VISIONS Scan – Potential Trades

Fellow Traders,

Earlier this afternoon I ran SCOUT in VISIONS to see if I could unearth any interesting NP trades for the 3 weeks remaining before APR expiration.  17 stocks met Ron’s Level 4 selection criteria.  The “Top 10” were BBBB, AKAM, STP, STRA, LPL, ARO, CELG, ICLR, UMPQ, and CEPH.  Out of the “Top 10” I felt AKAM, STP, LPL, ARO, and CEPH were worth digging into deeper.

My objective in running the scan was to find stocks trading in Ron’s VISION V with APR puts that met the following criteria:

(1) Strike price at or less than recent lows, and

(2)  Premium that provided an annualized ROIC > 15%.

In the first chart below you can see that LPL was the only stock that met both of my criteria.  However, you’ll also notice it has < 4% DSP.  I didn’t like that so I decided to explore a little further and see how much I had to increase the strike price to attain my desired minimum ROIC.  The results of that analysis can be found in the second chart.  By relaxing my first criteria I was able to identify three trades that I felt might be a reasonable trade.  These are highlighted in green. 

Of these three ‘finalists’ I think CEPH is the best bet.  Looking at its price chart over a 1, 2, and 5 year period reveals that it has strong support around the $55 level.  STP and AKAM do not have strong support at my chosen strike prices.  STP has some support at $7 but as we saw earlier there is no premium at that strike.  Looking at the 1, 2, and 5 charts for AKAM reveals a very scary situation in that it hit lows of around $10 back in 2009. 

Here is the VISIONS 1-year price chart for CEPH.  I would also encourage you to go to Yahoo or another site where you can see the 5-year chart to see the strong support at the $55 price point.

Check these stocks out and let me know what you think about my selection criteria and my process of elimination.

Regards,

Troy

Deep OTM NP Strategy – APR Week 3

Fellow Traders,

It is very slim pickings this week.  Only 3 potential trades met our Week 3 selection criteria.  Given the current state of the market and in some cases the circumstances surrounding the stock I can’t recommend any of the three. 

Hopefully Mr. Bear will rear his ugly head soon or at least we’ll get an uptick in volatility.  That would help expand the number of selections meeting our criteria.

Regards,

Troy

New NP Trade – CCJ

Fellow Traders, 

Today I executed a new NP trade on the world’s largest uranium miner, Cameco (CCJ).  I put Cameco on my watchlist shortly after hearing about the disaster in Japan.  However, when I first looked at the chart and the options premiums I didn’t like the risk/reward ratio.  After reading this trader’s commentary (http://www.growthstockwire.com/) today I took another look at it.  I didn’t like Jeff Clark’s trade but decided I would take another look at the option tables to see if I could find something I liked better.  I found I liked the MAY $25 strike at $0.50.  So here’s the trade I made:

STO 4 MAY $25 puts at $0.50

This trade gives me a 2% ROIC with 58 DTE and over 22% DSP.  Jeff’s trade of the JAN ’12 $17.50 puts at $0.50 has a better ROIC and more DSP but ties up your capital for a much longer period of time.  If you check out the trading volume on Jeff’s recommended trade you’ll see a lot of lemmings followed his advice.  So much so that they significantly drove down the price of the put.

Haven’t seen any other compelling trades this week.  Best of luck to all of you out there.

Regards,

Troy

MAR Wrap-up and New APR Trades

Fellow Traders,

Like many of you I’ve spent a good portion of this weekend reviewing how I did in March and looking for potential April trades.  Here’s a brief recap of my March activity.  First, my closed trades:

(1) Back on February 4th I sold 4 MRK MAR $31 puts at $0.35.  After commissions I netted $128.03.  These puts expired OTM.

(2) On February 28th I sold 3 RVBD MAR $35 puts at $0.45.  After commissions I netted $123.77.  This was one of my Deep OTM NP Strategy selections.  The puts expired OTM.

Now, onto my trades which remained open.

