The Money Tree

Safely Generating Income in Retirement

Archive for April 24th, 2011

Deep OTM NP Strategy – MAY Week 4

Posted by mounddweller on April 24, 2011

Fellow Traders,

Happy Easter!

We have a total of 7 trades which met our selection criteria, 3 are mid-caps and 4 are small-caps.  Most have shown up on our screen previously at one time or another.  The three exceptions are LIZ, PTIE, and TRGL. 

In running through through the vetting and DD process I use for these type of trades none of the selections jumped out at me as being a great trade.  When these situations occur (and they frequently do) I generally go back to the selections from the prior week and see which, if any, remain viable trade candidates.  Doing so this week returned me to AMSC.  Last week it closed at $12.81 and the $10 strike made our selection criteria.  This week it fell further, closing at $11.74.  The $9 strike has a bid of $0.10.  The $9 strike is also less than the $9.86 book value of AMSC.

Up above I referenced the vetting and DD process I use for my Deep OTM NP Strategy trades.  It is relatively quick.  I focus in two primary areas, (1) the one-year price chart of the underlying stock, and (2) that company’s most recent financial statements.

On the 0ne-year price chart I look at a few items, the 52-week hi and low, areas of previous price support, and where the current price is relative to the first two items.  I use these items to help me ascertain if now is a good time to trade the stock.  Stocks that are closer to their 52-week lows than their highs interest me.  Right or wrong I believe they have less distance to fall before value investors step in and begin buying the stock.  I also like selections where the strike price is below areas of previous support.    

On the company’s financial statements I look at profitability, cash flow, and net cash.   Trades where the underlying company is profitable, or at least generating positive cash flow generally rate higher than those that don’t.  If the company is neither profitable or generating positive cash flow then the amount of cash on the balance sheet takes on great importance.

I believe the first set of criteria help me pick trades that will expire OTM.  The second set of criteria are important for when I’m wrong about the trade.  If I can’t extricate myself from a losing trade prior to expiration and I end up having a stock put to me, I want to feel comfortable having it in my portfolio for some period of time.



Posted in Deep OTM NP Strategy | Tagged: , | 6 Comments »