Tuesday Tidbits

I've got a few things I've been meaning to comment on that I'm finally getting to today.

First up is this article from a few days ago about covered call writing in the WSJ. It would be worthwhile to read the comments too. I don't think it paid enough attention to the downside of the strategy. Basically when you sell a call you cap your upside but are still exposed to all of the downside, more specifically downside minus call premium taken in.

A good example could be with Murphy Oil (MUR). The stock closed yesterday at $59.10. A call 10% out of the money, so a call struck at $65, with a July expiration was bid at $2.75. I don't know if that was a good price to sell options because only two contracts traded yesterday but can we just say that it was? So how much downside protection is $2.75 for this stock?

The focus here not poor stock picking but if the market dropped a lot which after a sixty whatever percent rally is far from impossible. If the stock dropped to $50 then the premium might turn out to be decent protection. However if you researched the stock before buying then you aren't really worried about $9 dollars for the name. The stock peaked on July 1, 2008 just over $100. It bottomed out November 19, 2008 at $43.58. That 57% drop happened as the S&P 500 was dropping a little over 30%.

While I am sure the premium for the $110 call back when the stock was at its high was bigger than it was yesterday for the July $65 it would not have helped much in the face of a $57 decline. That it fell that much does not make it a bad stock. It is a volatile energy name. If the stock market fell 30% over the next four or five months I am sure Murphy would drop more just as it went up more than the market for the first eleven months of 2009.

Selling covered calls has a lot of devotees and you know their argument, and of course stop orders can be used on the stocks or any other exit strategy but any implication (and people think this) that you can buy a stock take in a handful of percent from a call and be spared in a pukedown is woefully misguided.

On a related note I spoke to the manager of the Collar Fund (COLLX) yesterday. I wrote about this fund the other day. The general idea is that it buys stocks, sells calls and buys puts to reduce the volatility. The track record has been to reduce it a lot, to the point of perhaps being more of an alternative strategy--an idea that the manager agreed with. I think I'm going to write an article about fund for theStreet about the fund. Stay tuned.

The Business Insider had an amusing post called 12 Places To Go If The World Goes To Hell. The choices included Chiang Mai, Thailand where Marc Faber lives, Denver because the ocean will never reach that far, to Tristan da Cunha which is an island chain with only 271 inhabitants because no matter what you'll always be able to fish.

While the post is tongue and cheek the US appears to be on a path to seeing more Americans leave. I read something recently (apologies no link) that said Americans are leaving the country at a growing rate but obviously the numbers are quite small. Ex-pats still get a social security check but if healthcare isn't "the best" anymore and it turns out we end up with a price inflation problem then people will leave.

To repeat myself I find the topic intellectually interesting but would have a difficult time leaving I think and besides if you came to Walker you might think it is a different country (insert kneeslap).

I stumbled across this article ages ago called New Zealand Set For Oil Bonanza. The article quotes a "leading US money manager" who is bullish about oil prospects for NZ. There are comparisons to Norway before oil was discovered in the North Sea. Clearly New Zealand would benefit financially from a huge oil find as would any location that does not now produce a lot of oil. The article seemed to be quite lean on facts but I might be overly skeptical. I will defer to late friend and blogger Greg Newton, a kiwi, who said there is no oil in New Zealand.

Yesterday there was an article in the WSJ about Syria as an investment destination. According to the article there is a stock market there but there are very few stocks and the market is only open ten hours a week. This sort of thing needs to be understood in the proper context similar to what I've talked about before with Kazakhstan and Iran. At some point they might be very viable investment destinations. This article about Syria tells of the need for infrastructure investments, like most countries, and provides a little bit of an introduction.

The article is an introduction to a country that has a lot of obstacles in front of it. There's still a little while to go with this, it's not like anyone has filed for a Syria ETF.