(1) First Exelon (EXC).  I started this trade almost one year ago, back on April 16th.  My most recent activity includes selling 2 APR $43 calls at $0.90 and then buying them back late last week at $0.30.  Also, earlier this month I sold 3 APR $40 puts at $0.50.  Between selling calls and puts, and the dividends received I have reduced my cost basis from $42.50 to $37.46.

(2) Next up is Hugoton Royalty Trust (HGT).  This is my third trade in HGT.  The first two were very successful.  I initiated this third trade back on March 1st, buying 500 shares of HGT at $21.50.  On March 17th I sold 5 AUG $22.50 calls at $0.80.    The strategy with HGT is to buy the shares, sell calls 4-6 month out, and then collect monthly dividends.

(3) CSCO is my next open position.  Back on February 10th I opened this trade by selling 5 MAR $18 puts at $0.21.  On Friday I rolled these puts out to JUN for a $0.70 net credit.

(4) NOK is up next.  I did a buy/write on them back on March 11th at a net debit of $8.17.  I sold the APR $9 calls. 

(5) My remaining open position is in Getty (GTY).  On March 14th I sold 5 MAR $22.50 puts at $0.55.  These puts expired ITM and thus I will have 500 shares of GTY put to me at $22.50 on Monday morning.  My plan is to sell the JUN $25 calls at $0.75 and collect the $0.48 dividend which will be paid in mid-April.

Now onto my my list of potential trades for April.

Let’s briefly look at each of these.

(1) First up is Gamestop (GME).  You’ll notice I have them listed twice.  That’s because I can’t decide which trade I like better.  I like the ROIC with the $19 put and I have traded GME at this strike price with good results before.  However, I like the $18 strike because there is better support at this price.

 (2) Next is CSCO.  As I mentioned above I am already short 5 contracts at the $18 strike.  This trade expands my position by selling more puts at a much lower strike.

(3) Aflac (AFL) is my next pick.  It has fallen sharply because of the tremendous disaster in Japan where it does a lot of business.  It closed at $50.47 on Friday well off its 52-wk high of $59.54.

(4) JNJ is up next.  I ‘borrowed’ this pick from by investing buddy Teddi over at www.fullyinformed.com.  JNJ is approaching bargain territory so this is a good trade despite the sparcity of DSP.

(5) AT&T (T) is fast approaching their ex-dividend date and is trading at a nice price.  Thus, I’m happy to enter a buy/write trade here and reinitiate a position in T.

(6) Last up is GTY which I discussed up above.  As I said before I intend to sell CCs against the shares I’m acquiring tomorrow.  With a dividend yield in excess of 8% I won’t mind holding this one for awhile.

Best of luck to all my readers out there.  Let me know your thoughts on my trades and I would enjoy hearing what trades you’re considering.

Regards,

Troy

Deep OTM NP Strategy – APR Week 4

Fellow Traders,

We have a total of 38 selections meeting our Week 4 criteria.  However, I don’t think all 38 are worthy of our risk capital.  As I mentioned in my MAR results post I think it is imperative, given the current market volatility, that we become more selective in what we choose to trade.  So, while I am posting the entire list of 38, I would like to highlight a few that caught my eye as having a good risk/reward profile.

Running down the list the first stock that caught my attention was Interdigital Communications (IDCC).  It closed Friday at $42.01.  The put I’m interested in is the $35 strike.  It has a bid price of $0.60 giving us a ROIC of 1.71% with 18.11% DSP.  Some will take one look at the chart and immediately wonder if I am out of my mind.  The stock had a strong run up from $25 to 57.50 and has since fallen sharply back to the low $40s.   But if you look closely you can see the stock is trying to find a bottom and that the money flow has bottomed out and is beginning to recover.  That technical indicator coupled with the stocks excellent fundamentals makes it a worthy candidate for an NP trade.  IDCC has a net margin of almost 40%!  Yes, you read that correctly, 40%.  It also boasts almost $12/share of cash sitting on its balance sheet.    It currently trades at about 12x trailing earnings.

The second stock that caught my eye was LDK Solar (LDK).  This is a stock I successfully traded under similar circumstances back in late November.  Friday, the stock closed at $11.47.  The APR put at the $9 strike closed at $0.15.  This gives us a 1.67% ROIC with 22.84% DSP. 

