Author Archives: Scalper1

Palo Alto Networks Aims To Outsmart Hackers In 2016

Hackers cut a wide swath in 2015, proving nothing is safe. Fiat Chrysler (FCAU) recalled 1.4 million Jeep Cherokees after the U-Connect feature proved breachable. Nearly 6.5 million children were exposed in the November hack of toy maker VTech. In July, hackers unleashed 37 million accounts tied to Canadian infidelity site Ashley Madison. The U.S. Office of Personnel Management breach — which exposed 20 million employees — showed even biometrics

The Time To Hedge Is Now! December 2015 Update

Summary Overview of strategy series and why I hedge. Short summary of how the strategy has worked so far. Some new positions I want to consider. Discussion of risk involved in this hedge strategy. Back to Do Not Rely On Gold Strategy Overview If you are new to this series, you will likely find it useful to refer back to the original articles, all of which are listed with links in this instablog . It may be more difficult to follow the logic without reading Parts I, II and IV. In Part I of this series, I provided an overview of a strategy to protect an equity portfolio from heavy losses in a market crash. In Part II, I provided more explanation of how the strategy works and gave the first two candidate companies to choose from as part of a diversified basket using put option contracts. I also provided an explanation of the candidate selection process and an example of how it can help grow both capital and income over the long term. Part III provided a basic tutorial on options. Part IV explained my process for selecting options and Part V explained why I prefer to not use ETFs for hedging. Parts VI through IX primarily provide additional candidates for use in the strategy. Part X explains my rules that guide my exit strategy. All of the articles in this series include varying views that I consider to be worthy of contemplation regarding possible triggers that could lead to another sizeable market correction. I want to make it very clear that I am NOT predicting a market crash. I merely like to take some of the pain out of the downside to make it easier to stick to my investing plan: select superior companies that have sustainable advantages, consistently rising dividends and excellent long-term growth prospects. Then I like to hold onto those investments unless the fundamental reasons for which I bought them in the first place changes. Investing long term works! If you are interested in a more detailed explanation of my investment philosophy, please consider reading ” How I Created My Own Portfolio Over a Lifetime .” Why I Hedge If the market (and your portfolio) drops by 50 percent, you will need to double your assets from the new lower level just to get back to even. I prefer to avoid such pain, both financial and emotional. If the market drops by 50 percent and I only lose 20 percent (but keep collecting my dividends all the while), I only need a gain of 25 percent to get back to even. That is much easier to accomplish than doubling a portfolio and takes less time. Trust me, I have done it both ways, and losing less puts me way ahead of the crowd when the dust settles. I view insurance, like hedging, as a necessary evil to avoid significant financial setbacks. From my point of view, those who do not hedge are trying to time the market, in my humble opinion. They intend to sell when the market turns but always buy the dips. While buying the dips is a sound strategy, it does not work well when the “dip” evolves into a full-blown bear market. At that point, the eternal bull finds himself catching the proverbial rain of falling knives as his/her portfolio tanks. Then panic sets in and the typical investor sells when they should be getting ready to buy. A short summary of how the strategy has worked so far I have been hedged since April 2014. In 2014, our only significant candidate win was Terex (NYSE: TEX ) which provided gains of over 600 percent to help offset some of my cost. I missed taking some profits in October of 2014 that could have put me in the black for the year, but by doing so, I would have left my portfolio too exposed, so I let most of those positions expire worthless. It is insurance, after all. The results for 2015 have been stellar! I like it when the market gives me a gain in early December because the likelihood of a year-end (Santa Claus) rally is very high and will usually give me an opportunity to redeploy the profits before the rest of my positions expire. I could have taken more gains but decided to leave some on the table in case the rally did not materialize to keep my portfolio mostly protected. I explained all my moves in the last