ERICOPOLY

I'd like to hear a bit of follow through from the Sprott lovers out there. He said in March 2011 that silver was the way to go!

I think that might be rather optimistic as 1. Even if fed funds rate goes up to 2% by 2016, it would likely not be a parallel shift. More likely a 1% shift at 10 year maturity. So the gain would be much more muted. 2. As he commented there would be OCI impact to book value that would take 3 years to earn back. I would think there would be a hit to earnings as well as trading securities would lose some value that would pass through the income statement. I am more optimistic on lower loan loss provisions being a tailwind for the next couple of years. Vinod Agree, it is the most optimistic assessment before subtracting off the things you mentioned. $5 x 11.5b is $57.5 billion of market capitalization. This number is going to be a lot higher than the after-tax cost to the balance sheet. Long rates may or may not rise another 100bps-200bps. They've come up 100bps so far this year. I've lost track of where they were when he passed those comments.

I remember the number Moynihan gave for BAC was an additional $7.4b of interest income if there is a 200 bps parallel shift in rates. That would be about $5.40 per share increase in share price at 12x multiple, 30% tax rate, and 11.5b shares. So check out the part of the quote below (I added bold emphasis): http://online.wsj.com/news/articles/SB10001424052702304866904579266432764849504?mod=WSJ_Home_largeHeadline In their latest economic projections, also out Wednesday, 12 of 17 Fed officials said they expected the central bank's benchmark interest rate, which is called the fed funds rate, to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016.

Finally taking their foot off the throat of the banks? All the bank stocks rallied the moment this came out: http://online.wsj.com/news/articles/SB10001424052702304866904579266432764849504?mod=WSJ_Home_largeHeadline After months of intense discussion at the Fed and in financial markets, the central bank's policy-making committee announced Wednesday that in January it would trim its purchases of long-term Treasury bonds to $40 billion per month, a reduction of $5 billion, and cut its purchases of mortgage-backed securities to $35 billion per month, a reduction of $5 billion. In their latest economic projections, also out Wednesday, 12 of 17 Fed officials said they expected the central bank's benchmark interest rate, which is called the fed funds rate, to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016.

Do you get paid in any way? In nature? ::) In my opinion I should be compensated better given her account returns: RothIRA.tiff

I manage my wife's RothIRA but let's be honest -- it was my money that went into the account in the first place, given that she spent all of her income.

Actually, you can't deduct a dime of student loan expense if you make above a certain amount (I think it's like $76,000/year.) I knew some of my business school classmates that paid off their student loans with HELOCs so they could get the deduction at their income level. So let's say they raise the tax rate back to 70%. The government is going to keep 70% of a person's revenue and expect them to repay their loans and interest with the remaining 30%? Imagine if they were to modify corporate tax law by eliminating the ability to depreciate capital investments. Further, image if they were to eliminate the deduction of interest used to finance capital investments. Your company would be taxed on revenue, not net income! That's exactly what the government is doing to these people with large student loans -- the government is taxing revenue, not net income. As for the people who paid cash for their educations -- same thing applies. You might be getting taxed on income yet be unprofitable overall if you consider the amount paid for the education. Tax rates in this country are likely a lot larger than they look compared to certain European countries where the university education is practically free.

This year my wife's Roth account did twice as well as mine (mine is up about 31%). It was a wise political move on my part.

The LED candelabra bulbs that I purchased this summer were terrible. 75% of them already need to be replaced -- failed/defective. The also had too cool of a color temperature. Perhaps this shape is very difficult to get right. The incandescent bulbs look a lot better. But some of these light fixtures we have in the house have 8 bulbs on them. 40 watt incandescent bulbs multiplied by 8 is 320 watts. They are an energy nightmare.

It's simply that you write off the puts used to hedge the position (the expectation is that they will be worthless). You don't write off the gains on the underlying shares. Overall, the position will be an economic gain even though you get to take a loss from time to time on the puts. Under community property laws here in the US, when either you or your spouse dies all of the capital gains held in the marriage community are forgiven via a full step-up in basis upon the death of the first spouse. You might find yourself a billionaire, with a ton of unrealized capital gains, separated from your wife and living with another woman. It would be better not to formalize the divorce under community property law.

But now that this secret is official, people will adept and reduce or remove the inefficiency and the only one thats going to get rich is the man who sold him the tips. :) I made a similar comment about the FFH situation. There may have been some illegal naked short selling, there may have been some illegal manipulation putting false reports out on the company and stories of Prem leaving the country with shareholder money.... all of those illegal things may have been knocking the price down... but you can make a lot of money from that illegal manipulation without breaking the law yourself (buy the calls after the stock is knocked down). I believe that if you can figure out that some criminal activity is involved, then you are more likely to find legitimately undervalued stocks (the price reflects falsified facts).

