Chat Transcript for Feb 29, 2012: My dad’s advice about gift horses, strategies for AAPL, APOL, and much more

Here’s the transcript of today’s chat. See you next week at 2pm EST at for more Q&A where you can ask me anything.

Q. Cody, after reading your united states of Apple piece, I would like to buy more AAPL calls…what would you suggest???
A. hmm, I think you’ll see the strategy I’ll suggest already in that USofApple piece you mention — I’d wait for weakness. I’m not sure you’ll be able to buy it under $500 a share again, but then again, a 10% pullback from all-time highs wouldn’t exactly be a shocking development either. There’s some serious momentum in AAPL for the very short term, but at some point, perhaps after we see the March 7 Apple releases, there’s probably got to be a pullback of some sort. If you truly think it’s going to $1000 by 2015, then the question is how best to capture the gains while minimizing your risk along the way. Or you could just buy the common and forget about it for three years or so.

Q. If you have AAPL calls for July that are well in the money, how long can you hold them before time decay has an impact? I hung in there for a couple of months on the APOL puts. Thanks for that recommendation.
A. With options that are well into the money, there’s not much time decay to worry about. Time decay really hurts holders of out-of-the-money options because you’re literally paying for a time premium since the option is technically not worth anything but a bet that eventually the underlying contract will be of value. “Eventually” being the operative word in that last sentence. On the other hand, when your far-in-the-money already on your options, most of the premium is charged because it allows owners of the options to control much more stock for less capital, so long as the options remain in the money. So the answer to your original question is that you don’t really need to worry too much about time decay on those options while they’re far in the money. Of course, you have risk and a lot of it in those far in-the-money options too. Because if the stock falls down to where your strike price is, the value of those options fades much more on a percentage basis than the underlying common stock and if the stock doesn’t come back above those strikes before they expire, you can lose the entire capital you had invested in them even as Apple continues on its way to $1000 over the next few years. Take some profits, keep some exposure, buy some higher-priced and longer-dated calls than you currently own when the stock is down next time. That’s how I’d do it. Congrats on the Apple calls!!

Q. I would like to say thank you to Cody and share with you that my wife’s new trading account has made 34% in only 8 weeks using Cody’s picks!  We started an ‘e trade account’ for her at Xmas with US$ 16,000 with her only wanting to trade common stock and not have to actively trade everyday.   Her approach was to invest rather than trade. We read Cody’s picks and she invested in 3 stocks only – long on AAPL & STX and short on APOL, in 8 weeks the only alteration we made was to recently swap our STX long for a long position in SNDK instead (after some great gains).  She has been moving her stop losses to stay at around 5%, locking in most of her profit.  I have a more active trading account and I have made a little over 7% during the same period!  My wife and I would like to thank Cody and all his team for your everything – I will be recommending you to more friends again.  Thank you so much!
A. You and your wife should be very proud — you guys made the trades with your money. Rock on and thanks for subscribing and the referrals!

Q. Cody, do like cavm or brcm?
A. Do I have to pick between those two? Feet to fire, I’d rather own BRCM for the next three years than CAVM. Both are good companies and positioned well for the mobile/tablet/smartphone/who-knows-what-next revolution.

Q. Cody, I didn’t sell the BK puts yet, as they don’t expire until Jan 2013…any chance of that working out? worth just less than half of what I paid now…but lots of time left.
A. The problem with all the mortgage-related shorts is that somehow the supposed “crackdown on financial fraud” from the DoJ and the supposed “mortgage-fraud settlement” between the banks and the DAs is that they’ve literally turned into backdoor welfare-handouts for the banking sector. The TBTF banks in the settlement are going to be able to count any losses they put onto their mortgage-backed security investors (think mostly FRE and FNM, all fully and explicitly funded by taxpayer money now of course) as credit towards the supposed $26 billion settlement. In other words, for every dollar they write down the value of their crappy mortgage products in either their own or their clients’ accounts, they get to pretend they paid $1 in fines towards that settlement. It’s appalling, but it’s the reality of our country’s rule of law today when it comes to the financial giants. And the point is that even though at some point, I do think that BK and WFC and the rest of the perpetrators of all this financial crime of the past few years, decades and still ongoing today, are doomed. But there will be time and lots of signals when they finally start to crack again. Until then, it’s anybody’s guess how they trade in the next few quarters.

Q. Cody the move in apple is almost parabolic on the charts w/o a rest is it not a bit of a dangerous buy w/o some pullback or sideways action even with 100B in cash and PE of 10ish when S&P P/E is 14-15??
A. Yes, I agree that the ongoing parabolic move in Apple probably is due for a pullback at some point, as I’d noted above. The very fact that I’m getting so many questions about how best to buy Apple right now in this week’s chat is also a anecdotally bearish indicator. I might even trim a little Apple in the next few sessions as it’s been my biggest position for a while now and we’ve got some huge gains in it and are probably a bit overweight in the name after this latest pop now.

Q. Hi Cody, with spring coming, what are your thoughts on Occupy Wall St. and how it will impact the the market?
A. Great question and great timing for this question. Yes, as you guys know I do think we’re going to hear and see a lot more from the entire Occupy Movement as winter ends and the weather for protesting gets better. In the grand scheme of things, anything Occupy does to make Wall Street and the Republican/Democrat Regime more accountable is very bullish for our markets, our economy and our society. But the stock market is more likely to be hurt by any serious escalation in the Occupy protests in this country as it would be disruptive to some of the status quo and the markets don’t like uncertainty about the status quo, even if the status quo is ultimately horrible for the markets, as our own status quo is.

