afop is underperforming

AFOP has been under-performing ever since it reported. I looked at and think these might be the reasons

  1. the outlook for Q4 was revenue between 21.5 and 23.4. They reported 21.8. Comparing with the mid-point of the outlook, it missed by 2.4%. And comparing with the top of the outlook, it missed by 6.8%

  2. yoy net income growth was -14% due to the fact that AFOP had a 3.5m tax benefit in q4 2012. Excluding the one-time tax benefit, Q4 net income would have grown by 149%.

3)q4 eps was similarly impacted for the same reason.

For people who just looked at the surface, these might just be good enough reasons to sell.



Excellent points, M. If someone just looked superficially at the GAAP headline revenues and earnings, without realizing the big tax benefit the year before, it could look like a bad comparison. It just makes it an opportunity for us. I actually bought a little more at $11.58 today.



AFOP has been under-performing ever since it reported.

Yes, if you are referring to the stock price it’s under performing. If you look at the business, it’s doing great.

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AFOP has had marked growth in the last year, I think due to telcom upgrade cycle. Does that mean this is a cyclical business? How long can the increased sales be expected to last? ie are sales going to drop off to 2011 levels a few years from now?


I bought some this morning. I will take this kind of quarter every time.

On AFOP the options premiums and the valuation looked good to me so I did the following:

Bought my targeted amount (x% of my portfolio) PLUS a 0.5% trading position.

Then I sold the Feb $12.50 covered calls against my trading position for 40 cents a share. Once they expire I will sell the March $12.50 calls and keep repeating this every month until the trading shares get called away.


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I employ a similar strategy trading around holdings. Although I usually go out longer than a month. Once called away I will sell puts until I re-establish the trading position. Then start selling covers again. Wash, rinse, repeat.


Thanks Rob.

Most of the time decay happens very close to expiration. Therefore, I have found it better to trade the options closer to expiration. For example, you can usually make more money selling options with one month time left three times rather than selling an option with three months left once.

Also, strike prices that are very close to the current market price offer the most efficient premiums.

I sometimes sell both the calls and the puts with the same strike price simultaneously. One will always expire worthless. If you think of owning stocks in a range of allocations, it makes making trading income easier. For example, if I wanted to own a total of a 3% position in AFOP, I might view a range of 2.5-3.5% acceptable. So I might buy a 3% position and then sell both the calls and puts for a 0.5% position. At expiration, my position will increase or decrease by 0.5% and then I can make adjustments by selling more options for the next month or buy or sell shares. Alternatively, I sometimes roll options positions forward just before expiration allowing me to collect more premium without worrying about changes in my position size.


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I bought at 12 and 11.80 and got 30 cents for my covered calls :slight_smile:

So, do you guys expect AFOP to outperform INFN in 2014?

So, do you guys expect AFOP to outperform INFN in 2014?


I pay close attention to maintaining my portfolio diversified across industries. I try to keep less than 25% of my portfolio in any one industry (just my rule).

After Saul brought my attention to AFOP, I had a closer look and then sold about 1/3 of my INFN to buy AFOP. They are in the same industries. I think both companies will benefit from this network refresh cycle which I’d say is still in the 2nd or 3rd inning. INFN just turned back to cashflow positive while AFOP has been running its business as a solid cash generating machine for many quarters. By just looking at the financial history and the valuation, I like AFOP a lot better. My expectation is that both companies will do well over then next 6 quarters, but for me it’s not possible to say which stock will do better in 2014. However, right now I feel (JMHO) that the downside risk of AFOP’s stock price is more limited. In the middle of 2015, I will look at possibly exiting both positions because I don’t want to ride the network refresh cycle to completion.

Again, I still own both companies.



Thanks Chris, nice analysis.

Hi Chris,

“I sometimes sell both the calls and the puts with the same strike price simultaneously. One will always expire worthless. If you think of owning stocks in a range of allocations, it makes making trading income easier.”

This sounded like a good idea to me but I didn’t quite get the value of the math, my weak point. Was the main idea just to keep your position size stable or were you able to make money with this with the bracketing premiums?

I think the put premiums are higher (or lower?) at the same strike price as the call premiums so I also wondered if that played any part in your strategy.

I also liked the idea of the short exp dates. I had just been thinking of doing something like that, doubling up on the calls, like in your example and making a nice return in less than a month’s time.

Could you expand a bit on the strategy for me?

