Possible New Trades

Fellow Traders,

OK, I promise this is my last post of the day.  Four in one day is enough.  In this post I want to share a few of the trades I’m considering in the week coming up.

First, is Freeport-McMoRan Copper and Gold (FCX).  It closed Friday at $31.81.  Over the past two years it has bounced off of support at $30 twice.  The JUN $30 puts are at $0.94 bid.  The $29 puts are at $0.69 bid.

Second, is British Petroleum (BP).  It closed Friday at $37.10.  Other than during its Gulf of Mexico crisis a couple of years ago it has exhibited good support at $35.  The $34 put is at $0.40 bid.  My buddy Ed didn’t have much good to say about BP so I’m leary of this one.  However, someone who likes BP might find this to be a good trade.

Last, but certainly not least is Applied Materials (AMAT).  Some of you may recall I traded this one at the beginning of the year.  In that trade when AMAT was at $10.21 I sold the JAN13 $10 puts at $1.57.  One month later I bought to close the puts for $0.75.  AMAT is now back down $10.36.  The JAN13 $10 put is at $1.07 bid.  I like AMAT at $10 or less.  With this trade I make over 10% ROIC if I don’t have the stock put to me.  If I do have the stock put to me at $10, I will own it at a net cost of $8.11 (10 + 1.57 – 0.75 + 1.07).  With an annual dividend of $0.36 and a net cost of $8.11 I would own AMAT with a dividend yield of 4.4%.  I like this trade.

Other stocks I’m keeping my eye on if the market continues lower include: WM, INTC, ADI, GLW, WAG, and MCD.

Regards,

Troy

 

New Trade – SLW

Fellow Traders,

Believe it or not I placed another new trade today.  Hard to believe isn’t it.  My trading had slowed way down.  Primarily for two reasons, (1) I didn’t trust the market, and (2) everything I wanted to trade had run up in price beyond what I was willing to own it at.

So, what changed?  Well, to be honest, nothing really.  I still don’t trust this market and there just isn’t much that I like at these prices.  However, I finally said I have to do something, I can’t keep all of my money in cash, not if I want to reach my retirement goals.  So, I decided to give Ron Groenke’s new trading system a try.  As I mentioned in my post yesterday, Ron has had great success with his new “Show the Trade” algorithms.  Having used Ron’s VISIONS software for the past several years, and having met him personally, I trust that he knows what he is doing.

So, I’m ‘sticking my big toe in the water’ so to speak and seeing if I can replicate Ron’s results in my own trading.  Yesterday, was my first “Show the Trade” trade in Chevron (CVX).  Today, it was Silver Wheaton (SLW) that flashed a buy signal so since I’d successfully traded it before and was comfortable owning it at these prices I decided to give it a go.

Here are the trades I executed.

(1) Bought 200 shares SLW at $30.07

(2) STO 2 MAY $29 puts at $0.64

Here is the one year price chart for SLW.  As you can see it has strong support in the $28-$29 range.

Well, there you are, two trades in two days.  I must be losing my mind (ha ha).  Time will tell if I can replicate Ron’s success.  Have a great weekend.

Regards,

Troy

New Trade – Dividend Superstar – Chevron

Fellow Traders,

I executed a two-part trade in my dividend superstar stock Chevron (CVX) today.  Here are the two trades I executed:

(1) Bought 100 shares CVX at $105.59

(2) STO 1 MAY $105.00 put at $2.02.

Some of you may have immediately noticed that I bought CVX without an accompanying short call position, but that I did sell a put.  Why did I do this?  Well let me tell you.  It’s because this is my first trade using Ron Groenke’s new “Show the Trade” functionality in his VISIONS software.  Ron has developed a mathematical algorithm designed to alert you to when the best possible time is to buy a stock for a quick gain.

Ron’s results in trading these short term buy/sell signals has been outstanding to say the least.  So much so that I decided I needed to try it myself.  I decided my first trial needed to be on a fairly conservative, blue-chip kind of stock.  What better choice than one of my dividend superstars, and more specifically a mega-cap, multi-national company like Chevron.