article of the series linked at the top. My biggest winners in 2015 were Men’s Wearhouse (NYSE: MW ) with gains of over 2,700 percent, Micron Technologies (NASDAQ: MU ) with gains of up to 1,012 percent, Sotheby’s (NYSE: BID ) with gains of up to 1,500 percent, Seagate Technologies (NASDAQ: STX ) gaining over 570 percent, and Williams-Sonoma (NYSE: WSM ) with a gain of 527 percent. The gains realized on sold positions now puts me in a position of needing to add some hedges going into 2016, but with plenty of available cash. I will only deploy enough of those gains to protect my portfolio through the end of June 2016 and hold onto the rest to be deployed into new positions to provide a hedge through January 2017. Some new positions I want to consider Do not forget that I usually buy multiple positions in each candidate that I use and you should, too, unless you get in at a particularly good premium and strike. I add positions as I find I can do better than what I already own in order to improve my overall hedge. Sometimes I may buy only half or a third of the position I intend to own in the first purchase. As we get deeper into this bull market (if it still is a bull), I try to stay closer to fully hedged as much as possible. I will be hedging most of my portfolio again over the next month or so since most of my remaining positions are set to expire in mid-January of 2016. I cannot emphasize this enough: buy put options on strong rally days! Here is the list of what I would buy next and the premiums at which I would make the purchases. I may get in if the premium gets down close to my buy price and you will need to make such decisions for yourself. This is a different format from what I have used prior to this month. I will be placing good until cancelled orders at or just below my target premiums to get the positions I want when available without my having to watch daily. I list the candidates in the order of my preference. I will explain how many contracts per $100,000 of portfolio value will be needed and list the expiration months below the table. Symbol Current Price Target Price Strike Price Ask Prem Buy At Prem Poss. % Gain Tot. Est. $ Hedge % Cost of Portfolio RCL $99.92 $22 $75 $1.85 $1.80 2,844 $5,120 0.180% GT $32.79 $8 $28 $1.25 $1.25 1,500 $3,750 0.250% ADSK $61.85 $24 $50 $2.03 $1.80 1,344 $4,840 0.360% SIX $54.63 $20 $45 $1.30 $1.20 1,983 $4,760 0.240% LB $96.82 $30 $85 $2.65 $2.50 2,100 $5,250 0.250% LVLT $54.40 $20 $48 $2.20 $1.90 1,374 $2,610 0.190% TPX $71.64 $20 $60 $2.85 $2.50 1,500 $3,750 0.250% UAL $59.78 $18 $50 $2.29 $2.00 1,500 $3,000 0.200% MAS $28.44 $10 $25 $1.25 $0.85 1,665 $4,245 0.255% ETFC $29.71 $7 $27 $1.87 $1.25 1,500 $3,750 0.250% I will need only one June 2016 RCL put option contract to provide the coverage indicated in the above table. Remember that this is one of eight positions, each designed to hedge one-eighth of a $100,000 portfolio against a 30 percent drop in the S&P 500 Index. I will need eight positions from the table above to protect each $100,000 of equity portfolio value. To protect a $500,000 portfolio, I would need to multiply the number of contracts in each of my five positions by five to be fully protected. Below is a list of the expiration month (all expire in 2016) and number contracts needed for each position I use. Royal Caribbean Cruises Ltd. (NYSE: RCL ) June One Goodyear Tire (NASDAQ: GT ) July Two Autodesk (NASDAQ: ADSK ) July Two Six Flags (NYSE: SIX ) June Two L Brands (NYSE: LB ) May One Level 3 Communications (NYSE: LVLT ) June One Tempur Sealy (NYSE: TPX ) June One United Continental (NYSE: UAL ) June One Masco (NYSE: MAS ) July Three E – Trade Financial (NASDAQ: ETFC ) June Two If I use only the first eight positions listed above, I would protect each $100,000 of equity portfolio value against a drop of approximately $33,080 for a cost of $1,920 (plus commissions). What this means is that if the market falls by 30 percent, my hedge positions should more than offset the losses to my portfolio. This coverage only provides about six months of additional protection, but I have more than double that from my gains taken this year. Hopefully, there will more gains available to further offset future losses come summer and I will roll my positions again (and again, if necessary) until we finally have a recession. Both MAS and ETFC “Buy at Premiums” listed above are below the range of the current bid and ask premiums. That was the case with all of the premiums I used in the last article and most of those have been achieved already. Patience often pays off in lower costs. All of the other premiums listed are within the current range and should be available either immediately