Cautiously Adding Microsoft $26

I am adding 5,000 shares of MSFT at $26/share

Immediately, i sold March $26 call and pocketed $1.03 premium.  I will also receive $0.2 dividend by 2/14/12.

This is how this investment look:

12/29/2011  MSFT 26 3/17/2012   1.23  53.4 26 50 4.73% $6,096.60   79  21% $130,000.00

If it got called away by 3/17/2012, my annualized return will be 21%.  If it fail to get called away, then, my cost for that 5000 shares will be $24.77

Upside:  I am very happy with 21% annualized return
Downside: I feel safe to hold MSFT at $24.77 cost.

Amazon, a company that I rely on. Building a position

Majority of my business are coming from Amazon.com.  Naturally, I have first hand experience with the strong growth it delivers.

12/1/2011, I couldn't resist it anymore.  I bought 200 shares of Amazon at $197.454/share.  I am no stranger to Amazon stock, i bought it in 2007 and sold it at lose.  I bought it again in 2009 and sold it for gain.  I did it again early this year and capture some meaningful gain.  My total gain on Amazon, after offset by lose is $43k.

My purchase price is high.  And this company never go on sale.  P/E is nearly 100.  The growth of Amazon is amazing though.  quarter after quarter revenue growth is over 50%, even at such a big base.  And the management is very good.  History shows they do not care about current margin.  They are focusing on the future.  Invest heavily on the future growth.  I found that approach very smart.  Now, I am using my trusty Covered Call strategy.  I understand even if the company is a good company, if i over-pay, I will not benefit from the position.

My position looks something like this:
12/1/2011 AMZN 197.454 12/17/2011 5.45 31.45 200 10 4.05% $7,964.55 16 92% $197,454.00

Option execution date is 12/17/11.

Today is 12/17/11, stock price dropped to $181.  So, i still own the 200 shares.  And the Dec 11 CALL premium brought my stock cost down to $192.004  (i am ignoring the personal tax consequence, just to simplify things)  OK, to make those 200 shares to work, I have the following 2 choices.

12/1/2011	AMZN	197.454	1/21/2012	8.45	31.45	195	10	3.04%	$      5,964.55	51	22%	$  197,454.00
12/1/2011	AMZN	197.454	2/18/2012	11.05	31.45	200	10	6.89%	$     13,564.55	79	32%	$  197,454.00

Jan 2012, $195 option call, if success, can translate to 22% annualized return in total 67 days.  That is a very good return consider 15% return is my ultimate target.

Feb 2012 $200 option call, if success, can give me 32% annualized return in total 95 days.  I like that a little better.  Because I am bullish about online shopping.  I am bullish about Amazon's strategy.  My own business's result support my point of view.  I do see phenomenal growth rate from Amazon's order.  Even their profit margin is volatile.  If they continue gain market share, they eventually can demand higher margin.  Third party merchant has no choice but to pay commission to Amazon.  The platform they built for third party merchant is so well.  Brings merchants tremendous success, a success that the merchant otherwise can't achieve.  

To summarize my reason.  I choose $200, (my cost is 192+) because i am bullish in Amazon.  I choose Feb is the premium v.s. risk is within my satisfactory level.  It will be after their earning report.  If this option position fail to get executed, then, I'll continue hold the stock and sell longer term CALL.  I am somewhat hopping it does not get executed.   If on other hand it get executed, i made 32% annualized return in 95 days.  Not bad~ I anticipate a volatile 2012.  So, the cash i get back can be used to pick up other bargain stocks.

Note: Due to its high P/E.  The near term downside can be very big.
Due to its high growth rate and strong market share. The foreseeable long term downside is minimal.

New position - BRKB ($75.6)

I have some BRKB at $66.21 a share.  That position had sold covered call $65 Dec 17.  If nothing dramatic happen, it will get called away.  So, i am building a new position to replace it.

When i shop around today, i was debating between AMZN, AAPL.  Amazon is a company that i love the most.  And i know its has room for long term growth.  PLUS, the management is setup the company to capture long term growth.  (they don't care about short term profitability)  I admire that a lot.  I know first hand that this company will have at least another 5 years of high growth.  HOWEVER, current valuation is way too high.  PE at 111.  Downside risk is too high.  I have to control my emotion and not invest in this company.
AAPL is a company with solid performance.  It is losing steam recently.  Price drop from 426 to $385.  I think the earning power is still there.  their future sales growth might not be as strong as before.  But their pipeline can support them to turn out few more years of good profit.  They do have enough time to develop new exciting products.  Best of all, the stock price is not expensive at all.  What stop me from putting significant amount of money in it is the uncertainty.
Berkshire (BRKB) on other hand is at a solid ground.  I feel confident to invest in it and leave it alone for next 5 years.  Plus, the covered call premium is above average.  AND, they are buying back their own stock.  Which set a floor of the stock at around $70.  So, downside risk is minimal.

