Reduced Applied Materials

I keep on fine tuning my portfolio, concentrating on my riskiest positions and cash management. I just sold 3 strike 10 Jan 2014 calls. I had bought them in mid May at 1.92 when the stock was slightly under 11 and sold them today at 1.98 when the stock was at 11.43. As you can see time decay works against calls.

When I started investing in Applied Materials (AMAT) I started to buy options soon. With Dell the difference was that I bought options after after having bought a substantial amount of stocks. When Dell kept falling I felt confident to leverage with cheaper options and therefore added near the stock lows. The advantage in the Amat case is that since I started with options which had 18 months of lifetime as the stock kept falling the options hardly decayed. Lower prices gave me the confidence to add a reasonable amount of stocks near the bottom levels. Now that the stock position is reasonable and that there are more attractive calls available I prefer to get rid of them. I also sold for similar reasons the riskiest strike 10 Dell calls initially bought while keeping the strike 7 and 8 ones bought at lower stock levels.

Call options often require dynamic activity, time is against you and you should therefore closely watch them and sell or exchange them for other options or stocks if convenient. In my case I base my option buying decisions on the company fundamentals. I basically only buy them when I consider the company to be very undervalued and when I already have stocks, or plan to have them. Examples of call options that worked out good are the ones I bought with United States Gypsum (USG, construction materials) and Western Digital (WDC, computer hard drives). I did it only when I was very sure that the stock and options were extremely undervalued. Recent examples are the Dell and Intel calls I just bought.

Like Philip Carret, one of the reasons I like to have cash on the sidelines is for those very special occasions when options get cheap. Carret, a very interesting guy and outstanding investor, was also special in the sense that he introduced me with the Austrian Economists way of thinking. I’m very grateful to him for that.

This act increases the future possibilities of buying more if the stock falls. It reduces the total amount of investments in technology and increases my cash percentage. It also gives the chance to exchange them with other calls, like for example further away strike 8 Jan 2015 calls, the advantage is that they have a smaller prime value and are more than 24 months away. The disadvantage is that if the stock falls under 8 I could lose more than with the strike 10s. But since I think that the company is fundamentally very sound and its stock price quite reasonable I do not care much about that disadvantage.


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 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 Reduced Applied Materials

  1. Amir says:

    Hi jrv,
    thank you for the blog and for your intresting posts.
    ok, i know that the stock is cheap but how do you know that the options is cheap too?
    you used black and scholes ?

  2. jrv says:

    Hi Amir,

    I do not use Black and Scholes.

    When a stock seems to be cheap I first make sure that the company is fundamentally undervalued.
    Then I choose some call option, generally in the money, and check that the time value is something I feel OK with. If that happens I usually buy stocks but if it seems very cheap and I have enough stocks I might then add calls.

    For example now Intel strike 18 Jan 2015 call is at 3.80. Since the stock is at 20.64 the time value is a bit over 1 (18+3.80-20.64). I believe that in 2 years Intel can go up substantially more than 1. Which is equivalent to say that it can go up quite more than 2.5% / year, therefore I bought the call.

    Actually when I bought, both the stock and the call were quite lower, it was even more interesting.

    Cheers and Merry Xmas !

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