Phil’s Stock World – A User’s Guide

March 19, 2007

272

You don’t have to trade like Phil!

Why would I say such a blas-phil-mous thing? Because Phil and I want YOU to MAKE MONEY! And making money does not necessarily mean trading like Phil. But wait a second…. doesn’t Phil make money? He sure does! Then why not trade like Phil? Well, that’s the clincher. If you can trade exactly like Phil then great! Historical returns at Phil’s Stock World indicate you’ve got a pretty good shot at replicating his stellar performance in the future. However, what if you are not able to follow every move? What should you do?

You can do like I do! (I’ll explain more on that in a few moments!) I have been teaching people how to trade stocks and options for years; it’s my passion. And, the only consistent thing I’ve really seen amongst all the people I have taught is how different each one of them is. You will have a different risk tolerance and different trading preferences to Phil or me or almost anybody else. That’s okay; you can still make money.

One way of evaluating your risk tolerance is by understanding how much capital you have to play with and ask yourself how much account value fluctuation can I tolerate?. If you are trading with $10,000 then $2,000 might be acceptable to you because you can handle that dollar change in your account. But the same 20% shift for a trader with $100,000 (i.e. $20,000) or $1,000,000 might be unacceptable.

Figure out what amount ensures you still sleep well at night….trust me it helps!

Then figure out how much you are willing to commit to any given position and determine how much it can fluctuate. For example, Phil constantly updates his virtual portfolio with a basket of puts and calls so he always has hedging so that no single day or series of unexpected moves can cause a wipe-out…that’s smart trading!

When I scan Phil’s trades I don’t pick randomly and I don’t encourage you to either. Random plays are not smart because the trade you choose could well be a hedge on some other position Phil has open. The best place to start is the long term virtual portfolio. I know it’s not as sexy as the aggressive shorter term plays, but it’s smart, and besides:

Boredom is not a reason to make or not make a trade!

Trade What You Know

I was scanning some long term trades recently and followed his CY Jan '09 $20 Calls for $2.80 per share! WOW! When I saw that I kicked myself for not having spotted the same trade. Why?

Cypress has an unbelievable asset hidden (well not so hidden any more!) in their majority shareholding of SunPower (SPWR). SunPower is a $3Bn company. Cypress is a approximately a $3Bn company. But wait a second doesn’t that make the intrinsic value of Cypress REALLY REALLY LOW? Well kinda sorta. They have some debt, almost $600M in fact. They almost converted it to equity through a convertible debenture a few years ago but some last minute stock price shenanigans (or maybe we should say 'alleged' shenanigans…. yes that’s better!) failed to give the green light to the convert taking place. Moving swiftly along…They do have almost as much cash as debt and they also have approximately $1Bn in revenues.

If you’re looking and saying holy shmoly what a bargain, you’re not alone! In fact, famed hedge fund manager Robert Chapman of Chapman Capital, LLC is hounding Cypress executive management to set in forth a process that would release value from the vast ownership stake and have it reflected in Cypress’s stock price.

Chapman claims Cypress CEO T.J. Rodgers is providing the following excuses for not releasing value:

The tax situation underlying the separation of SunPower from Cypress is too complex and it is better to wait until 2009 when it is easy.
Spinning off SunPower would be like selling off controlling interest in Intel in early 1972. SunPower is extremely valuable and Cypress should make sure Cypress shareholders benefit from it.
There would be lawsuits thrown at both companies should they attempt a separation.
Cypress provides SunPower expertise in the areas of management, engineering, manufacturing and facilities that is instrumental to SunPower’s growth and success.

To each so-called "excuse" Chapman has a rebuttal (each of which is too lengthy to be noted here but is available here )

Bottom line, when Phil issued his pick, I already liked the trade because I had done my homework on the Cypress. I liked the company from a long-term perspective and 2009 long call options at-the-money for less than $3.00 was a bargain to me! So I jumped in and bought some. Within a few days I was up over 25%. As a long-term play you don’t necessarily have to sell such a position but heck we’re all different and if you had followed that trade too and sold for 25%+ in a few days, then I don’t think anybody could fault you! It’s a phenomenal rate of return!

