The Money Tree

Safely Generating Income in Retirement

Archive for January 11th, 2011

New NP Trades – T and GME

Posted by mounddweller on January 11, 2011

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

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