Thursday, April 3, 2014

My outlook on the market April 2nd

I am going to post a recent assignment from one of my classes on here. It is lengthy but a good read. It describes some trades I recently made on my fake account on and what I plan on doing in the future. It is written as though this person was my client and I am speaking to him, just so you don't get confused.

Kelvin Brown
Mr. B


Dear Mr. Investor,
As discussed in our original IPS statement, we agreed I would inform you of any changes needed and make them accordingly. This is to match both your level risk and required return. Recently, you have informed me that you are interested in the derivatives market. These derivative markets being specifically options and futures. Mr. Investor you describe wanting more return and would like to take on some more risk in order to achieve that, also you would like to add stock to your current position and provide insurance and profits through covered calls and protective puts. I am glad you have chosen to go into this area of investing, it can be highly rewarding, but you must be aware that it can be highly risky and cause great losses if not properly executed or timing on of the market is wrong. Knowing this and you and I speaking, I believe we have chosen some remarkable investments that I plan on executing April 2, 2014. In order to create these positions some of the non-producing stocks have been sold and will be re allocated to these purchases. These are the same ones we discussed and chose when we met, for your reference they are listed in the 4th item, under the selection of the covered call position.

1.    Put Option- We have decided to purchase two option contracts on Apple (AAPL) with a strike price of $540, premium of 6.55 per share, and an April 19th expiration date. This date was chosen due to time constraints of this assignment.  We believe that this is a good purchase because apple in the last two years has fluctuated greatly between roughly $800 a share and $400 dollars a share. This due in part to a mass exodus of the original apple team, some due to death and some resignation. This has been a massive blow to the team at apple, especially with the death of their found Steve Jobs, who was thought to be behind most of apple’s early success and known in his later years to drive the creativity of most projects completed at apple. Also, we believe that the tight lipped information and research that was of the Steve Jobs era of almost a CIA like headquarters are also gone, with leaked product images showing up on many websites. For years the price of Apple was driven higher and higher due to a cult following and a constant yearning due to secrecy of the new “Apple” or “i” product. These are gone. Now that I have given you some ideology of the trade, lets discuss the science or facts behind this investment decision. Apple currently holds 158.8 billion in cash. This is 30x what they had in 2004. This is a bad sign to the market, showing that apple does not have any worthwhile investment or R&D projects to delve this heaping amount of money into or pay as a profit to shareholders in dividends. This, in my opinion, is a negative signal to the market and will eventually drive the price of the stock well below $540 strike price we paid. I believe this will happen quickly because this information was just released by Moody’s Investors Service and Bloomberg April 1,2014.

2.    Call Option- On the call side we have decided to go with Nike (NKE) and purchase two option contracts. Nike is a strong company that has weathered many ups and down in the market. We think the price is currently depressed due to uncertainty in China’s Economy and the uncertainty between Russia and Ukraine. This deflation of the stock is temporary, created by the market and not based on the company. We understand that China is a major market and producer of Nike brand products, who also have a cult like following of some of their brands, such as “Jordan’s” which are released with mass crowds waiting line to get them. As soon as this uncertainty is resolved (we believe it will be favorably) we should see a 10%-12% movement upward of the stock, which is trading just off its 52 week high of 80.26, with target estimate of 82.23.  The 52-week high was just reached in early March 2014. We think in the long run Nike will return and exceed the target estimate exceeding our strike price of 75, premium of .79 a share, expiring April 19, 2014.  We are hoping to be at 85.