The third stock I noticed is one that was on our list last month as well, Rambus (RMBS).  We all know the technology stocks have been taking a beating of late.  Rambus is no exception.  In the past few weeks it has fallen from just over $22 to almost $18.  Friday it closed at $19.06.  The $16 put is at $0.36 bid.  This yields an ROIC of 2.25% and 17.94% DSP.  The $16 stike is below the 52-wk low of $16.94.

I also found three other stocks on the list which I feel are worthy of your consideration.  They are AGO, TSL, and WFR.  AGO insures bonds, while TSL and WFR are solar related stocks.

Best of luck to everyone this month.  I think we are in for quite a ride. 

Regards,

Troy

Deep OTM NP Strategy – MAR Results

Fellow Traders,

Well, another month of options have expired.  The month started with a whimper but went out with a bang.  Volatility is up and this is evident in our results.  Fourteen of the 56 (25%) selections meeting our criteria this month finished ITM.   Before we look more closely at the losers let’s look some more at the overall results.  To have traded all 56 of the selections would have required $398,350.00 in capital.  This would have produced premiums totalling $6,216.65 (net of commissions).  This results in a ROIC of 1.56%. 

However, this month our premiums would have been gobbled up by losses.  We had several positions that finished deep ITM.   Our biggest loser by far was Finisar (FNSR).  At the time it showed up on our screen, 3 weeks before expiration, it was trading at $41.10.   The $35 strike price on the put offered a seemingly ample 16.3% of DSP.  However, the bottom fell out on March 9th.  The stock closed at around $40 on the previous day but closed at $24.61 on the 9th.  There was no chance to avoid this loss. 

Coming in second on our list of the biggest losers was Delcath Systems (DCTH).  It showed up on our Week 4 list with a price of $11.30.  The $9 strike price on the put offered 22.83% of DSP.   The stock closed today at $7.03.   However, this loss was easily avoided because the stock dropped precipitously at the open on the Monday following our selection on the prior Friday. 

Our next big loser was Medifast (MED).  Like DCTH, MED showed up on our Week 4 list.  It was priced at $27.15.  The $22.50 strike on the put gave us 19.34% of DSP.   Today, the stock closed at $18.36.  With this trade we would have had sufficient time to bail out before having to take a large loss.  The stock moved down steadily for over two weeks before the bottom fell out a week ago. 

These results have led me to conclude that this strategy can not be followed blindly.  In an uptrending market it does very well with very few trades finishing ITM.  When volatility picks up it pays to be a little more selective.  I am going to continue to post every selection meeting our criteria but I would highly recommend you do significant DD on any selection you choose to trade.

I’ll be back later this weekend with the first round of picks for APR expiration.

Regards,

Troy

GTY – New Trade

Fellow Traders,

I executed the trade I referenced earlier on GTY.   This morning I STO 5 MAR $22.50 puts at $0.55.  My ROIC is 2.44% with only 5 DTE.  If you missed my earlier post with my rationale for this trade you can find it here: https://troysmoneytree.wordpress.com/2011/03/12/nok-new-cc-trade/.  Don’t let the title fool you.  The post starts out talking about my NOK trade but further down you’ll find my thoughts on GTY.

Regards,

Troy

PS.  I held off pulling the trigger on the LO trade.  After giving it a second thought I decided the premium was too high.  That tells me somebody knows something I don’t.  Like my grandpa always used to say…”if something looks too good to be true, it is!”

NOK – New CC Trade

Fellow Traders,

Earlier this week I executed a CC trade on NOK.  I bought 500 shares at $8.35 and sold 5 APR $9 calls for $0.17.  This gives me a net cost basis of $8.18.  The 52-wk low is $8.00.   My uncalled ROIC is 2.035% with about 35 DTE.  The called return 10.024%.

As you’re probably aware NOK has been sold and left for dead on Wall Street.  However, being a contrarian (my wife just says I’m contrary), I think Nokia is a good buy at these levels.  I think the down-side risk is minimal and the long-term potential is enormous if their joint venture with MSFT is anywhere near successful.

