The Money Tree

Safely Generating Income in Retirement

Archive for July, 2009

What Others are Trading – August 2009

Posted by mounddweller on July 31, 2009

Back by request after a several month hiatus, I’m reinstating my “What Others are Trading” posts.  If you’ve just lurked in the past I’m anxious to hear from you.  Let me know what’s working for you, what’s not, and what looks interesting going forward.  Come on now, don’t be bashful.  Let’s get some discussion going.

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New NP Trade – TK

Posted by mounddweller on July 29, 2009

I sold a new round of naked puts on TK this morning.  Below are the pertinent details.

STO 4 TK AUG $15 puts at $0.30

ROIC = 2.00% (.3 / 15), Annualized 29.2%

Downside protection to strike price = 10.93%

Since I have traded NP on TK previously I will not bore you with a long-winded discussion on why I like TK or this particular trade.  Instead, if you’re interested in these details, I recommend you go back and read my earlier post regarding TK dated June 22.

NOTE:  For those of you who are new to my blog or don’t recall the details of my earlier trades in TK, I want to make it clear that I’m not selling these puts as a short-term trade.  I want to own TK long-term and am trying to accumulate a position in TK.  Thus, my trading strategy for TK is somewhat different than that of my other NP trades.

Here is an updated chart of TK.

VISIONS - TK Updated Chart

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New NP Trade – IPI

Posted by mounddweller on July 29, 2009

I executed a new NP trade this morning on IPI.  Here are the pertinent details:

STO 3 IPI AUG $22 puts at $0.50

ROIC = 2.27% (.5 / 22), Annualized = 33.18% (25 days to expiration)

Downside protection to strike price = 14.99% (25.88 – 22 / 25.88)

So, now that we’ve dispensed with the pertinent facts of the trade, let’s discuss why I like this trade.  First the fundamentals.  IPI (Intrepid Potash) is in the business of producing and marketing the sale of potash.  It is much younger (it was founded in 2000) and smaller ($395M in revenue) than it’s more well known competitors, POT and MOS.  However, younger and smaller does not make it inferior.  As a matter of fact it has better performance ratios (i.e. Gross Margin, Oper. Margin) than either POT or MOS.  It also compares favorably with them on ROA and ROE.  IPI also has no long-term debt and over $100M in cash on its balance sheet.  I also like IPI’s growth prospects.  For all these reasons, I would be happy owning IPI is it were to be put to me at $22.

Now, lets look at a few of the technicals.  The TAI (take-action indicator) rating for IPI is ‘TA’ (i.e, take action).  From the chart presented below we can see that it has been trading in the V for the past 17 days.  When I executed my trade IPI was trading around $25.88, just above it’s BL (buy limit) and 50-DMA.  We can also see that it has pulled back a little bit the past couple of days after rebounding strongly from hitting it’s 52-wk back in March.

Here are the other common KPIs (key performance indicators) I used to evaluate this trade.

IPI - Trading Plan Eval Criteria

VISIONS - IPI Chart

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New CC Trade – GME

Posted by mounddweller on July 20, 2009

Can you believe it?  I actually executed a new CC trade today!  This is my first new CC trade since January!  You contrarians out there be sure to note todays date as I have probably just called the top of this bear market rally.  Knowing my luck lately, I will have gotten  into a new position about the time everyone else starts heading for the exits.

Oh well.  For what it’s worth here’s why I like this trade.  GME has been on my watchlist for quite some time.  Why?  Because they sell what everyone wants right now…cheap entertainment.  Of course Mr. Market doesn’t agree with me because he has pushed down the price of GME from a recent high of $32.82 in April to a low of $20.02 on July 13th.

For those of you who don’t have kids, you probably don’t know that GME is THE PLACE to buy/sell new and used video games.  I think as we get closer to the holiday season Mr. Market is going to wake up to the fact that while lots of people are reining in their spending, none of them are going to go so far as to put lumps of coal into their kids Christmas stockings this year.   Thus, I anticipate strong sales in the latter half of the year at GME.  This should result in a rebound in the price of GME stock.

OK.  Now let’s look at this trade using my Trading Plan evaluation criteria.  First the pluses.  GME has huge operating margins and generates enormous cash flow.  The shares are also cheap, selling at a single digit P/E of 9.2.  The minuses?  Well,  the one thing that sticks out for me is their lack of bare cash.  Long-term debt exceeds cash on the balance sheet.  However, in my mind, this is more than compensated for by the huge amounts of free cash flow.

GME - Trading Plan Criteria

Now let’s look at the chart.  You can see that this isn’t a picture perfect trade from a Groenke / VISIONS standpoint.  While the stock has been in the V for 23 days, has a Gold$ score of 80, and is well under the BL of $24.56 the trend has only recently reversed and started going back up.  Thus, I was conservative and executed an ITM covered call.  I wanted to hedge my bets just in case the stock should resume its decline.  For you more adventorous types out there I will point out that the ATM calls earlier today were yielding a very generous 6.2%.

VISIONS - GME Chart

OK, I’ve rambled on long enough.  Here are the specifics of my trade.  I basically did what Ron likes to call his “double up” strategy.  I first did a buy/write asking for a debit of $20.17 or better.    This translated into me being filled on GME at $22.27 and selling the AUG $21 calls at $2.11.  If called away at $21 in August my ROIC will be 3.77%.  After getting filled on my buy/write trade I also sold the AUG $20 naked puts for $0.55.  If the NPs expire OTM my ROIC will be 2.75%.