3.    Futures Short and Long- I will invest $10,000 (from the liquidated assets in item 4) between both short and long future contracts. We decided to stay with the idea that the market is unfoundedly depressed right now due to China’s Economy, Russia and Ukraine relations, and if this is just a correction. First I will discuss your Short Position. (Gold) Our current short position on gold has had a nice return to date of 8.01%. This is the idea that we will stay with. Gold is generally flocked to during economic crisis as a safe haven and ran from with the cash from their sale placed in stocks, as the market seems safer. So essentially if the DOW or S&P 500 rise, the price of gold will continue to go down, as was our original theory, just proven to be true. In a short statement I am going to short gold futures, staying with our original ideology of market theory, with a belief that gold will go well south of $1000. Now for the Long Position- (Petroleum-Crude Oil) as we all know oil is controlled by a cartel of oil producing nations and so is its ever-rising price. Russia being one of the world’s largest consumers of oil and taking into account its current relationship with Ukraine, I believe much of the worlds oil would have to be shifted to Russia in order to supply them for what endures ahead, have it war or other, if these indifferences were not settled. Also, as summer approaches in the U.S. many families are going on vacation, which is well known by OPEC, who conspire together and decide the price per barrel. I believe they will slow production in their countries or keep their excess of current production in reserve in their own country off the books, until the price has risen to meets its summer demand, and then the price will head back south late august as the summer tourist season closes. For these two reasons, we will be long oil futures, this is because the current price of $99.63 a barrel is low and will certainly be between 105-108 by the beginning of May.

4.  Covered Call and Protected Put- Covered Call and Protected Put sound just like what they are. A protected put is used, as insurance in case the price of a stock you own were to decrease you would have the put to throw you a life jacket and limit your overall losses. A covered call is used as an income-producing asset if you want to make money off your stock but do not want to sell it. This takes place as your stock price rises you could sell the Call option and make a profit without having to sell any shares. In covered call or protected put you are required to own the underlying asset and I am glad this is one of the ways you have chosen to branch out with your investments and include the derivative market, many people get started in options with these two strategies. As a Finance Major I like to give my client an investment plan they can understand and realize what is going on If you didn’t understand your own money being invested, it would be as if you bet on a football game not knowing who was playing, where they were playing, or if any rules had been changed. You would be scared. With that in mind lets go over what we decided for your Covered Call- We have decided on Xerox (XRX), this is an asset that you currently do not own so we will need to liquidate some other non-producing assets from your portfolio. We together chose these bottom five which are UNIS, GRPN, ADTN, WEN, BAC. This liquidation will free up assets of $49,167.00. Based on the Strike Price and Premium on the morning of April 2, 2014 we will be creating a position of two option contracts.  Xerox I believe is trading below its current valuation, with a low P/E of 12.56 and a nice dividend of 2.30%. It is currently off its 52 week high of 12.65, which I think can be recovered and surpassed and be in 14-15 dollar range. Protected Put- We have chosen Facebook (FB) as our protected put. Based on the Strike Price and Premium on the morning of April 2, 2014 we will be creating a position of two option contracts Whoa has this stock had a wild ride. IPO in 2012 came out around $52 dollars a share with 100 P/E and plummeted quickly into the teens. This company’s revenue stream is still uncertain at best. With the current climate with the NSA spying and the Snowden conflict still not at rest in the American publics mind. I can see some down side here if they were to lose another major income stream, as they lost GM in 2012. As many people know, you and what you like on FB is tracked. I think this is our potential downside. Alongside of that there is the ever mounting pressure between CEO and Founder Mark Zuckerburg and Shareholders/Board Members to snatch up any company that could compete an bring down FB such Oculus (which was recently acquired for $2 Billion.) The potential upside I see is, through these acquisitions as they gain market share and venture outside of tracking consumers who join Facebook in order to produce income. I see an upside in the mid 70’s and down side high 50’s depending on news and earning reports and estimates soon to be released 05/07/2014.

In parting, I hope that this plan is up to your satisfaction and needs. I know we have discussed this before hand; this just helps us remember why we did what we did in case we make a mistake so we can learn from it in the future. As always, I hope that all our well thought out strategies and brainstorming can turn out just as we expected with some high overall returns. I am glad you are interested in this side of the market and as your financial advisor I look forward to helping you meet any of your goals.


Kelvin Brown

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