Hi Mykie,

Sure, I can talk about my specific money making (hopefully) tactics that I’m currently using with AFOP. In addition, I can tell you about some more general trading strategies that I use with options. First, you ask a couple of questions that have universal answers, so I’ll answer those first.

I think the put premiums are higher (or lower?) at the same strike price as the call premiums so I also wondered if that played any part in your strategy.

The premium (or value of the option) of a put can be higher or lower. In this case, I think the put premium for the March $12.50 strike price might have been higher simply because AFOP was trading below $12.50 at the time. There are several things that determine an options premium; they are the strike price of the option, the price of the underlying stock, the volatility of the underlying stock, the time remaining to expiration of the option, and the dividend on the stock. A formula called the Black-Scholes formula can be used to calculate options prices, but you don’t need to worry about that to make money. If you are interested in learning more about options, a good bock is “McMillan on Options”. Personally, I do not use much math in trading options; I think more qualitatively if a trade makes sense and do a rough semi-quantitative calculation to determine if a trade is worth it.

I also liked the idea of the short exp dates. I had just been thinking of doing something like that, doubling up on the calls, like in your example and making a nice return in less than a month’s time.

Using short versus longer expiration dates depends what I am trying to do. For AFOP, I am making the following assumptions/predictions and my use of options and how I use them reflects those assumptions/predictions. The following are my opinions on what is happening and will happen:

  1. AFOP is undervalued.
  2. AFOP can be a volatile stock and recently it has been.
  3. AFOP will likely increase in value, but I’m not sure when this will happen.
  4. AFOP’s downside is limited.
  5. AFOP is in a cyclical business and the cycle is in the upswing. I expect that the downswing may start in the second half of 2015.

Based on this, I have decided that I want to hold around a 3% position in AFOP. A 2.5% or 3.5% position would be acceptable too and I adopt a mindset that I am indifferent as to whether I own a 2.5% or 3.5% (or anything in the middle) position. This makes it easier for me to make money on the short term up and down movement of the stock. Ok, now let me get into specifics. I will use some example numbers which are not the numbers that I traded; they are just for illustrative purposes.

Let’s say I have a $1.2M portfolio (note: it’s not my actual portfolio size). I consider a stock portfolio to be comprised of stocks and cash. So in this case the total value of stocks and cash is $1.2M. So each 1% is $12,000. I used this number for it works well for this example since AFOP is trading near $12 per share. So if I want AFOP to be 3% of the portfolio, I buy 3000 shares which costs $36,000 or 3% of $1.2M. So based on my assumptions and opinions of AFOP, I expect to make a nice return in the next 18 months or so. Since I also see the downside of AFOP to be limited and since the stock is volatile (price fluctuates a lot), I believe I can make money with shorter term trading while still maintaining a longer term hold of the stock.

So one thing I can do is sell options. Options are good for making income if the volatility is high. So here are the actions taken and why.

Feb 2-6: Buy 3000 shares of AFOP at prices between $12.06 and $12.28. This is the 3% position.

Feb 11: Buy 500 shares at $12.20 trading position and sell 5 contracts of the Feb14 $12.50 call for $0.40 per share. I did not need to buy additional trading shares but decided to do so because of the potential upside and limited downside of the AFOP stock (that’s my personal opinion). I chose the Feb options because there was only one week left until expiration and there was a 40 cent per share premium. I considered this high because the stock was only at $12.20. This is a nice premium for only one week left. I chose the $12.50 strike price because it was close to the stock price at the time. In this situation (selling a covered call with not much time until expiration), you should get the most bang for your buck by selling strike prices close to the current stock price. The stock price closed below $12.50 at expiration on Feb 18th so I kept the premium and the trading position (500 shares). Had the stock closed above $12.50 on Feb 18th, my 500 shares would have been automatically sold from my account for $12.50 per share. I would also keep the 40 cents for the call so my proceeds including the options premium would have been $12.90 per share which would be a 5.7% gain in one week. Again, I was really indifferent as to whether the shares are taken away or not because as long as the price does not rocket up I intend to keep repeating my trading strategy monthly.

