Pssst!!!! Follow the money

https://www.youtube.com/watch?v=QodGxD19_as

**Revenue in Thousands**

2012 $92,335 $95,398 $100,183 $109,405
2013 $101,401 $109,589 $112,262 $118,608
2014 $121,163 $135,012 $143,270 $149,078
2015 $150,400

I am looking at the Revenue for this company. Have you looked at the Revenue for every quarter? Do you notice that it is going up almost every quarter? The only quarter that it actually went down was in the first quarter of 2013. That is interesting because usually a company will have a quarter that is weaker, but going back to 2012 this company has grown its revenue every quarter but one. This is nothing to get excited about because a lot of companies grow the top line, but can't seem to make a dime.

```

**EPS Non-Gaap earnings (adjusted earnings)**

2012  $.16. $.30  $.28  $.33 = $1.07
2013  $.09  $.03  $.11  $.10 = $.33
2014  $.02  $.08  $.24  $.29 = $.63
2015  $.22

```

Now EPS was growing really strong in 2012 but in 2013 it dropped off dramatically. Then towards the end of 2014 it started coming back again. In 2014 earnings was up 91%. Now that number gets me a little excited. But earning were down in the 1Q15 sequentially but was up huge YOY. For the last TTM the earnings were $.83, up 219$%, from $.26. The next quarter earnings should be up huge again YOY but the bar is set very low. For the next quarter the analyst expect earnings of $.23, for Q315 they expect earnings of $.30, and for Q4 they expect earnings of $.35. This should give earnings for 2015 of $1.10 which will give us growth of 75% over 2014. Not to shabby growth but also looks like earnings are coming back. The analyst are expecting $1.10 of earnings for 2015. Swir has beat their earnings for the last 3 quarters. Could they be on a streak and keep beating earnings?

[http://data.cnbc.com/quotes/SWIR/tab/5](http://data.cnbc.com/quotes/SWIR/tab/5)

```

**Free Cash Flow (FCF)in thousands**

2012 $1,520  $23,483  $-6,857  $6,476 = $24,622
2013 $7,746  $4,375   $15,245  $6,779 = $34,145
2014 $-4,824 $9,480   $26,675  $7,893 = $39,224
2015 $-23,861

```

Nice, every year they are FCF positive. This is pretty impressive because they are able to grow the company on the FCF alone. What really stands out though is the negative FCF for Q1 of 2015. AHHH!! finally the fly in the ointment. Why would a company go from free cash flow positive to negative free cash flow in one quarter? What takes up almost all of their Free cash flow for a year? Mr. Mclennan, Swir Cfo, stated **"$22 million increase in accounts receivable as a result of sales being pushed to the latter part of the quarter due to the impact component shortages had on the timing of manufacturing and shipping of products during the quarter. "**

So it looks like Swir's customers owe them a lot of money. Accounts receivables were unusually high this quarter. This is something that bears watching but if they are able to collect all of the receivables it should be a nice boost on revenue.

```

**Cash in thousands**
 
2012 $106,773 $125,312 $59,528  $63,600
2013 $55,923  $179,886 $179,886 $179,886
2014 $207,062 $168,418 $196,086 $207,062
2015 $99,555

**Debt in thousands**

2012 $0 $0 $0 $0
2013 $0 $0 $0 $0 
2014 $0 $0 $0 $0
2015 $0

```

So they are debt free, and they have cash on the books. Sure cash came down this quarter but they bought Wireless Maingate for $88.4 million.

**Finally**

Ok I don't know about you but when I see a company that is growing revenue's, growing earnings, FCF positive, Debt free, and cash on the books, well I think that is a buy, not a sell. Sure if you were looking to sell this company 2013 would have been a great time to sell but now things are starting to looks up. I like it when a company's stock price is going down while earnings are going up. If the company is also FCF positive and debt free well that is just icing on the cake.

1YPEG for Swir is .13, anything under 1.0 is considered cheap. But do your own due diligence.

Andy
Long Swir
25 Likes

OOOPs That was written for the swir board so it made sense over there. Sorry about that the Ticker is SWIR.