The options held their value very well earlier this week in spite of the pullback. Nevertheless they did pullback a little and are currently being offered at an Ask price of $3.40 down from $3.60 mid-week. If you were still interested in them, a prudent approach to this trade as with any other, is to scale in a little at a time as Phil always encourages (if you want to learn more about this scaling in strategy, the famous book: "Reminiscences of a Stock Operator" is a worthwhile read).

Note: Phil's did not buy the Jan '09 $20s for his LTP as he was already holding the Jan '09 $22.50s, against which he had sold the Apr $20s for $1 (now .35) on 2/26 (in anticipation of the correction). Phil often sees nice plays on stocks he's watching and mentions them for people who aren't already in.

Trade Short Term Plays

If you happen to be more aggressive then you'll probably gravitate towards the shorter term plays – but don't forget those longer term plays! One relatively recent shorter term play that Phil highlighted was puts on LAMR.

In early January Phil noted that Cramer had pumped LAMR heavily. The stock had jumped above $70 as the Cramerites jumped blindly on the band wagon. Since Phil took the other side of the trade, I was especially curious (love or hate Cramer, he's a smart guy and I don't like betting against smart guys haphazardly!). I looked first at the technicals – way overbought!

Stocks can remain overbought for long periods and indeed LAMR had been overbought for well over a month. Then I looked at the fundamentals. The company had at the time approximately a $7Bn market capitalization with so-so margins, not much cash, a ton of debt and a horrible P/E ratio relative to the earnings growth rate. Unless something really incredible could materialize imminently, I found it hard to believe the stock trading well above its 5-day EMA due to atypical buying (a.k.a The Cramer Effect!) could hold its value for any significant period of time. As a result I sided with Phil and jumped in with long puts! And within days the stock started to reverse and indeed it kept going….all the way down to its current price $63.93. It turned out to be a fantastic trade that we, along I am sure with many members, were able to close profitably in a very short timeframe.

On Phil's Stock World, trades like LAMR are "a dime a dozen" So, when following the incredible breadth of trades Phil highlights, take some time to spot trades that suit you and then do some homework on them and if you agree too that they are indeed going to match your trading style then you’ve probably a found a suitable trade for your virtual portfolio.

Trade Update

How is our Wal-Mart trade working?

Recall this was a very heavily hedged position that would take advantage of time-decay on our short options positions provided the stock remained between $47.50 and $50 through to April expiration – and if it didn't we could easily account for that by rolling the options forward another month or two.

Buying WMT Jan 09 $55s for $3.40 AND Jan 09 $45 puts $3.30 (total cost $6.70)

Update: WMT Jan 09 $55 Bid $2.85 AND Jan 09 $45 puts Bid $3.80 Unrealized Loss: $0.05

Selling WMT Apr $50s for .50 AND Apr $47.50 puts for $1.10 (total income $1.60)

Update: WMT Apr $50s Ask $0.10 AND Apr $47.50 puts Ask $1.75 Unrealized Loss: $0.25

Effectively the trade was biased somewhat positive (stock needed to finish between $47.50 and $50 by April 20^th)^.The Trade still has plenty of time to work, though we need the stock to rise back above $47.50 otherwise the short put may need to be rolled.

Note: A risk of assignment does exist for the short put given that the option is in-the-money. However, the fact that the option still has extrinsic value means the incentive for a trader on the long side of the $47.50 Apr strike to exercise their option is reduced.

How is our Sears Holding trade working?

Back on Feb 12th we took the SHLD June $185s for $12 and sold the March $180s for $8.20 (net cost $3.80).

Update: The March calls expired worthless but Phil rolled them into the March $175s on the 15th, picking up another $1.65 as those too expired worthless, reducing the net cost basis to $2.15.

The June $185s held $6 of their value for a nice 179% gain on the capital remaining at risk but Phil has now sold the April $180s for $3.50, causing us to have $1.35 more than we started with just a month ago with a free ride on the June $185s. Phil is advising a $4.50 stop on the April calls sold though, looking to resell on a loss of momentum if the market recovers a bit so members should keep an eye on the intraday updates.