Possibllity of retesting Mar. lows - how to protect our shares & leaps?

  • Posted: 07 May 2009 08:35 PM

    There is a lot of talk about the markets retesting March lows.  I have gone up & down with aapl and don’t relish the thought of seeing a retest of the LOWS.  What game plan should long term investors do now to protect our positions in shares and leaps? 
    1.  Buy puts - which month & strike price
    2.  Sell OTM calls

    Please share your recommendations.

    Why do people think that testing the lows is coming?  What are the supporting data?

    Thanks.

         
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    Posted: 07 May 2009 09:18 PM #1

    Bear markets retest before a new bull market begins.  Take a look at history from 1950 on Here  Not saying the current situation will repeat, but Mr. Market tends to have a herd mentality so it can become a self fulfilling prophecy once the correction begins.  Depending on your definition of long term and your risk tolerance you could use any of your suggested strategies or just hold on for the ride.  Apple’s fundamentals are very strong all things considered.  I would not expect a huge upside surprise from Apple in the June Qtr financials.  PCs are still not selling all that well and Apple is deferring recognition of this qtrs Iphones sales until the release of Iphone OS 3.0 so the Iphone number is basically the current deferred revenue plus some accessories and leftover carrier payments from version 1 iphone. The surprise on Apple will possibly come from two items in my mind.  Release of the Iphone in China which would give you an additional 6-8M unit per year or release of a new form factor Ipad or Netbook at WWDC which again would give some incremental revenue not currently modeled.  Realize that most of this revenue would occur in future quarters but the price targets would move up shortly after the announcement.

         
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    Posted: 07 May 2009 11:28 PM #2

    alice - 07 May 2009 11:35 PM

    There is a lot of talk about the markets retesting March lows.  I have gone up & down with aapl and don’t relish the thought of seeing a retest of the LOWS.  What game plan should long term investors do now to protect our positions in shares and leaps? 
    1.  Buy puts - which month & strike price
    2.  Sell OTM calls

    Please share your recommendations.

    Why do people think that testing the lows is coming?  What are the supporting data?

    Thanks.

    I don’t believe that AAPL will revisit its low.

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  • Posted: 08 May 2009 01:42 AM #3

    Thanks pats!  Thanks Eric!

    Another question - Stops, where would you set it and not get stop out on dips?

         
  • Posted: 08 May 2009 03:17 AM #4

    pats - 08 May 2009 12:18 AM

    Bear markets retest before a new bull market begins.  Take a look at history from 1950 on Here  Not saying the current situation will repeat, but Mr. Market tends to have a herd mentality so it can become a self fulfilling prophecy once the correction begins.  Depending on your definition of long term and your risk tolerance you could use any of your suggested strategies or just hold on for the ride.  Apple’s fundamentals are very strong all things considered.  I would not expect a huge upside surprise from Apple in the June Qtr financials.  PCs are still not selling all that well and Apple is deferring recognition of this qtrs Iphones sales until the release of Iphone OS 3.0 so the Iphone number is basically the current deferred revenue plus some accessories and leftover carrier payments from version 1 iphone. The surprise on Apple will possibly come from two items in my mind.  Release of the Iphone in China which would give you an additional 6-8M unit per year or release of a new form factor Ipad or Netbook at WWDC which again would give some incremental revenue not currently modeled.  Realize that most of this revenue would occur in future quarters but the price targets would move up shortly after the announcement.

    Consider that Apple’s EPS contribution from iPHones ALONE will approximate 70 cents, up from around 58 cents in prior quarter. Apple is guiding VERY conservative in the current quarter, and my preliminary calcs indicate they will beat the street Q3 09 even MORE than they did in Q2 09.  Plus, I believe Apple will sell more 3G iPHones in Q3 09 than they did a year ago, but I’ll defer to Deagol on this.  I think WS knows they have time to climb aboard, so Apple may drift in the meantime. I’m not confident with timing the market,  so I’m staying long, as I can without margin.  If Apple vaults to $140 soon, I may be tempted to look at puts.

    [ Edited: 08 May 2009 03:21 AM by ByeTMO ]      
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    Posted: 08 May 2009 09:57 AM #5

    Mercel - 08 May 2009 06:17 AM
    pats - 08 May 2009 12:18 AM

    Bear markets retest before a new bull market begins.  Take a look at history from 1950 on Here  Not saying the current situation will repeat, but Mr. Market tends to have a herd mentality so it can become a self fulfilling prophecy once the correction begins.  Depending on your definition of long term and your risk tolerance you could use any of your suggested strategies or just hold on for the ride.  Apple’s fundamentals are very strong all things considered.  I would not expect a huge upside surprise from Apple in the June Qtr financials.  PCs are still not selling all that well and Apple is deferring recognition of this qtrs Iphones sales until the release of Iphone OS 3.0 so the Iphone number is basically the current deferred revenue plus some accessories and leftover carrier payments from version 1 iphone. The surprise on Apple will possibly come from two items in my mind.  Release of the Iphone in China which would give you an additional 6-8M unit per year or release of a new form factor Ipad or Netbook at WWDC which again would give some incremental revenue not currently modeled.  Realize that most of this revenue would occur in future quarters but the price targets would move up shortly after the announcement.

