TIB: Today I Bought (and Sold) - An Investors Journal #18 - Oil Drillers, Rubies and SilversteemCreated with Sketch.

in #investing7 years ago

You cannot say that investing is a boring life - it's all about resources today from oil to rubies to silver.

Bought

Pacific Drillers (PACD). I added another small parcel as the share price drifted lower. Basically I will add another parcel, each time the share price comes off 10% until I see the bottom or I decide the holding is large enough. This is part of the theme that I wrote about in TIB12 and TIB10 (see http://mymark.mx/TIB12 for the full rationale) - once oil price moves up, buy the big oil drillers (Transocean (RIG)) and then when they move buy the small oil drillers (PACD)

Mustang Resources (MUS.AX): Mustang operates a new ruby mine in Mozambique. I bought a small parcel of shares in May 2016 at 4 cents a share. The idea came from a free newsletter I subscribe to (http://www.nextsmallcap.com/company/mustang-resources/). Today I saw a market announcement which talked about the first shipment of rubies to the US. Something in the recesses of my mind got me stirring. I do not know what it was but I immediately bought another parcel at 3 cents a share. [I was 37% down at the start of the day]. This is the snippet from the report that grabbed me.

6,221 carats struck me as a big number - for a business that has maybe $1 million in cash. Two stones of 24 carats struck me as a big deal. This is what I had invested for - a steady flow of gem quality rubies from a secure sovereign country (Mozambique is pretty secure). I did some (after the fact) digging to remind myself of why I bought Mustang in the first place - memories start to fill out now.

Mustang is located adjacent to an established ruby producers (Gemfield plc - listed in London) in Northern Mozambique (East Africa for those who do not know geography - we used to have our summer holidays there as kids). Gemfield received an average $317 per carat and cost is $6.19 per carat. This sure is a high margin business. The size of the parcel sold by Mustang came from sampling work - that tells me their field is comparable if this is what they got from sampling.

Ruby prices have been rising driven by the combined forces of improving demand and problematic supply from places like Myanmar and Madagascar. And the big kicker is the high prices demanded by large gem quality stones - two samples

With 2 of this size stones in the first shipment, Mustang is onto a winner. Those stones alone are worth more than the whole company was before trade started today. [Note: Mustang Resources closed at 5 cents a share - a 66% jump on what I paid.]

Expiring Options

Back to work on expiring options.

Transocean (RIG) Bought back January 2017 Call 30 contracts. This was the sold leg of a covered call - a big loss at this contract level (766%).

Before I explain away this loss, I need to describe the strategy of Covered Calls.

A “covered call” is an income-producing strategy where you sell, or “write”, call options against shares of stock you already own.

https://www.tradeking.com/education/options/5-tips-for-writing-covered-calls - this is an excellent article

The idea is to sell call options at a strike price higher than the current stock price for some stock that you own. The hope is that share price moves up but does not do enough to pass the strike price at expiry date. If that happens, you get to keep the premium - it is income. Then you sell another call option at a new strike price and new expiry date. You can keep doing this as long as price does not pass strike price at expiry. Now if price does pass strike price at expiry, you will be required to deliver the stock - and that is the end of that until you find another stock to do it with.

There are some important parts of strategy to get right

  • Choose a stock that is moving ahead in a steady way. If the stock races ahead price will pass the strike price and you will have to deliver the stock and will miss out on the price gain above the strike price
  • Keep the expiry dates close enough (can be a week, or a month or a few months) so you can be confident that price will stay below strike price
  • Choose a strike price that is far enough away so that normal market moves are contained (I like to use 5% for one month away)
  • Write only when implied volatility [means: the pricing for the options implied by the volatility in the underlying share price] is medium to high (i.e., not low)

I will work through an example that was working quite well for me during 2016 - on Daimler Benz. This is what happened - successfully completed 5 winning covered calls with only one loser which I bought back

I bought shares in Daimler Benz - the German carmaker (DAI.DE). I bought the stock because I was confident that demand for cars was going up and that Daimler would be a solid investment. Price had started a good improvement in early 2016 and had pulled back and found some support around €60. I bought at €63.42 in April 2016. (shown by the blue line on the chart below)

The chart shows each sold call. The strike price is in the box, the bottom of the box is the level of the strike price on the chart and the expiry is the next vertical green line. So you can see the first strike price (Call 66) was about 5% higher than my entry price. Winner (shown by the tick mark). Each strike price after that was about 5% above the current price. You will notice that I was quite happy to write calls at strike prices below my initial purchase price [this is not part of the normal strategy]. Why? Because I was confident in holding the stock and would simply buy back any sold calls that expired above strike price. This is what happened on the 4th contract (marked with an X). When I stopped I had made a net income of €127 which is 2% additional income (5% annualised). I stopped as implied volatility was getting low.

