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The dumbest stock

October 18th, 2010 at 01:22 pm

When asked what was the dumbest stock Warren Buffett ever bought, do you know what he said? Surprisingly, he said his own company, Berkshire Hathway!

Here's the whole article, by the way.

For those who want a quick synopsis, he was infuriated with the then-CEO, and bought a majority share of the company to get him fired. That's how he also became the head of Berkshire Hathway.

However, had he thought it through more clearly, and started out with the insurance company that he had wanted in the first place (Geico?), rather than a down-trodden textile company (just to get one man fired), then he say his financial empire would be worth $200 billion today!

In a nutshell, it's best to keep emotions out of investing and trading. Let the numbers do the talking. That being said though, I have to give old man Buffett respect for being able to point out his own mistakes. Even the best are only human.

On a separate but related note, here's a funny comic I came across. Buy! Buy! Sell! Sell!

All-in covered calls

September 20th, 2010 at 08:45 am

Today is the day my option contracts expire, and I can write more.

Again, my entire trading strategy right now is that I have no idea what the market is going to do for the next month, so I might as well be a vendor and just sell contracts instead of attempting to speculate in the market.

However, that is not to say that being a seller is dull, and I walked away with some interesting observations from the past 30 days.

First, there was a stock position that did very well, and that got Assigned at the last minute (that is, I had to sell my stocks to him at our agreed price). Congrats to whoever it is for your huge relative gains. In any case, now I know what it looks like when my stocks have been sold.

Second, there was another stock position that was essentially flat. In this case, the covered calls worked out perfectly, because I already made money on a flat-performing stock. Not surprisingly, it did not get Assigned so I get to sell some more contracts on it.

My third and final stock position was absolutely atrocious. Atrocious! Even so, I can still write contracts on them, albeit for a lower premium. Despite the paper drop, I am surprised that I can still squeeze out $200 this month on this position!

In all, I'm very pleased with this type of trading, even though, yes, it's still chock full of risks. Again though, I'm in no rush, so baby steps still.

My friends bug me sometimes

September 8th, 2010 at 06:37 am

So, a friend of mine is really itching to get into stock trading. Even though he's in a lot of debt and being garnished by the IRS, he wants to use like $2000 of his student loan money (at more than 6% interest) for it.

I told him about the risks, but he was like, "It's worth it. Gotta start somewhere." But I'm like, "Are you sure about this? Because the numbers don't make any sense." His response was, "Numbers never make any sense BA! They're subject to interpretation!"

Oh really? Playing with the stock market using borrowed money you need to live off of within 3 to 6 months, and at 6% interest is somehow subjective? And why so defensive? I'm just trying to be a friend and warn him of the dangers involved.

You guys know that for literally years, all I did was pay off my student loans. No stock trading here. And even now, I do not trade on margin (loans) whereas that's exactly what he plans to do. Also, he needs this money within 3 to 6 months, whereas I don't trade with any money that I need anytime soon.

I mean, it's just such a bad idea that even I would not have done it. I do wonder why he is so dead set on it? Is it ego? I know he's used me before as a source of information, and then passed it off as his own to try to impress beer buddies and women with it.

I do have to admit that I am partially to blame. He's a friend that I've been talking about all my stock and options trading to. So, clearly, I embedded the idea in him somehow. BUT, I had no idea he would decide to be so reckless about it. That's the last thing you want to do because the activity itself is dangerous enough as it is.

But I guess what really bugged me about all this is that he was being rude to me about it, even though I'm just trying to help as a friend. Whatever. I didn't tell him all this though. Instead, I just said that if he feels that strongly about it, then just open a Scottrade account, and buy his stocks there.

I don't think I want to hang out with him for a while though. That and a lot of other stuff makes him really stressful for me to be around him.

Last batch

September 1st, 2010 at 06:47 am

I just finished selling the last batch of call contracts available for me. After fees, it's another $280 I pocketed, pushing the income total up to above $1000. So, despite the fact that I'm a newbie in options trading, I think it's very realistic to generate $1000 a month in contract income this way.

Of course, risks and potential losses aside, most of this occur within my retirement accounts, so it's not like I can actually use it for anything.

I'm already fine-tuning the strategy as we speak, and I think I would like to get out of individual stocks completely. Maybe. The option is always there, of course, but I think I can use this strategy just fine with nothing but SPY (US stock market ETF). The volumes are gloriously high, and contract intervals are much shorter (which isn't necessary, but it does give me greater flexibility).

Yeah, in other words, I'm basically done trying to speculate on the market. I'll let others do that. I'm content with just being a "loan shark", and despite the name "options trading", holding SPY and selling contracts on them is actually very conservative and safe (as far as trading goes).