    Consider that Apple’s EPS contribution from iPHones ALONE will approximate 70 cents, up from around 58 cents in prior quarter. Apple is guiding VERY conservative in the current quarter, and my preliminary calcs indicate they will beat the street Q3 09 even MORE than they did in Q2 09.  Plus, I believe Apple will sell more 3G iPHones in Q3 09 than they did a year ago, but I’ll defer to Deagol on this.  I think WS knows they have time to climb aboard, so Apple may drift in the meantime. I’m not confident with timing the market,  so I’m staying long, as I can without margin.  If Apple vaults to $140 soon, I may be tempted to look at puts.


    I’m estimating an EPS of 1.31 based on 6% growth of Mac and -5% Ipod. I agree with you thoughts on Iphone Q3.  The rumor of build rates if they are to be believed say we should see a June launch and a full 3rd qtr of new Iphone sales.  The smartphone area is still showing healthy growth rates and I think the next version will eliminate most of the issues people have with the existing device.  The only thing folks will complain about is a lack of a physical keyboard.  If Apple announces China and a new form-factor at WWDC then they will take out $140 otherwise I think they move with the market.  As far as China the 3G trials start the 18th of May so I am also staying long.

         
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    Posted: 08 May 2009 10:35 AM #6

    alice,

    Thank for raising this issue of hedging.  Conceptually is easy.  The options rolleyes:

    1.  Close position (in lumpsum or scaling out); or
    2.  Long puts/call replacement/zero cost collar for partial or entire position; or
    3.  Long index shorts or puts; or
    4.  Step stops; or
    5.  Doing nothing.

    The hard part is determining the quantity/month/strike of options, setting stops, whether to roll the options and when to un-hedge.  If you get the timing wrong many times e.g.  selling too early and have to buy back higher, or wrong choice of puts all the times, cost of puts would eat into your return significantly so much so that option 5, doing nothing would be the best option.  In short, unless you’re as skillful as Hussman in hedging, doing nothing is probably the best option.  You need to be a good trader to be able to hedge well.

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  • Posted: 08 May 2009 10:59 AM #7

    alice - 08 May 2009 04:42 AM

    Thanks pats!  Thanks Eric!

    Another question - Stops, where would you set it and not get stop out on dips?

    I gave up on stops completely long ago for AAPL.  I got burned too many times no matter where I put the stops.  If you set a rational loss level you will be stopped out on normal dips, and if you set a catastrophic loss level you simply lock in a catastrophic loss.  Better to just watch closely.

         
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    Posted: 08 May 2009 11:42 AM #8

    pats - 08 May 2009 12:18 AM

    Bear markets retest before a new bull market begins.

    The assumption being made is that a new bull market is ahead. Another possibility which has more credibility to me is that this is a 1930-style suckers rally. They are sharp, fast, and don’t retest. Sound familiar so far? They just collapse down to much greater lows over time. Not saying AAPL will follow this pattern, but a valid case can be made that the broad markets are repeating history. The economic fundamentals and the potential for a major economic breakdown in future years are real possibilities. Keep in mind that Robert Pretcher, the most well-known and experienced Elliott Wave forecaster is adamant that the DOW will go under 1,000 eventually!

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  • Posted: 08 May 2009 12:13 PM #9

    Mace - 08 May 2009 01:35 PM

    alice,

    Thank for raising this issue of hedging.  Conceptually is easy.  The options rolleyes:

    1.  Close position (in lumpsum or scaling out); or
    2.  Long puts/call replacement/zero cost collar for partial or entire position; or
    3.  Long index shorts or puts; or
    4.  Step stops; or
    5.  Doing nothing.

    The hard part is determining the quantity/month/strike of options, setting stops, whether to roll the options and when to un-hedge.  If you get the timing wrong many times e.g.  selling too early and have to buy back higher, or wrong choice of puts all the times, cost of puts would eat into your return significantly so much so that option 5, doing nothing would be the best option.  In short, unless you’re as skillful as Hussman in hedging, doing nothing is probably the best option.  You need to be a good trader to be able to hedge well.

    Thanks Mace.

    Hedging is hard.  I totally agree with you.  Doing nothing is what I have been doing but is it wise to do nothing if there is a strong possibllity of retesting the March lows?  It seems the easier method of hedging is to sell OTM leap calls but one will still have to determine when/quantity/price correctly.

    Keep in mind there are others like Cramar that does not believe in this rally or the next bull market and that this is just a bear market rally.

         
  • Posted: 08 May 2009 12:19 PM #10

    Zeke - 08 May 2009 01:59 PM
    alice - 08 May 2009 04:42 AM

    Thanks pats!  Thanks Eric!

    Another question - Stops, where would you set it and not get stop out on dips?