Andy

I am with you Andy. I added 15 LEAPS today to start a position. This is getting killed from past market performance. They are turning the business now. I got LEAPS for better use of my capital.

So many bargains out there.

LegoAbs

1 Like

Hi Lego,

I wish I understood options so maybe I need to get into one of the newsletters for options. I was into Swir in 2012 and made some good money. It looks like it is coming back now, but I am in a little early, down about 9% but I think it will come back with the next earnings report. Ready for another run up.

Andy

I guess I was even earlier Andy, I am down 16 percent but your post adds to my confidence, so thanks for that. Hope the good news continues.

2 Likes

Hi Lego,

I wish I understood options so maybe I need to get into one of the newsletters for options. I was into Swir in 2012 and made some good money. It looks like it is coming back now, but I am in a little early, down about 9% but I think it will come back with the next earnings report. Ready for another run up.

Andy

Andy,

Up until 5 years ago, I was the Peter Lynch type of investors; I wouldn’t touch options with a yard stick. Before the Internet existence, that would make sense, but today, I truly believe, it COMPLEMENTS our trading. Options are inherently risky, but as you know, that means higher potential return. What I eventually learned is that if you use it on your LONG stocks, the ones you know inside out, there is virtually no risk at all.

There are many complicated option strategies which I never use. All the information you need are available from the (free) options boards at MF and especially with a SA membership. I learned everything I need to know from MF free brochures and boards. However, I heard the folks at MF Options are doing a great job introducing Options to the masses.

Here are the basics:

Sell CALL: Use when you want a higher selling price OR collect premium immediately while you wait to get your price. For example, I have some extra UNBT set for $35. I can keep selling calls until I get my price. (Risk: shares price runs up pass your price, but you were going to sell anyway)

Sell PUT: This is my most used strategy. I use this to buy stocks at lower prices (within my time frame, weeks, months etc.) I rarely ever buy stocks at today’s prices unless I need it right away or it’s less than 100 shares. If you don’t get the shares, you keep the premium. (Risk: the price go way down, but recall, you were going to buy at today’s price anyway)

Buy CALL: Most bang for your bucks if you pick the correct price and time frame. For example, my 15 SWIR options mean I have rights to buy 1500 shares @ $25, but paid less than the cost for 200 shares. I now sit and wait for the price to go over $25. Every $1 up from here, the option value goes up ~ 30%. The leverage is incredible! (Risk: the $25 dollars prince never happen, you lose your initial investment)

Buy PUT: I never use this strategy. It’s basically insurance to protect your gains. Let say you believe SKX went up too much,you would like to sell at $115 per share because the next earning is going to be really bad and the price can drop back to $76. For a few dollars, you can buy a $115 put to protect yourself.

You can use some mixtures of these strategies to help offset your cost, like using the money from selling puts for buying calls. (I believe GauchoChris did this with SWKS)

In the end, I believe Options are useful but not necessary to boost your return. If you can calculate Saul’s 1YPEG, you are more than qualify to understand it. Today, 2 out of every 3 of my trades use options. I use it to boost my return on the same stock that I’m LONG. My one year portfolio gain is at 36%. If you are the kind of person who checks this board daily, you may like options. There is excitement every month as the premium stays in your account.

LegoAbs

14 Likes

Nice write-up, Andy. I became interested in SWIR about a year ago (caught the IoT fever like so many others). It’s been on my watchlist but I’ve not yet pulled the trigger. Here’s a significant factor in my deliberations: the performance of the Toronto Stock Exchange.

http://tinyurl.com/nwome68

As one can see, the Toronto Market has not been having a banner year. In fact, it’s been falling rather steadily since April. Now, I’m one of those investors who pays attention to overall Market and market sector performance. Heck, we all saw this past week how overall Market behavior affects individual stocks. If one compares the SWIR chart to the TSX chart, one can easily see that SWIR has been trading down along with the rest of the Toronto exchange:

http://tinyurl.com/nry4l4h

Having said all that, I believe there’s quite a bit of upside potential in the Toronto Market and SWIR as well. I figure I’ll be hitting the “Buy” button fairly soon.