This is the equivalent of just buying calls (synthetic calls). Interesting that you consider the tax angle. I suppose that doing the synthetic call is in fact more tax efficeint? you keep taking the tax losses and can hold the shares and not pay those taxes indefinitely? Is that the strategy? Yep, you just hold the shares and kick the unrealized capital gains on the shares down the road, writing the puts off against dividend income or whenever you take a capital gain. Let's say you buy something like Berkshire, and hedge it with a put. The capital gains of the shares will compound tax deferred, there will be no pesky dividends from Berkshire, and you would eventually get a step-up in cost basis on Berkshire (eliminating all tax on them) when either you or your wife expires. Meanwhile, every year you get this valuable put that can be used to offset capital gains or dividends elsewhere in your portfolio. So Berkshire merely needs to beat the after-tax cost of the puts. I think that's a pretty good use of money that would other wise just be sitting there in cash. But you can pick something other than Berkshire -- it's just an example.

They got pretty aggressive over the past 12 months with spinning off a meaningful portion of their loan servicing portfolio. I wonder if they were motivated substantially by the risks of these sleazy third party servicers dragging their name through the press.

This is worth some more thought on my part; however, I've never actually used puts before. Would you mind giving an example that you think would be in the ball park of what you are saying, so I could play around with it? I'm about as Australian as you can get without having actually been born there. So the concept of negative gearing is in my blood ::) ::) ::) That might explain everything if you take the totality of all my trades. Let's say you put your last 20% of liquidity into BAC stock and you want that 20% to be available on a moment's notice. You purchase $15 strike puts that can be exercised (worst case) in a panic to ensure that you do in fact have $15 worth of cash to pay your monthly bills (or meet redemptions if you are a fund manager). The puts cost you an annualized rate. So that's the hurdle rate on what would otherwise have just been a cash position. There will be times when you wind up with less can than otherwise (due to the puts costing you money). But the rest of the time when you are beating that hurdle rate, it should make up for it. Anyhow, in my personal life I don't hold any cash at all. I just have a large chunk hedged with puts for liquidity guarantee. I would rather lose it to the options market than the tax man anyhow. The puts don't cost as much as they appear in a taxable account -- the IRS shares my losses on them.

You could also be 100% invested and hedge a portion of what you invest with at-the-money puts. You'll do better this way as long as you beat the hurdle rate of the annualized cost of the puts. You won't suffer too much anyhow if the market goes straight down -- it would have been better to be in cash in that case... however I think during the rest of the years you will (I believe) make up for it.

Remember, the point of the strategy is to get paid IF the stock doesn't move. Unlikely, yes, I'm aware. I have 30% of my portfolio in common so don't worry about me being too upset for just getting an extra X number of shares by reinvesting the put premium. This reason for one (although the possibility is likely remote)... "We have recently stopped lending out our shares because we are increasingly concerned that there could be a fail-to-deliver problem if there happens to be a short squeeze based on the market better recognizing the company’s underlying value as a result of real estate deals..." http://www.oldwestim.com/files/media/Download%20this%20site/Commentaries%20and%20Investor%20Letters%202013.02.04.pdf I once lent FFH shares at Charles Schwab. I was issued a letter of credit from ANZ bank as insurance against counterparty default. So, not sure why they can't arrange the same.

Of course I don't expect the stock to stagnate forever, but the point of the trade is to get PAID in case it does (I don't have your gift of being a master timer of the market, but I like to profit regardless). My original post on this topic is below... the entire point of the trade is that it "pays you for waiting" for the SHLD thesis to play out. I completely understand the mentality because I've been there before. I have, however, been cured of that disease. Imagine how it would feel to write WFC puts in March 2009 at the bottom, making 50% yield. The "genius" of the strategy wears off after the stock is up 200% in 6 months. Believe me, it's at that time that you know who the patsy is. Lending your shares is a way to get paid to wait, and also fully profit all the way to $200+, but you aren't doing that. The reason why you are getting such a high put premium is BECAUSE of the high lending fees. It keeps the put/call out of parity, with the puts being the more expensive of the two. So why don't you get paid to wait that way?

