The Money Tree

Safely Generating Income in Retirement

Archive for December, 2010

Update – Visa (V) Trade

Posted by mounddweller on December 27, 2010

Friends,

I took advantage of the jump in Visa (V) today by BTC my JAN $65 puts and STO JAN $67.5 puts for a net credit of $0.45/share.

Originally, back on 12/17, I had sold the JAN $65 puts at $1.75.  Holding these to expiration would have generated a ROIC of 2.61% with a holding period of 36 days.  Today, with V jumping back above $70, I saw the opportunity to increase my ROIC with very little additional risk.  The additional $0.45/share will increase my ROIC from 2.61% to 3.09%.   If, at expiration, I choose to have the stock put to me at $67.50 I will own 200 shares of Visa at a cost basis of $65.46.

Finally, a quick plug for my broker, Charles Schwab.  I entered my trade today as ‘All or None’.   However, the floor trader at the CBOE failed to notice this and only executed one of my two outstanding contracts.  I call Schwab and they contacted the CBOE on my behalf.  Schwab made sure my other contracts were executed at my previously set net credit price (even though the market had moved away from a net credit of $0.45 down to $0.41).  Scwab then called me back to tell me everything had been taken care of and to ensure I was happy with the execution.

Regards,

Troy

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Posted in Portfolio Updates | Tagged: , | 2 Comments »

UPDATE – NP Strategy – JAN Week 4

Posted by mounddweller on December 27, 2010

Friends,

Just a quick couple of notes on my NP Strategy selections, VRGY and LPHI. VRGY also has a $10 strike price that looks very attractive. This morning it is trading at a bid/ask of $0.10/$0.15 and has traded as high as $0.18. Anything above $0.15 would work for me. At $0.15 you would have a 1.5% ROIC with 23.5% downside protection.

Now, an update on LPHI. Earlier this morning I read the WSJ article about LPHI. It does not cast LPHI in a very favorable light. I also read the LPHI CEO’s rebuttal. My advice would be to proceed with caution. The $14.75 strike price that appeared in our selection results has a very wide bid/ask spread of $0.20/$0.75. I see that as a ‘red flag’. I am going to hold off selling any puts on LPHI until I see how this shakes out. I recommend you do the same.

Regards,
Troy

Posted in Deep OTM NP Strategy | Tagged: , , | 2 Comments »

First Post – New NP Strategy – JAN Week 4 Selections

Posted by mounddweller on December 24, 2010

All,

Below are this week’s selections for the Deep OTM NP Strategy.  Please recall the selection criteria for this week are (1) downside protection of at least 17.5%, and (2) a Put Factor (PF) >= 2.0. 

Of the three selections meeting our criteria, LPHI and VRGY peaked my interest.  LPHI closed yesterday (12/23) at $18.71.  It is almost midway between it’s 52-wk high of $24.50 and the 52-wk low of $14.69.  Note the proximity of the strike price to the 52-wk low.  I like that!  Other items that appeal to me are that it pays a 5% dividend and has a P/E of 9.26.    So, why the high premium on a deep OTM put for a stock that sports a high dividend and a low P/E?  Well, the best I can figure is it is tied to a recent story in the WSJ.  The WSJ questioned some of LPHI’s business practices.  Earlier this week LPHI’s CEO issued a rebuttal to the story.  Bottom line, despite the negative press I like this trade. 

Now let’s look at VRGY.  The fundamentals, while not bad, are not near as good as LPHI.  It doesn’t pay a dividend and has a much higher P/E.  It also is trading much closer to it’s 52-wk high of $13.79 than the 52-wk low of $7.48.   What’s appealing about VRGY is that it is a takeover target.  Advantest has said they would like to buy VRGY for $15/share.  This is a sweetened bid from an earlier price that was rejected as too low.  In my mind this limits the potential for the stock to decrease substantially betwen now and expiration on January 21st.

Before closing, just wanted to mention why THC doesn’t appeal to me.  With a premium of only $0.05 you would need to sell a substantial number of contracts to make it worth your while.  That, coupled with the relatively low 1% ROIC, makes it a less attractive trade.

Well, that’s it for this week.  Best of luck in the last week of 2010.

Regards,

Troy

Posted in Deep OTM NP Strategy | Tagged: , , , | Leave a Comment »

Introduction to new DEEP OTM NP Selection Strategy

Posted by mounddweller on December 23, 2010

All,

As promised I am expanding The Money Tree blog to include trades from my new DEEP OTM NP Selection Strategy.  I have been beta testing this strategy for the past 7 months and sharing the results with a few select investing buddies.  The results of this new strategy have been nothing short of fantastic.  In the 7 months since I began beta testing this new strategy over 93% of the trades have expired OTM!  The average monthly ROIC (net of all commissions and trading losses) is 1.56% (over 19% annualized).