2 Likes

Thanks Lego I am really going to have to look into them now. I like the idea of buying my stocks cheaper.

Andy

Thanks Putnid that could be it. Maybe it is just following the Toronto exchange. I have heard that the Toronto exchange is dominated by oil and we all know how oil is doing.

Andy

1 Like

Hi Putnid, the problem is that the Toronto Exchange has fallen about 7% since April according to your graphs, and is roughly flat since the beginning the year, while SWIR has fallen almost 50% since the beginning of the year. If you think that SWIR is falling in sympathy with the TSX you are kidding yourself.

Saul

3 Likes

I wasn’t going to write this post (and I probably shouldn’t), but I feel that I have to after seeing Andy’s response.

Let me first say that I like options and use options successfully, and I’m very glad I have them as a tool in my box. I’m no options hater. But I have to strongly caution about what LegoAbs wrote. There are a lot of subtleties to options that can really hurt portfolio performance, and I think many people using them aren’t aware of them (or don’t properly appreciate them). Based on your post, Lego, I think you might be in that category, especially with regard to selling puts.

Risk: the price go way down, but recall, you were going to buy at today’s price anyway

Sure, that’s the obvious risk. But it’s not the most insidious one.

I use this to buy stocks at lower price… I rarely ever buy stocks at today’s prices

THAT’s the insidious risk. This is what causes the most portfolio damage, IMHO. You are destroying the math that otherwise works in your favor as an investor: that a stock can only lose 100%, but can gain many many times that.

Imagine if I pitch a company to you that sounds wonderful, so much so you’re very interested in owning it. Presumably that’s because you think it’s going to up, right? But then I say “Hey, I’ll sell you shares, but you only get to keep the first 5% if it does up – but if it goes down, well you’re on the hook for that.” Does that sound enticing? Because that’s more-or-less what you get when you write a short put: you are throwing away nearly all the upside, but keeping nearly all of the downside risk. It’s exactly the opposite of what most people want.

The problem is that put writers don’t look at it that way. They see it as “lowering” their risk, because if they have to fulfill their obligation then they’re buying at a lower price than today. And if they don’t have to fulfill their obligation, then they get to pocket the “premium” they were paid for taking on that obligation. Unfortunately, this attitude is reinforced by the way MF Options keeps score, which is by “success rate” rather than returns. Now to be fair to MFO, they’re a pure options service, so buying shares isn’t a choice for them – and they use a lot of different types of trades in an effort to be educational.

But if that company I pitched to you goes up 30% or 50%, and instead all you got was the 5% premium, was that really successful? Sure, the absolute worth of your portfolio did increase a little bit, but your opportunity cost was huge! And that’s real damage in my opinion, just as much as it would be if you sold that winner after a 5% pop in the price and gave yourself a hearty pat on the back for your “success.”

It gets worse, though.

And are you going to jump in to the stock after that 30% rise? Or are you going to price anchor, since you could have bought it much lower, but chose to write that put instead? How much additional damage are you going to do as that stock goes on to double or triple, but you’re busy picking up little 5% premiums on other companies because that one “got away”?

But wait, what if the stock dips, instead?

Saul has said he doesn’t like to buy a stock on the way down unless he knows exactly why it’s falling and thinks the market is just being dumb. Writing that put not only obligates you to buy in the future, when perhaps things have changed with the business, but that obligation also can serve as impediment to taking advantage when the market is being dumb. You imply that, worst case, you’ll get shares but maybe not at the bottom. But that’s not true. Occasionally the market is dumb for a long time, but not usually: typically prices will recover fairly quickly, and you may decide not to take advantage because you have this put obligation out there and you either (1) assume you’ll get shares, or (2) are worried that you’ll end up over-allocated if the stock continues dropping and you buy more on top of that outstanding obligation. So you end up completely missing the dip, the stock rises back above the strike price of your put, and you end up zero shares: you missed the very dip you were looking for! Most put writers will view this as “success” since they pocketed the premium, with back slaps all around. But again, it’s opportunity cost. This has happened to me multiple times, and I even saw it recently happen to MF Pro, so even the best option writers fall victim.

