Tuesday, May 25, 2010

Personal Trades- Week of May 10th

As pronounced in my recently published third installment of "My Prediction on the Economy & Market," I started to purchase put options against some of the more volatile stocks that I have had on my radar for quite some time.

As cited in May 11th's Bloomberg story posted here on Common-Sense-Investing, the Euro continued to weaken against the dollar after the EU and IMF extended a $1 trillion loan to Greece.  To me, that triggered my instincts to look for a European company that might be dramatically effected by such news.  I knew I already had one in a company that I have loved for over a decade, Central European Distribution Company (CEDC).

CEDC is the largest vodka manufacturer in Poland and Russia, as well as the owner of another large distillery in Hungary.  It is based in the U.S. and started out as purely a distribution company in Poland but has recently delved into production of vodka, looking to increase its margins, while maintaining their already market-leading distribution position in Poland.

I became aware of CEDC in 2000 after doing some market research following a three-month internship in Poland.  I thought of working there someday but hesitated to purchase its stock, after a bad experience in owning micro-cap stocks, which it was at the time with a market valuation of around $100 MM.  For the next decade I kicked myself for not owning it, as the stock price shot up more than 20 times.

In 2008, I jumped at the chance to own the stock after it sunk from $70 to $20.  I later sold it for around $30 and then jumped back in when it fell back to $20; however, I sold it that same day after Congress failed to pass TARP the first time around.  I watched as my favorite little-known stock fell all the way to $6/share in March 2009.  I listened to their quarterly call, which was ironically held around that time, and thought to purchase a small amount of it, remembering my plan to average cost purchase the shares, but instead hesitated.  The stock jumped past $12 within days, and I hesitated the purchase the stock, knowing that the economic downturn was not over but overlooking the effect of government inflation.  CEDC rose to over $40 most recently and remains one of my favorite long-term ideas.

I have maintained my knowledge of Polish knowledge since the days of 2000 and know that as Germany and Western Europe goes, so does Poland.  Knowing that the Euro was going to continue to collapse after reading the Bloomberg article on May 10th, I jumped at the chance to buy put options on volatile CEDC, which had fell more than 15% two days prior due to a lowered outlook, then the next day rose 15% on news of the bailout.

I purchased 3 June $25 puts at $0.45 on May 10th without hesitation-- the stock was trading at $30, up from $26 the previous day-- not understanding why the market had priced them so cheaply, especially in light of the falling Euro.  The options, which expire on June 25th last traded at $2.00.

In hindsight, I should have purchased many more options given the price, coupled with the news of the falling Euro, but I also understood just how quickly one could also lose money in options and hesitated.  A lessen I hope to overcome the next time I see a steal.

On May 13th I read Whole Foods' conference call on Seeking Alpha and noted the companies exceedingly optimistic outlook for the remainder of the year and 2011.  Knowing that the firm's sales had fallen dramatically during the latest recession, I knew that their comparable numbers, as also noted by management, were exceedingly low.  I was stunned at the level of optimism of management and saw that the stock had been upgraded and was at a 52-week high (with an equally high P/E to boot) on the same day as a falling market, and checked out their options.  I liked what I saw, even though the options were close to their expiration date.

I purchased 10 May $40 puts at $0.15, believing that the stock would fall along with the stock market out of fear of the collapsing Euro.  WFMI was trading at $42.50 at the time, meaning that the market had discounted the stock's volatility by a ridiculous margin.  I sold 5 options at $0.65 the next day and 2 at $1.00 on May 21st.  I allowed the remaining 3 options to exercise and now hold 300 shares of WFMI short.  The stock closed at $39.24 on May 21st.

I continue to have conviction that the stock market will fall for the foreseeable future, acknowledging that it will ebb and flow like all markets do.  Therefore, I will remain cautious on short-term options and will continue to look for cheap, long-term put option contracts in which I can invest a significant amount of my portfolio.  I have total conviction in my long-term outlook for the economy and plan on making money this time around after not being prepared the last time.

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