11/10/2011 Action:

Bought 2,000 shares at $75.6/share
Sold Jan 2012 $75 call for $4.40

that translate to invest $151,200 for 72 days.  If success, then, earning will be 5.03%.  Or annualized 25%

Buffett is holding a lot of cash and he can use them in the volatile market.  The long term view of Berkshire is very positive.

Result 1/20/2012 :-- Success !  

Buying Wells Fargo again ($25.5)

I bought 5k shares on 10/17 for $24.66.  Today, I am buying another 5k shares for $25.3

Needless to say, I like the Q3 earning report that I see.  The management is demonstrating great discipline and excellent execution skill.  They handled the Wacovia merger beautifully.  I have to think that it is very challenging to merge those 2 giant operation in the short 3 year term.

I will have some covered call position (AMZN and BRKB) execued this Friday.  So, i will have some free cash that allows me today's action.

I bought 5,000 shares of WFC at $25.3.  Immediately sell Nov $24 covered call.  Premium is $2.05.  And early November, WFC will give out $0.12 dividend.

So, the action looks something like this:

10/19/2011   WFC     25.3    11/19/2011    2.17    45.45   24   50   3.44%    $4,304.55  31 40%  $126,500.00

If by Nov 19, 2011, WFC stock price is above $24/share, then, this position will be called, and I will declare this move a success.  Potential gain is 3.44% in 31 calender days.  Or annuallized 40%

If the price is below $24 a share, i will be happy to hold it a the cost of $25.3 - 2.05-0.12= $23.13. 

I am reserving some cash that in case WFC drop near $23, I will pull the trigger and buy another batch.  The future stock price for WFC will move up and down base on macro environment.  What will stay solid is their increasing customer base.  Their enhanced market share.  Best of all, their strong management team.  Those element will not be changing anytime soon.

I do not care too much if this action success or fail.  I do know current price is a great bargain.


RESULT:  Success

Opportunity showing up, again, WFC 24.66 - Covered call strategy

Wells Fargo is my major long term holding.  I will not touch the current holding.  But I am pulling the trigger for new "trading" position

10/17/11,  I bought 5,000 shares at $24.66/share.  Immediately sold in the money cover call (Nov $23) for $2.3 premium

Translation:

If by 11/19/2011, stock price stay above $23, my 5,000 shares will be called away.  My trade will be consider as success.  Total holding period will be 33 calender days.  Total return excluding dividend will be 2.6% , or 28% annualized.  If include $0.12/share dividend, return will increase to 3.08% or annualized 33%

If by 11/19/2011, stock price stay below $23, i will continue own that 5,000 shares.  My cost for those shares will be $24.66 -2.3 - 0.12 = $22.24.  Base on my research, that is a very safe price level and I am more than happy to hold it a little longer.  It is likely i can sell another round of Jan $23 contract for a good premium.  Will update this post if that ever happen.

Option strategy works great in volatile market.  Pair this strategy with value stock pick, the odd of beating the market is extremely high.  My objective is conservatively grow the portfolio 15% compounded annually.  Do not take unnecessary risk.


The following illustration shows if I can maintain 15% compounded annually return, by the end of year 10, my portfolio portfolio's total return will be over 400%

	15%	20%	25%
Year 1	1.15	1.20	1.25
Year 2	1.32	1.44	1.56
Year 3	1.52	1.73	1.95
Year 4	1.75	2.07	2.44
Year 5	2.01	2.49	3.05
Year 6	2.31	2.99	3.81
Year 7	2.66	3.58	4.77
Year 8	3.06	4.30	5.96
Year 9	3.52	5.16	7.45
Year 10	4.05	6.19	9.31

12/16/2011 END RESULT for that position :  Success~!

Tokyo Electric (TKECF $5.8)

Fourth largest electric power company in the world.  The share of this company in Japanese electric market is approximately one-third.


According to Wiki, they generate 

• Hydro: 160 / 8.521 million kW
• Thermal (oil, coal, LN(P)G, geothermal): 26 / 36.995 million kW
• Nuclear: 3 / 17.308 million kW
• Wind: 1 / 0.001 million kW
• Total: 190 / 62.825 million kW

If i do my math correctly, 27% of the power is from nuclear.  Fukushima I Nuclear Power Plant contribute  40% of the nuclear power.  That also means. That power plan count as 11% of entire Tokyo Electric's power generation capacity.

Stock price drop from normal level of $24 to today's $5.8.   Thats means 75% of the company's valuation evaporative due to this accident.  Is it too much?  Time will tell

I am starting a position - China Mobile CHL ($46.39)

Recent Libya tensions created a good opportunity to start a position.  This company has very little impact from International unease.  Inflation can cause very little negative effect to this company.  Management has over 10 year's of solid performance.  Dividend is attractive.  70% market share also looks very promising.
All those reasons only shows that this is a good company.  We should not buy into a position solely because this is a good company.  What convinced me buy into it is the valuation.  Current price is below fair market value.

