Options Update: Savient (SVNT) (again)

Whatever news Savient (SVNT) released on Thursday ended up being good news. I only skimmed the release and saw something about gout. Gout didn't seem to be a big deal in the episode of House M.D. that it played a role in. Oh well, the important thing is that SVNT is up to $18.90, which is well above the $12.50 it needs to be at in order for my shares to be called away and for me to be done with this. I don't particularly like being invested in a company I know nothing about. But for a 25% return in a few weeks, I'm willing to make an exception every so often.

Options Update: Savient (SVNT)

So, it's been awhile since I've updated things on the financial side. I realize it's not anything people read in detail, but tonight I have nothing else I can write about.

So, if anyone happened to check up on Hythiam (HYTM), they'll quickly realize that it is far below my $5.80 break-even price. Yes, I seem to be losing money on that. But, this hasn't stopped me from experimenting with highly volatile options writing. Enter Savient, another small pharmaceuticals company. They apparently have some data coming out sometime in December, but I have no idea when. No matter when the data comes out, though, it is causing the implied volatility to be in the 220% range, which is ridiculously high. I bought 300 shares at $12.10 a couple weeks ago and was able to sell 3 covered call options for $2.60 each. Thus, I made roughly 21% for the month of December.

It is possible that whatever news is coming out will be negative and the underlying stock price will plummet, but there is more call interest than put interest, and I do have 20% downside protection. Plus, the stock price has reached $15.40 today, so any plummet starts from a profitable position. I see it as much more likely that my shares will be called away at $12.50 and I will be done with the matter. Of course, now that I've said that, the exact opposite will happen, as with Hythiam. I should learn to keep my fingers from typing such things. Well, wish me luck.

Small Company Earnings

HYTM was listed as releasing it's earnings yesterday, November 5. Instead, their expected earnings release date was pushed back until November 12. I think this is a phenomenon pretty much unique to small companies. I can't imagine Google, IBM, or Apple getting away with a week's delay in releasing financial information.

In fact, HYTM hasn't really gotten away with it. The past couple of days have seen HYTM drop down to $4.71 so far. Incidentally, this puts me fairly deep in the red. We'll just have to see what the implied volatility does after earnings. It may still be worth holding on to if I can still get >5% a month in options premiums. Or perhaps earnings will beat analyst estimates and I'll get my shares called away after all.

In other news, Garmin (GRMN) is down below $100 again. I think if I had $10,000 or multiples thereof, I would buy some GRMN shares and write more out of the money covered calls. Garmin seems to be down on fears of a TeleAtlas bidding war with TomTom (TOM2.as). However, I see this as both a good move and temporary. Garmin has about $1B cash on hand and is worth >$20B, while TomTom probably has less on hand and is worth ~$6.3B.

Garmin used to be in a position of having TeleAtlas in the hands of TomTom and Navteq in the hands of Nokia, meaning they might face an increase in mapping costs. Garmin has either put TomTom in this position, or forced them to go deeper in debt by upping the price of TeleAtlas. If Garmin gets stuck buying the company, they at least have the advantage of being able to afford it, and they have a longer history of acquisitions, which implies to me a better ability to integrate TeleAtlas. It will be interesting to see how this develops. Unfortunately, I'll be watching from the sidelines.

Implied Volatility (updated)

I've been continuing my research into options strategies. Earnings season is here again, which always causes a spike in implied volatility. GRMN released it's earnings this morning. Yesterday, the implied volatility of at the money calls were in the 80s and 90s. Today, they are in the 60s. I suspect they will continue to fall for a couple more days.

Implied volatility is the free-market version of statistical volatility. SI indicates how much the underlying stock actually fluctuates, while VI indicates how much people expect it to move. What's this mean for options? Before major events, like earnings releases, IV spikes, as do options prices. Thus, much of the movement people expect is already priced into the option. In general, right before earnings is a bad time to buy options. However, if you own shares in the underlying stock, writing covered call options is very good, or if you have cash on hand, you can make a quick 2-4% by writing cash secured puts.

Anyway, in my research, I found a great site for finding highly volatile options: http://www.schaeffersresearch.com/streetools/filters/implied_vol_filter.aspx

Here, you can specify a minimum stock price, minimum open interest, and a % out of money maximum something that I don't understand. I don't know exactly what all the filters in the Power Tools tab do, this one included, but I like sorting by the 'Call Implied' column. Unfortunately, the filter is confused by recently split stocks, where a $10 stock with a $20 strike will trade at $2 (the $20 strike option was written before the split, and the options trading house hasn't fully updated everything), so it looks like the $20 strike is trading abnormally high, when in actuality, you can't really trade it. It will also show a lot of $5 stocks with a $7.50 strike trading at $0.10. This isn't a high enough price to make much money writing options, sadly. To avoid the latter problem, I like to specify a minimum stock price of $6. Higher priced stocks have closer strike prices.

Using the sorted 'Call Implied' column, though, I've found HYTM. I don't quite know what to make of it, yet, but it's a $6.50 stock with a $7.50 November 2007 call option price of about $0.70. That means people are willing to pay a 10% premium betting on a 15% move in one month. Admittedly, HYTM's earnings is on November 5, so I don't know what the long-term IV is like. This may be a stock only worth writing options against this one time. Also, Google Finance's stock page for HYTM shows a news story where the state of Washington kicked out HYTM's drug rehabilitation cocktail because it didn't work. Collecting a 10% premium isn't a good idea if the underlying company goes broke.