Can you explain like I'm five? SHLD trades at approximately $44 today. Suppose you have $44 in cash. The Feb $44 put contract can be written for $5.35 bid. The Feb $44 call contract can be purchased for $4.70 ask. The call is cheaper than the put. The upside is cheaper than the downside. So for every $1 of downside you write, you can purchase more than $1 of upside. Luke is getting penny wise and pound foolish by thinking it will be better to just pocket the premium from the put and invest it in the common. It looks more profitable than putting it in the call if the price of SHLD stagnates and the call premium deteriorates. But he also thinks the stock is worth like $200+, so the day the stock hits that price the real cost of his strategy will be plain to see. Except he then asks how he could possibly be losing out if the stock is up $200. I don't know, perhaps he expects the stock to stagnate forever -- that's where his strategy is optimal. But it doesn't mesh with his other comments on SHLD where he doesn't want to part with it for $60.

And since I'm using the premium to buy shares, the stock going to $200 hurts me how? I didn't want to comment again but you're basically making my case for me :) You had $40 in cash that you are using to write covered puts. You write a put for $1 premium. You invested $1 into the stock. I know I don't have to explain why investing $40 into the stock is going to be more profitable than investing $1 into the stock. So why do you keep acting like you are making out like a bandit here?

It doesn't stay down long -- that's the whole point. SHLD has a very wide and violent trading range. You don't write puts at $60, do you? No, you start getting tempted around these prices. You do in fact make some money, no doubt about it. The last time you sit down at that table playing this game is the last time it will be getting down to these levels. You'll pick up your last dollar or two in premium, and meanwhile the stock will go up $200 bucks. So it's like picking up nickels in front of a steamroller. It's a steamroller of opportunity cost -- so you just aren't acknowledging it as a cost because you don't notice any of your money missing.

So today if you write the Jan put with $44 strike you'll get $4 premium. You are tying up $40 of your own cash for the potential settlement. You invest only that $4 premium in the common and the common then goes to $60. Your $4 premium is now worth $5.35. Oooohhhh...... Instead, just use your $40 of cash and buy the stock for $44. You'll have $14.54 in profit when it hits $60 per share. Instead of having $5.35, you have $14.54. It's an illusion to think you are making some fat premium by writing the puts -- you give up so much more in exchange. You make a profit, but incur a large opportunity cost. I've never seen the stock sit around at the bottom long enough for you to get multiple successive swipes at the option premium before the stock takes off.

That's more expensive than the IB margin rates. There is little risk of rising rates in that timeframe. True, but this is non-recourse leverage vs margin account's recourse leverage. Okay, then the credit card leverage is certainly better given that you don't have to repay it in the event that the stock you purchase with the loan goes south. Are you sure you don't have to repay it? That's unlike any credit card that I've ever owned. (the key thing is that in both cases, you need an at-the-money put to make it non-recourse leverage. Therefore, in comparing them the interest rate alone is sufficient).

Eric, I'm also buying common with the proceeds. It's a bullish bet. Then you are giving up upside on the large moves -- which is precisely the kind of move that you are fearful of missing out on. Instead, for every put contract, buy an offsetting call contract. You will be able to get more than a 1:1 upside leverage this way for the amount of downside you are taking on. You are doing something else if you are buying the common with the proceeds -- for every dollar of notional downside you are taking on, you are retaining less than a dollar of notional upside.

Doesn't this thinking assume that SHLD will continue trading up and down between, say, 40 and 60 or so? I mean, if you are long the stock and think it's worth, say, 80/share and think eddie can keep growing it from there....why risk selling @ 60 or writing calls at 60 and losing the entire upside which is the basis for your thesis? Oh shit! It's NOT MY THESIS. Somebody else remarked earlier that he sold calls when it was at $60-$65. He gave up all the further upside beyond the strike price in order to earn a rate of decay on the option premium. I'm simply saying that if you are going to give up all the upside, once you've made that decision, then the more optimal move in SHLD has always been to just sell it and get it cheaper soon after. The movements are so large that there is way more potential than can be found in these premiums.

Additionally, the guy who was shorting it at $60 paid a high annualized borrowing cost... but he didn't have to wait very long for it to drop back to $40. So in absolute terms it didn't cost him very much. The more violent the movements, the less the cost of carry matters to him. He could instead have written a call and purchased a put with the proceeds. That would have looked like a lower annualized cost to short, but it would have cost him more because that gap between put and call at $60 strike disintegrated quickly as they went deep in the money as the stock travelled to $40. That disintegration proved to be more expensive than if he had just borrowed the common and paid the high annualized cost of borrow. I've been thinking about this for a while to figure out the mentality of the people who pay these really high premiums. That's what I came up with. They may look stupid on an annualized cost basis, but they've actually been saving themselves money by doing it this way because the stock's volatility is so high. It goes from $40 to $60+ and back quite a bit. So like, trying to grab a couple of dollars of profit when it goes to $40 (by writing a put) is leaving a lot of money on the table because the thing rapidly shoots up and the size of these rapid movements outpace the speed at which these puts decay.