Now time to discuss what I was doing at Transocean (RIG). I set this up as a variation on the covered call strategy using options. The variation is instead of buying the stock, one buys an "in the money" call option on the stock. Then one sells call options at a higher strike price. So this is still a covered call as the sold call is covered by the 'in the money" bought call.

Three key things to note

  1. The "in the money" call needs to be as far out in time as you can manage. Same principles apply to owning the stock - you want to hold it, you believe it will move upwards steadily, it is not too volatile.
  2. Expiry on the sold call should be somewhat close in time (same as for a covered call)
  3. If you get exercised, delivery is different because you do not own the stock. You could buy the stock and deliver it. Easiest is to buy back the sold call. You can choose whether to sell the "in the money" call at the same time.

My situation as Transocean combines these two approaches - I was testing out an idea.

I bought the stock at $10.67 and I bought an "in the money" call option (expiry January 2018 strike 10 - the bought call). I sold November 2016 Call 16's for a very good price - the sold call [note: I sold 5 contracts. I could have sold 10 as I had 5 bought calls and 500 shares - 1 contract is for 100 share]. Price did not reach the sold call strike price in November and I pocketed a neat 10.5% return compared to the stock price and 32% compared to the bought call option price.

The next sale was more challenging - strike price was still more than 10% away but premium was a lot lower. That was the warning sign - implied volatility had fallen. Price has since raced ahead and past the strike price. My upside on the covered calls has been capped at the 13 strike price. Facing a January 20 expiry date I have choices

  1. Deliver the stock - that gives away $2 per share plus any further upside from here
  2. Buy back the sold call only - that cost $2.08 less the $0.24 I received on the sale. That would leave the stock in my hand and the "in the money call" which now has $5.09 of value above the strike (called intrinsic value)
  3. Buy back the sold call and sell the "in the money" call. Currently this has an Ask price of $6.15 which is $1.06 higher than the intrinsic value.

I am going with number 2 for now. I will keep the stock as I think there is more upside. I have bought back the sold call for a net cost to me of $1.84. I have put in an offer to sell the "in the money" call for $6.15 which would net me a profit of $2.65 which leaves $0.31 net profit to add to the $1.13 I made on the first cycle. So the income strategy has added 13% income to my stock purchase. It all feels like hard work. Good news is I still have the stock and I could do it all again - if the conditions for success are right.

Currency Trades

I did say I would review currency markets following Janet Yellen's speech on January 18. The markets certainly went back to a more fundamental view of the world.

Silver (XAGUSD): When the US Dollar strengthens gold and silver typically weaken. The chart shows that silver has been making lower lows progressively since July 2016. The momentum indicator (Stochastic in the bottom half of the chart) also shows the regular cycles of overbought (top) going to oversold (bottom). This is the signal I used to go short Silver (i.e., buy US Dollars). There is a warning in this chart - the last high from two days back was higher than the previous cycle high. However, I am prepared to take the trade because this high is testing two horizontal levels that the market has rejected before

Swiss Franc Buy (USDCHF): This pair also showed the oversold to overbought cycles - the trends are a little less comfortable so my trade was made at smaller size - it feels more risky but not risky enough to not make the trade .

Cautions: This is not financial advice. You need to consider your own financial position and take your own advice before you follow any of my ideas. There is a lot of advanced material here - follow it with solid advice from a professional. I do participate in an investing group - some of the ideas flow from there.

Images: I own the rights to use and edit the Buy Sell image. The imagery relating to rubies are copyright Mustard Resources. The ruby prices chart was copied from Mustang Resources materials but is copyright Gemval.com - a paid service. All other images are created using my various trading and charting platforms. They are all my own work

January 19, 2017

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Bought some of these beauties today - rubies. What are the economics of ruby mining? Read this and more in https://t.co/pDI6Izw2Bb @steemit pic.twitter.com/0Nb9jdA7VY

Mark Carrington (go4forexprofits) January 20, 2017

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