Below you can find a 1-yr chart of Chevron from Ron’s VISIONS software which shows the buy/sell recommendations from the past year.

Following the previous buy/sell signals for CVX from Ron’s “Show the Trade” algorithm over the past 12 months would have resulted in a gain of 28.44% in 3 trades.  It’s important to note that Ron’s program is not designed to predict every turn up or down in the stock.  It gets you into the trade when it appears the stock is ready to run up but then gets you out after a predetermined gain so you don’t stay in it too long and then end up giving back your gains.  It also gets you out at a predetermined loss if the trade is not going as planned or predicted by the algorithm.

The software generated the buy signal yesterday after the market close.  CVX had closed at $103.85.  The stock opened this morning at $104.00 and never looked back.  By the time I could place my trade during lunch it was over $105.00.  It closed today at $106.22.   The put I sold at $2.02 closed the day at $1.63.

Regards,

Troy

New NP Trade – VXX

Fellow Traders,

I am sticking my big toe into the water and trading NPs on VXX.  The VIX is very low right now and a lot of market indicators are flashing overbought.  Thus, I think we could see increased volatility in the near future.  Increased volatility will drive both the VIX and its proxy VXX higher.  Now, in my opinion is a good time to sell puts on this ETN. Here’s the trade I just made:

Action Quantity                 Symbol                        Unit Price             Principal Amount

Sold           5          VXX 03/17/2012 22.00 P         $0.50                         $250.00

The most recent low for VXX is $23.67.  My strike price of $22 is well under this low.

Regards,

Troy

New Trade – WAG

Fellow Traders,

On Friday, I executed a new NP trade in one of my ‘dividend superstars’, Walgreen’s (WAG).   Walgreen Co., together with its subsidiaries, operates a chain of drugstores in the United States. It sells prescription and non-prescription drugs; and general merchandise, which include household products, convenience and fresh foods, personal care, beauty care, candy, photofinishing products, and seasonal items, as well as home medical equipment, contact lens, vitamins and supplements, and other health and wellness solutions. The company offers its products through drugstores, mail, telephone, and online. It also provides specialty pharmacy services; customers infusion therapy services consisting of administration of intravenous medications for cancer treatments, chronic pain, heart failure, and other infections and disorders; and clinical services, such as laboratory monitoring, medication profile review, nutritional assessments, and patient and caregiver education. In addition, it operates Take Care Clinics to treat patients, give prescriptions, and administer immunizations and other vaccines. As of January 4, 2012, Walgreen Co. operated 7,811 drugstores in 50 states, the District of Columbia, and Puerto Rico. The company was founded in 1901 and is based in Deerfield, Illinois.  It currently pays a quarterly dividend of $0.225 ($0.90 per annum).  At Friday’s closing price of $32.63, it currently yields 2.7%.  Walgreen’s has increased its dividend for 36 consectutive years.

Below you’ll find a plethora of financial information about Walgreen’s.

I want to call attention to several pieces of the information.  First, sales have increased every year for the past 10 years.  Net margin, not untypical in retail operations is thin.  However, it is consistently in the 3.5 – 3.8% range.  It dipped slightly during the recession in 2008/9.  Debt/Equity is very manageable and the P/E ratio is well below its 10 year average.  For traders wanting to accumulate a long-term holding in WAG it is important to point out that its dividend payout ratio is a low 27%.  There is ample room for continued growth in the dividend, even if revenue and net income growth were to stagnate for an extended period of time.

Now let’s take a look at the price chart.  I have chosen to show you the 3 year chart so that you can see what happened to the stock during the financial crisis and thus see what might transpire should the sovereign debt situation in Europe blow-up and send the market into a tail-spin.

During the last crisis, on March 9, WAG bottomed out at $21.39.  More recently, on November 23, it hit a 52-wk low of $30.34.  Its 52-wk high occured last March 15 when it hit $47.11.