Q. could someone give me a simple explanation of “parabolic”…it scares me. Last time I heard it, aapl tanked from 525 to 500
A. Another great question that I bet a lot of subscribers also have. “Parabolic” according to the standard dictionary is defined as “Of or having the form of a parabola or paraboloid.” A parabola is “A plane curve formed by the intersection of a right circular cone and a plane parallel to an element of the cone or by the locus of points equidistant from a fixed line and a fixed point not on the line.” Here’s a picture of a parabola: Now the way this all relates to a stock is that you should look at a stock chart and pretend that the intersection of the axis themselves are the start of the chart and you see that Apple’s weekly stock chart looks a little bit “parabolic”. At any rate, the main idea behind “parabolic moves” is that they are unsustainable because the stock has run up so much so fast that profit takers, shorts, bears, and worry warts are going to sell simply as a function of the stock having run up so much so fast, making it a self-fulfilling prophesy. I’m not a “technical analyst” or a “chartist” because I don’t draw lines on stock charts to make my trading decisions, but common sense itself tells you that when Apple’s gone from $380 to $540 in a few months’ time, that people like you and me are going to do a little selling ourselves and that too can self-fulfill that prophesy.

Q. Amazing call on APOL ! Thank you!
Q. CODY, great job and conviction on Apollo! My stops kicked in so my contracts sold but i was happy with the big gains and i guess not being a pig……….. but i am interested in what you have to say tomorrow about it. It would seem that all of the insider selling by the Sperlings over the past few months has been a prelude to this announcement. Thanks for the great info. When i signed up for the subscription it was a really bad start on the trades but you have made some great calls overall and sticking with the program has been very rewarding. Thanks again.
A. I did think and write repeatedly for you guys that it looked like APOL was “about to crack” when it was still at $52/53 or so last week, but for it to warn and collapse two days after we loaded up on those puts was pretty darn lucky. We’ll take it and I do think we’ve got a few more trades just like this setting up for us right here right now. Stay tuned as March should be a very exciting and perhaps very profitable month for all of us. Thank you for subscribing and congrats on nailing the APOL — you pulled the trigger as you risked your money, not me. Rock on.

Q. I’d like to buy some google calls, what would you suggest???
A. It depends on your time frame and how much you’re willing to risk to get how much reward when it comes down to picking which call options to choose for any trade. If you think Google can get to $700 by the end of the year, then common stock is probably the best way to play that. But if you think Google can get to $700 by this summer, then buying some August $640s or July $600s would pay huge if you are correct about the stock hitting $700. If you think the stock can get to $2000 by 2020 like I do, then probably holding common stock and very long-dated in-the-money calls is probably the best bet until you see a new near-term trading set up for Google and that’s when you’d go after some of the more aggressive kind of near-term and out-of-the-money calls.

Q. Any comments on todays SLV action?
A. I shorted SLV and wrote about it for subscribers back when it was still above $40 and we eventually covered it for some nice profits. The main reasoning behind the timing of that SLV short trade was that silver had recently gone “parabolic” and then, more importantly, started making huge dislocating daily moves of 2-5% per day. And yesterday and today you’ve seen SLV dislocate up and then back down by 5% or so. That kind of dislocating action in a commodity that I’m generally bearish on anyway does indeed put SLV back on my radar as a short. I’ve not acted on it yet, but will likely do so soon and will let you guys know in real-time if and when I pull any SLV triggers.

Q. Cody … first of 3 questions today and in priority order in case you don’t get to them all…Great call on APOL but I was only able to short the common as my put orders didn’t get filled (as i stated yesterday penny wise and dollar foolish), so with it in the $42 range now, do you see it bouncing back a bit? I would like to initiate some puts still, so do you see this thing really tanking, like to the teens or even single digits or was this about where you expected to see it land? In other words is the trade over?
A. Hey don’t look a gift horse in the mouth as my pops the cowboy veterinarian would say. Of course, he does look into horse’s mouths for a living as a large animal vet and I’d bet he’d look even a gift horse in the mouth, but that’s besides the point. The point is that when you make money on a trade even though you probably could have made more by doing the trade differently, you need to not look back. My final article for the Financial Times a few years ago when I had to quit because I took the Fox Business TV show was called “Running money is for idiots”. And the main point of that article is that any time you do a trade, you’re going to feel like an idiot. If you match the market, you feel like an idiot because you couldn’t outpeform. And if you couldn’t even match the market, then you really feel like an idiot. And finally, and the reason why running money is truly for idiots, is because of exactly what you just wrote — you can even feel like an idiot when you get the trade right! And you got that APOL trade right, no matter if you could have made more money by buying puts instead of shorting the common. You can always look at EVERY trade you’ve ever done and figure out a way to have bought different options or shorted some derivative or something to have made MORE MONEY. But don’t look back. As far as adding to your APOL shorts/puts now, stay tuned as I’ll likely be doing the same in coming days, weeks and months. No rush because APOL just gave us a gift horse and we don’t want to look gift horses in the mouth. Or do we? Dad a little help here? Ha.

Okay guys, unfortunately, I’ve got an appointment I’ve got to get to for now. I will answer the remaining questions in a series of posts over the course of the next couple days. I am pumped about March and the rest of this year and I hope you are too. Thanks and please keep the questions, comments and especially the testimonials coming!