Feb 18: Sold 5 Mar14 $12.50 calls (note these calls expire on Mar 22, 2014 but I named them Mar14 where 14 is 2014) for $0.65 per share premium. These options expire on March 22nd. Last time I received $0.40 per share. This time I received $0.65. The premium is higher because there are 4 weeks until expiration (instead of 1 week). Also, the volatility may have changed and the underlying stock price may have moved. I don’t worry about the details of why it changed; I just look as the $0.65 being a good enough premium to open the trade. To summarize, I now own 3500 shares and I am short 5 contracts of the Mar14 $12.50 calls. This means that I own a 3.5% position and have the possibility to lose 500 shares if the price closes above $12.50 on March 22.

Feb 20: I decided to sell more options. The stock price was very close to $12.50 now so you can get a good bang for your buck. I sold 5 more Mar14 $12.50 calls and 5 Mar14 $12.50 puts. The premiums looked good: 90 cents for the calls and 80 cents for the puts. One trick to use is to enter the trade as a combination trade or a spread trade. When doing this, you are combining the 2 options into one trade so it will only execute if both are executed simultaneously. The advantage is that you can get a slightly better premium because options trade in 5 cent increments. However when you enter trades in combinations, the increments drop to 1 cent. Also, the bid ask spread on options can be high so entering combinations can give you a better deal. I received $1.73 per share on the sold calls and puts (when taken together). If I had enter the trades as 2 separate trades, I probably would have received only $1.70 instead of $1.73. Selling the puts and calls together has another big advantage: the closing price on March 22 cannot possibly be BOTH above and below $12.50. This means that one of the options must expire worthless (there is a rare exception which I’ll get into later). So to summarize, the total positions owned are the following: long 3500 AFOP, short 10 Mar14 $12.50 calls, and short 5 Mar14 $12.50 puts. The puts do add some risk that an additional 500 shares can be assigned on March 22 which would put the total AFOP position at 4000 shares or 4% of the portfolio. Yes, 4% is higher than the upper range of 2.5% - 3.5%. I am taking an additional risk here, but this risk can be mitigated in a number of ways. Recall that I received $1.73 per share on the equivalent of 500 worth of shares. This means that any assigned shares would need to drop below $10.77 ($12.50 assignment price less the $1.73 received for selling the March calls and puts). I think it is unlikely that the shares drop below $10.77 but I could sell 500 shares at any time should the stock drop. The other action I can take is to roll my puts forward just before options expiration. By rolling the puts forward, I would delay the assignment of the 500 shares on March 22 and collect additional premium in the meantime. Here’s how rolling forward works: buy back 5 contracts of Mar14 $12.50 puts and simultaneously sell 5 contracts of Apr14 $12.50 puts. This trade will give a net premium credit because the time value left on the April option will be greater than the time value left on the March option. To maximum the net credit, it is almost always best to wait until just before the expiration to initiate the trade. I think that is possible that I will do this in March and I’ll explain the details later, if I do.

Some more on expiration: there are a few additional rules that you should be aware of. First, options may be exercised at any time before expiration. The owner of the option may exercise before expiration but they rarely do this because there is still time value on the option. Second, options do not expire at the same time as the market close. The options holder has an extra hour (expiration is at 5pm Eastern, not 4pm Eastern) to exercise the option. If some news comes out after market close then the option owner may still exercise. Hypothetically, if AFOP closes at $12.40 and at 4:05pm Eastern someone offers to buyout AFOP for $18 per share, then your short calls will almost certainly be exercised.

I also liked the idea of the short exp dates. I had just been thinking of doing something like that, doubling up on the calls, like in your example and making a nice return in less than a month’s time.

Assuming that the stock will stay near the current price (and not go shooting up), you should usually make more money by selling options with short time left and repeating this. It’s called time value harvesting. You will notice that if AFOP is trading at exactly $12.50 that they value of the $12.50 options chain (Mar, Apr, Jun, Sept) will increase the farther you go out in time. But the time value increases more slowly the farther you go out. Options time value decays over time and the decay progressively increases the closer you get to expiration. The last few days is decays the fastest. For this reason, you can often make more money by selling short term options repeatedly. But it all depends on what you are trying to do…often it’s better to trade options with longer time remaining.

Hope this helps and good luck with your trading.



Wonderful explanation and I thank you.

This is such a great post that I’m sure I am going to include some of your tactics into my trading. I’d do them all but I have to read this stuff 3 times to really get it, so instead, I read it once, grasp one good idea, implement it a few times until I have internalized it and then go back to your post (that I have printed) and get the second pearl.

Wonderful stuff and thanks for sharing.