So, I’m sure inquiring minds want to know why the stock has sold off in the past several months.  The short answer is two words, Express Scripts.  Express Scripts is a pharmacy benefit manager.  Walgreens previously filled a lot of prescriptions for Express Scripts customers.  However, the two companies were unable to agree on new contract terms before the old contract expired at the end of 2011.  Mr. Market fears Walgreen’s will lose a substantial amount of business in its pharmacy department if they lose Express Script’s customers.  I’m of the opinion they may see a temporary decline but that they will eventually figure out a way to continue growing without the benefit of Express Script’s business.  Walgreen has been in business for over 110 years.  During this time there have been many, many BIG changes in the medical industry.  Walgreen’s has adapted and will adapt again.  This confidence in Walgreen’s long-term viability led me to place the following trade:

STO 4 WAG FEB $30 puts at $0.38.

My ROIC, net of commissions, for this trade is 1.18%.  At Friday’s closing price of $32.63 I have down-side protection of 9.22% with 35 days to expiration.  If my puts are ITM at expiration I can choose to either roll them out to either March or April, or I can except assignment.  If I accept assignment I will own 400 shares of WAG with a net cost of $29.62.  My initial dividend yield would then be 3.04%.

Let me know your thoughts or questions by posting a comment below.

Regards,

Troy

New Trade – BBY

Fellow Traders,

I have a new trade, well actually trades, to share with you.  Today I executed the following naked put trades on Best Buy (BBY):

(1) STO 2 JAN $22.50 at $0.56

(2) STO 3 MAR $20 at $0.56

The JAN $22.50 puts give me a 2.49% ROIC with 24 days to expiration, albeit with very little downside protection.  My annualized return on this trade is 37.85%.  The MAR $20 puts give me a 2.80% ROIC with 80 days to expiration.  The annualized return is 12.78% with 13.04% downside protection.  My combined ROIC for both positions is 2.67%.

These are the first trades I’ve executed in my new trading/investment strategy.  First, let me provide a few more details about BBY then I’ll tell you more about the strategy.

Best Buy Co., Inc. operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China.  The company was formerly known as Sound of Music, Inc. and changed its name to Best Buy Co., Inc. in 1983. Best Buy Co., Inc. was founded in 1966 and is headquartered in Richfield, Minnesota.

As you can see in the chart below Best Buy has solid financials.  Like most retailers it has slim net profit margins.  However, it has an outstanding return on equity (ROE), while maintaining a reasonable debt/equity ratio.  It has grown revenue substantially in the last 10 years.  In 2003 it began  paying a modest annual dividend of $0.20/share.  It has raised the dividend every year since.  It’s last quarterly dividend payment was $0.16/share implying an annual rate of $0.64/share.

Other financial information not shown above but worth mentioning are the fact that Best Buy generated $2.16B in levered free cash flow in the past twelve months.  Also, it has more cash in the bank than debt on its balance sheet.

Now, let’s take a look at the price history of Best Buy.  A 3-year price chart is presented below.

As you can see Best Buy is trading very near its 52-wk low of $21.79 which occurred on October 4.  It is also trading at 3-year lows.  That’s what I like most about this trade.  In my mind the downside risk is very low.  This is a key feature in my new trading strategy.

Now, having mentioned that let me briefly describe my new strategy.  My new strategy focuses exclusively on 76 large-cap companies which pay a substantial and growing stream of dividends.  I’ll soon be adding a new page to my web-site containing the names of these 76 companies.  For now, suffice it to say that Best Buy is on the list.

My plan is to only execute trades on these stocks when the price is at multi-year lows.  There are a great number of stocks that have cycled up and down over the past 12 years having essentially gone nowhere.  Anyone following a buy and hold plan has seen very little capital appreciation over the past 12 years.  Any gains received would have come from dividends.

