Get Paid for Agreeing to Buy Discounted Stocks I want

      Before jumping to this topic, let me just say that there may a great opportunity around the corner. Euro to me is a doomed currency and I'd like to bet that it may not be alive within 10 years. I made thousands of dollars early this year by shorting Euro (betting devaluation of Euro) and got out of the trade right at the bottom of it in Jun. I'm excited to see Euro is fighting back and appreciating substantially against US$. I think it is still a bit early but very close to its top again. When the time comes, it would be a great opportunity to short it again. Will let you know. Now back to the today's topic.

      If I ask you: which price you want to pay for a stock, at $50 or at $40, you may think what a stupid question I'm asking. If I ask again: how about another 12% discount to pay the stock at $35, you would think this guy looks like has lost his mind to even think about such a stupid question. If I ask further: how about you get paid to wait for the chance to buy the above stock with the discounts indicated above, you will certainly think this guy must be insane now without knowing what he is asking! But wait. I'm still mentally sane and it is indeed a legitimate way to invest. Let's see a real example. For my friends working in the pharma industry, many of you must know Genzyme, a Boston biotech company. It is famous for its medications for rare genetic diseases. About 2 years ago Genzyme got a big trouble due to a contamination issue in the manufacturing process. They had to recall some key products which significantly hurt its bottom line. The stock price has since dropped from $80 to around $50 early this year. This has really got my attention. Heck, Genzyme is a fundamentally very sound company with products which have very little competition due to their orphan drug status. Manufacturing problems are not deadly ones, which can be fixed eventually. To me, if the stock drops below $50, it is a good discount and I'd be happy to buy and hold. So I made the following trade. It is called Sell Put, an option trade.

GENZ Jan 21'12 $40 Put		$0.50					-10		$5.10			$4,582.33*			89.54%*

     Given that many friends may not be familiar with option, which requires some understanding of the underlying concepts, let me first explain what a put selling means with this real example. I will later post more on the technical details of option trading. For now, simply remember buying "Call" options means betting a stock price will increase (Call up) and buying "Put" options means betting a stock price will decrease (Put down). Therefore in contrast, selling call options means to bet a price decline and selling put options means to bet a price increase. In this case, I sold 10 contracts (1000 shares) of put option of GENZ for a strike price at $40 with a date of Jan 21, 2012. What it means is that, if GENZ price drops below $40 on the date of Jan 21, 2012, I will have the obligation to buy GENZ 1000 shares at $40. For this obligation, I'm immediately getting paid with $5.10 per share (ie $5100 for 10 contracts). If the price is above $40 on 21-Jan-2012, the option expires worthless and I'm off the hook completely and I keep the whole $5100 hard cash in my pocket. Of course, I can also get out of this trade (obligation) at any time before expiry (either with a loss or with a reduced profit depending on the stock market price). The beauty of such trading is that I don't use my cash upfront (but need 20% fund as collateral); rather immediately take in (paid) $5100 deposited in my account. Remember my 3 questions at the beginning? When GENZ was around $50, I wanted to buy it at $40 or below. Since I got paid with $5.1 per share, I would actually just pay about $35 per share ($40-$5.1), a 12% further discount, if I ever have to buy. For me agreeing to wait for the chance to buy at such discounted price within the next 18 months (up to Jan 2012), people are willing to pay me for the chance at $5.1 per share. Do you still think I'm a dummy and insane? A note of the position status. Since Sanofi is trying to buy Genzyme (a happy surprise for me), GENZ is currently traded at around $70, meaning less and less chance that it will drop below $40. Therefore, its put price is around $ 0.5 now. In other words, if I want to totally get out of this trade, I can buy back the put option at $0.5 per share (pay $500 for 10 contracts) to close the position, with a $4500 profit. Not a bad trade for about 6 months without using my own money upfront. I guess you will agree with me now that you probably don't every want to buy any stock outright at its market price, if selling put is possible for the stock. I certainly don't!

      I'm telling you this trade now because there may be a great chance in about a month or so for the Merck stock. Merck is currently being sued by J&J and the ruling may be come in about a month. If Merck fails, it may lose its main product, Remicade, a $2-3 billion blockbuster. If this really happens, I think Merck stock may get a hair cut. If it drops around $30, I think it will be a great buy and I will be looking at a trade to get paid for agreeing to buy Merck at a price much less than $30. My fingers-crossed!

Trading Market Panic NOW

Dear Friends,
This is my first blog. So a bit of my self introduction first. I'm a physician by training but I love finance. I started my investment career 15 years ago. Initially in the first few years, my investment results were great as everyone knows what the market looked like before 2000. My portfolio contained a full list of high tech stocks and the value of my portfolio kept increasing almost on a daily basis. Then all of you can guess what was the next: The market came to a full stop and crashed almost overnight around 2000. Same as every amateur investor, I hopelessly held my stock positions, begging the market would come back quickly. Of course it was just a mirage. I lost a fortune and sold my stocks at the bottom of the market. Retrospectively, I could have easily been a millionaire if I simply knew when to get into the market, when to take profits and when to stop loss. Rather I did exactly the opposite. What was the root cause? My ignorance of trading and investment! Understanding of this, I started my intensive and extensive self studies. I've spent all my extra time as far as I can to learn, to absorb, and to practice about investment and trading. After 15 years of accumulation of knowledge and experience, I'm very confident that I'm on my way to prosperity. I have many friends who don't know investment very well but would like to learn. Encouraged by their eagerness to learn, I start this blog to share my knowledge and thoughts about the market and investment ideas. Please note, investment and trading is not science but an art. Not only one needs to be armed with knowledge and experience, one also needs a lot of patience and discipline. With this in mind, here is my first idea.

What am I seeing now about the market?  Extreme bullish and complacent! What does that mean? It means almost everyone thinks it is good time to buy stocks and the market will continue to rally. The major stock averages are up about 9-10% since September began. That's a huge rally for such a short period of time.The American Association of Individual Investors (AAII) conducts a market sentiment survey regularly. The extreme bullish level of the sentiment survey is 45% or above. We have stepped into that excessively bullish territory. Over years I have learned that when everyone stands on one side of a boat, it will capsize eventually. It is important to be contrary in investment. Of course my investment/trading decisions are not purely based on sentiment. I also study some technical indicators and charting analysis. Putting everything together, I think the market is at a very dangerous point of crashing, at least a short but severe correction. I'm maybe early but I think it is very close and I'd like to bet on it. So how to trade this market? I'm trading Market Panic. There is an index called VIX, which tracks market volatility. It increases when the market is panic and down and decreases when the market is up and calm. When VIX is at 20 or below, it is at extremely calm territory and almost always snaps back, meaning panic comes back along with the market down. We are at the this level now and VIX is 22.6 today. We can trade VIX with an ETF fund, symbol VXX. It increases with VIX when the market becomes panic and down when the market is up. There are several ways to trade VIX:
(1) Simply buy VXX at current level. It is $16.6 at today's close (Sep 28, 2010)
(2) Buy call option: I like long term options (called LEAP). For tracking purpose, I'd buy Jan 2010 $10 call option, symbol VXX120121C00010000. Today's price is $7.8 per share.
(3) The best way and lowest risk is to sell put option. Again, I would sell Jan 2010 $15 put option at $3.46 (VXX120121P00015000). You will get paid upfront with $3.46 per share.

I know for many of you, option is a mystery and sounds risky. Actually if you know how to trade options, it can be very safe with minimal risk but maximal return. I don't have time to go into details about options, which will be the subjects of my future blogs. I just wanted to get these ideas out first and we can track them over next weeks and months to see if trading panic is a good idea now. Thanks for your patience and interest.