What do y’all think?  Do you like the trade?  Why or why not?

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Rollouts on FRX and UNG

Posted by mounddweller on July 14, 2009

Guys and gals,

I executed two rollouts today against my open positions in FRX and UNG.  Those of you who have been following my trades know that I’ve been in FRX since January.  I originally entered the position by buying 200 shares at around $25 and change.  I then sold the February $25 calls.   Since then I’ve acquired an additional 200 shares after having shares put to me at $22.50.  I’ve also been able to sell the $25  calls almost every month.  This month, like last month, I decided to rollout my position rather than wait for expiration day on Friday.  However, my reasoning this month was different than last month.  Last month you’ll recall I wanted to roll early because I felt there was an opportunity for the stock to go ITM prior to expiration.   Not wanting to take a chance on getting assigned I decided to take advantage of a decent premium on the rollout.  This month my reasoning was just the opposite.  The market has rallied sharply the past couple of days but I fear we may have a sell-off before Friday expiration.  Thus, I wanted to capture the relatively high premium tied to today’s price rather than chance having to sell another round of calls after expiration at a much lower premium.    The bottom line result is I was able to rollout to the AUG $25 calls for a net credit of $0.75.   My net cost basis is now $20.50 while my ROIC is now 18.71% (31.19% annualized). 

For those of you who don’t yet own FRX, it isn’t too late to get into this high quality stock.  With a market cap of $7B FRX has $2B in bare cash!  Below is a current VISIONS chart of FRX.

VISIONS - FRX Chart

 

Now, let’s talk about my NP position in UNG.  Those of you who follow the natural gas market know there is currently a glut.  Thus, prices are very low.  Since UNG is an ETF whose price is determined by the price of natural gas futures it too has continued to fall.  When I originally initiated my position in UNG naked puts UNG was trading over $15/share.  It had never closed below $13 so I felt reasonably safe in writing the JUL $13 naked puts.  Well, never say never.  Over the past couple of weeks UNG sliced through $13 on its way to setting a new 52-wk low of $12.03.  It has since recovered and moved back up to around $12.50.  Seeing this I decided to take advantage by rolling to the AUG $13 naked puts for a net credit of $0.70.  If UNG remains below $13 at expiration in AUG and I choose to allow the stock to be put to me I will have a net cost basis of $12.00.  If unassigned my ROIC will be 7.69% for two months.  That sure beats the interest Schwab is paying me on my cash reserves!

Best of luck to y’all in your trading. 

Regards,

Troy

PS.  My NP trades in O and TK remain open.  I’ll be updating you on them after expiration Friday.

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Scout Report – Interesting Results

Posted by mounddweller on July 8, 2009

I ran a VISIONS scan last night and was rather surprised by the results.  What surprised me was that a majority of the most highly rated stocks came from the Biotech or Healthcare sectors.  Biotechs are well known for having occasional periods of strong upward moves.  Perhaps this is the beginning of one?

Below is an image of my Scout report.  The image contains the top 20 results of my scan.  The complete report contained 70 stocks.  HNT looks particularly attractive as it is trading below book value.   Do your own DD and let me know if any others look particularly appealing to you and why you think so.

VISIONS - Scout Report 070709

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New NP Trade – O

Posted by mounddweller on July 2, 2009

I have executed yet another NP trade.  Anyone reviewing my trading history in 2009 will find I have been almost exclusively selling NPs this year.  As a matter of fact I’ve only executed one new CC trade in 2009.  To be quite honest, I’m not sure why that is the case.  It’s not for lack of trying.  I run my VISIONS Scout screener every week looking for great CC trades.

Anyway, like I mentioned above I did execute a new NP trade today.  I sold the AUG O $20 puts for $0.50.  My ROIC on this trade is 2.50%. 

Now that I’ve explained what I did let me tell you why I did it.  My reasons for executing this trade is similar to that of my recent NP trade in TK.  I want to own O, Realty Income Corp long-term.  Realty Income Corp is a REIT engaged in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators.  It pays dividends monthly.  In fact the company has declared 468 consecutive common stock monthly dividends throughout its 40-year operating history and increased the dividend 54 times since Realty Income’s listing on the New York Stock Exchange in 1994.  Annualized the current dividend is $1.7085.  If assigned at $20 my initial dividend yield will be 8.54%. 

My objective in owning O and TK (as well as some high yield MLPs) is to build a portfolio of stable business which are able to consistently grow their dividends.  By reinvesting those dividends from now until when I retire I plan to have a substantial income stream to supplement my CC/NP trading income.  In the interim I can also generate additional income by selling CCs on these positions as I accumulate shares.

Below is the price chart for O.  You’ll immediately notice this is NOT a good short-term trading candidate based on Ron Groenke’s criteria.  I would not recommend this trade to anyone unless (like me) you intend to hold it for a very long time.  My plan is to sell additional NPs over time if the price continues to fall.  For example, if O trades for less than $20 and the stock is put to me, I’ll probably sell additional NPs at the $17.50 strike price or lower until I have accumulated the total number of shares that I’d like to own.

VISIONS - O price chart

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