The strategy will be to sell naked puts on the stocks when they are within 10-15% of the bottom of their 12-year range.   Depending on how the stock is acting, if the puts finish ITM I’ll either let the stock be put to me or roll it out a month or two.  I will use the proceeds from the put sales to reduce my overall net cost position in the company.  After accepting assignment I will begin selling OTM covered calls and will begin collecting the quarterly dividends.  I will sell the stock when it approaches multi-year highs OR if I feel I have captured a majority of the gains possible and a better use of my capital is available.

So, now having told you a little bit more about my strategy let me show you why I chose Best Buy as my first trade.  I’ve already told you Best Buy is at 3-year lows; however it get even better than that.  I’ve looked at 12-years of price history for Best Buy.  It is now in the bottom 10% of its price range for the past 12-years.

This chart gives me confidence that my downside risk is limited.  It shows me that over 97% of the time in the past twelve years Best Buy has traded at higher levels than it is now.   Best Buy has fallen over 50% since hitting a high of $48 back in late April of 2010.  It trades at less than 8x trailing earnings.  Everyone thinks the economy is headed for another recession and that holiday sales were weaker than anticipated.  They’re all saying SELL, SELL BEST BUY.  I say, be a contrarion, BUY BEST BUY while it is on sale.

Now, let me conclude by saying Best Buy may indeed have further to fall and that I may not have perfectly timed the bottom.  However, I again refer you back to my Decile chart.  12-years of price history is a long time, over 3000 days.  It has traded at less than $23.58 for only 95 of them.

Regards,

Troy

New Trade – AMAT

Fellow Traders,

I have a new trade to tell you about.  Earlier this afternoon I executed the following:

STO 5 AMAT JAN ’13 $10 puts at $1.57.

I haven’t executed a trade like this in the entire 3 years I have been publishing my blog.  However, I have done similar trades a time or two prior to beginning my blog.

Before I begin discussing why I executed this trade let’s take a moment to get you familiar with Applied Materials (AMAT).  Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic (PV), and related industries worldwide.   It was founded in 1967 and is headquartered in Santa Clara, California.

As you can see from the financial data provided below AMAT operates in a highly cyclical industry.  It is either feast or famine.  Lately, it has been a feast but as we’ll see when we look at the price chart, Mr. Market believes a famine is right around the corner.

The cyclicality of the business is evident in the sales numbers.  Sales were low during the recession in 2002/2003.  They accelerated rapidly coming out of the recession in 2004 and expanded along with the economy until the financial crisis in 2008/2009.  Then it was back off to the races again in 2010.  That has continued into 2011.

You’ll also notice AMAT enjoys fat profit margins when times are good but can fall into negative territory when the economy slows down.  However, AMAT being the well managed company it is plans for the lean times by keeping debt low and cash levels high.  Debt to Equity is a very reasonable 22.00% and cash, net of debt, is $4.29B or $3.27/share.

Now, let’s take a look at the 3-year price chart.

As I mentioned earlier Mr. Market is anticipating a slow-down in the economy and thus is dumping cyclical, high tech companies like AMAT.  In addition, AMAT generates a portion of its revenue from the solar photovoltaic industry, which has been decimated in recent months.  Both of these factors have combined to knock AMAT down from a 52-wk high of $16.93 to the 52-wk low of $9.70 which was hit on October 4.

On the 3-year price chart you can see AMAT hasn’t been this low since March 9, 2009 when it closed at $8.58.  If you take a moment to look at a longer price chart you’ll notice that AMAT prior to March 2009 hadn’t been under $10 since 1998!

So, by now you’ve surely determined one of the primary reasons I like this trade.  AMAT is trading at historic lows!  The risk/reward ratio is solidly in my favor.

Here’s another reason.  Back in 2005 AMAT began paying modest quarterly dividends.  Every year since then they have increased the dividend.  It is now $0.32/year.  Hence, it is currently yielding 3.2%.  Not bad for a cyclical tech stock.  That is on par with MSFT and INTC.  If they continue their recent pattern the dividend will go up again in May 2012.

