FRX Update – part II

Oh the frustration that comes from trading in a volatile market!  As I mentioned yesterday, my objective today was to sell the Mar 22.5 puts to lower my net cost basis.  The good news is I achieved my objective.  I sold Mar 22.5 puts at $0.85.  This lowered my net cost basis to $22.77.  The bad news is FRX continued to sell-off after I sold my puts and closed significantly lower at $21.36.  Now, I’m under water on the 22.5 puts as well.   

What is so frustrating is that I thought I had came close to finding the bottom.  FRX had ran up a couple of time to over $23.00 before lunch.   Then, more bad news came out and sent the stock into it’s afternoon downward spiral.

What the events of the last few days have taught me is that all of us should have a written trading plan.  A key component of this plan is a risk management plan.  Going forward, I’ll be putting mine together and will post it as a page on my blog.  If any of my readers have such a plan and wouldn’t mind sharing it, please feel free to pass it along.

FRX Update

I’ve been trying to sell a new round of calls on my FRX postion for 3 days.  Monday the stock sold off a little bit.  No big deal I thought, the whole market was getting crushed.  Tuesday, a big up day for the market.  I’m thinking, OK this is it.  I should be able to get my price on those Mar 25 calls.  No such luck, FRX trades sideways most of the day and finishes down.  Today, the stock was loosely following the market but consistently giving up ground.  Me, I keep thinking it’ll turn around.  Nope.  Finally around 3:45 I see a news release which explains everything.  The good ol’ federal government has been investigating FRX for fraudulent sales practices.  Now the price decline really gets going. 

So, what to do?  First, acknowledge I screwed up.  I should have taken what the market was offering at the opening bell on Monday.  The school of hard knocks has tried to teach me this lesson before, but hey, I’m a slow learner.  I tend to get greedy thinking I should wait and get just a nickel more.    Mr. Market was willing to give me $1.00 for those options early on Monday.  At the close today they’re going for around $0.45.  Lesson learned, now what?

My plan is as follows.  Since the news came out fairly late in the afternoon.  I’m guessing there will be some residual selling tomorrow morning.  After which I’m hoping the price will stabilize.  At that point I’m going to assess the risk/reward of selling the Mar 22.5 puts.  They closed today at $0.70.  Assuming I am able to sell at $0.70 would reduce the net cost on my original shares to $22.87.   Then, my next steps depend on what happens between now and March 20th. 

—If the stock rebounds, I’ll sell the Mar 25 calls and further reduce my cost basis.

—If the stock closes at < $22.5, I’ll own twice as many shares but my overall cost basis will be around $22.69.

Stay tuned and I’ll let you know how it all turns out.

New February Trade – EWZ

Well, I went and did it.  I sold EWZ Mar 25 puts at $0.65.  Time will tell if I come out looking like a genious or the village idiot.  As I mentioned in earlier posts I originally was interested in either the $26 or $27 puts.  But with the sell-off in the market (again) today the $25 puts caught my eye. 

So why EWZ you ask?  First, some background information for those who might not be familiar with EWZ.  EWZ is the ticker symbol for the iShares MSCI Brazil Fund.  This ETF seeks to provide investment results which approximate the price and yield performance of the MSCI Brazil index.  Consequently, it is full of the largest, most well capitalized companies headquarted in Brazil.  Brazil as many of you already know is a fast growing emerging market and is the ‘B’ in the acronym ‘BRIC’.  So, back to the original question, why EWZ? 

(1) I like the chart.  EWZ bottomed out back on November 20th, closing at $26.64 (intra-day low was $25.55).  Since then it has been range bound hitting $40 no less than 3 times and subsequently falling to around $32.  Prior to today’s debacle it had been in the Groenke V for quite some time.  After the decline today it now has a TAI score of GR, a BR of 6.33 and Gold $ score of 40.  Not exactly stellar, but hey we’re selling puts here that are way out of the money.

(2) I like the risk/reward profile.  First, the risk.   EWZ closed today at $31.95, down $2.50.  To be assigned EWZ must fall another 21% in less than 30 days.  Not impossible, but improbable.  Also, as I mentioned above, the 52-wk low is $26.64.  Our $25 strike price is 6.15% below that; the break-even point is $24.35, 8.6% below the 52-wk low.  What’s the reward?  2.6% ROIC for a holding period of 25 days; an annualized return of 37.96%.

