Friday, January 7, 2011

Making Money With Options

Yesterday we learned that talks between the Astros and Yankees about Jeff Keppinger didn't get very far. The 30-year-old utility player appeared to be a fine fit for a team in need of bench help, but New York could instead turn to rookie Eduardo Nunez to fill the role. That, however, seems like a Plan B more than anything right now.

If the Yankees want to sift through other options on the open market they'll find that there isn't much left to choose from. Former Yankee prospect  Cristian Guzman is still available after posting a less-than-stellar .648 OPS with the Nationals and Rangers. Despite a solid body of work throughout his career, Julio Lugo disappointed in Baltimore last season, hitting .249/.298/.282 in 93 games. Both players offer average defense at shortstop (-0.2 and -0.4 career UZR/150, respectively) but Lugo has more experience playing second base. Those two are essentially the cream of the free agent utility infielder crop.

The Yankees have had trouble signing bench players in recent years in part because no free agent in their right mind would join the Yanks only to sit on the bench behind their impressive cast of regulars. They've had to trade for bench help as a result, grabbing the likes of Wilson Betemit, Jerry Hairston Jr., Eric Hinske, and Austin Kearns at the deadline in recent years. John Hickey of Sportspress Northwest writes that the Mariners need to make a deal if they hope to free up spending cash this winter, so perhaps a deal involving Jack Wilson and the $5MM left on his contract deal could make sense for both sides. 

GM Brian Cashman has started each of the last two seasons with young gloveman Ramiro Pena on his bench, so the team could go with him again if they feel Nunez needs more minor league seasoning. The Yankees have money to spend after missing out on Cliff Lee, but quality reserve players are tough to find these days. Overpaying for bench players is a good way to waste money, so don't be surprised if New York starts the season with Pena before making yet another in-season trade. What do MLBTR's readers think the Yankees will do with their bench during before Spring Training?

Mike Axisa contributed to this post.

My guest on Hedge Fund Radio this week is penny stock trader and Internet entrepreneur, Tim Sykes. Every once in a while I run into a natural born trader, someone who crawls out of the crib quoting options spreads, price earnings multiples, and book values. His first spoken word was “Sell!” While other kids were practicing their ABC’s, Tim was pouring through prospectii.

During his college years, Tim skipped classes and turned a $12,415 Bar Mitzvah gift into $1.65 million by trading the market from his dorm room. By the time he graduated from Tulane in 2003, he was already running his own hedge fund. Barclays Bank rated it the number one short bias fund during 2003-2006.

Tim argues that if you cut through all the hype and manipulation in the penny stock market, it is clear that there are huge opportunities on the short side. Most of the companies trading there are frauds, and most will fail. Mini Enron’s and mini Madoff’s abound.

Defined as trading under $5 a share, these stocks are purchased mostly by individuals desperate for “get rich quick” success. Promoters buy lists of email addresses from major online publishers, sometimes paying millions of dollars, to launch a never ending onslaught of “pump and dump” schemes. Email barrages and Twitter spam have replaced the dinnertime telemarketing calls and junk mail of yore.

The SEC is so inundated with tips on Madoff copycats and competitors ratting out each other, they don’t have time to pursue gripes about $1,000 losses emanating from penny stock scams. It’s like expecting the FBI to pursue shoplifters of 99 cent items from Seven Eleven stores.

Some of the claims made by these bogus IPO’s boggle the imagination. Tim’s favorite was one company’s efforts to promote vitamins infused with stem cells. Another offered a solar spray that turned you house into an energy source. Then there was the BP Gulf oil spill that threw up innumerable crude eating forms of algae. As for my own experience, I’ll never forget the aquaculture farm in the middle of the Saudi Arabian desert. To separate out the obvious rip offs from the legitimate companies, Tim spends hours a day gleaning through voluminous SEC filings, some of which are blatant cut and paste jobs from earlier failed floatations.

Even though most of these companies are fake, prices can run away to the upside, wiping out the early short sellers. So some risk control discipline is required. When a stock truly rockets, “buy-ins” of shorts can also be a problem. A few hundred penny stocks are launched each year, but only about five a month catch on fire. And remember, Apple (AAPL), and True Religion (TRLG) jeans were once penny stocks.

To avoid being taken to the cleaners by unscrupulous con men, Tim offers some very basic advice. If it is too good to be true, it generally is. It also helps to read the SEC filings, which can be obtained online for free.

Tim claims to have a success rate with his short strategy of 75%, which has delivered a 56% return in 2010, proving he still has the golden touch. His problem is that the strategy is not scalable, and can only be executed with a small amount of money. No mega hedge fund for him.

That’s why Tim has turned to online education instead of ramping up a big hedge fund. Today, he is offering several subscription newsletters, trade alerts, chat rooms, along with a DVD course on making money in the penny stock market at his website at . 

To listen to my highly informative and entertaining interview with Time Sykes on Hedge Fund Radio, please click here at .

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

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