There is another good article on Apple at The Street.com titled “Apple: Why you should buy the hype“. We found this article interesting as it discusses two aspects of investing that are, not necessarily polar opposites, but could lead to very different decisions. One is what we call as “investment psychology” or investment strategy and the other is raw data. A quick search within this portal will tell you that we have not been shy in pointing out Apple as a great investment in the last several months.

Suffice it to say that we remain long on Apple and believe that the stock will deliver good returns for the next 3 years at the very least. It is one stock that we recommend investors hold on for the long haul. The math is quite simple. Apple continues to innovate and execute in one of the most consistent manner. If one looks at the raw numbers, the price earnings multiple is currently in line with other similar companies. Note that historically Apple has always commanded a slight premium on the P/E multiple. But let us assume that the P/E will remain the same, the EPS (Earnings Per Share) is expected to grow almost at around 50% year after year. That itself translates into a stock price growth of 50% per year. With that potential, we still consider it as one of the best investments out there.

The Euro has been around for only over a decade now and there are already questions as to whether the currency is going to survive or not. The Euro reached a double peak around April – July 2008 and has been on a downward trajectory after that. It is currently trading at around 1.34 to the US Dollar and has a strong support at around 1.30. If it goes below 1.30, then it can go all the way down to 1.20.

We are still not making long term forecasts for the Euro yet. Although the challenges faced by the Euro are quite huge with the biggest problem being the economies of the so called second-tier Euro nations. Germany is undoubtedly the “first among equals” and there is every indication that the Germans will tolerate lesser equals only for so long. On hindsight. the Europeans (especially Germany and France) are realizing that the theory of a single currency is much better than the actual practicality of it.

But the US situation is also not strong. And one has to always remember that the strength of a currency is never measured as a standalone item. It is always measured against another currency. Thus, it will turn out to be a case of who can handle the situation better – the US or the entire Euro zone. In the near term we are banking on the Euro falling further at least below the 1.30 mark. Beyond that, we will have to wait and see how things shape up.

The basic Trading Indicators for Newmont Mining (NYSE: NEM) are giving signals of a downturn in the stock price. Then, of course, there are fundamental reasons for gold and gold mining stocks to be languishing for a bit at this time due to the recent strength of the US Dollar.

We are looking at the NEM chart with the plot for the 10-day and the 50-day moving averages. We see that around middle of December 2009, the 10-day moving average went down and crossed the 50-day moving day average on the way down. That typically is a bearish signal for traders and tells us that the stock price is headed down in the near term.

These are small duration moving averages that we are using. So, typically we wait for the indicators to show proof that it will continue with the trend which NEM has in this case. So, our near-term outlook on NEM is that it will stay under $45 for a few weeks at the least.

Accordingly, we are buying the NEM March 2010 $45 put option contracts to make some gains. Our buy-in price is at a premium of $245 per contract and we hope to reap some rewards soon on this trade.

This is our second trade in NEM. Readers may remember that we made some good gains in NEM put options last October. Lets hope this trade is a profitable one as well.

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We are trading contracts in the Australian Dollar (XDA) put options. This is the AUD (Australian Dollar) against USD (US Dollar) FOREX instrument that is traded in the Philadelphia stock exchange. We are buying put options which means we expect the AUD to fall against the USD.

The AUD has been moving up nicely over the last few months and we have collected our trading gains on the currency. But we do believe the tide is turning a bit especially with the “cooling” plan that China has indicated recently. Our expectation is for the AUD/USD FOREX pair to fall to around 0.8730 first and then potentially go all the way down to 0.8360.

We are buying the March 90.50 puts at a premium of $234 per contract. We expect this trade to be closed sometime in February 2010 for a nice gain in the premium.

Note: Options traders should note that the new options contract naming has gone into effect and every broker may have their own naming convention. My broker’s naming convention is quite easy. For this trade it is XDA100320P90.5 which can be translated to SYMByymmddP90.5 (where P stands for put and 90.5 stands for the strike price).

We will provide update here on how we did with this trade.

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We fail to understand this phenomenon. Search the web on the Apple tablet (presumably going to be announced on January 27, 2010), and at least half the articles will discuss how it is a competitor to the Amazon Kindle. Yesterday I watched the “Fast Money” gang on CNBC discuss the same thing.

