Sold my Western Digital put and reduced positions

I sold last week the strike 20 2013 WDC put for 299. I had bought it a month or so earlier for 260, I just could not get comfy enough with the idea that for that put to make money the stock would have to drop down fast, specially given how incredible resistant the stock has reacted to the Thailand flood news. I was in a sense fortunate to sell it since I could buy it back now for close to 220 but I do not think I want to do that for the moment. The company is definitely the market leader and has a great management, but it was hit by very bad luck and that should affect the share price, it will be OK in the long term, but it will likely have some serious issues before.

That put was financed by selling a strike 35 call, making a collar around 20 and 35 to protect my WDC shares against the flood situation. Now that I sold the put I am positioned with a covered call. Which is OK since I really would not mind selling at 38.

I am quite positive on the long term recovery of WDC but not before it goes down. For that same reason I also reduced my positions and sold yesterday 20 shares, keeping 100. I had bought the 20 shares before the flood and they were trading surprisingly at higher prices than when I bought… Until now the market does not seem to realize how bad the flood consequences will be, actually the stock is trading quite higher than before the flood, and now there are more bad news, like a half a billion payment owned to the main competitor Seagate due to litigation and forced asset sales, at a very bad market time. This is ruled by the European anti-monopoly commission, in order to be able to realize the Hitachi acquisition.

As soon as its quarterly results are shown or when the market realizes that the current situation is quite bad the stock should fall, by then I will maybe either buy more stocks or short some puts (or maybe do nothing). I am quite convinced though that the stock fall will happen because I have been trading this stock very successfully since 2007 and it has always been very influenced by short term developments: negative results will kick down the stock for sure.

Given my expectations of more downside due to the flood damages I do not want to start adding more positions yet, and I will only do it only at much lower price if the opportunity arises, and if I do not have better things to do, probably closer to 20 price level, certainly not close to 30 as it is now.

Cheers!
jrv

SLD 1 WDC JAN 18 ’13 20 Put Option 2.99 USD CBOE NOV 25 14:55:00 1.03
SLD 20 WDC Stock 27.61 USD ISLAND NOV 29 12:53:19 1.00

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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2 Responses to Sold my Western Digital put and reduced positions

  1. The Borg says:

    Have you changed your mind on WDC since Friday’s gap up?

    Would writing a naked Dec 34 call for 0.45 or a Dec 35 call for 0.30 make sense?

    The Borg

  2. jrv says:

    Hi TheBorg,

    Not really changed my mind, I am actually pleasantly surprised that I was wrong and that it went up since I have 100 shares and a covered call. But I think the risk for it to go down is too big so I definitely would not add more at this levels. I think also that they are surviving on inventory and due to the higher prices. But next quarter it will be harder, they will then suffer the real impact of the flood. I also have my doubts they will manage to clean up the machines that build their hard drives as fast as they imply on their last communication. Those machines were and several still are underwater and I do not think the damage is small or that it can be dried up and fixed in a couple of weeks as people seem to think, I think that the risk of permanent damage is big and I do not know how fast damaged machines can be ordered and replaced. Also I consider that their Hitachi acquisition was unnecessary and way too expensive.

    So overall I am happy it went up, but I would definitely not add more, actually if it goes up or if time enough time passes and it remains at this levels or higher I will even buy a put, strike 30 or 35, 2013, like that I will establish a very tight collar (that will be financed by the call I sold) and forget about this position.

    I do not think that it makes sense to sell a Dec 35 call (or 34), this is an extremely manipulated and volatile stock, it can go up or down very fast, I would maybe do it if I had the shares and would not mind selling them at that price but just naked selling, now, I find it too risky.

    Cheers!
    jrv

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