ORCL - Oracle

[Olmsted]

I think someone needs to at least bring up the bear thesis (not that I necessarily agree with all of it):

 

Yes, there is a big installed user base and high switching costs.  But their business model is under the threat of disruptive innovation from cloud-based service providers.  While their base is likely unassailable, new business is likely to choose software-as-a-service because of the lower upfront costs and gentler learning curve.  Oracle may be able to compete in this space, perhaps even dominate, but it will cost them in margin compression.

[Guest valueInv]

I think someone needs to at least bring up the bear thesis (not that I necessarily agree with all of it):

 

Yes, there is a big installed user base and high switching costs.  But their business model is under the threat of disruptive innovation from cloud-based service providers.  While their base is likely unassailable, new business is likely to choose software-as-a-service because of the lower upfront costs and gentler learning curve.  Oracle may be able to compete in this space, perhaps even dominate, but it will cost them in margin compression.

 

Another factor:

 

Their core DB market is also under attack. There are cheaper, and for many applications, more efficient NoSQL DBs that are gaining traction. 'The one-size-fits-all DB model may go away.

 

The future looks cloudy for Oracle - in both ways.

[boilermaker75]

^Out of curiosity, why are you not buying the underlying? Do you normally just prefer to get exposure via options?

 

All of my long positions were acquired by writing puts. If I pick a price below which I want to enter a stock, I have a problem waiting until the stock dips below that price. I have this feeling I will miss the opportunity because the stock won't get to, or below, my entry price. By writing puts I find I have the patience to wait till I get put to because I am collecting the put premium while I wait. So I think of writing puts as entering limit orders. Yes I may not get put to, but the only stock that got away from me has been MCD.

[Guest valueInv]

^Out of curiosity, why are you not buying the underlying? Do you normally just prefer to get exposure via options?

 

All of my long positions were acquired by writing puts. If I pick a price below which I want to enter a stock, I have a problem waiting until the stock dips below that price. I have this feeling I will miss the opportunity because the stock won't get to, or below, my entry price. By writing puts I find I have the patience to wait till I get put to because I am collecting the put premium while I wait. So I think of writing puts as entering limit orders. Yes I may not get put to, but the only stock that got away from me has been MCD.

 

Thats interesting, why is this strategy not more widely used by value investors?

[boilermaker75]

^Out of curiosity, why are you not buying the underlying? Do you normally just prefer to get exposure via options?

 

All of my long positions were acquired by writing puts. If I pick a price below which I want to enter a stock, I have a problem waiting until the stock dips below that price. I have this feeling I will miss the opportunity because the stock won't get to, or below, my entry price. By writing puts I find I have the patience to wait till I get put to because I am collecting the put premium while I wait. So I think of writing puts as entering limit orders. Yes I may not get put to, but the only stock that got away from me has been MCD.

 

Thats interesting, why is this strategy not more widely used by value investors?

 

They have more patience than I do?

[Palantir]

I would use the same strategy too, if my account was bigger.  :-[

[compoundinglife]

^Out of curiosity, why are you not buying the underlying? Do you normally just prefer to get exposure via options?

 

All of my long positions were acquired by writing puts. If I pick a price below which I want to enter a stock, I have a problem waiting until the stock dips below that price. I have this feeling I will miss the opportunity because the stock won't get to, or below, my entry price. By writing puts I find I have the patience to wait till I get put to because I am collecting the put premium while I wait. So I think of writing puts as entering limit orders. Yes I may not get put to, but the only stock that got away from me has been MCD.

 

Thats interesting, why is this strategy not more widely used by value investors?

 

Good question. One answer might be that if you are in a retirement account or just don't have margin on your account then the sum of the stock that can be put to you is locking up cash. So if I write a put in cash only account for 1 contract and the strike is $20 per share then I have 2k of cash locked up until the put expires or I close out the position. WEB got a chuck of his BNSF stake with puts that he wrote at 80 and 77 strikes. I assume it was with a private party but don't know for certain.

[rjstc]

^Out of curiosity, why are you not buying the underlying? Do you normally just prefer to get exposure via options?