If, as traders, we should have learnt something about Apple, is that they do not compete with any existing product in the market. They change the game. When will traders start realizing that Apple has never been a “me too” company. They have been a “top that” company. One has to be bold when predicting or forecasting what Apple is going to do. Only then will one come close to the truth.

Make no mistake about it. We are long on Apple stock as well as options. But we will sell when the bump-up from the news dies down. And we also think our expectations of AAPL stock price moving over $250 after the Tablet announcement is a reasonable expectation. And it will ave nothing to do with the Amazon Kindle.

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We are trading call option contracts in Apple (NASDAQ: AAPL) again. Yes, we know there are those that are saying AAPL is overvalued. Yes, we know there are those that say AAPL has gone up too much too fast. But we are skeptical of these experts. We think Apple is still very much a compelling story and cannot be ignored.

First of all, if one looks at AAPL from March 2009, then yes, it has gone up dramatically (over 100%). But if one looks at the recent bull run over the last several weeks, it has been the Financials that have made the run. Apple stock price has languished. We are looking at three catalysts here:

1.   The impending announcement around the tablet PC. This is a well discussed event, but we feel Apple still has the ability to surprise at this event.

2.  Earnings are coming up and we are again betting for upside to the same and an immediate pop in the stock price.

3.  The rumor mills around the change in their accounting system and policy which in turn is expected to lower their P/E ratio. The accounting folks are still working their pencils on this one but we expect them to come to some consensus soon. And when that happens we expect it to be positive for the stock price.

Accordingly we are buying the AAPL April 2010 $250 call option contracts at a premium of $280 per contract. This is a far out of the money contract. But we have time on our hand. And time will tell.

As the word suggests, trading in the investments world is buying and selling of financial instruments. We differentiate between Trading and Investing by the frequency of the transactions. We define a buy-and-hold strategy as an Investment. Trading, as opposed to that, is buy-and-sell or sell-and-buy. The trading objective is to make quick gains using momentum and knowledge of directional movement as the key factors in making the trading decisions. The typical time frame for closing a trade could be anywhere between a few minutes to a few months.

We use Options as our trading instrument. Options are derivatives of stocks, commodities, currencies, indexes, etc. Basically anything that you can invest in a regulated market such as a stock exchange or a commodities market has options derivatives that one can trade in. We will not go into a detailed definition of options here, but there are several sources on the web where one can get plenty of information on options. Our objective in this note is to highlight why options are a great instrument for short-term trading. And also, why we like short-term trading.

Let us tackle short-term trading first. We believe a straightforward buy-and-hold strategy is a very risky strategy. Our belief has obviously been vindicated with the market turmoil in recent years as well as during the dot-com bust. Investors who had held stock portfolio for years and years had the majority of their gains taken away in a very short span of time. So, at the end many were back to square one. We believe that short-term trading involves risk but, if applied correctly and with discipline, can be a great risk mitigation strategy. Which investment is safe? Even a bank account that cannot even be considered as an investment was not safe for a while. It is only the level of risk that may be different.

We think that people either fall in love with a stock or do not want or have the time to spend doing the necessary research. Those are probably the main reasons why such investors do not look at short-term trading. Our question is why should an investor not sell a stock when there is a very high probability that either the market or the stock price is going to go down? What is the point of holding on thinking we will tackle the roller-coaster ride and then eventually be ok? Why not sell the stock and buy it back when it dips? Sure, one will have some brokerage costs and maybe some tax implications. But they will probably be negligible compared to the cost of weathering the turbulence in the stock price.

So, in a nutshell, our strategy is to act according to the market. When the market is telling you get out, then get out. That is why we are into short-term trading and that is what we cover here. Do not get us wrong. It is not like we do not have or believe in any long-term investments. We do and we think everyone should have some. But we think that to eke out the gains that one can in the market, one has to have a strategy that combines short-term and long-term investments.

Now let us get onto Options Trading. The biggest advantage of options, according to us, is leverage. When we buy one options contract, we are essentially controlling 100 units of the underlying stock (or instrument). That is a huge leverage. Typically, for an “at-the-money” call option, the “delta” will be 1. This means that for every $1 upward movement in the stock price, there will be an equivalent $1 upward movement in the call option premium. Since the call option premium is on a contract consisting 100 units, the $1 value increase in premium translates to a huge percentage increase on the premium. Readers of our articles on trades will know of what we are talking about.

