Chat Transcript for May 30, 2012: Option strategies explained, how big traders are shorting Facebook 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.

Hi guys, let’s rock n roll.

Q. When you rate a stock 7 or higher after these 20-30% declines in almost every stock on the market, are they not more compelling buys at these much lower levels? Do any scare you with their declines? Are there any declines based on bad company fundamentals or just declines with the rest of the market? EX FIO ZNGA NUAN LVLT SNDK to name a few very hard hit names.
A. Everytime a stock goes down after I buy it I am scared. Everytime a stock goes up after I buy it I am scared. Everytime a stock goes sideways after I buy it I am scared. I am always scared to expose my capital to potential for capital losses and for the potential of market crashes and the potential for fraud at the companies I’ve invested in and so on and so forth. Fear comes with investing and is magnified when trading. Stocks and the markets will go up and they will go down and sometimes I’ll have huge gains and they’ll just seem like they’ll keep coming forever and other times I’ll have losses and they’ll seem like they won’t ever stop. It’s all about trusting that your analysis and your ability to get many more trades and investments right than wrong over the next 10,000 or 20,000 days and knowing that you’ve done everything you can do to maximize your gains and minimize your potential losses.

Q. So, company fundamentals are intact from your most up to date research on your holdings and the 20% decline in the SOX index since INTX TXN and other confirmed a cycle bottom was at hand 2 months ago is just a matter of the correction underway and not something to do with actual demand falling like a rock, as the companys stocks have?
A. Yes, as I’ve explained almost every time I buy or add to a stock, I wouldn’t be doing so if I didn’t think the fundamentals of the broader corporate economy, the stock market itself, the company’s business prospects and the price of the stock weren’t favorable.

Q. Here is a curveball for you. My close friend is looking real hard in ARENA PHARMACEUTICALS (ARNA)……They are trying to push a big drug which has the potential to pass in a month or two. I know this is a extremely broad question but i’m very hesitate to add a pharmaceutical stock because when they go down they go down……what are your thoughts on this?

A. I think that most pharmaceutical companies are just gambles on their ability to lobby the FDA and other Republican/Democrat Regime Bureaucracies to approve whatever stuff they’ve come up with. In general, I think the entire health care industrial complex is doomed because it’s become so beholden to government demand, government subsidies and government regulation.

Q. Hello Cody – Hey, do you have any thoughts on Wynn Resorts (WYNN)? It’s been beaten down quite a bit and it’s sitting there near yearly lows and possibly ready to make a move to the upside. I appreciate your insights and a mega thank-you for your unwaivering support of our US troops!
A. I know Steve Wynn and have interviewed him and hung out with him in the green room at TV shows over the years. I personally would never invest my hard-earned money in a casino of any sort. It’s not my style to trust those who promote gambling, even if they call it entertainment. I think the business draws the worst kind of characters. I’m not exactly a fan of either his nor Donald Trump or any other casino magnate in large part because it seems that history would show that casino operators/magnates always come out on top even when normal shareholders lose everything.

Q. I read about FICO in your book and am considering buying some puts. What are your thoughts on the stock and do you think you’ll add it to the portfolio on the short side anytime soon? Thanks!
A. Great timing on your question about FICO and when we should look at shorting it. Hmm, I’ll look at that one this week afresh and let you guys know if I pull any triggers.

Q. With FFIV dropping down to these levels do you feel like this is a good entry point to start building a position here.
A. Yes, I like FFIV back here below $107. The fundamentals and the outlook there look very strong to me, even if the stock says otherwise, as I’ve been discussing in the prior post.

Q. Two months ago I was thinking interest rates would start ticking up mid-late-summer, but have fallen with European contagion. With this, I would have thought a flight to gold would have ensued, yet it has sold every rally since. I know you’re short gold. Any thoughts on why and where its going?
A. I think gold as an asset class is bubbled. I think it’s a crowded investment and a crowded trade. I think the price of gold is not dependent upon rates and won’t be for the foreseeable future.

