VSEA Update

A couple months ago I sold some puts as a merger arbitrage play. It's time to close out the Varian Semiconductor(VSEA) trade. I originally sold a November put for $1.55 back on August 1. The option was trading down to $0.15 today so I closed it out. The model portfolio has enough margin available that this isn't necessary, but it's a habit. There's just no point in tying up the margin requirements for another month to make an extra $15(0.15x100).

• Buy to Close: One(1) VSEA Nov 19 2011 60.0 Put @ $0.15

I am recording a gain of almost 11% in less than 3 months.

The Numbers

• Cash: -$15
• Short Option: +$20
• Margin: +$1000

Berkshire Puts

Berkshire Hathaway(BRK.A or BRK.B) is the investment vehicle of one of the greatest value investors ever: Warren Buffett. Warren recently announced(or at least I recently heard about it...not sure when he actually said it) that he would buy back as much BRK stock as he could at or below 1.1 times book value. This effectively puts a floor on the stock price of about $108,500 per "A" share or $72 per "B" share since anytime the stock drops below that, Buffett will put Berkshire's cash to work(and Berkshire has a LOT of cash). Since I have no problem owning Berkshire long term, this gives me an easy option trade.

• Sell to Open: BRKB Jan 20 2012 67.5 Put @ $2.30

I chose the $67.50 strike just because it gives me a little bit of a buffer zone. It was only about $0.50 less than the $70 options, and saved a little margin space.

The Numbers

• Cash: +$230
• Short Option: -$230
• Margin: -$1050

Buying Gold

It's option expiration week and I'll have an update on what I do with the two October option positions in the portfolio later this week. First though, I have a couple new trades.

I'll start with gold. I'm very bullish over the long term on gold and purchase both gold and silver bullion as part of my long-term savings. Since it's mostly a long-term inflation/chaos hedge for me, I don't usually worry too much about the day-to-day price movements of gold, but yesterday I noticed that gold has been trading pretty close to it's 120 day moving average(MA). This gives me a chance at a low-risk play on the short-term gold price. I chose to use DGP, the 2x leveraged Powershares gold ETF(there is also a leveraged ETN that performs almost identically to DGP that uses the ticker UGL). The unleveraged gold ETF(GLD) would offer a lower volatility trade, but I would lose out on some of the upside. The trade is simple. I buy DGP with a tight(5%) trailing stop. I chose the 5% based on where the 120 day MA is now. I could just use a close below that MA as my stop, but this gives me one less thing to watch on a daily basis and offers more protection if gold shoots higher and gets away from its MA.

On trades like this, I also prefer to use the actual stock as opposed to options. It takes some of the timing and risk out of the trade. If gold were to stay in a tight trading range for awhile, I could lose a lot of the time value of any long options. I also don't want to sell puts like I might normally do. If gold were to drop below its 120 day MA, I could end up losing a lot more than 5% if I closed out a naked option trade. And I don't really have any desire to hold onto any gold ETF(and especially not a leveraged one) for an extended period of time since I prefer physical gold for long-term holdings. This isn't a long-term trade. It's simply a low-risk, high-reward trade based purely on current technical analysis.

• Buy 50 shares of DGP @ $53.86

If I had a larger portfolio(or a lower priced ETF alternative) I would look at doing a covered call. That requires a minimum of 100 shares though, and would put more than 20% of my model portfolio into a single, leveraged ETF...not something I'm interested in doing. Even 50 shares is probably more than I'd normally recommend, but with such a tight stop, I'm alright with it.

The Numbers

• Long Stock: +$2,693
• Cash: -$2,693
• Margin: -$1,600

More Arbitrage Trades

A couple more merger arbitrage trades popped up on my radar this week. First up is Pharmaceutical Product Development(PPDI). PPDI is being bought out by two private equity groups: The Carlyle Group and Hellman & Friedman. They have offered $33.25/share and are expecting to finalize the deal late this year. I sold a January $32.50 put for $1.06 this morning. With margin requirements of about $800, this will give me better than 13% return...not too shabby for less than 4 months.

