The Money Tree

Safely Generating Income in Retirement

New NP Trades

Posted by mounddweller on April 13, 2011

Fellow Traders,

I made a couple of NP trades over the past couple of days that I want to update you on.  One is a very conservative trade on a true blue-chipper, MSFT.  The second one undoubtedly involves a substantially greater amount of risk.  It is with the high-flying mid-cap networking company Riverbed Technology (RVBD).

First up let’s look at my MSFT trade.  Yesterday (4/12) with MSFT trading at $25.59 I decided to STO 5 MAY $24 puts at $0.26.  My ROIC is 1.083% with 38 DTE and 7.15% DSP.  Here’s why I like this trade; look at the chart below of MSFT’s trading history for the 9 years.  It has gone nowhere.  It peaked in October of 2007 at $37 and fell to about $15 in March 2009.   Eliminate those peaks and valleys and it essentially has been range bound between $23 – $30.  With MSFT currently trading in the bottom of this band selling the MAY $24 puts seems like a pretty safe trade.

My objective in this type of trade is to generate a 12-15% annualized ROIC.  The strategy for achieving this objective is to sell near month puts on safe, large-cap stocks.  If the puts expire OTM and the stock is still in the bottom of the range I’ll repeat the trade next month.  If the puts finish ITM I will accept assignment and sell near month ATM calls against those shares.

My inspiration for doing this type of trade comes from my investing buddy, friend, and mentor Teddi over at www.fullyinformed.com.  Check out her recent article on how her trades in MSFT have outperformed gold over the past few years. 

Now let’s look at my more speculative NP trade in RVBD.  This is strictly an opportunistic trade.  Strike when the iron is hot.   My regular readers will recall Riverbed Technology (RVBD) appeared on our Deep OTM NP Strategy selection last month.  The stock was at $41.25 when I sold 3 MAR $35 puts for $0.45.  Those puts expired OTM.  Since then I had been keeping my eye on RVBD.  The stock price had continued to fall, closing yesterday at $30.92.  After the close yesterday afternoon they pre-announced their 1st quarter results.  Sales were up over 45%.  They are stealing business away from CSCO.  Anyway, the stock gapped up at the open this morning at over $35.  I took advantage of this by placing the following trade: STO 2 MAY $30 puts at $0.75.  My ROIC is 2.5% with
over 16.5% DSP.  The strike is below recent lows.  The PF at the time of my trade was 2.0.

My objective in this trade is simply to generate a generous ROIC relative to the amount of risk I believe I am taking.  The strategy involved is just taking advantage of opportunities as they present themselves in the market.  As I mentioned earlier this trade is not without substantial risk.  RVBD has been on a tear over the past year.  It had gone up almost 200% (from $15 to $45) in the past year before starting to fall back to earth a month or so ago.   

Regards,

Troy

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