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Safely Generating Income in Retirement

Archive for January, 2009

New Round of Calls on December Pick, XLI

Posted by mounddweller on January 21, 2009

All,

I STO Feb 22 (XDLBV) contracts on XLI at $0.70.  My ROIC for this round of calls on XLI is 3.18%.  My total income on this position now totals $1.60/share.  If called away on February 20th, my two month total ROIC will be 7.27%.

Troy

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Trade Executed on XLE

Posted by mounddweller on January 20, 2009

All,

Selling options is such a great way to invest.  No matter what the market does… goes up, down, or sideways there’s always a way to profit.  The big sell-off today gave me a wonderful opportunity to sell XLE puts.  Please recall in my earlier post, , I said I intended to sell the XLE Feb 39 puts (XLENM) for around $0.85.  With the market down sharply today I was able to sell for $1.10.

So let’s look at this trade more closely.  What’s my ROIC?  Well, since I’m trading in a retirement account, I do not have the ability to use margin.   Thus, my broker requires the short position to be covered by cash.  This makes the ROIC calculation very easy.  It is simply $1.10/$39.00 = 2.82%.  Isn’t this great!  I just put more cash in my account than a 10-year treasury note would pay me in a year. 

Why did I choose the $39 strike price?  Two primary reasons.  (1) Quite simply because I felt safe in agreeing to buy XLE at that price.  I think the probability of assignment is low.  XLE closed today at $44.06.  To be assigned XLE will need to drop another 11.48%.  Impossible?  No, certainly not, especially in this market.  (2) The 52-wk low for XLE is $38.80.  If assigned, my net cost will be $37.90.  Thus, if I am assigned I’ll be buying low, and hopefully selling higher via a near month March call.

One final note.  You may notice that with the sell-off today XLE slipped out of the Vision V and now has a TAI value of GR (Get Ready).  Thus, if you are considering this trade, proceed with caution.  I still think it’s a good trade but I don’t want to make a habit of ignoring Ron’s trading parameters.  He has a proven track record of sucess and I hope to emulate his results.

Below are the stat’s and chart for XLE.

01/20
Price
52 Wk
High
52 Wk
Low
50 Day
Average
Buy
Limit
Buy
Rank
TAI Dividend
Yield
 $   44.06  $   91.42  $   38.80  $   43.31  $   51.95 5.99 GR 1.90%
TOP 10 HOLDINGS ( 70.97% OF TOTAL ASSETS)  
 
Company Symbol % Assets
APACHE CP APA 3.07
CHEVRON CORP CVX 15.44
CONOCOPHILLIPS COP 7.71
DEVON ENERGY CP (OK) DVN 3.59
EOG RESOURCES INC EOG 2.69
EXXON MOBIL CP XOM 24.62
OCCIDENTAL PET OXY 4.66
SCHLUMBERGER LTD SLB 4.01
TRANSOCEAN LTD RIG 2.48
XTO ENERGY INC XTO 2.7
EQUITY HOLDINGS  
 
Ratio  
Average Price/Earnings 6.89
Average Price/Book 1.51
Average Price/Sales 0.74
Average Price/Cashflow 4.50

jan-pick-xle-chart

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Potential January Trades

Posted by mounddweller on January 18, 2009

All,

Here are the potential trades I’m considering when the market opens on Tuesday.  

(1) Our position in XLI remains open after our Jan 22 calls expired.  The ETF closed Friday at $21.82.  Thus, I intend to STO the Feb 22 calls (XDLBV) at around $1.05.  

(2) I’m also considering selling naked puts on the SPDR Energy ETF, XLE.  Specifically, I’m looking at selling the Feb 39 puts (XLENM) at around $0.78.

I’ll provide more details on these trades after I’ve entered them on Tuesday.

For those of you interested in additional trades here are some others that look good to me.

(1) Buy XLE around $46.50, STO Feb 44 (XLEBR) at around $4.55.

(2) Buy RSP around $26.70, STO Feb 27 (RSPBP) at around $1.20.

(3) Buy ADI around $19.80, STO Feb 20 (ADIBD) at around $1.20.