2/23/2011
Bought 2,000 shares at $46.39

2/24/2011
Sold 20 contract ($45 March 19)   -- Premium $1.9
Target 1.1% profit in 24 days.  Or annualized 16% return

3/24/2011
Option executed.  This action is a success

Starting a position for a friend (China Mobile - CHL) - $46.3

China Mobile

• 3.88% dividend, Very likely they will increase dividend later this year. Will push dividend rate to over 4%
• A Chinese company. As USD is going to devalue. It makes this company have currency advantage.
• 10 years revenue and earning growth is amazingly stable. Very solid financial statement.
• Competition wise, this company is also in a solid position. 70% market share
• Low price. Today, it trades at 10.86 PE. Partially cause by China'a major policy change. That punish entire China stocks market. However, government policy will not change how this company make money. People will not stop using their mobile phone because policy change. Even inflation will have very little effect in this company's profitability.

I start accumulate position for a friend. Due to China's policy uncertainty, i play extra safe by sell $45 covered call. If this stock move below $45, i will buy much bigger chunk and will not sell call. This is a very good long term holding.

Another "trading" action MSFT

Background:

I have extra cash that I will need them by 4/15/11. I want those cash to generate some profit for me. I can only afford to expose to minimum risk.

Among all my holding, Microsoft is still selling at bargain price. Downside is minimum. Only draw back is, option premium is low. However, it is important to have minimum risk. So, i am ok with lower profit

Action:

Today, 2/22, i purchased 8,000 shares of Microsoft at 26.72 per share. Paid 8000x$26.72=213,760. I immediately sold April 16 ($25) call for 2.05. Pocketed $16,400 today.

Translation:

If I success, that means by 4/16, MSFT stock close at above $25. My position will be sold at $25 x 8000 = 200,000 Plus the premium i pocked today, that is $200,000 + 16,400 = $216,400

My initial investment 213,760, that means profit of (216400-213760 = $2,640) Also means return of 1.24% profit. The whole duration will be 53 days. That means 8% annualized return.

If I fail, that means by 4/16, MSFT stock close below $25 and I will keep my 8000 shares stock. My unit cost for those stock will be 26.72-2.05 = $24.67

Bottom Line

I am not too worry about success. (I think my chance of success is over 90%) If i fail, unit cost of $24.67 is a great great great bargain. I don't mind to hold it. I can always use other fund to pay for my personal tax. hehehe. I will make profit regardless of the result. The only difference is, success, i will will make set amount of profit within 53 days. If i fail, i will make unknown amount of profit at unknown amount of time.

This is a TRADING action. Not a investment action. Investment is for longer term.

I will update you the result.

4/16/2011  Operation success

Microsoft, a stock that is worth holding and trading

On Jan 12, i had the following action:

Background:

Between now and 4/15 tax due day, i have extra $250k sitting there and doing nothing. Bank yield is less than 0.3%. Almost like nothing. So, i decide to put my free cash into work and earn some profit while expose to minimal risk.

Microsoft is a company that i follow closely. (i am holding big % in my portfolio) It is currently undervalue. Stock price 5 year fair value is over $35. Yesterday, it trade at $28~. So, i am comfortable to hold this company for long term if my cost is anything below $30.

Again, remember my objective? I want minimum risk exposure. I want short term, might need the $ to pay personal tax.

So, in the near term, anything can happen. Even a company thats fair value is over $35 that is trading at $28. It is possible for that company to go below $28, $27 or $26 in the near term. Anything crazy can happen (i never worry if it goes other direction, which is up)

My Action:

Yesterday, i bought 8,000 shares of MSFT for $28.23. Today, i sold covered CALL (2/19/2011 $27) and receive $1.88 per share.

Translation:

Yesterday, I pay $28.23x8000=$225,840 for my Microsoft shares.

The covered call i sold, i received $1.88x8000=15,040. That money is in my pocket today!

By 2/19, if stock price is above strike price of $27, my stock will be taken away from me for $27 per share. Even stock price at that day is $35 or higher, it is none of my business. they still pay me $27 per share.

If So, you do the math, by 2/19, i will receiving:

$27x8,000 = $216,000

I also got to keep the dividend issued on 2/15

$0.16x8000 = $1280

Plus the initial $15,040 that i pocked today. My total will become 216000+1280+15040 = 232,320

That means a profit of $6,480 (minus some brokerage fee) That means 2.87% return on my investment of 225,840 in 40 calender days. That also means 26% annualized return

Conclusion:

Will i success? Time will tell. I believe the chance is very high. Can i fail? absolutely. If i fail, that means stock price by 2/19 is trading below $27. That also means no one will buy it from me for $27/share. So, i got to keep that 8,000 shares. My cost for those shares will be $28.23 - 1.88 -0.16 = 26.19. So, i will be stuck with the stock, which i am happy to pay any price under $30 (fair value over $35) Assume my fair value is correct, the stock that cost me $26.19 will eventually move above that. And my risk is minimal.

I will update you 40 days from today. Will share result with you.

Result:  Success