Deep OTM NP Strategy – FEB Week 3

Fellow Traders,

My apologies for the delay in getting this posted.

The pick-up in volatility this past week resulted in a corresponding pick-up in the number of selections from our strategy.  This week we have 12 new selections (5 mid-caps and 7 small-caps).  In addition many of the selections from last week reappeared this week.  I’m hopeful continued volatility will result in some large-caps making our list in the coming weeks.  Despite the great record of the overall strategy it is very hard to blindly sell puts on some of these smaller companies.

Here is the list for this week:

Have a great week trading.  I’ll be back again next weekend with another round of picks.  I’ll also keep you in the loop with regard to other CC and NP trades that I make outside of this particular strategy.

Regards,

Troy

Deep OTM NP Strategy – FEB Week 4

Fellow Traders,

As promised here are the selections for FEB Week 4 of our Deep OTM NP Strategy.  This week we have 20 stocks that meet our criteria (17.5% DSP and PF >= 2.0).   There are no large-cap stocks in our list.   There are 4 mid-caps and 16 small-caps.

As you can see our list contains several repeats from last month.  These include LKD, MBI, ALJ, VRGY, and ZLC.  In looking through the list none of the selections jump out at me as being great individual trades.  However, that is part of the beauty of this strategy.  There is safety in numbers.  It would be hard to pick out the one or two that are destined to finish ITM and thus avoid them.  By allocating capital across all of them we greatly reduce the risk of being wrong and picking losers.

Best of luck in your upcoming trades.

Regards,

Troy

Deep OTM NP Strategy – January Results

Fellow Traders,

It was a ‘so-so’ month for our Deep OTM NP Strategy.  Certainly it was not an auspicious start for 2011 nor for the beginning of posting this trading strategy on my blog.  Enough of the lamenting let’s get on with reviewing the results.

This month we had 27 trades in our strategy to choose from.  After the market close on Friday (1/21), 23 of them closed OTM.  That’s a success rate of 85%.  Certainly not bad given the types of stocks that meet our trading criteria.  In the current market environment most of our trades involve small and mid-cap stocks with less than stellar fundamentals.  However, it is not nearly as good as the 96% success rate I was experiencing last year before I began publishing my results.

Had you chosen to sell puts (using the capital allocation plan I outlined in an earlier post) on all 27 selected trades this month it would have required a capital balance of $175,925.  Remember, this assumes you are trading in a tax-advantaged retirement account which does not allow the use of margin.   Doing so would have generated total premiums of $2,756.60 (net of commissions).  This equates to a 1.57% ROIC, which is 16.82% annualized.

But wait, you say, what about the losers?  Yes, my friends we have to account for our capital losses.  We had 4 trades that finished ITM.  On Monday we will have to purchase these 4 stocks.  They are PSDV, LPHI, SVU, and CREE.  Assuming we did nothing to mitigate our losses by either (1) buying to close the puts at the first sign of trouble, or (2) holding the stock after assignment and possibly selling CCs against it, our total capital losses (based on Friday’s closing prices) would equal $2,764.80.  The net result (premiums plus capital losses) would be a very small loss of $8.20.

However, as I mentioned above we have several options (pun intended) available to us to mitigate that loss and perhaps we could have ended the month with a significant gain had we proactively managed the trades.  Let’s look at each of the four losers and see what our best course of action might have been.

First up, let’s look at PSDV.  We sold 10 JAN $5 puts back on 12/19/2010 when the stock was trading at $5.70.  It closed Friday at $4.53.  This left us with a capital loss of $0.47/share or $470.00 on 10 contracts.  However, we had plently of time to recognize the trade was in trouble and could have avoided the loss by not holding the contract to expiration.  The stock gapped down on 12/27.  Over the ensuing 3 1/2 weeks we would have had many opportunities to close the trade with a small loss or possibly even a profit.  Alternatively, we could have chosen to take assignment and hold the shares until they get back above $5.  It’s not unreasonable to assume this could occur over the course of the next week.

Next is LPHI.  Unfortunately, there wasn’t much opportunity to avoid this sizeable loss.  The stock dropped almost $2.50 on 1/20, just one day before expiration.  Given the significant gap between the closing price on Friday ($11.82) and our strike price of $14.75 there also appears to be little sense in waiting for an uptick in price before selling the stock.  In this situation in my opinion the best course of action is to just suck it up and take the loss by selling the shares on Monday.  This trade represented the bulk of our capital losses ($1,473.95 of $2,764.80).