Here is a brief synopsis of how the strategy works.  After the close of the markets every Friday I scan the options universe looking for naked puts that meet two criteria, (1) a minimum amount of downside protection (DSP) based on the number of weeks to expiration, and (2) a Put Factor (PF) >= 2.0.  Position sizing for each of the selected naked put trades is based on the strike price.  Details on the amount of downside protection required each week and the amount of capital allocated to each trade can be found on my Trading Plan page.

My plan is to post all of the trades meeting my selection criteria after the market close on Friday of each week.  I will highlight at least one trade that I feel is most worthy of your consideration.  Note:  entering trades for all of NPs meeting my criteria may be capital intensive.

A final word of warning.  Although this strategy has proven to be very successful based on the high percentage of trades that expire OTM you may find many of the underlying companies unsuitable for investment based on your tolerance for risk.    THIS IS NOT AN INVESTMENT STRATEGY.  IT IS A SHORT-TERM TRADING STRATEGY. 

I’ll be back with another post later this holiday weekend with the selections for this coming week.

Regards,

Troy

Posted in Deep OTM NP Strategy | Tagged: , | 2 Comments »

A New Tool for Your Option Toolbox

Posted by mounddweller on December 4, 2010

All,

Today I’d like to reintroduce you to a tool I’ve been using for the past several months.  Back in June I posted a message about my investing buddy Patrick’s new option search engine on his Market Timing Research web-site (www.mtrig.com).   Using Patrick’s search engine you can find either call or put options which meet your specific criteria. 

You can search by: Market Sector (i.e., Utilities, Technology, etc.), Option Type (Call or Put), Desired ROIC (i.e., 1%, 2%, etc.), Expiration Date, Range of Stock Prices (ex. $10 to $50), Range of Price/Earnings Ratios (ex. 5 to 20), and Dividend Yield. 

Patrick has made a lot of updates to the search engine since initially rolling it out back in June.  For example, you can now search for option on practically the entire universe of stocks; small-caps, mid-cap, large-caps and even ETFs.  You can also limit your search to stocks that are approaching their ex-dividend date.

Search results have also been expanded.  In addition to containing the following fields: Stock Symbol, Stock Price, Option Type, Strike Price, Expiration Date, Last Traded Price of the Option, Bid and Ask Prices on the Option, Total ROI, Monthly ROI, Last Trading Day Volume, and the Open Interest; the results now also include implied volatility, the Greeks, and the dividend ex-date and pay-date.  The search results are displayed in a scrollable box on the screen.  Patrick has also provided a convenient way to export the search results to Excel.      In addition, you can quickly pull up a chart of the underlying stock.  The chart pops up in a new window.

So, why do I like this tool?  Well, first and foremost, it is quick and easy to use.  Also, it is web-based so you can access it anywhere you have an internet connection.  I have been successfully using the tool for the past six months to beta-test a new naked put strategy I’ve developed.

Here’s a link to the tool on Patrick’s site: http://www.mtrig.com/Members/OptionsAdvancedSearch.aspx.  Go check it out! 

Regards,

Troy

Posted in Uncategorized | 7 Comments »

Rich’s INTC Trade

Posted by mounddweller on December 4, 2010

All,

A first for The Money Tree blog.  I am posting a message on someone elses trade.  My investing buddy, Rich shared with me his INTC trade.   His results todate are superb.  Thus, I want to share them with you.

Rich’s strategy has been to sell OTM puts every month on INTC.  His objective is to use other people’s money to eventually buy INTC stock.  He started in January, buying 100 shares of INTC and then selling a CC against those shares.  From that point on Rich has been aggressively selling OTM puts, using the resulting cash flow to reduce his cost basis on his 100 shares.  As of today he has generated $1,867.25.  He only needs another $215.75 to own his 100 shares of INTC free and clear.  His rate of return on the average amount of invested capital used in selling the cash secured puts is 8.58%.  Below is a Rich’s complete INTC transaction history.

Way to go Rich!

Regards,

Troy

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What Others Are Trading – December 2010

Posted by mounddweller on December 3, 2010

All,

Sorry for the delay in getting this message posted.  I see dealmakr posted a couple messages about his recent trades under my MYGN trade.  Any other trades out there folks want to share?  Here’s your opportunity.  Just post a comment to this message.

Regards,

Troy

Posted in Your Picks | 14 Comments »