The Money Tree

Safely Generating Income in Retirement

Archive for May, 2010

What Others are Trading – June 2010

Posted by mounddweller on May 31, 2010

All,

Here is the post for all of your June trades.  Rich, can you believe it, I actually got the new post added before we were several days into the new month!?!  Hope everyone is having a great Memorial Day.  Please take a few moments to give thanks and remember those who made the ultimate sacrifice for our country.

Regards,

Troy

Advertisements

Posted in Your Picks | 17 Comments »

New Naked Put Trades

Posted by mounddweller on May 25, 2010

All,

The recent volatility has gotten me excited again about the possibility of making money selling puts.  Accordingly I spent some time this weekend looking at some possible JUN expiration trades.  I didn’t use a methodical or even
logical approach to identify potential trades.  I simply went back through my list of stocks I’d successfully traded before or stocks I wouldn’t mind owning and looked for what I thought was a fair return for the risk being taken.  For each of the stocks I identified I looked at the chart to look for areas of support.  More importantly though I looked at the risk/reward of various strike prices and their corresponding premiums.  Of course, the best tool with which to evaluate risk/reward (in my opinion) is Ron’s “Put Factor” (PF).  Using the relationship between the current stock price, the strike price, the put premium, and the number of months until expiration the PF allows you to make an ‘apples to apples’ comparison between multiple NP trades.

My initial list contained 14 stocks.  With several of the stocks on this list I looked at multiple strike prices.  Two, NVDA and EWZ really caught my eye.  Both had excellent premiums at strike prices with substantial downside protection.  Accordingly, the PF for these trades was also very high.

I used the sell-off at the opening bell today to sell naked puts on each of them.  Here’s are my trades:

(1) Sold 5 NVDA JUN $10 puts at $0.21

(2) Sold 2 EWZ JUN $45 puts at $0.67

Below is a chart which shows the parameters I was looking at when I pulled the trigger on these trades.

I think it’s pretty obvious why I liked the trades.  With NVDA I have almost 19% downside protection yet I’m earning 2.1% ROIC with only 24 days remaining to expiration.  The PF when I placed the trade was 3.28!  With EWZ I got less return (1.49% ROIC) but more downside protection.  My dowside protection with EWZ is almost 23%!  The PF was 3.10.  Both stocks ended the day significantly higher in price than they were when I sold my puts so my downside protection from here is even greater than that referenced above.

Now, a little about the two stocks on which I sold the puts.  As I’ve mentioned several times before in my blog I never sell puts on a stock that I wouldn’t mind owning.  So why won’t I mind owning NVDA and EWZ if I have them put to me?  Well, with NVDA I would be buying THE industry leader in graphics processors at a great price.  The 52-wk high is 18.96.  The 52-wk low is 9.63.

EWZ is an ETF.  It holds a basket of Brazilian stocks.  Brazil is one of the fastest growing economies in the world.  It is also one of the most resource rich countries.  It does not have the heavy debt problems that now inflict many other countries.

As this market correction continues I plan to remain on the look-out for other similar opportunities.

Posted in Troy's New Picks! | Tagged: , , , | 11 Comments »

New Short-term Trade – GME

Posted by mounddweller on May 17, 2010

NOTE:  What follows violates almost every single rule in Ron’s approach to trading covered calls and naked puts.  Procede with extreme caution.

For many months now I’ve been considering the opportunities that might exist in selling naked puts in the week of expiration.  Certainly this is not a new idea.  There’s even at least one book written on the subject; however, I don’t recommend you buy it.  I found it to be very technical and overly complicated.  Despite my disappoinment in the book I still think the idea has merit.  Consequently, this weekend I went in search of a couple of good opportunities with which to test the waters.

My objective in doing these types of trades will be to pick up some quick cash by selling what I feel are mispriced puts which have little risk of assignment.

The stock I chose for my first foray in this type of trade is GME.  I chose GME for a number of reasons but the most important one was that I am already familiar with the company and the stock.  I have successfully traded it twice before in the past year; albeit using a different strategy.