Finally, one more blow: that put premium will always be taxed at short-term rates. So it’s also tax-inefficient, putting your portfolio at even further disadvantage relative to stock ownership.

Now there are things you can do to mitigate the above. Personally, I no longer write (sell) puts for premiums: if I sell a put, I use the premium to buy a call so that I can benefit from the upside, because that’s where the real wealth is built over time. This option strategy more-or-less mirrors long stock ownership (and so is referred to as a “synthetic” long), but requires very little or even zero out-of-pocket capital, trading that instead for for an obligation to buy shares later. In other words, it uses leverage. This trade has a whole other set of subtleties and risks that I’m not going to go into – I’m not recommending it here, merely using it as an example of things I do to align my options strategies with my investing philosophies, which is critical: you don’t want to let the tail wag the dog.

Options are a great tool, but they take years to learn – they’re one of those things where people have to make their own mistakes to really appreciate the risks and subtleties – and even then it’s easy to screw up. I think writing puts is especially problematic because long-term failure is disguised as a series of short-term “successes.”

Andy: I wrote this post primarily for your benefit after seeing your comment that you “like the idea of buying my stocks cheaper.” Please don’t. I do encourage you to learn options, and put writing does have a place, but IMHO trying to buy stocks cheaper is one of the worst uses for them.

Neil

39 Likes

Neil,

I don’t think this is the board to discuss Options in details, so I will be brief. However, there are answers to almost all of what you are saying/concerns. As I said, it complements my portfolio trading. When I like a stock, I buy some and sell puts together. I will sell puts to buy more in the future. I always own some, so it doesn’t run away like you said. However, I benefit if it drops. Also, I sell puts on only stocks I want to own and have money to buy. In an IRA account, tax is not a concern. In any case, I have a 90% plus success rate with options with over 200 option trades! I certainly believe I know what I am doing. I read on SA Options board about the risks and the mistakes of others, etc. That said, I have to agree, you have to know what you are doing, but I see value in using them to complements my return, and will continue to use them. The sky is not falling.

LegoAbs

3 Likes

Neil, I agree with you absolutely that holding off buying a stock because you are trying to buy it cheaper is a huge mistake. I’ve used the example (rare occurrence I’ll admit) of a 3D printing stock I bought at $15 and it hit $175 within a year. If I had tried to buy it with a put instead, to try to make a few percent premium, I would never had gotten the stock and would have missed over an 1100% gain. That would wipe out a lot of gains of premiums, but the person who sold the put would consider it a “success” because he got the premium. For an example closer to home, 10 weeks ago AMBA closed at about $72. If you tried to buy it the next week at $71 it never happened. It went straight up to $127 or something, and is now at $99. Or SKX. Twelve weeks ago it closed at $73.50 or so. Trying to get it at $72.50 sounds smart, doesn’t it? But it’s now at about $119. It never got down to $72.50. Ah! You missed the stock, but you got the option premium, so it was a success! Right?

Saul

For Knowledgebase for this board
please go to Post #9939.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

11 Likes

I wasn’t going to write this post (and I probably shouldn’t), but I feel that I have to after seeing Andy’s response.

Lol I know how you feel Neil but I am glad you did. This board is great for sharing ideas and you bring a lot of information Neil. I value your opinion.

But Lego does bring up some great points. When I first came on the Motley Fool I invested through MDP and there came up a discussion on options. You would have thought it was some sort of black magic. A lot of people were upset with options and did not want them discussed on the board. Unfortunately I was one of the people. It was due to my total ignorance on options and sadly wasn’t one of my finer days.

But you are correct too Neil. I won’t be planning any option trading until I understand them better. But I do plan on studying them and see if I can broaden my horizon. Thanks for your cautionary notes Neil.

There is a lot to learn about investing and at this point in my investing career I try to keep an open mind on all forms of investing. Because obviously their are many different paths to success and if anyone can give me insight to be a better investor I can only thank them.

