Sunday, October 24, 2010

yet another Chipotle update..

Had you made a play on Chipotle stock as I have been talking about you would have done quite well on friday.  Chipotle announced earnings Thursday after the markets closed and was soon up $8 dollars in after-hours trading.

On Friday the stock was up close to $26...or 15% for the day.  Had you bought shares or a call option you would have done quite well for the day.

I think that I will probably try using the same strategy again in January (buying a call a few weeks in advance of Chipotle's earnings report).  I'm hoping I can find another stock like this and am always up to suggestions.

Thursday, October 21, 2010

Told you to buy Chipotle..

DENVER--(BUSINESS WIRE)-- Chipotle Mexican Grill, Inc. (NYSE:CMG - News) today reported financial results for its third quarter ended September 30, 2010.
Highlights for the third quarter of 2010 as compared to the third quarter of 2009 include:
  • Revenue increased 23.0% to $476.9 million
  • Comparable restaurant sales increased 11.4%
  • Restaurant level operating margin was 27.7%, an increase of 220 basis points
  • Net income was $48.2 million, an increase of 39.9%
  • Diluted earnings per share was $1.52, an increase of 40.7%
Highlights for the nine months ended September 30, 2010 as compared to the prior year include:
  • Revenue increased 19.7% to $1.35 billion
  • Comparable restaurant sales increased 8.3%
  • Restaurant level operating margin was 26.9%, an increase of 180 basis points
  • Net income was $ 132.5 million, an increase of 39.1%
  • Diluted earnings per share was $4.18, an increase of 41.2%

Chipotle is up $8.58 in after hours trading...take that, non-chipotle stock buyer people

Tuesday, October 19, 2010

So how good is Jim Cramer?

 I was reading an article today about some of Jim Cramer's stock picks.  At the bottom I saw "Jim Cramer was up 31% in 2009."  Article can be found here:

I thought to myself wow he did pretty good in 2009.  Then I decided to calculate my own portfolio return for the year.  Turns out not only did I do better than him but i pretty much kicked Jim Cramer's ass.

My stock portfolio for the year of 2009 got a return of 57.5%.  How did it do so much better than him?  Well first off I think I know that I threw larger percentages of money into "riskier" investment choices that had been beaten down at the time, including steel (X), oil tanker frontline (FRO), and a real estate investment trust (FRESX).  Secondly, I didn't do a crapload of trading.  When you make trades on a daily or even weekly basis you eat up your gains with all the commissions and fees.  Now I'm sure Jim is doing much larger trades so the commissions are probably pretty negligible but for me $8 to buy and another $8 to sell each position really does add up over time.

In this case I'd have to say the Warren Buffett inside of me kicked in.  I bought when others were fearful.  The idea is to buy low and sell high.  When others were selling low (to cut their losses) they were missing out on huge potential future gains.  An adjustment here and there is always going to be necessary when the market makes big moves (either up or down) but if you don't have the right balance to begin with you're going to screw yourself over should the market crash.

I don't see myself making 57.5% this year but I'm definitely hoping to be in the 20%+ range.

Sunday, October 10, 2010

What is a day off worth to you?

I always find it interesting that when people are offered some money to work out of their normal work schedule, such as the weekend, they look at the situation in many different ways.

Some people would be more than happy to pocket the extra cash, even if it's less than or equal to what they would make at their "normal" job.  They just see it as bonus money and it goes above and beyond what they're already making so as long as they're busy they don't really care if they're making a bit less $ since in the end it's extra.

On the other hand, there are people that see a lot more value in their weekend, and free time in general.  These people tend to be the ones that get upset when they have to work overtime at their regular job, even if that results in a bigger paycheck.  It would take a lot more money than their regular pay rate for them to be motivated enough to do some side work on the weekend.  If they regularly make $20 an hour they might not even do some work on the side for $30 or $40 an hour, whether it's because they can live without the extra bit of money or they just want to be able to enjoy their day off.

So the question is what kind of person are you and why?  Does extra cash motivate you to accept offers for side jobs or are you one of those people that likes their weekend routine and it would take a hell of a lot of money to change that.

Thursday, October 7, 2010

Easy way to become a millionaire

How hard is it to become a millionaire?  Well it all depends on the path you take and how much time you are willing to wait.  One of the easiest ways is to start saving at an early age.  If you're 18 years old and want $1,000,000 by the time you are 65, you have 47 years to both contribute and allow past contributions to grow.  In this scenario you could have $1 million if you saved $161 away each month (assuming an 8% average rate of return).  That's it.  $161 might seem like a lot to a teenager, but once you are in your twenties, thirties and beyond it won't be such a big chunk of your take-home pay.  

Now let's imagine you couldn't get started at 18 & instead you started 10 years later at age 28.  Now you'd have to put away $368 each month...that is over 2x what you were required to save at age 18.  Why so much more, you ask?  Basically you're missing out on 10 years of contributions and 10 years of your contributions to get that 8% assumed rate of return, but the main reason of the difference is called time value of money.  