Our third loser was SVU.  Recall on 1/7/2011 we sold 10 JAN $7.50 puts on SVU.  SVU was trading at $8.66.  Friday it closed at $7.33.  SVU gapped down on 1/11/2011 closing at $7.59.  Again, like PSDV, we had a couple of weeks to get out of this trade if we wanted to.  Even if we hadn’t we still aren’t in a bad position.  Having closed only $0.17 below our strike price it is very likely we will have been able to sell it above $7.50 at somepoint on Monday.

Our last loser was CREE.  On 1/14/2011, with the stock at $63.77, we sold 1 JAN $57.50 put.  On Friday the stock closed at $51.26.  It had gapped down earlier in the week, falling from $62.71 to $53.63.  Their really wasn’t a good way to avoid this loss.  However, we could have lessened the size of the loss by buying to close our puts when the stock gapped down on 1/19. 

Well, there you have it my friends.  I’ll be back later this weekend with another post to announce the first round of February selections in our Deep OTM NP Strategy.  I’d be interested in hearing if anyone selected any of the picks from my strategy in January.  If you’d like please post your results as a comment to this message.

Regards,

Troy

New NP Trade – ABT

Fellow Traders,

I made another naked put trade today.  Like the naked put trades I made earlier this week this trade was made in a stock that I’ve successfully traded before.  In this case it is Abbott Labs (ABT).  I sold 2 FEB $46 puts at $0.60.   ABT has been falling for several days now and it appears it may have further to fall.  Thus, I limited my trade to only 2 contracts.  My plan is to sell additional contracts if it continues to fall.  Looking at the chart I think it has strong support at $46. 

ABT is a stock that I wouldn’t mind owning in this price range.  It has a strong history of growth in earnings and in raising its dividend annually.

My ROIC is 1.19% with a holding period of around 35 days to expiration.  Not great but not bad either given the blue-chip status of the underlying company, Abbott Labs.

Regards,

Troy

Deep OTM NP Strategy – JAN Week 1

Fellow Traders,

I have 3 selections for you this week from our Deep OTM NP Strategy. 

As you can see from the chart above two of our three selections are mid-caps with stock prices suggesting they may be viable choices for a NP trade.  In doing some basic DD I found that both CREE and PLCM will be announcing quarterly earnings next week.  That accounts for the relatively high premiums for only 8 days to expiration.  Both CREE and PLCM are relatively expensive from a fundamental perspective, trading at over 21x estimated 2011 earnings.  However, on the plus side both have zero debt and large cash balances.

From a technical perspective I like CREE better than PLCM.  PLCM has had a strong run-up in price in the past 4 months, increasing from just under $29 to almost $42.  CREE has backed off from recent highs, falling from $72 to just under $64.  The other thing I like about the CREE trade is the $57.50 strike price.  It is under CREE’s 200-DMA of around $60.50.

Best of luck to all this week and especially at expiration on Friday.  As always, remember to do your own DD and that nothing written in my blog should be construed as personal investment advice.

Regards,

Troy

New NP Trades – T and GME

Investing Buddies,

I placed two new NP trades yesterday.  Let me tell you a little bit about them.  First off let me make it clear that neither of these trades are the result of new selections from my Deep OTM NP Strategy.  No, rather these trades come from two entirely different NP trading strategies.  In my mind that is the absolute beauty of trading naked puts.   Naked puts can form the basis for many types of trading strategies with differing objectives and risk profiles.

The first trade I would like to tell you about involves AT&T (T).  You’ll recall last week I had an early assignment of my JAN $29 calls due to another investor who wanted to capture the upcoming T dividend of $0.43.   Having been called away at $29 I immediately began to formulate a plan to rebuild a new position in T over time.  I accomplished the first phase of this plan by selling 2 FEB $28 puts at $0.58.  Now, with hind-sight being 20/20, it’s clear that I reentered the position a little early.  T fell again today and closed at $27.91.  However, since my goal is to establish a long-term position in T I’m not really concerned if I catch the very bottom in prices.  T is very cheap at this price, currently trading for 7.5x earnings and yielding 6%.  The next phase of my plan will be to sell another 4-6 NP contracts at lower strike prices, further out on the calendar.  My ultimate objective is to own 600-800 shares of T with a net yield of > 7.5%.

So let’s recap how I’m using NPs in this strategy to achieve my goals. I’m using naked puts to accomplish three things (1) generate immediate income (cash flow) in my account, (2) lower my eventual cost basis in AT&T when I accept assignment and have the stock put to me, and (3) and accumulate a long-term postion in AT&T.

This first trade generated $105.55 in cash flow, lowered my potential cost basis to $27.47, and if T closes less than $28 at expiration in February and I choose to accept assignment I will have acquired 200 of my total desired 800 share position.  My ROIC is 1.88% with 40 days to expiration.