Q. Hi Cody – excuse the foul language “SPAIN!” A much bigger sick patient than Greece. What is your view on it and how it may infect the other patients and the markets? Thanks!
A. Did you read my detailed analysis about Spain from this morning’s post?
Here are a few questions for you instead, the answers to which will answer your question about how much I think Spain/EU/Greece/et al matter to my investments over the next three years — is the Nasdaq up or down since Spain joined the EU? Is Apple up or down since the dot com bubble popped? Is Google up or down since the darkest days after the first financial crisis hit in 2008? If my answer to your question is that Spain’s banks are going to be just as corrupt and insolvent tomorrow as they were at any time in the last fifteen years and they will still be that way in three more years no matter what happens with the governments of the EU deciding how much money to give to their insolvent and incompetent central bankers for the next six months, then what does that mean for our investments in AAPL’s and LNN’s stocks?

Q. In response to your comment from Alistair, and an often highlighted response from you Cody, you often talk about not worrying about the next 10 days and point out that the long term or gains over the next 10,000 days or 3 years as noted in your response to Alistair are important. The frustrating thing about that type of response is that you recommend buying calls, and a lot of your recommendations have a time limit. So when you dismiss the near term in that fashion, it is often frustrating. No one expects you to be spot on but it sounds dismissive.
A. Apologies to readers and Alistair for sounding dismissive, I certainly didn’t mean my comments that way. I was trying to be challenging and I’ve seen Alistair’s questions over the last year or so and I think/hope he understood that I was answering him personally and that it was supposed to be helpful. Anyway, I bought calls in Juniper today that are dated 540 days out. That’s not exactly 10,000 days, but it’s certainly not a short-term trade. Further, the main point is that even if you’re day trading, you obviously are doing so because you want to be in this game making money at the markets for the next 10,000 days, not just tomorrow or the next thirty days. And even if you’re daytrading, you have to plan for both hot and cold streaks that will come and you have to know and be able to handle that some of those hot and cold streaks will last longer and shock you more than you’d ever thought possible. And that over the next 10,000 days, all investors and traders need to get more trades right than wrong and maximize their gains while minimizing their losses as they do so, no matter their time-horizons for each individual position and no matter what’s going on in Spain/EU/Greece/etc.

Q. Cody, when you’re trading equities and options…what ratio do you try and stick to? I’ve found myself getting too heavy into options, not that its bad, but the time erosion factor is always on my mind. Do you keep a mental note of what percent is here or there?
A. I’d try to keep no more than 1/3 in options relative to each individual longer-term common stock holdings. And overall in the portfolio, I’d be careful to never go over 25-33% or so in options relative to the overall holdings in common stock.


Q. I was contemplating a short in FB but was told that FB is not marginable for 30 days after the IPO and thus not eligible for short sale. 1) Would you consider FB a short at this level? It was at $29.20 this morning recently around $28.20. 2) Would you buy puts at this price? If so which ones would you consider?

A. Last week I wrote: “Q. At 31.50, is that a good number to start a tranche in FB? I’d be looking at a year out at least with this of course, making tweaks around earnings reports, particularly the first one which is I believe 3 months away. A. I do like the rather remarkable amount of bearishness and outright disdain for FB and how it came public from a contrarian perspective and I might buy some FB at some point if it drops much further or if I see another catalyst for upside besides just contrarianism. Q. Your thoughts on FB and FB suppliers out of the gate? A. As I’d noted earlier, I’m starting to get interested in FB from the long side, at least for a trade. I do think we’ll see it with a $100BB plus valuation again sometime this year. The question is from where it bounces, I guess. To loop back around to that prior question about maybe starting a tranche in FB here, I’d probably say yes, but don’t expect to flip it tomorrow and expect that you’ll probably get the chance to add more under $30 at some point before you flip it, if my feet were to the fire.”
I still think that and the fact that FB is so hated and so overborrowed that it can’t even be located to be shorted is making it set up for a big rally back towards its IPO price before July 4th or on into the end of the summer. In other words, No I do not think that FB is a good short candidate and I wouldn’t buy puts on it. I’d rather be long FB at $28 after it’s down 40 billion dollars in market cap from its IPO than short it.