More covered calls

August 30th, 2010 at 10:49 am

This month's stock market has been tough. My stocks have slipped rather substantially at this point, so I guess it's good timing to make some income off of them.

With the market slip, I bought some more stock and sold more covered calls, pocketing another $380. I think the total of contract premiums I've made is up to... almost $800? They're all set to expire on September 18th, so I can sell another round of contracts then.

I've also been fine-tuning the strategy, to focus more on earning the premiums over trying to win the market somehow. Less speculation and more guaranteed income.

While covered calls still have the same downside risk as regular stocks, at least you're also propped up a bit with the contract income. The real downside, I think, is giving up on the upside potential. However, I don't see how this is a problem because, again, I'm trying to reduce speculation, and exchanging it for guaranteed income. Despite that, even covered calls have the ability to return 10% to 30% in annual gains, depending on your trading abilities and market conditions. Good enough for me.

I'm also reading up on cash-covered shorted puts. It's the cousin of covered calls where you sell put contracts (to buy their stocks at a set price), again, for a fee premium. But in theory, I could do absolutely nothing more than covered calls, and still do just fine. But adding more and more of these strategies ultimately gives me more trading flexibility, regardless of the market direction.

Bought more SNDK

August 25th, 2010 at 01:25 pm

Today's market started out rather low, and I decided to buy more SNDK, and then make some more covered calls with it.

You know, I really like this covered calls option. This way, you're not entirely at the mercy of the stock market. You make decent (immediate) income selling contracts that although locks you into a price you are obligated to sell, you are nevertheless selling at a profit. And you can also adjust how much passive income versus market volatility you want to depend on for your money.

For example, I just made an additional $200 (for a total of $300) just for selling contracts that, even if it's exercised, would allow me to sell my stocks at a pretty substantial profit (15%+).

Now you're probably saying, "Wait, where's the downside?" The downside is that you're still at the mercy of the stock market, and there is still a risk of losing money. There is also the "risk" of capping your gains, but I'm not greedy, and it's 15%+ profit. The real risk is that your stocks can still lose a lot of value, to a point that it erases both the market value as well as contract premiums that you make.

But hey, nobody said this was a free lunch. I mean if I want a lot more guarantee, then I might as well buy bonds instead.

Believe it or not, but covered calls actually cushions me from a straight up stock trade. Geez, I don't know why I haven't done this sooner.

My first options trade

August 24th, 2010 at 07:16 am

I just checked my account and saw my dividend payout for Best Buy stocks I bought earlier. I lost a little bit of money on that trade, but the dividend helped even things out.

Also, I just saw Sandisk drop substantially today. This company is pretty solid and has great growth prospects. I don't know why it's falling by that much, but I bought some up.

My stock trading is evolving more and more, and right now, it's at a point where I am more passive than I am speculative.

I mean, yes, who am I kidding? Stock trading is still a speculative activity, but it's quite tame compared to my fast trading BP days not too long ago. Here's all I do right now: I keep an eye out for great companies that are selling at a great discount. When I see one, I analyze the company financials and stock technicals. If it still looks good, I buy it, set it (with a reasonable limit sell) and forget it. That's it. Easy peasy.

I've also experimented with some covered calls for the first time. Ironically enough, I haven't gotten around to them until now. I don't know why. It's a great way to add an extra layer of income generation, especially in a flat market (which is what we appear to be in).

I guess the thing is, I still don't have a firm grasp of the options market just yet. And frankly, this is something I just don't want to rush into, even with covered calls. That's also why I'm sticking only with covered calls right now.

But I did it with the Sandisk stocks that I just bought. The options symbol took a little bit for me to get it just right, but when I did, the transaction went right through. I earned a tiny profit from selling the contracts (the commission fee for the sell is still the same), and we'll see if anyone exercises the contract.

Edit: Just wanted to add some details to this trade (for anyone curious and for my own reference). The contracts are $45 calls that expires on Sept 10th. Right now, my SNDK stocks is showing a $100 paper profit, and I locked in an extra $100 from selling the contracts.

It is unlikely, but always possible, that the contracts could be exercised, but the upside is that at least I will be selling at a price I want. If not, I can keep writing contracts on them and make more income.

Also, writing covered calls means that my gains will always be capped at $45 in this case, but that's not a huge deal to me considering that that would be a very profitable sell, and I still made income on the contracts. In any case though, that's the risk, although it's worth explicitly noting that writing these calls actually LOWERED my overall loss potential than just sitting on the stocks.

So, yeah, I think I can really get used to this. Still, one baby step at a time. In the future though, I think I will write contracts with longer expiration dates, so I can earn more on them, but also so I can sort of go back to my "set it and forget it" attitude. So, yeah, this appears to be a great replacement for limit sells or trailing stops that I've been using.