(3) Finally, and probably most important.  If assigned this is an investment I want to own.  EWZ is full of growing companies, trading at very low P/E multiples, and throwing off over 6% in dividends.

Below are the stat’s and chart for EWZ:

2/23 Price	52 Wk High	52 Wk Low	50 Day Average	Buy Limit	Buy Rank	TAI	Dividend Yield
$   31.95	$    102.21	$     26.64	$     35.64	$   43.02	6.33	GR	6.09%

 

TOP 10 HOLDINGS ( 62.21% OF TOTAL ASSETS)

Company Symbol % Assets BRADESCO PFD N1 BBDC4.SA 5.54 ITAU HOLDING PFD N1 ITAU4.SA 5.4 AMBEV PFD AMBV4.SA 3.11 Companhia Siderurgica Nacional N/A 2.15 COMPANHIA VALE ADS RIO 7.05 Gerdau N/A 2.08 PETROBRAS PETR3.SA 11.3 Petroleo Brasileiro Sa Petrobras N/A 12.89 UNIBANCO UTS UBBR11.SA 3.6 VALE R DOC PFD-A N1 VALE5.SA 9.09

EQUITY HOLDINGS

Ratio EWZ Average Price/Earnings 6.98 Average Price/Book 1.36 Average Price/Sales 0.97 Average Price/Cashflow 3.50

 

January Trade Results

Well, none of my positions I entered in January were assigned after the market closed on Friday.  As you’ll recall I entered three positions in January.  First, was selling a second round of calls on my position in the ETF, XLI.  These expired OOM and I now have the opportunity to sell a third round.  I’m not sure what my next trade with XLI will be but I’ll let you know as soon as I pull the trigger. 

Second, I had entered a new position in Forest Labs, FRX.  These also expired OOM and I will be selling a second round of calls after the market opens on Monday.  My intention is to sell the Mar 25s at around $0.85.

Last, but not least you’ll recall I had entered a new position in the energy ETF, XLE.  I sold the Feb 39 puts.  These also expired OOM and I have since written a new round of Mar 39 puts.

The information presented in the Historical Results and Open Positions pages have been updated to reflect these results.

Update on Potential February Trades

Well, weren’t the last 4 days fun?  Not!  As promised, here’s an update on the potential trades I referenced in my earlier post.

Covered Calls

(1) Stryker (SYK) – Well, this one fell much like everything else in the market.  It now has fallen to the bottom of the Groenke V and has a TAI status of GR (get ready), and a Gold $ score of 70.  On the plus side it has a good BR (buy rank) of 5.05 and is well under the BL (buy limit) of $44.03 .   I’m going to keep it on my watch list.  A rally in the market would quickly rekindle my interest in establishing a position in SYK. 

(2) ABB (ABB) – The situation with ABB is similar to Stryker.  The market sell-off has pushed it down and it is now just below the bottom of the Groenke V.  It now has a TAI status of GR and a Gold $ score of 40.  I’ll keep it on my radar screen for a potential CC play in the future.  A more immediate opportunity (albeit with more risk) might be to sell the Mar 10 puts for around $0.25-0.30.  Note: this NP trade wouldn’t meet Ron’s criteria.

(3) Analog Devices (ADI) – This one still remains a viable candidate.  Even with the market setting new lows ADI still remains inside the Groenke V, has a TAI status of TA (take action), and a Gold $ score of 70.  Further, it has a reasonable BR of 3.00 and at $19.30 is under the BL of $20.76.  A couple up days would make this an almost perfect set-up for a successful CC trade.

(4) Activision Blizzard (ATVI) – Activision is much like the first two, SYK and ABB.  It has fallen to the bottom of the Groenke V and is rated GR.

ETF CCs

(1) XLK – It seems I have to  keep repeating myself.  XLK has now fallen below the Groenke V and has a TAI status of GR.  Hopefully the market will turn around soon.

(2) EWZ – I still like EWZ.  It is just inside the bottom leg of the Groenke V, has a TAI status of TA, and a Gold $ score of 70.  It very much is like ADI.  A couple day rally could present a very nice entry point for a CC trade.  Impatient and more aggressive traders might consider selling March NPs as there are several at various strike prices with enticing premiums.