 

All of my long positions were acquired by writing puts. If I pick a price below which I want to enter a stock, I have a problem waiting until the stock dips below that price. I have this feeling I will miss the opportunity because the stock won't get to, or below, my entry price. By writing puts I find I have the patience to wait till I get put to because I am collecting the put premium while I wait. So I think of writing puts as entering limit orders. Yes I may not get put to, but the only stock that got away from me has been MCD.

 

Thats interesting, why is this strategy not more widely used by value investors?

 

They have more patience than I do?

 

And conversely do you use covered calls to exit positions?

[bargainman]

I'm not boiler, but I do this a lot too.  I sell puts to enter, earn premium (usually 5-15% annualized), then if I get assigned, great, I usually wait till the stock goes up somewhat to IV then sell calls to exit, or force myself to exit.  rinse repeat.  I rarely go all in with puts or calls.  So I might sell puts, acquire a 1/3 position, then get the stock, sell more puts, maybe get to a 2/3 position, then sell some calls on half of my acquired position, but leave the rest uncovered.  It's a very nice way to beat the psychological biases out of yourself.  You are forced to buy when it goes down, forced to sell when it goes up, and the kicker is you earn anywhere from 5-15% annualized premium along the way.  There are caveats.  I never sell margined, ie I'm always cash secured for puts.  Also if there is a massive run up, you miss out on the covered stocks, which is why I rarely fully cover.  Overall I like this strategy.

[boilermaker75]

^Out of curiosity, why are you not buying the underlying? Do you normally just prefer to get exposure via options?

 

All of my long positions were acquired by writing puts. If I pick a price below which I want to enter a stock, I have a problem waiting until the stock dips below that price. I have this feeling I will miss the opportunity because the stock won't get to, or below, my entry price. By writing puts I find I have the patience to wait till I get put to because I am collecting the put premium while I wait. So I think of writing puts as entering limit orders. Yes I may not get put to, but the only stock that got away from me has been MCD.

 

Thats interesting, why is this strategy not more widely used by value investors?

 

They have more patience than I do?

 

And conversely do you use covered calls to exit positions?

 

Yes

[hyten1]

i do this every once in a while as well

 

 

[valueorama]

^Out of curiosity, why are you not buying the underlying? Do you normally just prefer to get exposure via options?

 

All of my long positions were acquired by writing puts. If I pick a price below which I want to enter a stock, I have a problem waiting until the stock dips below that price. I have this feeling I will miss the opportunity because the stock won't get to, or below, my entry price. By writing puts I find I have the patience to wait till I get put to because I am collecting the put premium while I wait. So I think of writing puts as entering limit orders. Yes I may not get put to, but the only stock that got away from me has been MCD.

 

Do you usually write puts with less than 3 months expiry? or your willing to wait a longer. I find it scary to wait for longer as new information can change your view on the situation.

[boilermaker75]

^Out of curiosity, why are you not buying the underlying? Do you normally just prefer to get exposure via options?

 

All of my long positions were acquired by writing puts. If I pick a price below which I want to enter a stock, I have a problem waiting until the stock dips below that price. I have this feeling I will miss the opportunity because the stock won't get to, or below, my entry price. By writing puts I find I have the patience to wait till I get put to because I am collecting the put premium while I wait. So I think of writing puts as entering limit orders. Yes I may not get put to, but the only stock that got away from me has been MCD.

 

Do you usually write puts with less than 3 months expiry? or your willing to wait a longer. I find it scary to wait for longer as new information can change your view on the situation.

 

90% of the time they are less than 2 months out.

 

For some companies, like BRK/B, I am comfortable writing longer term puts that are more out-of-the money. For instance, when BRK/B was trading in the 60s, I wrote some 40-50 strike puts that were on the order of 6 months out. I figured it was unlikely I would be put to and at the time the premiums were very good. And the 40-50 range would have been a great get for BRK/B not so long ago.

 

If new information changes my view I can buy the puts back to close out the position.

 

If a stock moves up and the premium drops, I then buy them back to close the position figuring they were no longer an effective "limit order" and just a trade. I then can move on to the next position.

 

In the last few months I started using the weekly puts that are available on some companies like BAC, WFC, DELL, and ORCL.

 

I also use them to get some effective margin. Often if I was put to on everything I have open, I would be on margin. I am risking a black swan event. But worst case I put myself in a position where I would be only about 10% on margin. When I write a put that would result in my going on margin my open puts are well out-of-the money making it unlikely.

