Saturday, April 29, 2006

What was I thinking?

Reviewing my latest post, the summary of the predictions, there is something that I didn't publicly announce, but that I feel I need to disclose in Detail:

When at $42+ AMD started to go down on Conroe/price war fears, I took it as a buying opportunity. And since it kept going down with an impressive stream of good news and only the non-news, non-worrysome Intel developments, I started to invest increasingly aggressive bullish positions, and went as far as to buy some March calls, which went *worthless*, and substantial amounts, like 15% of my whole PF in July calls, that right now are down to less than 50%.

I was sure that AMD was going to beat the estimations, and couldn't find a reason for it to go down on good earnings. Thus, I had a specific moment, the Earnings Report, to speculate in the stock market. When one has precise timing, it is correct to go the route of options if there is a suitable combination of Expiry, Strike Price and Price.

I set up to find such adequate options to gamble. It is important to understand the mathematical theory of options. Time value decays exponentially with time, with the steepest decay the last days of vigency. Thus, you absolutely don't want to hold an option for more than 1/3 the time to expiration from the moment you bought, and in extreme circumstances, up to 1/2. So, if you are fixed on April 12 (AMD earnings) to make a bet on March 12, the proper thing to do is to buy at least June calls, but July would be much better: In case a catastrophe happens, you can sight and assume some losses waiting for another presumably positive jump due to earnings in July, much better than just being below the waterline in June.

Thus, I bought July calls merrily.

AMD reported, beat the expectations by an off-the-chart marging, provided (giving the circumstances) very bullish guidance, but AMD lost another 14%; thus, I screwed it big time with my gamble, because even though the options expire in July, it was for events that will take place this month that I bought them.

By the time the earnings report came, I was already prepared, for an adverse reaction, and fortunately abstained myself of loading more. Although very surprised by the market reaction, I knew that the general principles I described in my last posts still held, thus I followed an adaptation of the plans pointed out, and indeed wrote the covered april calls, with good profits (although I did a preemptive chicken buy-to-close instead of allowing them go worthless).

I was prepared because I understood what was my mistake: AMD became disruptive, thus risky, thus a less desirable investment. If Intel would be today very competitive against AMD, AMD would have flown, because what AMD would be doing is to little by little erode Intel's market. But Intel is in a pathetic situation, it is not that AMD "awoke the giant", it is that the market is already feeling the possibility of an Intel collapse without guarantees about AMD nor AMD intrinsic attractiveness (because it doesn't aspire to be a greedy monopoly but a teeming ecosystem leader).

I should have known better, that AMD could do slightly better than just punching Intel becoming disrruptive.

But "I should have known better" is the lament of all the smart players when they lose with options, anyway.

Still, there is people who doesn't get it, such as Sharikou and AMDACE, who think that AMD should go for the yugular right now just because it has the great chances of succeeding. That would be a catastrophe for all of us who have bullish positions on AMD.


Anonymous said...

"When at $42+ AMD started to go down on Conroe/price war fears, I took it as a buying opportunity. And since it kept going down with an impressive stream of good news and only the non-news, non-worrysome"

That's a congtradiction, Conroe / price war fears and "then non-news, non-worrysome" statement. One has got to be right, obviously the first. If you favour a two horse race and always have a favourite you are bound to lose in the long run if you keep betting with your heart. Best to swap between the two depending on your head.

Eddie said...

No, my friend, it is not a contradiction. The market gave to the price war and Conroe a significance with which I disagree, they weren't news nor something worrysome, despite what the market seemed to think. Since I think I know better than the market in this case, I went the contrarian route and bought.