Last, but not least, another reason I like the trade is of course the size of the premium.  I sold the JAN ’13 $10 puts for $1.57.  My annualized ROIC is 14.51%.  At that rate I am able to double my money every 5 years.  Note also that my net cost if I have the stock put to me next year will be $8.43.  This is below the March 2009 market lows!  And, assuming AMAT continues paying the current dividend of $0.32 my dividend yield would then be 3.80%.

Well, there you have it.  One final point, you may have noticed I only sold 5 contracts.  My strategy here is to sell more if AMAT continues to drop.  I will keep an eye on the premiums for the JUL $8 or $9 strikes.  If, at some point in the year I can sell either of those for a 15% annualized ROIC I will do it.

Regards,

Troy

 

New Trades – T and WM

Fellow Traders,

Yesterday I opened two new NP trades.

(1) STO 3 T DEC $27 Puts at $0.40

(2) STO 4 WM DEC $28 Puts at $0.40

First, let’s look at my trade in AT&T (T).  I’ve traded in and out of T on a couple of different occasions.  I find it attractive at $27 or less.  I sold my puts when T was trading at $27.63.  With this trade I don’t have much down-side protection but in this case that wasn’t important to me.  If I have T put to me at $27 at December expiration I will be in line to receive the $0.43 dividend; T goes ex-dividend on January 6th.  My ROIC is 1.36% (net of commissions) with 23 days to expiration.

I limited the size of my trade to 3 contracts.  If T continues to move lower I will sell additional puts at the $25 and/or $24 strike price.  T has a solid and steadily increasing dividend.  I think it will find support as its yield closes in on 7%.

Next up is Waste Management (WM).  Regular readers may recall that I sold naked puts on WM last month as well.  The puts at the $28 strike price expired worthless.  Thus, with the market selling off again on Wednesday, I took the opportunity to sell the DEC $28 puts for $0.40.  My ROIC, net of commissions, in this trade is 1.34% with 23 days left to expiration.

Looking at the chart above it should be obvious why I like the trade at the $28 strike price.  WM has solid support at $28.  You’ll notice both the T and WM charts are 3-yr charts.  One thing I’m looking at all of my trades these days is where did the stock trade in October 2008 and March 2009.  This gives me some sense of how much down-side risk I might have if either the European or American debt crisis causes the markets to come unglued.

Both my T and WM trades represent my efforts to focus more of my trades in blue-chip, large-cap, dividend achiever types of stocks.   These are stocks that I can feel comfortable owning and establishing long-term positions in.    Once assigned I can collect dividends over time and sell calls against these positions.

Regards,

Troy

New Trades – Part Two

Fellow Traders,

Let’s get right to it.  Yesterday, I told you I recently entered 4 new trades and discussed one of them, Waste Management, with you.  In this post I’m going to tell you about my other three trades, one with Cameco (CCJ) and two with the Royal Bank of Canada (RY).

First, let’s look at Cameco Corporation (CCJ).  Cameco Corporation operates as a uranium producer, supplier of conversion services, and fuel manufacturer.  The company was founded in 1987 and is headquartered in Saskatoon, Canada.  This is not the first time I have traded CCJ.  I sold puts on CCJ back in March of this year.  You can read about that trade here: http://troysmoneytree.wordpress.com/2011/03/24/new-np-trade-ccj/.

Here’s my most recent trade.  On November 9th I sold 5 DEC $16 puts at $0.25.  At the time CCJ was trading at $19.44. Thus the $16 strike gave me 17.7% of DSP.  My ROIC, net of commissions on this trade is 1.43% with 38 days to expiration.  Annualized my return is 13.69%.  This is slightly under the 15% targeted return I referenced in my message yesterday but is still far better than money market or bank CD is paying.

Let’s look at the chart for CCJ and see why this trade caught my eye.

As you can see the price chart for CCJ is similar in many respects to that of WM which we discussed yesterday.  CCJ hit a 52-wk high of $44.81 back in February and then fell precipitously after the earthquake and tsunami in Japan.  Last month it hit bottom with a 52-wk low of $16.68.  It then bounced back up to around $23 before retreating again.  Yesterday, it closed at $19.38.