[Palantir]

^ Very nice....what are your approximate annual returns with this option strategy?

[LC]

 

I also use them to get some effective margin. Often if I was put to on everything I have open, I would be on margin. I am risking a black swan event. But worst case I put myself in a position where I would be only about 10% on margin. When I write a put that would result in my going on margin my open puts are well out-of-the money making it unlikely.

 

Right but if you were put to EVERYTHING, that scenario would most likely be a market-wide sell off. Which means your other holdings would drop in value...so if you estimate you would be at a 10% margin of today's values, you have to factor in how your margin limit would drop under a systematic event...have you thought about that?

[boilermaker75]

^ Very nice....what are your approximate annual returns with this option strategy?

 

Taking a quick look about 13% in 2010, 10% in 2011, and 19% in 2012.

 

So not great, if I can get to where I average 15% per year I will be satisfied.

[boilermaker75]

 

I also use them to get some effective margin. Often if I was put to on everything I have open, I would be on margin. I am risking a black swan event. But worst case I put myself in a position where I would be only about 10% on margin. When I write a put that would result in my going on margin my open puts are well out-of-the money making it unlikely.

 

Right but if you were put to EVERYTHING, that scenario would most likely be a market-wide sell off. Which means your other holdings would drop in value...so if you estimate you would be at a 10% margin of today's values, you have to factor in how your margin limit would drop under a systematic event...have you thought about that?

 

Yes the way it would happen is if the markets opened way down one day, which would mean a much larger margin position than 10%. But I am only talking worst case margin of 10% in my margin accounts. So factoring in my non-margin accounts, my TIAA-CREF, real estate, etc. it is not that large. Besides I don't envision ever needing/spending the money in my margin accounts. I am playing for charity in those accounts.

 

Edit: We have about 20% of our net worth in these margin accounts where I will sometimes write puts beyond what I have cash to cover with the 10% number I have been throwing out a rare extreme.

[Palantir]

I think boilermaker deserves his own thread in Strategies.

[boilermaker75]

I think boilermaker deserves his own thread in Strategies.

 

Palantir,

 

Thanks for the endorsement. There are many here who use similar strategies and I am sure are much more successful than I.  The key is still finding companies trading well below IV.

 

Boiler

[rjstc]

I think boilermaker deserves his own thread in Strategies.

 

Palantir,

 

Thanks for the endorsement. There are many here who use similar strategies and I am sure are much more successful than I.  The key is still finding companies trading well below IV.

 

Boiler

 

And of course there are many methods. How do you come up with IV yourself? By the way. These are great conversations and thank you very much for your taking the time. I have a library of investment books going back about 45 years and this site is for me more understandable than most all of them because it pretty much cuts right to the chase. Thanks again, Ron

[boilermaker75]

I think boilermaker deserves his own thread in Strategies.

 

Palantir,

 

Thanks for the endorsement. There are many here who use similar strategies and I am sure are much more successful than I.  The key is still finding companies trading well below IV.

 

Boiler

 

And of course there are many methods. How do you come up with IV yourself? By the way. These are great conversations and thank you very much for your taking the time. I have a library of investment books going back about 45 years and this site is for me more understandable than most all of them because it pretty much cuts right to the chase. Thanks again, Ron

 

 

Ron,

 

Thanks for the endorsement. I also love this site. I hope to learn to be a better investor from all the great advice, and ideas, that are freely shared.

 

I used to put a lot of effort in an attempt to figure out IV. I would make a detailed spreadsheet with 10 years of financial data. I would look at FCF over the past 10 years , calculate things like FCF ROIC , look at what had been happening with outstanding shares, etc. I would use the past FCF growth to estimate FCF growth for the next 10 years. I would then figure the present value of that stream of FCF as an estimate of IV.

 

But I have a day job, which often includes some evenings and weekends. Plus I don’t know how much better that detail is than just quick back of the envelope calculations.

 

I will now embarrass myself by telling you how simple I do things.

 

My interest in ORCL is because of doing just the following,

 

(Market cap of 151.43B – cash of 14.955B – short term investments of 15.721B)/(TTM FCF of 12.823B) = 9.41

 

So even with no growth you are still getting 10.62%. I would take that if I owned a business. Maybe ORCL’s business model is under threat, but that is why it is cheap. 