(4) MSFT also looks interesting this month.  However, I’d wait until after their earnings announcement later this week.

Regards,

MD

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An Early Pick for January

Posted by mounddweller on January 15, 2009

Guys,

Late last week I ran Ron’s Scout Express search looking for companies with a market cap of > $5B.  The stock that peeked my interest the most was Forest Labs (NYSE: FRX).  It originally caught my eye for two reasons (1) the abnormally large premium remaining on January calls (6 days before expiration), and (2) it is a drug stock…one of my most successful positions this past year has been with another drug stock, KG. 

After doing my customary due-diligence (details provided below) I attempted to sell the January 25 calls.  With the stock trading around $25, the calls were priced to give me around 3% for just a 6 day holding period! 

A very important lesson I’ve learned previously is generally there is a very good reason the market has placed an abnormally high premium on a company’s stock options.  Caveat emptor!   However, after looking over FRX’s chart and fundamentals, I decided to forge ahead.

Unfortunately, I tried to push my luck and sell the calls at more than the bid and didn’t get filled.  Another lesson learned, if you really want into a position…take what the market gives you.  

After not getting filled last week I continued to keep track of FRX.  Today, at the opening bell, I noticed FRX was up $1.48.  The reason?  The company announced it had received approval from the FDA to market a new drug.  I immediately looked at the February calls.  I looked at the 22.5s, 25s, and 27.5s.  After calculating the called and uncalled returns on each, comparing those to Ron’s “Magic Chart” guidelines, and reviewing the last few weeks of pricing action I decided the Feb 25s provided the best “bang for the buck”.

With the market going crazy (read “volatile”) again this morning, I decided to enter a buy/write order with a net debit amount of $23.50.  For those of you who don’t use buy/write orders what this means is I told my broker to simutaneously buy FRX and sell FRXBE for a debit amount of $23.50 or better.  My order filled within a few minutes at the following prices:  Bought FRX at $25.60 and sold FRXBE at $2.10.  My potential returns are as follows:

  • If called away at $25 on February 20th – 5.86%
  • If uncalled – 8.20%

Now, here’s why I think this is a great trade.  Check out the key statistics as found in the Finance section of Yahoo.  First, look at the TTM P/E and the forward P/E, 8.36 and 7.33, respectively.  Can you say CHEAP!  Even better, the forward P/E is less than the TTM P/E indicating analysts expect the company to grow earnings next year.  By the way, management agrees with that assessment as they upped their 2009 earnings guidance back in October.  Not too many companies doing that in this economic environment. 

Next, let’s look at some key ratios.  Profit Margin, Operating Margin, Retrun on Assets and Return on Equity are all outstanding. 

Here’s what convinced me to place the trade though.  It’s the Balance Sheet and the stock chart.  Look at those numbers from the Balance Sheet.  FRX has 25% of it’s market capitalization sitting in cold, hard cash with ZERO long-term debt.  This company has no liquidity concerns.  The current financial crisis is of no concern to them. 

Now, let’s look at the stock chart and while we’re at it some of Ron’s trade parameters.  I like the chart for FRX.  It’s showing a nice uptrend since bottoming with the rest of the market back in late November.  It’s been consistently in the V for quite some time, 35 days to be exact.  And it hasn’t been gyrating wildly.  Another thing I like is the 50-day MA has also started to trend upward.  Further, the current price is less than Ron’s Buy Limit (BL) of $25.81. 

Now, let’s consider the negatives.  There are a couple of things that don’t meet Ron’s criteria.  Both the Buy Rank (BR) and TAI scores are well outside of what Ron considers ideal.   Hopefully the positives I’ve outlined above will out-weigh these two negatives.