Q. I was told (by E*Trade) that FB is not eligible for shorting for 30 days from the IPO. Not that shares could not be located. Am I getting bad info?
A. With high-frequency trading dominating the volumes and with FB trading tens of millions of shares per hour, I think there’s lot of FB shorting going on, naked and/or normal and/or enforceably-illegal or not would be the question. Here’s a couple articles that will illuminate how the lack of enforcement of our country’s capital markets laws, including shorting IPOs and naked shorting are collapsing: AND

Q. We lost CRUS rally in May. Can you please tell me why you preferred LVLT and FIO instead of CRUS? Did you make up your mind? Would you consider buy it in next dip?
A. I liked CRUS just about as much as FIO and/or LVLT when you’ve asked about it, but I can’t own every stock and I will unfortunately be long stocks that don’t go up while similar ones do go up. CRUS is a great way to play the iPhone/iPad/Smartphone/Tablet future and I’ve highlighted it in several of the books I’ve written about those sectors. I still think it’s a great theme.

Q. Your last post said you have to buy the crisis. I agree, but its very difficult. Cody, any view on BRCM or QCOM?
A. I feel a lot about BRCM and QCOM as I do CRUS — they are great plays on the future of smartphones/tablets et al, but I can’t own them all. I might need to just buy a smaller amount of my five favorite/blue chip Apple suppliers and consider it a basket of one investment. I just don’t want to over diversify either. And yes, it is difficult to buy today. Just as it was difficult to sell in October 2007 and close my hedge fund when the world and the markets looked like they would keep rising forever.

Q. CSCO – at these levels, I was thinking of making this a core “longer term” holding. What do you think is a good entry point?
A. I sold a bunch of CSCO calls for a big profit when it was back near and above $20 a share. We’d been buying those calls as noted repeatedly here on in real-time at the time, when the stock had been been at $16 and $15. I still think those are pretty good entry points, but as always, I’d start a little when you’ve made the choice to buy it and then use tranche-buying from there.

Q. Cody why did you by 2014 Juniper calls instead of 2013 Juniper calls? Are you thinking it will not bounce enough by the end of this year?
A. I bought the January 2014 calls for around $3 each instead of the January 2013 calls for around $1.50 each because that way if the trade does start to work out over the next six months or nine months or twelve months then I’ll still make money whereas if my options would expire in January 2013 instead then I’d only have six months for the trade to work out. The premiums on the call options for Juniper are very cheap and that’s another reason I went out there that far — because the price meant the risk/reward was even more favorable for the longer-term calls at twice the price of the shorter-term ones.

Q. Cody I enjoy reading your wisdom throughout the week. This is my first question I have thrown out on the Question and Answer Week. ZNGA started around $11 dollars which I believed was going to take off which its hasn’t. But it did increase in the area of $14. Then suddenly dropped due to Facebook IPO. What’s your thoughts on Znga? Is it worth buying? If so, short term? Also linked with that question is Facebook which I’m sure dozen people ask you when is the time to buy and is there a long term hope with all the question marks on inside information and lawsuits that are taking place?
A. I should have sold all the ZNGA when it popped as I’d expected heading into the FB IPO, but I blew it. I still own some and let’s talk about it. At $6 a share, ZNGA really can be considered a call option on the future of gaming on Facebook and iPads and smartphones. They are likely to continue to deliver big growth in the number of games being played and the question really is whether or not they are going to figure out how to monetize that growth in years ahead. Zinga’s management continually talks and have been executing on trying to make their Zinga gaming platform a de facto standard for the industry and it’s going to work wonderfully or fail miserably — a binary outcome. In other words, I highly doubt that Zinga stumbles along for three years — the company’s business plan will either work out very, very well and the stock will be much higher or it will fail miserably and be tomorrow’s which went from IPO to $0 in a straight line as the dot com bubble burst. I think ZNGA is worth at least 4-5x more than Instagram ever will be and Facebook bought Instagram for a billion dollars and since Zinga has a market cap of $4.7 billion, it’s certainly looking like a buy from that perspective. However, you could have said should have been worth 1/20th of what Time Warner paid for in the year 2000 and you still would have lost everything on the PETS stock as it went to zero. The upshot is that because I do think Zinga’s gaming platform is catching traction and because I do think Zinga could generate the 30-40 cents per share in earnings next year that analysts are looking for and because the company has $2 per share in net cash on the balance sheet and that means that the stock is trading at less than 10x next year’s earnings…I am going to hold onto and will likely buy some more Zinga in the next few days while it is down here below $6 per share now.

Okay guys, that’s it for today. Thanks for the great discussion! And God bless our troops and all those suffering in wars around the world.