Andy
Who believes this board has made me a better investor

5 Likes

Sell PUT: This is my most used strategy. I use this to buy stocks at lower prices (within my time frame, weeks, months etc.) I rarely ever buy stocks at today’s prices unless I need it right away or it’s less than 100 shares. If you don’t get the shares, you keep the premium. (Risk: the price go way down, but recall, you were going to buy at today’s price anyway)

Isn’t there another risk, that the price never falls low enough and you never buy?

Recommendations: 12

nevercontent added to your Favorite Fools list.

I wasn’t going to write this post (and I probably shouldn’t), but I feel that I have to after seeing Andy’s response.

Let me first say that I like options and use options successfully, and I’m very glad I have them as a tool in my box. I’m no options hater. But I have to strongly caution about what LegoAbs wrote. There are a lot of subtleties to options that can really hurt portfolio performance, and I think many people using them aren’t aware of them (or don’t properly appreciate them). Based on your post, Lego, I think you might be in that category, especially with regard to selling puts.

Risk: the price go way down, but recall, you were going to buy at today’s price anyway

Sure, that’s the obvious risk. But it’s not the most insidious one.

I use this to buy stocks at lower price… I rarely ever buy stocks at today’s prices

THAT’s the insidious risk. This is what causes the most portfolio damage, IMHO. You are destroying the math that otherwise works in your favor as an investor: that a stock can only lose 100%, but can gain many many times that.

Imagine if I pitch a company to you that sounds wonderful, so much so you’re very interested in owning it. Presumably that’s because you think it’s going to up, right? But then I say “Hey, I’ll sell you shares, but you only get to keep the first 5% if it does up – but if it goes down, well you’re on the hook for that.” Does that sound enticing? Because that’s more-or-less what you get when you write a short put: you are throwing away nearly all the upside, but keeping nearly all of the downside risk. It’s exactly the opposite of what most people want.

The problem is that put writers don’t look at it that way. They see it as “lowering” their risk, because if they have to fulfill their obligation then they’re buying at a lower price than today. And if they don’t have to fulfill their obligation, then they get to pocket the “premium” they were paid for taking on that obligation. Unfortunately, this attitude is reinforced by the way MF Options keeps score, which is by “success rate” rather than returns. Now to be fair to MFO, they’re a pure options service, so buying shares isn’t a choice for them – and they use a lot of different types of trades in an effort to be educational.

But if that company I pitched to you goes up 30% or 50%, and instead all you got was the 5% premium, was that really successful? Sure, the absolute worth of your portfolio did increase a little bit, but your opportunity cost was huge! And that’s real damage in my opinion, just as much as it would be if you sold that winner after a 5% pop in the price and gave yourself a hearty pat on the back for your “success.”

It gets worse, though.

And are you going to jump in to the stock after that 30% rise? Or are you going to price anchor, since you could have bought it much lower, but chose to write that put instead? How much additional damage are you going to do as that stock goes on to double or triple, but you’re busy picking up little 5% premiums on other companies because that one “got away”?

But wait, what if the stock dips, instead?

Saul has said he doesn’t like to buy a stock on the way down unless he knows exactly why it’s falling and thinks the market is just being dumb. Writing that put not only obligates you to buy in the future, when perhaps things have changed with the business, but that obligation also can serve as impediment to taking advantage when the market is being dumb. You imply that, worst case, you’ll get shares but maybe not at the bottom. But that’s not true. Occasionally the market is dumb for a long time, but not usually: typically prices will recover fairly quickly, and you may decide not to take advantage because you have this put obligation out there and you either (1) assume you’ll get shares, or (2) are worried that you’ll end up over-allocated if the stock continues dropping and you buy more on top of that outstanding obligation. So you end up completely missing the dip, the stock rises back above the strike price of your put, and you end up zero shares: you missed the very dip you were looking for! Most put writers will view this as “success” since they pocketed the premium, with back slaps all around. But again, it’s opportunity cost. This has happened to me multiple times, and I even saw it recently happen to MF Pro, so even the best option writers fall victim.

