The Money Tree

Safely Generating Income in Retirement

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

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