VALUATION MEASURES  
 
Market Cap (intraday)5: 7.81B
Enterprise Value (15-Jan-09)3: 5.41B
Trailing P/E (ttm, intraday): 8.36
Forward P/E (fye 31-Mar-10) 1: 7.33
PEG Ratio (5 yr expected): 0.75
Price/Sales (ttm): 1.90
Price/Book (mrq): 1.89
Enterprise Value/Revenue (ttm)3: 1.41
Enterprise Value/EBITDA (ttm)3: 4.416
Profitability
Profit Margin (ttm): 24.97%
Operating Margin (ttm): 29.22%
 
Management Effectiveness
Return on Assets (ttm): 16.08%
Return on Equity (ttm): 26.86%
Balance Sheet
Total Cash (mrq): 1.89B
Total Cash Per Share (mrq): 6.271
Total Debt (mrq): 0
Total Debt/Equity (mrq): N/A
Current Ratio (mrq): 5.007
Book Value Per Share (mrq): 12.824

 

 
 

Ron's Vision V Chart for FRX

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November Pick

Posted by mounddweller on January 14, 2009

All,

Here’s a re-post of  the pertinent information on my November pick, XLU.  Please recall I originally distributed this to the group via email.

“Please recall last week I indicated that it looked to me like XLU was setting up
for a solid entry point over the next few days.  For me that day was Tuesday,
the 25th.   I executed a CC trade on XLU.  This was my first trade using Ron’s
Vision V methodology.  Below are the specifics of my trade:

Bought XLU at $29.15
Sold XLULB (DEC 28s) for $2.15
ROIC if Called at Expiration: 3.43%
ROIC if Not Called: 7.38% ”

Regards,

Troy

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December Pick

Posted by mounddweller on January 14, 2009

Guys,

Below is the information and commentary on my December pick previously distributed by email.   I’m adding it here so all of our information is in one place.

The idea I like best this month is another ETF.  It is another member of the SPDR family; the Industrial Select Sector SPDR (XLI).  I like it for many of the same reasons I liked XLU last month.  First, and foremost I like the chart pattern.  XLI found a bottom in late November and has since reversed course and is trending higher.  Second, it is an ETF full of solid, large-cap companies.  See Exhibit 1A for a list of the top 10 holdings.  Finally, it has favorable values for Ron’s key metrics, like Buy Rank and TAI.  These are listed in Exhibit 1B.  Ron’s Vision V chart is in Exhibit 1C.

Here’s how I’m going to play it.  I’m going to buy XLI at the market and sell the Jan 23 calls, XDLAW.  Using the closing prices from Friday as a guideline here’s my setup:  Buy XLI at $22.58 and sell XDLAW at $0.75 or better.  If assigned this results in a return of 5.18%.  If the calls expire my return will be 3.32%.

NOTE: Please recall after sending this out I slightly modified the parameters of my trade.  Here’s what I said:

“…wanted to let you know I had to adjust the trade parameters this morning on XLI.  Because of the sell-off in the market I sold the Jan 22 calls (XDLAV) instead of the Jan 23s I reference in the attachment.  I was filled on XLI at $21.99 and sold XDLAV at $0.90.

 dec-pick-all-exhibits2

Also, wanted to let you know I did not pull the trigger on the other two picks.  Thus, I will not be including them in my future discussion on portfolio results.  However, as of today (1/13) both would have been good plays.  ACL is trading almost exactly where it was a month ago.  Thus, if I had executed this trade I’d be in a position next week to potentially write another call with a February expiration.   Likewise, if I had written the INTC $12.50 naked puts I most likely would not have been assigned and could have chosen to either write February puts or move on to something else.

Regards,

Troy

 

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Welcome!

Posted by mounddweller on January 13, 2009

Guys,

Happy New Year!

I’ve decided to try something different.  I’ve decided to create this blog for posting my thoughts about using Ron’s Visions software and the covered call and naked puts trades generated from its use.  I’m hopeful that (1) this will be easier than trying to learn how to efficiently and effectively use Microsoft Publisher, and (2) provide a better forum for y’all to respond with your ideas and thoughts.

Unlike most blogs I don’t anticipate having daily entries.  My thought is that at a minimum I’ll post my monthly picks.  I may also post a weekly market commentary focusing on the open positions in my portfolio.  Further, I may occasionally post something during the week if there’s exciting news or if I decide to pull the trigger on a mid-month trade.

Initially, my plan is to keep the blog private.   This should minimize unwanted commentary from folks outside our group.  However, please feel free to distribute the URL within your circle of friends, if you feel they would enjoy participating in our discussion.

Troy

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