• Sell to Open: 1 PPDI Jan 21 2012 32.5 Put @ $1.06

Telvent GIT(TLVT) is being bought out by Schneider Electric(SU.FR) for $40/share. The options prices are very attractive despite the stock being up almost 5% this morning. I don't know if I'm missing something on this deal, but everything I can find seems to indicate it's a done deal. I might end up regretting this one, but the returns are high enough I'm going to take a chance on this. I sold the February $40 put for $3.20. That comes out to about 28% return on margin in about 5 months.

• Sell to Open: 1 TLVT Feb 18 2012 40.0 Put @ $3.20

There's another one I've got my eye on as well. Temple Inland(TIN) being bought out by International Paper(IP) for $32/share. Right now the option premiums aren't very attractive and the deal isn't expected to close until next February. Rather than tie up margin for that long, I'm going to wait and see if I can get a better option prices down the road.

The Numbers

• Cash: +$426
• Short Option: -$525
• Margin: -$1,900

Update/New Trade

I'm not very good at this regular updating thing apparently. And since these aren't the only trades I make, it is tough sometimes to keep track of the model portfolio as well. I will try to get that up-to-date this week and hopefully there should be more regular updates.

A couple updates to make. In my last post I was looking at different ways to handle my LZ naked puts. I ended up buying those back for a nickel instead of rolling them out, so that trade is closed out.

I also entered into a couple new merger arbitrage trades. The first was Motorola Mobility Holdings(MMI) which is being bought by Google for $40.00/share. The other one was NetLogic Microsystems(NETL) being bought by Broadcom for $50.00/share. The recent volatility has widened the spread on both of these, but I will list the prices I got for them.

• Sell to Open: 2 MMI Apr 21 2012 39.0 Puts @ $1.60
• Sell to Open: 1 NETL Apr 21 2012 49.0 Puts @ $1.50

I realize that's a bit of revisionist posting, but since I could likely get even more for both of those today, I'm not going to worry about it too much. I will use the current market value for the short option and margin values.

The Numbers

• Cash: +$470
• Short Option: -$1100
• Margin: -$3600

Option Expiration Update

I've been out of town working again and haven't been making any published trades. But option expiration is coming up, so there is one trade I need to update.
The September LZ puts I sold as a merger arbitrage trade a little while ago is coming up on expiration and since the merger hasn't been completed yet and the stock is trading below the strike price. The puts for future months are exremely illiquid at the moment, so I may not be able to roll them out. If that happens, I can either buy back the puts or take the stock. Unfortunately, with the high bid/ask spreads, there's a good chance I wouldn't be able to buy them back for a reasonable price. Here is what I am going to do: I will put in a good-till-canceled order to roll them out for a small credit, most likely to the January or March expiration for $0.05 or $0.10 credit. All I really want to do with the credit is cover my commissions for the trade, anything above that is a bonus. If that trade doesn't get executed, I won't worry about it and will take the stock and wait for the merger to be completed to get the $135/share in cash. I'm not sure when I'll be able to post again as I'll be down here in Texas working until right before I leave for vacation in Germany(Oktoberfest baby!!). When I get a chance, I will post an update with how the trade played out.

More MSFT Calls

I've been waiting for MSFT to rise enough to be able to sell weekly calls against it at $27 or $28, but it's just not happening. Instead I'm going to take advantage of the higher volatility in the market to get a higher price on some further out calls.

• Sell to Open: 1 MSFT Nov 19 2011 28.0 Call @ $0.47

This will give me an immediate 1.8% return in cash. Given the market weakness and Microsoft's price action the last year or so, I don't expect the stock to get called away from me by November, but if it does, I'll close out the trade with over 10% capital gain(plus the 2+% I got in covered call premium) in just 6 months.

The Numbers

• Cash: +$47
• Short Option: -$48