Here’s why I like this trade.  I think CCJ is oversold due to fallout from the Japanese earthquake.  CCJ mines uranium.  Nuclear power is not going the way of the dodo bird.  It will be around for a long time.  As a matter of fact CCJ is so confident of this it plans to double production by 2018.  If I have CCJ put to me at $16 I will own it below the current 52-wk low and very near the 2008 market lows.  It pays a modest dividend that has been steadily increasing for years.  CCJ currently yields 2%.  At my $16 strike it will have a dividend yield of 2.4%.  Not great, but again higher than short-term bond yields.

Last, but certainly not least, I’d like to tell you about my two recent trades in the Royal Bank of Canada (RY).  I have had my eye on RY for several months now.  RY is a favorite of my friend Teddi over at http://www.fullyinformed.com/.  Teddi has written about RY many times.  One of her most recent postings can be found here: http://www.fullyinformed.com/royal-bank-stock-learn-bear/.

As I mentioned I have entered two separte trades on RY.  First, on November 1st I sold 2 NOV $45 puts at $0.80.  With 18 days to expiration net of commissions my ROIC is 1.68%.  Annualized that comes out to a return of 33.99%.  Then, with the stock continuing to exhibit further weakness, on November 9th I sold 2 DEC $40 puts at $0.75.  My ROIC, net of commissions, on this trade is 1.76% (16.91% annualized).

Looking at the chart you can see why I like these trades.  RY is a blue-chip Canadian bank.  It has fallen significantly due to the sovereign debt crisis in Europe.  However, todate there has been no indication that they have much exposure to this problem.  The stock is trading at 2 year lows.  Does that mean it can’t fall further.  No, certainly not.  During the financial crisis in 2008/2009 it did fall much lower.  However, what is important to note is that it quickly rebounded.

RY is a slightly different trade from my normal NP trades in that I want to own RY long-term.  It pays a large ($2.15 / 4.70%)and increasing dividend.   I would eventually like to own several hundred shares against which I can collect dividends and sell covered calls.  My strategy with RY will be very similar to that of my position in Exelon (EXC).

Well, that’s all I’ve got time for this time around.  I hope you will take time to do your own DD on these trades.  I especially like the WM and RY trades.  You may find them suitable for your trading portfolio as well.

Regards,

Troy

New Trades

Fellow Traders,

I’ve fallen behind in updating you on some of my trades.  So, without further delay I’d like to tell you about a couple trades I made last week and another couple I made earlier this week.

First up is Waste Management (WM).  WM has been on my radar screen for a few weeks now.  I’ve had considerable success in the past selling puts on large-caps which are currently out of favor on Wall Street.  I think WM is a similar opportunity.  Let’s take a look at the price chart and you’ll see what I mean.

After hitting a 52-wk high of almost $40 back on May 2nd WM fell sharply and subsequently hit a 52-wk low of $27.75 on August 9th.  Since then WM has rebounded to as high as $35 before falling back.  Today it closed at $31.16.  Last Tuesday, November 1st, I sold 4 NOV $28 puts at $0.25.  At the time I placed my trade WM was priced at $31.72.

I felt comfortable placing this trade for several reasons.  First, my strike price of $28 was very near the $52 wk low.  Also, its financial crisis low in March of 2009 was $23.26.  Second, WM has a dividend of $1.36 / share.   If I were to have WM put to me at $28 my dividend yield would be 4.86%.  Over the past 5 years WM has increased its dividend by 55%.   Third, my ROIC, net of commissions, is 0.8% with an 18 day holding period and 11.7% DSP.  Annualized my ROIC is 16.23%.

For these kinds of trades I like to have an annualized return greater than 15%.  Why 15%?  Because at 15% you’re doubling your money every 5 years.

OK, I’ve ran out of time tonight before I’ve been able to tell you about my other 3 trades.  I’ll by back tomorrow with another post to tell you about RY (two trades) and CCJ.

Regards,

Troy