(3) XME – This one has an interesting chart.  Like the others we’ve discussed, it is now outside the bottom leg of the Groenke V and has a TAI status of GR.  What makes XME different and interesting is that it isn’t a sharp price drop that has caused it to drop out of the V.  Rather, it moved outside the bottom leg because it has been moving sideways for so long.   Looking at the available option chains reveals many potential CC and/or NP trades.   This one intriques me, despite not meeting Ron’s criteria.

Well, that’s it.  As you know from my earlier post, I pulled the trigger on my XLE put trade.  So far so good.  Even with the steep sell-off I’m still well north of my $39 strike price.  I’ll be back later this weekend with an update on my January trades and other open positions.

Regards,

Troy

What others are trading – February 2009

I’ve received a request to start a new thread on my blog where we can discuss trades that others are making.  Since one of my primary objectives in starting this blog was to foster discussion about covered call and naked put trading, I’m happy to oblige.

So, here’s how this will work.  Each month I will add a new post entitled “What others are trading”.  Then, y’all record your trades as comments to that post.  Others can follow by commenting on another persons trade or adding their own trades.  I’m looking forward to hearing what everyone else is doing.  I’d like to think no one of us has found the ‘holy grail’ of CC/NP trading but that collectively we can all get better by learning from each other’s successes and mistakes.

Let’s get started!  OK, who’s going to be first?

Early February Trade

Let’s see, what’s that old adage…”strike when the iron is hot” or something like that.  Well, that was me today.  I didn’t waste any time in implementing one of the potential trades I just told you about yesterday.

I took advantage of the sell-off in the market to enter a naked put position on XLE.  It is essentially the same trade I made in XLE last month (which still has 3 days to expiration).   Below are the details:

STO XLE Mar 39 puts (XLEOM) at $1.15

Since I’m selling these puts in an IRA they must be secured by cash.  Thus, my return on invested capital (ROIC) is 2.95%   (1.15/39).  With a holding period of 31 days my annualized return is 34.73%.

Why did I choose XLE?  Even though the TAI is GR (get ready), I still like the chart.  Since October 2008 it has basically traded in a range between $43 – $53 with one or two drops into the high $30s or low $40s.  With the sell-off today we are once again near the bottom of that range.  In my mind, that’s the perfect time to sell puts.

Why did I choose the Mar 39s?  Well, my primary criteria was XLEs 52-wk low at $38.83.  I also considered my goal of achieving a monthly ROIC of at least 2.5%.

So, what is my risk profile on this trade?  First, XLE must fall an additional 10.84% from todays closing price of $43.74 before hitting my $39 strike price.  For comparison purposes this means on March 20th the DJI would need to be around 6733 and the S&P 500 at 703.  Second, if this were to happen and I was assigned, I would then own an interest in some of the world’s largest integrated oil companies like Exxon Mobil, Conoco-Phillips, and Chevron.  I’m not saying oil can’t get cheaper but these companies aren’t going to go out of business.

So having said all that, what do y’all think?  Have I missed something?  Post a comment and let’s get some discussion going.

Potential February Trades

Well, here we are just 4 trading days left before expiration on Friday.  I’ve started looking at potential trades for February.  Who knows what will happen between now and the market close on Friday but here’s what looks interesting to me right now.  These trades are listed in my order of preference based on various fundamental and technical indicators as well as perceived risk.

Covered Calls

(1) Stryker (SYK) – Great Balance Sheet, Recession resistant business, and a very nice looking chart.

(2) ABB Ltd (ABB) – Solid Balance Sheet, and a timely infrastructure play (think “stimulus” package).

(3) Analog Devices (ADI) – Great Balance Sheet, bad news appears to already be priced in.  We’ll find out after market close on Wednesday.

(4) Activision Blizzard (ATVI) – Great Balance Sheet, most aggressive idea.

ETF Covered Calls 

(1) Technology Sector SPDR (XLK) – CSCO, INTC, GOOG, MSFT, T, VZ all in one trade; what’s not to like!

(2) iShares MSCI Brazil Index (EWZ) – in my opinion the least risky of the emerging markets. 

(3) SPDR S&P Metals & Mining (XME) – chock full of beaten down commoditiy and mining companies.

Naked Puts

(1) Energy Select Sector SPDR (XLE) – like it again this month.

As I mentioned above, these are my POTENTIAL trades for February.  Who knows what any of these will look like by Friday.  

I’ll be back with another post after the market close on Friday.  I’ll update you on the potential February trades outlined above and give you some ideas on what I will be looking at going into the weekend.  In addition, I’ll let you know how my January picks turned out.