or with a small additional rally. I do not intend to chase these premiums and will try to get lower premiums when available. I expect that the current rally could extend into year-end giving me a better entry point on some of these candidates and possibly some others that just do not work at this level. I will provide another update if that opportunity occurs. But I am not ready to take that possibility to the bank, so I will place some orders Monday morning. I do not try to hedge the bond portion of my portfolio with equity options. For those who would like to hedge against a rout in high-yield bonds, I use options on JNK and may add HYG as a candidate for that purpose. If that seems interesting, please consider my recent article on the subject. Discussion of risk involved in this hedge strategy If an investor decides to employ this hedge strategy, each individual needs to do some additional due diligence to identify which candidates they wish to use and which contracts are best suited for their respective risk tolerance. I do not always choose the option contract with the highest possible gain or the lowest cost. I should also point out that in many cases I will own several different contracts with different strikes on one company. I do so because as the strike rises, the hedge kicks in sooner, but I buy a mix to keep the overall cost down. To accomplish this, I generally add new positions at the new strikes over time, especially when the stock is near its recent high. My goal is to commit approximately two percent (but up to three percent, if necessary) of my portfolio value to this hedge per year. If we need to roll positions before expiration there may be additional costs involved, so I try to hold down costs for each round that is necessary. My expectation is that this represents the last time we should need to roll positions before we see the benefit of this strategy work more fully. We have been fortunate enough this past year to have ample gains to cover our hedge costs for the next year. The previous year, we were able to reduce the cost to below one percent due to gains taken. Thus, over the full 20 months since I began writing this series, our total cost to hedge has turned out to be less than one percent. I want to discuss risk for a moment now. Obviously, if the market continues higher beyond January 2016, all of our old January expiration option contracts that we have open could expire worthless. I have never found insurance offered for free. We could lose all of our initial premiums paid plus commissions, except for those gains we have already collected. If I expected that to happen, I would not be using the strategy myself. But it is one of the potential outcomes and readers should be aware of it. I have already begun to initiate another round of put options for expiration beyond January 2016, using up to two percent of my portfolio (fully offset this year by realized gains) to hedge for another year. The longer the bulls maintain control of the market the more the insurance is likely to cost me. But I will not be worrying about the next crash. Peace of mind has a cost. I just like to keep it as low as possible. Because of the uncertainty in terms of how much longer this bull market can be sustained and the potential risk versus reward potential of hedging versus not hedging, it is my preference to risk a small percentage of my principal (perhaps as much as two percent per year) to insure against losing a much larger portion of my capital (30 to 50 percent). But this is a decision that each investor needs to make for themselves. I do not commit more than three percent of my portfolio value to an initial hedge strategy position and have never committed more than ten percent to such a strategy in total before a major market downturn has occurred. The ten percent rule may come into play when a bull market continues much longer than expected (like five years instead of 18 months). And when the bull continues for longer than is supported by the fundamentals, the bear that follows is usually deeper than it otherwise would have been. In other words, at this point, I would expect the next bear market to be more like the last two, especially if the market continues higher through all of 2016. Anything is possible but if I am right, protecting a portfolio becomes ever more important as the bull market continues. As always, I welcome comments and will try to address any concerns or questions either in the comments section or in a future article as soon as I can. The great thing about Seeking Alpha is that we can agree to disagree and, through respectful discussion, learn from each other’s experience and knowledge.