Finally, one more blow: that put premium will always be taxed at short-term rates. So it’s also tax-inefficient, putting your portfolio at even further disadvantage relative to stock ownership.

Now there are things you can do to mitigate the above. Personally, I no longer write (sell) puts for premiums: if I sell a put, I use the premium to buy a call so that I can benefit from the upside, because that’s where the real wealth is built over time. This option strategy more-or-less mirrors long stock ownership (and so is referred to as a “synthetic” long), but requires very little or even zero out-of-pocket capital, trading that instead for for an obligation to buy shares later. In other words, it uses leverage. This trade has a whole other set of subtleties and risks that I’m not going to go into – I’m not recommending it here, merely using it as an example of things I do to align my options strategies with my investing philosophies, which is critical: you don’t want to let the tail wag the dog.

Options are a great tool, but they take years to learn – they’re one of those things where people have to make their own mistakes to really appreciate the risks and subtleties – and even then it’s easy to screw up. I think writing puts is especially problematic because long-term failure is disguised as a series of short-term “successes.”

Andy: I wrote this post primarily for your benefit after seeing your comment that you “like the idea of buying my stocks cheaper.” Please don’t. I do encourage you to learn options, and put writing does have a place, but IMHO trying to buy stocks cheaper is one of the worst uses for them.

Neil,

I have had a nagging feeling for a long time that owning none dividend paying rising stars was a bad idea. Your post is another affirmation of that feeling. I am not a successful investor, and this board has a tremendous amount to teach me. (Read: I am an experienced unsuccessful investor.)

However, do not worry that I am going to run out and open an options account. I am still learning math, (even though I am way past the math learning age.) and expect that both equities and option trading, vice investing, will have to wait until I master ( https://www.khanacademy.org/math/probability ) Khan Academy Probability an Statistics, which means I must complete Calculus, which means I need to complete Trig, which means I must review Geometry. So it will be another year at least.

One good thing about that timing. The best I can tell, we are very close to the beginning of a 20 year secular bull market.

Cheers and thanks,
Qazulight

3 Likes

You can also sell puts just for the premium and not to try to buy the stock at a lower price. In this case you don’t care how high the stock goes as long as it is above the strike price. You can also own the stock outright and use both strategies.

Full disclosure, I am a novice in the options world. Also, You do have to know which puts to sell and be willing to buy the stock (or close the put) if the stock declines below the strike price unless you are happy with buying it at a lower price.

Just saying.

Andy

Another BIG problem with option trading is a margin is required until it expires.
Why?

Because most brokers require the money be in place to place the bet. This is your cash basically seized or secured to cover the outcome. Much like insurance or a lien. The amount of margin is determined by your broker. When in Vegas you have chips as margin.

I use options occasionally:

… to sell a stock I own at a higher price through being called away at a certain date and price.
… to purchase a stock at a lower price because it is too highly valued currently. But only stocks of MF Pro service.

… and some closely following the MF Options service … to learn teh proper techniques … and some of these go awry … and these MF know what they are doing!

… and some to short a stock “buy a put” or “sell a call” … or is it the other way around? … I don’t remember

Personally, I go off the reservation so to speak but you really need to think out the real consequences of each order.

I agree with all of the posts ( I’m not a politician)

*there is mucho risk. After all you are playing against true professionals that can eat you for lunch.

  • however, used properly, can produce YOUR desired reults

But beware … Vegas exists for reason.

Mark

3 Likes

Ok, I will chime in.

I like the idea of buying my stocks cheaper.

When I like a stock, I buy some and sell puts together.

If I sell a put, I use the premium to buy a call so that I can benefit from the upside.

All of these can be fine ways to achieve an end, but knowing which to use for the most optimum result requires a deeper understanding of context.