Imagine investing $100 for 10 years at the same 8% rate of return.  After 10 years you'd have $222.  Now, imagine instead that you invested the initial $100 for 40 years.  You'd end up with $2,427.  As you can see, it isn't just 4x what the 10 years option earned because the earnings are also being compounded.

So long story short, the earlier you start saving the better.  By starting at age 18 you end up saving $90,804 of your own money (the rest of that 1 million is all growth).  If you started 10 years at age 28 you'd end up saving $163,392.  That is $72,588 more dollars you'd have to come up with just to be able to meet the $1,000,000 goal in time.  So take a look at your finances and see what you're willing to put away each month and you should be able to make that $1,000,000 mark without much problem, especially if time is on your side.

Wednesday, October 6, 2010

Sometimes even when we dont want to we have to let go

The great thing about selling covered calls is that you know ahead of time, in the event that the stock price goes beyond the strike price you sold it at, how much you will make.  Unfortunately your earnings potential is capped at the strike price, but at least you get to decide what that strike will be.  If you set your strike price above the money not only do you get to pocket the premium but you also get the difference between your cost basis on the stock and the stock price.

I purchased AMSC (an alt energy company that deals w/ wind technology) for about $28 a share in july.  I sold a covered call with an expiration of October 15 at a strike price of 36.  I made $70 off of selling the covered call, which computes to an annual return of 7.5% on the premium alone.  Should the stock make it above $36 and be called away from me, I'd make $36 - 28 + .70 = $8.7 per share, or a 31% return on the 4-month trade, which is a 93% annualized return.  I don't know about you but as far as I'm concerned the stock could go up to $50 in the next week (i'd still only profit up to $36) and either way I'll be happy with my 93% annualized return on my trade.

I guess the moral of the story is that you need to make sure that when you initially are deciding on selling a covered call, you will be happy whether or not your shares get called away.  You can't get too greedy with trying to get the highest premium WHILE hoping your shares don't get called away from you.  Decide on a strike price you are comfortable with in the event you do get called away.

I'll keep you updated on whether or not my shares actually get called away.  They are currently at $35...only $1 away and have over a week to get to the $36 strike price.

Tuesday, October 5, 2010

What a great day for the market

If you haven't heard today was a great day for the markets.  

NASDAQ +2.36% 
S&P500 +2.09%
DJIA +1.8%. 

 I think it's funny that those who are afraid to invest in the stock market because of its volatility will settle for 1-2% return on their money for a year in a CD or high-yield savings account.  Well I made more than what they make in a year TODAY.  

Of the 12 holdings in my ROTH (not including any options I own), 10 of them were up 2% or more, with 5 in the 3-5% range.  No losers in this account either.

In my taxable account I had 1 loser (it literally lost only $0.70...I think I'll sleep tonight).  Over all that account averaged a 3.5% gain.

It's days like today that make me love the stock market, but you can't get caught up in it all.  You really need to remember to think through each and every investment decision you make.  A lot of people are looking to gold right now because they see how much it has gone up over the past 10 or so years.  Personally I've never been a big fan of gold, but I do think precious metals have their place in ones portfolio (a small, small place).  Putting all your money into one stock, commodity, etc. is gambling.  Earlier this year nobody would have ever thought BP's stock would or could ever take such a big hit, but things happen.  That's why financial advisors always use that crazy "diversification" word...don't put all your eggs in one basket.  Sure you'll win sometimes, but it only takes one accident to drop your basket & crush your nest egg (see what i did there?).  All in all I'm glad to see a great day for the markets and I hope the momentum continues, but I don't see myself throwing all my liquid cash into it right now either.  
Remember...if you want to consistently beat the market you need to see what everyone else is doing then do the opposite.  I'm not trying to be pessimistic about the future I just think people should THINK before they ACT on emotion alone.  
Hope your day was as good as mine...or even better :) 

Sunday, October 3, 2010

Chipotle (CMG)...great food with a great company behind it

One of the most important things I have learned from Warren Buffett's trading style is to invest in what you know...and I know Chipotle.  I typically eat there at least once a week and it seems no matter what time I arrive there is always a line.  Thankfully, their lines move quite fast and they also accept online orders so in the event I am in a hurry I can always place an order ahead of time and have it ready for me at the time of my choosing.  

That being said, I can say that I've been an owner of Chipotle since February of this year.  I was fortunate enough to get in on the action at about $101 per share, which translates to a gain of 72.6%.  Not bad huh?

Chipotle will be announcing their 3rd quarter earnings on October 21.  I have almost no doubt in my mind that they will beat the analysts' estimates.  Why will they beat them?  Well there are a few reasons, the main one being that when these estimates were calculated, I think they factored in the current economic problems and possibly not as much foot traffic in the stores.  As stated above, from my experiences, Chipotle has no problem getting a line out the door.  