My criteria for placing this type of trade are as follows:

(1) ROIC > 0.5% or 36.5% annualized (in this trade it was 1.75%)

(2) Put Factor (PF) > 2 (in this case it was over 3)

(3) Dowside protection > 10% (in this trade it was only 9.02%)

Note:  These are preliminary criteria.   Since I’m experimenting with this strategy they are subject to change based on my actual results going forward.

Here are the specifics of the trade I executed earlier today: Sold 3 MAY GME $20 puts at $0.35

If you find this particular trade intriquing you can still get into it.  Using today’s closing prices it is even more appealing than when I first saw it over the weekend.  Today GME closed at $22.02.  With only 4 days to expiration the MAY $20 put is at $0.24/0.27.   Selling the puts at $0.24 generates a yield of 1.2% (annualized that is over 100%).  Ron’s PF is 4.09 and he estimates the probability of assignment is < 1.00%.

BEFORE EXECUTING THIS TRADE IT IS IMPORTANT TO NOTE THAT GME WILL REPORT FIRST QUARTER EARNINGS ON THURSDAY.  THAT IS WHY THE PREMIUMS ARE SO HIGH.  THERE IS A LARGE AMOUNT OF UNCERTAINTY AS TO WHAT THEY ARE GOING TO REPORT.  INDUSTRY SALES WERE DOWN SHARPLY IN APRIL.

Below are a VISIONS Stock Explorer screenprint and Price Chart for GME.  One look at the chart will show you why Ron would not endorse or support entering this type of trade.

 

I’m very much interested in hearing your thoughts on this trade.  Please comment and let me know what you think.  If you choose to execute this or a similar trade let me know how it turns out.

Posted in Troy's New Picks!, Uncategorized | Tagged: , , | 2 Comments »

MYGN – An Update

Posted by mounddweller on May 7, 2010

Well everyone it looks like MYGN has went from a short-term trading opportunity to a long-term investment.  However, given the conservative approach taken in selecting MYGN as a trade, I have no qualms in holding it longer term. 

Let’s quickly review why I originally bought MYGN and why I don’t mind holding them through this rough patch:

(1) outstanding balance sheet – $3.58/share in cash and ZERO debt.  At current price around $17.50, cash on hand is 20% of the market cap.

(2) excellent income statement – net profit margin is > 30% (note: they recently cut earnings forecast so this may drop a little, but it could be cut in half and still be a great number)

(3) excellent cash flow – operating cash flow > 30% and levered free cash flow > 10% of revenue

Now, an update on what’s happened to put the stock on the “1/3 off” sales rack:

(1) March 30 – Company lost a court case regarding the validity of its patents on genes used in its breast cancer susceptibility tests.

(2) May 4 – Company announced 1st quarter earnings.  Revenue only grew 5%.  However, that wasn’t the bad news that sunk the stock price.  It was the lowering of forecasted annual earnings of $1.30 to $1.35 that did that.  Previous guidance had been around $1.50/share.

(3) The overall market has gotten a recent haircut as well.

Combined these three events have knocked MYGN for a loop.   However, I think the market is being short sighted.  First, the verdict on the patent case is already being appealed.  It will be many years before a final decision is made regarding the legality/morality of patenting human genes.  Second, the reduced 2010 full year forecasted results aren’t that bad.  The company still expects growth in excess of 50% over last year!  Finally, last but not least, the current market weakness will pass.  

Now, finally a quick update on my current position in MYGN.  As you’ll recall on 3/29 I bought 300 shares at $24.68/share.  I then sold the APR $25 calls for $0.55.  These expired OTM.  Then, on 4/27 I sold another round of MAY $25 calls at $0.60.  This makes my current net cost $23.53.   Barring a huge rally in the next two weeks these too should expire OTM. 

I now have a decision to make.  Do I try to lower my cost basis by selling OTM NPs  or after MAY expiration do I begin selling CCs below my current net cost?  Time and overall market conditions will determine which will be the best course to follow.

Posted in Portfolio Updates | Tagged: , , | Leave a Comment »

What Others are Trading – May 2010

Posted by mounddweller on May 7, 2010

All,

Sorry I haven’t been posting much of late.  I’ve been traveling a lot these past few weeks and busy with my “day job”.  Here’s this months post for what you have been trading.  I’ll be back hopefully this weekend with an update on my recent trading activities as well.

Regards,

Troy

Posted in Your Picks | 5 Comments »