    I gave up on stops completely long ago for AAPL.  I got burned too many times no matter where I put the stops.  If you set a rational loss level you will be stopped out on normal dips, and if you set a catastrophic loss level you simply lock in a catastrophic loss.  Better to just watch closely.

    Zeke, are you suggesting mental stops?  Is it working for you?  It didn’t for me.  I watch aapl dropped from it’s high to it’s lows in jan 2008 and sept 2008.  Thanks!

         
  • Posted: 08 May 2009 12:20 PM #11

    cramar - 08 May 2009 02:42 PM
    pats - 08 May 2009 12:18 AM

    Bear markets retest before a new bull market begins.

    The assumption being made is that a new bull market is ahead. Another possibility which has more credibility to me is that this is a 1930-style suckers rally. They are sharp, fast, and don’t retest. Sound familiar so far? They just collapse down to much greater lows over time. Not saying AAPL will follow this pattern, but a valid case can be made that the broad markets are repeating history. The economic fundamentals and the potential for a major economic breakdown in future years are real possibilities. Keep in mind that Robert Pretcher, the most well-known and experienced Elliott Wave forecaster is adamant that the DOW will go under 1,000 eventually!

    Cramar - What do you suggest for hedging?  Thanks.

         
  • Posted: 08 May 2009 12:27 PM #12

    Eric Landstrom - 08 May 2009 02:28 AM
    alice - 07 May 2009 11:35 PM

    There is a lot of talk about the markets retesting March lows.  I have gone up & down with aapl and don’t relish the thought of seeing a retest of the LOWS.  What game plan should long term investors do now to protect our positions in shares and leaps? 
    1.  Buy puts - which month & strike price
    2.  Sell OTM calls

    Please share your recommendations.

    Why do people think that testing the lows is coming?  What are the supporting data?

    Thanks.

    I don’t believe that AAPL will revisit its low.

    I’m glad to hear you don’t think aapl will revisit its low but I have read from your other postings that you do believe that the market may retest the lows.  Right?  Hedging is hard.  Do you have specific recommendations for hedging regarding aapl?  Thanks.

         
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    Posted: 08 May 2009 12:43 PM #13

    cramar - 08 May 2009 02:42 PM
    pats - 08 May 2009 12:18 AM

    Bear markets retest before a new bull market begins.

    The assumption being made is that a new bull market is ahead. Another possibility which has more credibility to me is that this is a 1930-style suckers rally. They are sharp, fast, and don’t retest. Sound familiar so far? They just collapse down to much greater lows over time. Not saying AAPL will follow this pattern, but a valid case can be made that the broad markets are repeating history. The economic fundamentals and the potential for a major economic breakdown in future years are real possibilities. Keep in mind that Robert Pretcher, the most well-known and experienced Elliott Wave forecaster is adamant that the DOW will go under 1,000 eventually!

    I suspect the composition of the DOW will adjust to prevent that from happening.

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  • Posted: 08 May 2009 01:01 PM #14

    alice - 08 May 2009 03:19 PM
    Zeke - 08 May 2009 01:59 PM
    alice - 08 May 2009 04:42 AM

    Thanks pats!  Thanks Eric!

    Another question - Stops, where would you set it and not get stop out on dips?

    I gave up on stops completely long ago for AAPL.  I got burned too many times no matter where I put the stops.  If you set a rational loss level you will be stopped out on normal dips, and if you set a catastrophic loss level you simply lock in a catastrophic loss.  Better to just watch closely.

    Zeke, are you suggesting mental stops?  Is it working for you?  It didn’t for me.  I watch aapl dropped from it’s high to it’s lows in jan 2008 and sept 2008.  Thanks!

    Yes, mental stops…more like calendar stops.  I like to sell in December and buy in July, the exact timing depending on price goals I keep in my head.  It works for me most of the time.  I’m about 3500% ahead over the last 5 years.

         
  • Posted: 09 May 2009 02:07 AM #15

    Many good replies here.  Two additional thoughts.

    1) When using Puts or Calls to hedge, one must take into account what the options guys call Implied Volatility.  It fluctuates a lot.  When it is low I tend to favor buying puts; when it is high I tend to favor selling calls.  For example volatility for at-the-money options right now for AAPL is about 39.  This is lower than it has been running for the last many months.  So buying puts is more favorable now than it has been.  There was a while there when IV consistently ran over 60, making selling calls a higher probability play.

    2) You don’t have to hedge AAPL with AAPL.  You can hedge it with SPX or NDX or whatever.  I used puts on both of these from autumn of 2007 until late summer of ‘09 when the IV just go too high for my liking.  Another way to do it is to short some other tech stock.  Someone here (is it DT?) likes to hedge his AAPL by shorting Dell.  RIMM would be another way to do it; RIMM has a higher Beta than AAPL, so in a downdraft it might fall more.

    The problem with all hedges is that they almost always reduce your profits in an up market with the possible exception of out-of-the-money calls writing.