Nathan Buehler Positions For 2016: Attractive Opportunities In ETFs

You don’t have to trade every day to make above average returns in the market. Patience is the key to any good strategy. For typical ETFs that track broader indexes, watch the management fees when considering a fund. The Fed will continue to provide distractions throughout 2016 with constant assessment and analyses of when they will raise again and what that means for the economy. Welcome to the ETFs section of Seeking Alpha’s Positioning for 2016 series! This year we have once again asked experts on a range of different asset classes and investing strategies to offer their vision for the coming year and beyond. As always, the focus is on an overall approach to portfolio construction. Nathan Buehler has been an author on Seeking Alpha since May 2014, specializing in the coverage of ETFs and volatility investments. In addition to writing on Seeking Alpha, he works full time as a Teacher in the Lee County School District, volunteers as his communities HOA President, and participates in local government. Most of his strategy is geared towards long term outlook with focuses on short term events or situations that create attractive opportunities. Seeking Alpha’s Carolyn Pairitz recently spoke with Nathan to find out what he is expecting from ETFs in 2016. Carolyn Pairitz ((CP)): While you cover a number of ETF topics, the VIX has been your focus on Seeking Alpha. What drew you to study and invest in volatility? Nathan Buehler (NB): I started investing in penny stocks when I was a teenager. I had no idea what I was doing and lost most of the money I invested. I didn’t give up and was always looking for ways to get rich quick. Getting rich quick also led to additional losses. As I grew up and matured I began to realize there was an opportunity to make money off of people that were either looking to get rich quick or panicking. I started researching volatility as an asset class and began practicing with options strategies and trying to learn everything I could about how volatility behaves relative to the market. Eventually I fine-tuned my knowledge of the VIX to the point I felt comfortable trading it. I love investor psychology and I will often have different takes and points of view on the VIX than other seasoned investors. This again comes from the fact I am self-taught. I learn something new every day and use that to continuously improve upon my investment objectives. CP: Do you have any advice for readers considering ETFs for their portfolios in 2016? NB: For typical ETFs that track broader indexes, watch the management fees. There are a number of very low cost funds run by very reputable companies. For volatility ETFs my only advice is to fully educate yourself before trading these products. This is also true for many ETFs that track commodities and have very specific objectives. ETFs don’t always behave like a stock and can lead to serious losses if an investor is not properly prepared. CP: Going into 2015, which asset classes are you overweight? Which are you underweight? NB: In my general portfolio I have moved overweight in select oil companies. I believe this is a cyclical pattern and as long oil prices stay low, demand will keep increasing. Eventually economics will take over and the present fear factor will clear itself up. These are positions I plan on keeping for 5-10 years so even if oil takes another year to recover, I am fine with waiting. CP: The SEC recently proposed rules that could shake up the current structure of leveraged ETFs. Could you elaborate on this further and how it could affect the ETF market in 2016? NB: The ETF companies have been on top of this from the start and ProShares even contacted me directly in response to one of my articles that covered the topic. For right now it doesn’t appear that this rule will have a real effect on any of the 2x leverage ETFs. However, many if not all 3x leverage products could be forced to close. I am not a fan of 3x leverage products and I feel this is the right decision to protect investors from themselves. At some point it is wrong to let people purchase a product that could wipe out their entire net worth in one day. Gambling is still legal if someone wants to bet it all on black. CP: With the Fed having raised fund rates this December, are you updating you VIX strategy or do you feel this change was already priced into the market? NB: I felt that the rise in rates was long overdue and well expected by the market. I was hoping for a hold which would have created an excellent opportunity for a sharp increase in volatility. The Fed will continue to provide distractions throughout 2016 with constant assessment and analyses of when they will raise again and what that means for the economy. To me, the Fed is just a bunch of noise. They get people hopped up and will calm the markets down. They have been a good tool in respects to volatility. CP: Are there any global issues on the horizon that ETF investors should pay particular attention to? NB: Geopolitical events always provide good opportunities for volatility. Two years ago Russia was providing regular spikes in volatility. The world loves a villain. We make movies about them and the super heroes that save us. Russia and China used to be those villains in regards to the stock market. Investors loved to gawk over what Russia was doing, who they were invading, and how China’s economy was collapsing. Now we have ISIS. Friends and foes alike have come together to take on ISIS. As far as I am concerned, this is a negative for volatility, a positive for the market, and a win for humanity. CP: As a teacher and an author on Seeking Alpha, do you have any advice for readers who work a full time job but also want to be involved in the markets? NB: There have been multiple studies out on how teachers make the best investors. Each of these studies cited one fact consistently, lack of trading. You don’t have to trade every day to make above average returns in the market. I constantly get questions on timing the market, when to get in, when to get out, etc. Investors need to chill out. My goal is to make a 15% return during the calendar year. Not 15% in January and then try for 80% by December. Patience is the key to any good strategy and if you are glued to your monitor all day watching the ticks of the market it isn’t healthy. I would conclude that a full time job gives you proper time to analyze the markets in the evenings and make more rational decisions by the next trading day.