Either way, I went ahead and bought 1200 shares and wrote 12 call options for $6.45 and $0.65, respectively. After commissions, I made about 9.7%, which I will fully realize on November 17. Then I'll be able to see how much a regular month's option is worth. I may end up bailing out after that time. Or, I may get my shares called away at $7.50, giving me a total profit of ~25%, instead. I can live with that.

Updated at 3:00pm

HYTM announced a double blind study, so the stock price shot up to $7.30 (+0.85 over purchase price), and DXUKU (Nov $7.5 calls) are now at $1.10. So, I missed out on some options premium profit, but at this rate, it's looking like that 25% profit on November 17 will be happening. I can still live with that.

AMD Options Assigned

As I discussed in an earlier post, I bought 300 shares of AMD at $13.00 each, and wrote 3 options contracts to sell at $14.00 with a $0.30 premium. Well, on Friday AMD closed at $14.16, which is more than $0.05 in the money (the most common automatic exercise threshold). Not surprisingly, then, my contracts were assigned.

So, I automatically sold 300 shares of AMD at $14.00 with a $20.06 commission. I'm not sure how the commission is computed, honestly. But, I made $300 - $20.06 in the sale, plus $90 - $15.24, minus the original purchase commission of $12.99. All together this is a profit of $341.77, which is an 8.76% profit on my initial $3900 investment under a month ago. Not too bad.

Even better, I really do think AMD will go down in price again, and I don't think I would have sold my shares otherwise. So, I'm locking in some profit that would otherwise have been likely to disappear in the near future. This is a short term capital gain, however. Also, I'm more impressed with the rate of return than the actual dollar value of the profit. Still, $350 is most of a washing machine.

AMD and Call Options

Today, AMD spiked up as high as 13.61, from a previous close of 12.86. This spike prompted me to go ahead and write 3 April $14.00 call options. Since no one else knows what I'm talking about, I'll explain a bit. A call option allows the holder to buy shares of a stock at a given price (the strike price). Option contracts are typically for 100 shares. The writer of a call option owns these 100 shares, but promises to sell them whenever the option holder asks for them. For this right to buy stock at a set price, the option holder pays the option writer a premium (quoted per share).

A little while ago I bought 300 shares of AMD at $13.00. Thus, I can cover 3 contracts worth of call options. That is precisely what I did. April's expiration date is the 21st. This means I sold the option to buy 300 shares of AMD at $14.00 at any time before the 21st of April. Someone paid me $0.30 per share for this honor. So, I made $90 today, minus $15.24 of commission ($12.99 + $0.75/contract). So, $74.76 in profit. Since I paid $3912.99 (including commission again), I made 74.76/3912.99 = 1.91%. This is also immediately available cash - not just a paper gain.


When these options expire, I will either have sold my shares of AMD for a 7.7% profit (in about 3 weeks), or I will have the shares and be able to write more call options for May. I see the latter as far more likely. AMD got a boost today by saying they won't lose as much money as everyone feared, and that they'll be restructuring the company to cut costs. I don't see this as a lasting price increase, yet. This month is a risky month for options writers, though. AMD releases their 1Q results on the 17th. If they did better than people expected, the price could spike, and I may have to sell. Still, 7.7% (plus the 1.9% made today!) is very acceptable.

Stock Options

I've been thinking about writing some covered calls, lately. I've been trying to figure out the general strategy I'd like to take, running a few numbers, and asking a few questions of the Internet.

Let's take AMD, for instance. AMD's closing price today was 14.13.
The two main choices I was considering were monthly calls, or yearly. If I wrote a covered call every month, I could make about 1.4% per month in premiums. For instance, April $16.00 calls are $0.23/share. 0.23/14.13 = 1.63%. Then take off a bit for the fact that there are 37 days left instead of 30 and that I'd have to pay a commission. But, 1.4% per month is not a bad return. That ends up at 17% for the year. This is in addition to any stock appreciation!

A January 2008 $17.50 call is 1.29/share. 1.29/14.13 = 9.13%. This looks substantially lower than 17%. There are still other things to consider, though. Let's say AMD releases their Barcelona CPUs and R600 graphics cards early, and Intel doesn't immediately have an answer. AMD could shoot up in price and my option contract may be exercised. In the monthly case, I will make the 0.23/share premium, plus 1.87 in stock appreciation. A nice round $2.10/share. In the yearly case, I'll make the 1.29/share premium, plus 3.37 in stock appreciation. We now have a $4.66/share profit. Still, this is only a fair comparison if AMD surpasses $17.50 in the first month. If it doesn't, the monthly option writing catches up pretty quickly, depending on stock price movement.

It's far less likely that an AMD option will be in the money within a month than it is that it will be in the money within a year. So, writing monthly call options makes me more likely to hold on to my underlying shares. I also have more flexibility to adjust to changing market conditions. Some of the links below also mention that covered calls are more conservative than outright stock ownership.

The premium received does offer some downside protection. With AMD, I see a company that will eventually have a higher stock price. I feel comfortable owning AMD shares long term. I view it as making shares appreciate more. Instead of just getting stock appreciation, I also get option premiums. And I risk the loss of huge profits should AMD skyrocket. I don't see that happening, though. Practically speaking, I'm gaining income, gaining downside protection, and at the worst, only making a significant profit on stock appreciation, rather than a huge profit. I have made it more likely that AMD will be a moneymaker for me. I don't have access to many probabilities, but intuitively, I see my expected return going up at the expense of potentially missing an unlikely surge in stock price.

I'm think I'm going to do it, once I figure out what my AMD target purchase price is.

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