013 at http://www.optiontiger.com/share-buybacks/

    macbookair-smartmoney_ppityOver the last few years, we've heard a lot about share buybacks. In fact, share buybacks are at historically high levels. This pattern has been going on for a few years now, and many US companies, holding large amounts of cash are putting it to use by buying back their own shares.

    But what exactly does this mean ? And how should retail investors interpret this phenomenon ? There are several interpretations and it could mean one or more of the following:

    1) In general, companies would (should) prefer to deploy cash into additional revenue generating avenues. This could be opening new factories, new products, invest in R&D, or building new businesses. These activities, over the long run, will produce a higher return on capital than if the money was just being held as cash. By using this cash instead to buy back its own shares, perhaps is a sign that these companies don't feel confident of building additional revenue streams, at least in the prevailing environment.

    2) Share buybacks can also mean a company is having serious issues with growth, specifically, growing the bottomline. As we all know, companies are valued in the public markets based on several parameters, but the chief ones are earnings, and earnings growth. The exact metric is EPS (Earnings per share). If a company has an EPS of $3/share, and the next year, they produce an EPS of $5/share, this is great. It shows that the company is growing nicely, right ? Well, this is the problem. Many companies use the share buyback trick to mask poor earnings performance. When a company buys back shares from the market, there are fewer shares in circulation. As a simple example, if there were 100 shares in the public float before a buyback, and a company buys back 25 shares, then there are only 75 shares in circulation. The EPS calculation now is much higher, and gives a false perception of growth or the health of the company.

    3) Companies can be genuinely concerned about market conditions and/or their own stock price. If they feel their stock is undervalued, for whatever reason, it may be a good time to buy back some shares. And when the market eventually prices its shares according to what it deems to be a fair valuation, the company can make good profits by selling it back at that time. There is nothing wrong with this move. It's just taking advantage of temporary situations in the markets. The key indicator is to see how much was the buyback relative to their other normal business investments for the year.

    So how can a retail investor figure out which one is it ? Well, if you're a "fundamental" investor, you must be familiar with poring through financial statements. This is the basis of your investment philosophy. There is plenty of information you can glean from financial statements. For example,

    - How was revenue growth and compare that to EPS growth ? If you see strange numbers like revenue increased by 5% but earnings increased by 20%, that does not sound right. You'll need to look for reasons why this happened. There may be a genuine reason - like a major cost cutting initiative that panned out very well. But whatever the reasons are, it's important to understand them.

    - How does the amount of share buybacks compare to say, their usual investments into new products or R&D. If a company normally (average last few years) invests $100M into R&D, and this year they invested only $20M but were involved in a large share buyback, that does not sound good.

    Whatever the reasons are, retail investors should make sure it passes the "smell test". A quick review of the financial statement should clearly reveal the nature and amount of buybacks, the reasons the company gives for these buybacks, and your own investigation into the numbers should reveal the true picture. If it smells fishy, then it probably is…Not every share buyback is to be interpreted as negative, although a majority are in some respect or the other. Would welcome your thoughts below.

    May 16 5:44 AM | Link | Comment!
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