Now let’s talk about Gamestop (GME).  My strategy and objective with GME is different from that of AT&T and different from the strategy and objectives of my Deep OTM NP Strategy.  My trade in GME is an opportunistic one.  I wanted to execute a trade in GME because the market offered me an attractive entry point and a favorable risk/reward ratio.   While I don’t necessarily want to own GME as a long-term core holding, I am not averse to holding it in my account for some period of time. 

I have traded covered calls and naked puts on GME several times in the past.  It is a stock I am comfortable owning when it approaches its book value which is currently $18.30.  For this particular trade I noticed that GME had fallen sharply from a recent high of just over $23 to down around $20.  In looking at the chart I also noticed that it had very strong support between $18 and $19.   So I decided to sell 5 FEB $19 puts at $0.38.

Again, my objective with this trade is to just take advantage of the recent sell-off in price and use it to generate income (cash flow) in my account.  This trade generated $177.30 (net of commissions) which equates to a 1.87% ROIC with 40 days to expiration.  If I choose to have the stock put to me at $19 I will own it at a net cost of $18.62, a mere $0.32 above its current book value. 

Regards,

Troy

AT&T (T) – Position Closed

Earlier this week I closed out my long-held trade in AT&T (T).  Let me give you a brief history of this trade.  I initiated this trade before I found Ron Groenke and began using his VISIONS software.  My original plan for the trade was to buy the stock, sell a LEAP call against these shares and collect the dividends until called away or the call expired.  Then repeat the process by selling another LEAP call the following year.  Well, as you might expect, my ‘perfect’ trade didn’t play out as planned. 

We all know what happened in 2008.  By late summer/early fall the market began to fall.  By January 2009 my originall LEAP calls did expire worthless but because of the steep drop in the price of AT&T I was unable to write another LEAP call at my original strike price.  At this point I had a number of options (pun intended) available to me to try to recover and manage the position.  However, given it’s relatively small size I instead let it lanquish in my account and for another 17 months did nothing but collect the quarterly dividend.

About midway through 2009 I decided I had to do something.  I had to either accept the loss in capital and move on, or more actively manage the position and attempt to recover my original capital.  I decided the best course of action was to sell puts on additional shares until assigned.  I did one round of naked puts but then decided to just buy additional shares outright because I felt the stock had bottomed.   Finally, in the fall of 2010, I decided to sell the OTM JAN $29 calls. 

It was these JAN $29 calls that lead to me closing out my position.  Earlier this week, someone decided they needed AT&T’s next dividend more than I did.  My calls were assigned early on the day before T went ex-dividend.  I think I got the better end of the deal though as T has since fallen below my strike price of $29. 

At the end of the day I’m pleased at how the trade turned out.  By being patient I was able to turn what could have been a loss into a $934 gain.  My annualized ROIC of 3.53% is nothing to write home about, but it sure beats the $1400 loss I was looking at when T bottomed out in March 2009.

Here is the complete history of this trade:

I like AT&T.  It has a great, stable and reliable dividend.  Thus, I am looking to reenter a position in T.  Earlier today I tried to sell the FEB $28 puts at $0.45.  Unfortunately, my trade did not fill.  I am going to continue following it closely next week in the hope I can find and get filled at a suitable entry point.

Deep OTM NP Strategy – JAN Week 2

Hello everyone.  I’m back with the selections for January – Week 2 of the Deep OTM NP Strategy.  This week we have 3 selections, 2 mid-caps and one small-cap.  Information on each is provided below.

 

In addition to these 3 new selections, as was also the case last week, there are several other trades that reappeared on our screen after having been selected earlier this month.  Stock which reappeared on our screen this week are: MBI, VHC, VRGY, and ZLC.

Please keep in mind, generally speaking, NONE of these trades are suitable as long-term investments.  We are simply looking to pick a little money off the money tree by placing a calculated bet that the stock will not decline sufficiently in the time remaining to expiration to close below our strike price.

New INTC Trade

I executed a new INTC trade today.  I STO 5 FEB $19 puts at $0.26.  The premium (net of commissions) was $117.26.  If the puts expire worthless at expiration in February my ROIC will be 1.23% with a 45-day holding period.  This equates to an annualized return of 10.01% which is a little below my desired minimum return of 15% annualized. 

Despite the sub-par ROIC I went ahead with the trade for the following reasons:

(1) First, and foremost, I wouldn’t mind owning INTC at $18.74

(2) I have way too much capital sitting on the sidelines earning nothing.  Selling OTM INTC puts is a safe way to deploy capital and generate income.

What Others are Trading – January 2011

Fellow Investors,

Here’s your chance.  Let us know what you’re trading.

Regards,

Troy