However, my immediate interest in NOK is more short-term in nature.  NOK generally pays a dividend once per year.   This generally occurs in late April or early May.  While I haven’t been able to find any news releases regarding the amount of the dividend, based on amounts from the past few years I believe it will be around $0.50.  At Friday’s closing price of $8.49 this is a yield of 5.9%. 

I believe buyers, wanting the upcoming dividend, will provide support to the price of NOK.  If this holds true there are two possible outcomes to my trade.   First, NOK could rise and close above $9 at APR expiration.  If this occurs I will miss getting the dividend but will have earned 10% on my money in just 35 days.  I’ll happily forego receipt of the dividend for that kind of return.  Second, the stock may rise or hold steady and my $9 calls will expire worthless.  However, if this occurs I will still own the stock when it goes ex-dividend and will be entitled to the estimated $0.50 dividend.  After the stock goes ex-dividend I can either sell the stock outright or sell another round of MAY or JUN calls.  

I believe a similar scenario can be set-up with one of our Deep OTM NP selections from last week, Getty (GTY).  Here’s a trade I’m considering:

(1) STO GTY MAR $22.50 puts at $0.55 or better.  This is a 2.44% ROIC with only a week to expiration.

(2) If GTY closes below $22.50 I will have the stock put to me at $22.50.  However, GTY has a $0.48 quarterly dividend and goes ex-dividend on 3/31.  Having the stock put to me on 3/21 I will be eligible to receive this dividend.  After 3/31 I can sell an APR $22.50 or $25 call, or I can just sell the stock outright.

(3) If GTY closes above $22.50 on Friday, I get to keep my put premium of $0.55 which equates to an annualized ROIC of 178%.

Again, the key to this trade is that I feel all of the bad news has already been priced into GTY and that it won’t fall much further over the next week or so.  Like NOK, if anything, the upcoming dividend should provide support to the stock price as buyers jump into try to capture the dividend.

Regards,

Troy

Deep OTM NP Strategy – March Week 1

Fellow Traders,

Nothing much to consider this final week before March option expirations.  Below is the list of stocks that met our screening criteria.  None of them jumped out at me as compelling, “must do” trades.

However, I do want to give you a “heads-up” on a stock that made our selection criteria back on March – Week 3.  You’ll recall Lorillard (LO) made our list that week.  It was down significantly on rumors that a report being filed by an independent commission to the FDA might lead to a ban by the FDA of all menthol flavored cigarettes.  I felt the odds of this occurring were slim to none and said so in my write-up here (https://troysmoneytree.wordpress.com/2011/02/25/otm-np-strategy-mar-week-3/).  As it turns out excerps from that report have been released and the results do not appear to be fatal to Lorillard or other menthol cigarette manufacturers.

However, for whatever reason(s), the premiums on LO options remain high.  The stock closed Friday at $79.35.  Yet, you can still sell the MAR $70 put for $0.74 and the $67.50 for $0.43.  Both of these have PFs > 2.0.  On Monday, I am going to enter an order to sell the MAR $70 at $0.70 or better. 

Best of luck to everyone this week and especially on expiration Friday.

Regards,

Troy

Deep OTM NP Strategy – March Week 2

Fellow Traders,

I don’t have a lot of commentary this week to accompany our weekly picks for the Deep OTM NP Strategy.  Nothing really jumps out at me as a compelling trade.  I will make a few comments about Getty Oil (GTY).  GTY is a Real Estate Investment Trust (REIT) that leases gas stations to operators.  They have over 1,000 locations primarily in the Northeast.  This past week their largest tenant, a subsidiary of the Russion oil company, Lukoil sold their interests to another company which then announced there would be a delay in the March lease payment.  Given the market doesn’t like uncertainty the stock understandably declined precipitously.  The new tenant said it would be making the lease payment on or around March 7th.  That’s Monday.  If the new tenant makes the payment on Monday and the put premium remains high it might be a good trade.  However, I’m not sold on it as a longer term investment.  This new tenant may attempt to reduce the lease rates and thus impact GTY’s ability to maintain its current dividend.

Best of luck to everyone in their trading this week.  Be careful out there.

Regards,

Troy