 

I always check on what has been happening with outstanding shares to make sure management isn’t turning all the owner earnings into management compensation.

 

With BRK/B I can find out the IV by just going to the following site,

 

http://finance.groups.yahoo.com/group/chucks_angels/

 

Roberts 1001 at chucks angels is always compiling BRK IV estimates from many sources.

 

Or I will look at what BRK is buying. If it looks like a value to me from a quick 5-minute look I write some slightly out-of-the money puts to start a position. I admit I often don’t get why BRK/B is buying something, so I don't start a position. I still have a lot to learn.

 

I have made an exception with banks. I have no idea how to value banks. But my second largest position, next to BRK/B, is WFC. I am blindly following Buffett. In addition to my long core holdings in WFC, I continue to write puts, followed by covered calls if I get put to, on WFC. I have had open put positions on WFC since the end of 2007. Similarly for BAC, but my core holding in BAC is probably 1/10 the size of my WFC position.

 

Boiler

 

 

[rjstc]

I think boilermaker deserves his own thread in Strategies.

 

Palantir,

 

Thanks for the endorsement. There are many here who use similar strategies and I am sure are much more successful than I.  The key is still finding companies trading well below IV.

 

Boiler

 

And of course there are many methods. How do you come up with IV yourself? By the way. These are great conversations and thank you very much for your taking the time. I have a library of investment books going back about 45 years and this site is for me more understandable than most all of them because it pretty much cuts right to the chase. Thanks again, Ron

 

 

Ron,

 

Thanks for the endorsement. I also love this site. I hope to learn to be a better investor from all the great advice, and ideas, that are freely shared.

 

I used to put a lot of effort in an attempt to figure out IV. I would make a detailed spreadsheet with 10 years of financial data. I would look at FCF over the past 10 years , calculate things like FCF ROIC , look at what had been happening with outstanding shares, etc. I would use the past FCF growth to estimate FCF growth for the next 10 years. I would then figure the present value of that stream of FCF as an estimate of IV.

 

But I have a day job, which often includes some evenings and weekends. Plus I don’t know how much better that detail is than just quick back of the envelope calculations.

 

I will now embarrass myself by telling you how simple I do things.

 

My interest in ORCL is because of doing just the following,

 

(Market cap of 151.43B – cash of 14.955B – short term investments of 15.721B)/(TTM FCF of 12.823B) = 9.41

 

So even with no growth you are still getting 10.62%. I would take that if I owned a business. Maybe ORCL’s business model is under threat, but that is why it is cheap. 

 

I always check on what has been happening with outstanding shares to make sure management isn’t turning all the owner earnings into management compensation.

 

With BRK/B I can find out the IV by just going to the following site,

 

http://finance.groups.yahoo.com/group/chucks_angels/

 

Roberts 1001 at chucks angels is always compiling BRK IV estimates from many sources.

 

Or I will look at what BRK is buying. If it looks like a value to me from a quick 5-minute look I write some slightly out-of-the money puts to start a position. I admit I often don’t get why BRK/B is buying something, so I don't start a position. I still have a lot to learn.

 

I have made an exception with banks. I have no idea how to value banks. But my second largest position, next to BRK/B, is WFC. I am blindly following Buffett. In addition to my long core holdings in WFC, I continue to write puts, followed by covered calls if I get put to, on WFC. I have had open put positions on WFC since the end of 2007. Similarly for BAC, but my core holding in BAC is probably 1/10 the size of my WFC position.

 

Boiler

 

Boiler; If you're embarrassed then I must admit that I am too. Simple is better. Most of the heavy duty investment ideas leave me with a headache trying to understand them. I find that I do much better doing a combination of your way, Giofranchis way and Ross's way. I make enough to be satisfied, stay less stressed, and still enjoy the challenge.

[hyten1]

boiler

 

i am with you, i use to do all kind of crazy spread sheet. but now things are simpler, a lot simpler for me.

 

 

hy

[Palantir]

I do what boilermaker does too...but have tried to get more sophisticated because when you talk to employers, they want to see valuation skills that's more advanced than FCFE/(C-D) = RoR... and then they go hire IB and PE guys with no knowledge of investing.

[Phaceliacapital]

http://www.reuters.com/article/2013/06/20/us-oralce-results-idUSBRE95J14H20130620

 

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