If stock has very little movement, and you pretty much expect that to continue, you could actually get a better return from selling the put than owning the stock. In this case, you’re using leverage to generate some “excitement” around an otherwise dull and boring security. If you don’t get the stock, no big deal - you’ll catch it next time. In a similar fashion, if you do end up owning this humdrum through some put shares, you could sell calls at a slightly higher strike to generate more bang from it yet again. If the stock goes north of your call strike - well, again no big deal. It wouldn’t have gone too far. This is a stalwart stock after all. Write some puts and start again.

While this strategy works well for the slow movers, I would never write puts or calls on a stock going through an extreme growth spurt. Following a strategy like that, I’d likely never get to own the stock. I’d be chasing it upward and onward while generating mediocre returns along the way.

Similarly, I would never write a call on a high beta stock for the same reason - I would likely miss out on a stock’s upside by having my shares called away after its last leg up.

Also, if by chance my stock sputters during its growth phase, and if I have a put obligation in the works, my capital commitment could quickly turn into a liability. I’m on the hook to actually buy this stock at a higher price than its now worth, and the reason for the trip south could be for valid reasons - and I do this for what sort of return exactly?

Nearly all of the stocks mentioned on this board are of the high beta, high growth variety. Very exciting and potentially very rewarding, but horrible candidates for writing puts or covered calls. I think that is where the caution lie. Option writing is great if you want to generate an extra 5% or 8% on some stock you really like, but recognize you may never actually own that stock (ala put writing), or you won’t for very long (ala call writing). Not if it’s of the high growth varieties talked about here.

Now, buying a stock talked about on these boards and selling some puts to get an extra 5-8% may look like a reasonable strategy, but I personally think it is misplaced opportunity. I will explain my thinking.

Again, this is my opinion after spending the past 4-5 years with options. If I were to tie up some capital with a written put, I would use the premium received to purchase a call of the equivalent strike and expiration. If you really, really like the stock and anticipate a strong trajectory, why settle for a cap of 5-8%? You could turn that modest return into a limitless one. Plus, the capital commitment is really no different. By writing the put you’ve committed a portion of your capital to buy the stock at a certain price (this is your risk). You’re doing this to generate a return of 5-8% (this is your reward). I don’t view this as a good use of risk/reward (100% risk for 5-8% reward). I would much rather “invest” the premium received into a purchased call and remove the cap on my reward.

I hope that makes sense. I’ve used synthetic LEAPs on stocks I like to substantially boost my returns. Year to date I’m up 67%, BUT, before you go out and implement such a strategy for your own, know that these are advanced techniques and can use a significant amount of leverage (risk). It is not for the faint of heart. I was up 82% YTD a few weeks ago only to see my portfolio levels drop to 55% YTD during the recent market turmoil. You have to have a decent amount of capital on hand (an iron stomach also helps) and you need to recognize you run the risk of getting entirely wiped out, especially if you choose your stocks poorly and over-extend your leverage (all downturns become very, very much magnified).

Anywho, I hope this additional perspective helps. Options can be a powerful investment vehicle if you know how to use them. But in the words of a famous spandex-toting web-slinging wall-crawler: with great power comes great responsibility. Before doing anything with options I strongly recommend spending some time with the MF option service. Jeff Fischer and Jim Gillies are very purposeful in their selection of option strategies for different situations and they explain them all very well. I would go there for a full education before deciding on any next steps with options.

Best,
–Kevin

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If stock has very little movement, and you pretty much expect that to continue, you could actually get a better return from selling the put than owning the stock. In this case, you’re using leverage to generate some “excitement” around an otherwise dull and boring security. If you don’t get the stock, no big deal - you’ll catch it next time. In a similar fashion, if you do end up owning this humdrum through some put shares, you could sell calls at a slightly higher strike to generate more bang from it yet again. If the stock goes north of your call strike - well, again no big deal. It wouldn’t have gone too far. This is a stalwart stock after all. Write some puts and start again.

While this strategy works well for the slow movers,

I can’t understand why you’d be mucking about generating mediocre returns with puts and calls when you could be putting your capital to work on good investments. While this may be a workable strategy (on paper anyway, until a “slow mover” decides to move quickly downward, then the reality paints a different picture), why on earth are you doing it?

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