Jeffrey McLarty

Everybody always gets confused when you say you’re short puts. It’s a double negative, and it’s rightfully confusing. Let me explain.

When you’re short any asset, you profit from it falling in value. When a stock goes up, or stays flat, or doesn’t fall fast enough, the puts fall in value. So if you short them, you’re bullish. In my opinion, you’re less bullish, than if you actually owned this stock.

Yesterday, I was watching FSLR at $270. I thought to myself, “I want in, but that’s an expensive stock…I don’t want to pay $270 per share, but I would pay $210.” So, instead of putting in a limit order to buy it for $210 (and obviously never getting hit) I sell a put contract for someone to force the shares onto me at $210, in the future. They gave me $1.35 per share in exchange for me essentially selling them insurance to take the losses if the stock goes down lower than $210. BUT, since I’d buy it if the market took it to $210 anyway, then I really don’t mind having that downside. Infact, I kind of hope I get the chance to buy FSLR at $210, that’d be a treat.

There’s more perks. I don’t put up any cash, I only put up margin. My broker only requires me to keep 1/4 of the cash on hand to buy the shares should they hit $210. So, I have ‘invested’ $210/4 = $52.50 per share, and stand to profit $1.35 if FSLR doesn’t fall lower than $210. Now, it’s prudent to make sure you could make $210 per share available, if you’re forced to buy the stock. But I’d sell AAPL to get cash available if FSLR fell to $210. My point is, I can easily get a hold of the required $210, if the position goes against me. Now, if you can’t anti up the $210 per share, then you shouldn’t be doing this strategy. It can go horribly wrong if you don’t actually want to get assigned the shares at a cheaper than market price.

So, as of yesterday, there were 21 trading days, 30 days including the weekends. $1.35 / $52.50 = 2.6% in one month. That compounds to 36% per year…and I’m ‘invested’ in solar. While, I won’t make 200% a year, slow and steady wins the race. Its basically a good way to put excess margin to use. AND, the position can be closed early, if the stock moves up.

The nay sayers will tell you, that my upside is $1.35 per share, while my downside is $208.65. Wow, that looks horrible. But, you can’t think about it like this, because I make money, even if FSLR falls, so long as it doesn’t fall too much. Basically, if you’ve ever put in a limit order, and walked away, it’s the same thing - but my limit order lasts a month, and I get paid for leaving my order open.

Howard Lindzon hates this strategy, he calls it ‘assanine’. I’ve never heard him have a good reason for calling it that. Maybe he’ll chime in.

I plotted a 3-D Profit/Loss for this strategy, but I used today’s data. My short was for $1.35 per share yesterday, today they fell to $1.08, since the stock moved up. I expect them to expire worthless, or be worth $0.10 very soon.

Yes, I would have made more if I would have bought the stock yesterday, hind sight it 20/20. I also would have had to put up cash, and in my opinion I would have had more downside, downside I don’t especially like in FSLR from $270 to $210 - I leave that downside to somebody else. I’m really leaving what I call, ‘the most likely downside’ to somebody else. Ie, it’s more likely that FSLR falls from $270 to $210 than it is to keep falling from $210 to I don’t know, say $150.

So, ‘Blank Check’ Company, Heckmann Corp. (HEK) recently announced they bought a Water Bottling company in China. I’m like - wow - what a great business to be in right now. Probably a scam. The chart exploded this morning. Some heavy money traded the shares north of $8.50, then it pulled back to ‘pre-publicized’ levels of $8.25. I figure 1. What a scam, these guys are investing in a likely trend/shell company, which their brother in law probably owned. If it is legit, it’s likely a great investment - anybody in charge of a ‘blank check’ likely knows what they are doing. If their crooks - no way did they go to all that trouble for the shares to peak at $8. If they aren’t crooks, same holds. So since it went back to pre-publicized levels, I bought a few shares at $8.2799. I especially liked the fact that I could consume everything in current circulation, in english, in less than an hour. It has just become my smallest holding, my biggest gamble, and most un-researched purchase. According to Lindzon, due diligence if for underperformers, lets see if he’s right. I’m literally gambling with ~1.5% of my portfolio…so blow on the dice for me…I know it’s wrong…and I’d never do this with other peoples money.

Plus, the downside shouldn’t be worse than the lows during the chart where the company was just a blank check. That’s $7.22. Soooo…yaaah. D

JCI has fallen more than 2% three days in a row. Sucks to be me, and long. But I’m bullish in the long run.

But the $30 calls for July were trading at $3.60 and $3.90 while the stock was sitting at $33.10.

The gift part comes in, because the $35 calls were trading between at $1 and $1.10.

Do the math on this, hit the ask on the $30’s and the bid on the $35’s. That position sells for $2.90 but had $3.10 in value - before you do anything. So, I did, but I wrote ‘em in the middle of the bid/ask on the $35’s, and got hit at $1.05 instead of a $1.00 so I paid $2.85 for the combo, and by the time my order filled the stock was already at $33.20. SO, I paid $2.85 for something already worth $3.20, more than a free quarter. Now, I don’t normally go long front, or second out, it can go against me - so I only bought 2 contracts…less than $600 invested, after fees.

All I’m saying is, my break even point is $32.85, so I’m already in the green as soon as the order executed. If JCI moves up at all, or stays level between now and July expiry, I get those free quarters. Yah, I only picked up 200 free quarters, but it’s still $50, and I think the upside is good compared to the downside.

Numbers wise, the downside is my $570, and upside is $430…but, I’d actually like the 200 shares at $32.85 anyway - sooo this was a no brainer.