Another reason to trade options is because one can make a play with a known risk. One pays a set amount on the premium to buy an option for a future date and one knows that the maximum loss is the amount paid towards the premium. If the option expires worthless, it is only the premium amount that is lost. As an example, if we think that a stock price is going to go up by about 10% from its current price of say $100; one way to play that would be to buy the stock. However, in order to buy 100 shares of the stock, we would have to make an investment of $10,000. Instead, the 3-month call option for a strike price of $110 may be selling at a premium of $300 per contract. So, our investment to control 100 shares of the stock is only $300. Of course, we would need the stock price to go up to $113 in the 3 months to really break even. But, on the other hand, we may not wait the 3 months and potentially sell the call option contract back in the market at a higher premium assuming that the stock price has moved in the direction we expected it to. Again, readers of our articles will know what we are talking about.

A lot of investors use options to add protection to their investment or to earn some income by selling covered calls. Again, we do not want to go into details here on these strategies but want to highlight that all types and levels of investors can benefit from trading in options.

Any which way you look at it, options trading provides significant opportunities that any investor cannot ignore especially in a volatile market such as we are in.

Today we sold our MGM Mirage (NYSE: MGM) February 2010 $11 call options at a gain of 55% within 8 trading days. This is our first trade close of the new year and we are happy to take a profit. This trade has worked out perfectly for us and exactly as planned. We had purchased the call options at a premium of $55 per contract and have sold it at a premium of $85 per contract today.

We are happy to make a gain of course. But we are also happy because we followed through with our overall trading discipline exactly on this trade. We got into the trade after seeing huge trading volume on the stock. We anticipated the reversal of fortunes (at least short-term) for MGM and decided to make the short term call option play. Now that the stock price has gone up modestly, the value of our call options have also appreciated. So, we did not wait even though there is still some time before the options expire. Tomorrow the momentum may take the stock price higher and perhaps we have left some money at the table. But the important thing is we have booked our profits.

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We are making a FOREX trade against the Euro (EUR) with the expectation that it will drop in the near term. The month of December 2009 has seen a full 180 degree about turn by traders on their expectations for the EUR. From playing for a rise at the beginning of the month, traders now are banking on the EUR to fall as can be seen from the EUR contract transaction data. The situation with Greece is probably the prime reason but the other PIGS nations namely Portugal, Ireland and Spain are helping as well.

However, we are not shorting the EUR against the US Dollar (USD) as we are not sure of the USD direction in the near term. A safer bet is to go with the Japanese Yen (JPY). So, we are shorting (selling) the EUR/JPY currency FOREX pair and looking for it to move down to around the 129 mark. We sold the FOREX play at 131.90. A move down to the 129 level would give us a gain of around 300 pips.

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We are making a Google (NASDAQ: GOOG) call option play on a couple of news items. One is their announcement on Nexus One phone based on their Android OS. The other is our anticipation of good 4th quarter earnings they will announce middle of January. Granted, the Nexus One announcement is probably already baked into the stock price. But we think there is still some room for the stock to run.

There are some good things happening for Google as well. The stock price target recently got upgraded to $810 by FBR. That is quite big given that the stock price has been on a run lately. In the last 1 month the price has gone from around $585 to $625 which is close to a 7% rise.

There is still speculation in the market as to whether the Google phone will cause any dent in the Apple iPhone sales. We agree with the market that it will not. However, the smart-phone market itself is expanding at a rapid pace and that fact alone provides some market to Google. And there are strong predictions for mobile search to take off in the next 1 – 3 years which again spells good for Google. The bottom-line for Google is that it is not a negative to have the phone. And their bread and butter business of search is intact.

We are entering into a short term out-of-the-money trade by buying the February 2010 $700 call options at a premium of $320 per contract. This means that we would need the stock price to go up over 10% to be on-the-money. However, our expectations are for a modest gain of around 50% in the contract premium at which point we will sell the call options and get out of the trade. Our expected holding period on this trade is under 4 weeks.

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