So you might be thinking "well why don't you just buy some more shares then Rob?"  Well as much as I would love to load up on shares the current price of $174.50 I have been thinking about another option...and that option is to buy a call option.  

Some background before I get into the details:
By buying a call option, I am essentially paying a premium to have control over a contract (each contract is for 100 if i buy 1 contract i control 100 shares, 2 contracts is 200 shares, etc.).  I am basically entering into an agreement with someone else where I pay them to have the OPTION to buy their shares off of them at a set price, the strike price.  This all has to happen before the expiration date of the contract.  

As you can see by the above option chain, the 180 Call option for Chipotle that expires on November 19, 2010 will cost me 7.30 per share, or $730 (remember each contract is for 100 shares).  I highlighted the main things that I look at...obviously you want to pick a strike price that is attainable before expiration (this is the price of the stock you are paying for the right to buy it at.  So if chipotle doesn't get up to 180 then you are only out your cost of the contract, in this case $730).  Check the 200 strike asking price.  The reason it is only 1.65 is because the odds of such a huge gain by then are a lot lower.  

There are essentially three things that can happen should I buy that option.

1)  Chipotle goes above and beyond the 180 mark...let's say it gets up to 195 at the contracts expiration.  That would mean that my profit is 195 - 180 - 7.30 = 7.70 per share, or $770 profit for the contract...not a bad return on investment for less than two months time.

2)  Chipotle never quite makes it to 180 and let's say it closes at 178.  Our contract is worthless because why would we buy shares at 180 when we can get them on the open market for 178.  We are out our investment of 7.30 per share, or $730 for the contract of 100 shares.

3)  Let's say it is October 22, the day after Chipotle announced their earnings and the stock is up to 183.  I don't know about you, but personally I don't have $18,300 lying around to cover the cost of 100 shares of Chipotle should I want to use my call option.  If I wanted to get rid of my position, I could simply sell my option contract on the open market.  When we first bought the call option we did a "Buy to Open" trade.  In order to close our position we can execute a "Sell to Close" trade.  The plus side of this is we will get any intrinsic value associated with our position as well as any time value.  A simple way to explain this is to consider the following:  What would you pay more for, a contract that expires in a week or one that expires in 2 years?  The obvious decision is that having 2 years will allow for a stock to have plenty of time to grow thus giving you a much higher probability to reach your strike price.  In the case for Chipotle, if the stock price was at 183 on October 22, we'd have about a month left of "time value" incorporated into our option.  So while we only have an intrinsic value of $3 per share (183 - strike price of 180), the time value will be there still as well, possibly $6 or so it really depends on current market conditions and how much open interest there is.  So long story short, we can resell our option at any time up 'til its expiration and either make a hefty profit or cut our losses.

One question people always ask me is "Well what's in it for the other guy to sell you a call option?" 

The simple answer is they get cash flow via the premium you pay to have control over their shares should they reach the agreed upon strike price.  I am both a buyer and seller of call options, but we'll get to the selling part at a later date.  

Hope this post was more informative than confusing.  If anything needs further clarification leave me a comment and I'd be more than happy to try to explain it another way.

Saturday, October 2, 2010

Kicking some index ass

I don't know about you guys but so far this has been a good year for my portfolios.  Year to date my ROTH is up 16.25% and my taxable account is up 18.84%.  To put those percentages into perspective, the S&P500, NASDAQ, and DJIA are up 4.35%, 4.48%, and 5.98%, respectively.  That means for EVERY $1,000 that I have invested, I made about $100-130 more than the indices did.  I find it funny that I've read a lot of articles saying how the common investor is better off in the long run to stick with indices because if they just trade on their own their profits will be eaten up by their brokerage commissions.  
Just some background:  I am by no means a professional trader.  I have only been trading for about 5 years or so.  Back in the day I started off by throwing a hundred dollars at 5 or so different stocks and basically tried reading and learning as much as I could.  From my experiences, the best way to learn anything is to jump right in.  Reading is fine and dandy but until you have money on the line (no matter how little) you won't get as much out of it.  Keep in mind that had I started all over again today, I wouldn't throw $100 at a few different stocks because let's say that $100 worth of shares costs us $7 to buy the shares and another $7 whenever we want to sell.  That means we need to make $14 JUST to break even.  Lucky for me I did pick a few winners when I started out.  As my experience grew, I was more confident in my abilities and invested larger sums of money and my love of equities grows everyday.  I currently am both buying call options and selling covered call options.  I think it's a valuable tool to have and a great way to leverage your money without having to use margin.  I'll make sure that I go into depth on options in future posts as well as keep you posted on specific trades (both the good and the bad) so you can hopefully learn something from this.  I know I kind of rambled so get ready for a lot of that.  This is MySecretPublicProfile, not Yours so I'll ramble whenever the hell I want :D

So here we are...

So the day has come.  Day 1.  The day I start putting my thoughts into words and posting them online for others to read.  So get ready world...