Don’t get me wrong. I love Sallie Mae.
Obviously, no one really loves Sallie Mae if they are their student loan processor, but I’m well beyond that stage of my life and fortunately my kids didn’t need to go that route.
But you have to love Sallie Mae if you’re a trader. Even investors have to admire Sallie Mae, although the ride from $6 to $10 was bumpy, as it was from $12 to $14.
I have to credit Jim Cramer for first putting Sallie on my radar screen a few years ago. That was when Sallie was at about $6, recently up from about $3. Even with that kind of move, Cramer was convinced that Sallie was going higher.
You could have made your career on that gutsy call alone.
At that time, there was widespread belief that the Obama administration was going to dismantle Sallie Mae, so a trade in it was fraught with risk. Since I don’t like risk and donâ€™t like to speculate, I’m still amazed that this one caught my interest.
Remember cousins Freddie Mac and Fannie Mae?
The upside, though, especially if you were a covered call trader, was considerable. In those days, Sallie’s volatility was high, but the share price always seemed to revert to a slowly increasing mean.
On top of that, the options premiums were in the 6-10% range for the near term strike and money price.
I had not owned shares for about 2 months, but then repurchased for the March 2011 options cycle, as Sallie kept testing the $15 mark, I was always happy when the cycle ended below $15.
Even though the options premium in the lower volatility environment was now in the 3-4% range, still not a bad monthly return.
On Monday I sold May $15 options and then bought them back on Wednesday, as Sallie fell prior to its earnings announcement.
So what happens?
Sallie announces earnings 25% less than itâ€™s comparison quarter.
Bad news, right?
Oh, it also announced a pitifully small $300 million stock buyback.
And you guessed it. The stock surges by about 17%
Now I’m not complaining, because that gave the opportunity to sell new call options. even though Sallie now went well beyond $16, I still sold the $15 options, as I expect the price to fall down somewhat. Since my purchase price was about $14.50 and the cost basis now even less by a few months of options premiums, the in the money call option will give penny for penny profits if the stock price falls.
Now all of this happens on a day that GE, which is not the parent corporation of this blog, announces great earnings and another, albeit small, dividend increase.
Again, you guessed it. GE moves down, after a very nice pre-market move, testing $21. Not just down, but below $20.
In the first iteration of this blog, a few years ago, I thought that I had learned not to apply rational thinking to the market’s moves.
Clearly, I haven’t learned that lesson, as I’m still amazed at the irrational reactions.
It canâ€™t be reading between the lines. There has to be something else at work here.
While I can’t complain about Sallie Mae, I can about GE, as I still havenâ€™t had an opportunity to sell call options. As it is, the GE shares are becoming the dreaded “dead money.” Even Microsoft is performing better. At least I can get a decent options premium on those shares, which barely move outside of their tight range.
In the end, does it matter that nothing really makes sense?
Not really, but it’s still very difficult to get a rational mind to think irrationally on a consistent basis.
Fortunately, as I’m getting older, the rational part of my mind seems to be diminishing in its relative strength, being replaced by the need to grow hair out of areas that never had hair before.
When you think of the divine nature theory of the creation of the universe and all creatures, you really have to wonder what was in the grand plan that called for hair to grow from your ears as you got older.
That really doesn’t make sense.
Why couldn’t the creator of the universe rest after creating the need for a rising waistline and a complimentary white belt?
I guess rational thought has never really had a place in the universe.
Sadly, tomorrow is a stock market holiday. I hate those days, with all due respect to dead Presidents, religious celebrants and laborers. It means that I’ll have to actually do something less constructive, but it will give me the opportunity to ponder how I might implement irrational thought processes so that they operate in the background.
But if I did that, they I could never become a talking head or “contributor'” because that would mean that I would correctly be predicting and analyzing the markets.
I wonder what I would say about the price of silver?
Maybe not making sense is really the way of the universe.
Go figure, but do so irrationally.
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Copyright 2011 TheAcsMan