What Others are Trading – June 2011

Fellow Traders,

New month, new opportunity to post your favorite new trades, or update us on your old ones.

Regards,

Troy

 

 

Deep OTM NP Strategy – JUNE Week 3

Fellow Traders,

We’ve got a short trading list this week to go along with our short trading week.  Only 4 stocks met our selection criteria.  I’ve got to think this is a good leading indicator of a possible correction in the near future.  When everyone wants to be on one side of the trade that tells me the end is near.

Here are the four selections for this week.  Only one, IDCC, interests me.

IDCC is the business of liscensing their extensive portfolio of telecommunications patents.  They recently announced their second quarter revenue would be less than originally expected.  This caused the stock to fall substantially as you can see in the chart below.

The stock appears to have  found support at just above $40.  It bounced off of this support back in March and it appears to want to bounce off it again now.  That’s my primary reason for liking this trade.  Fundamentally the stock is sound.  It trades for a reasonable 14x earnings and has over $11/share in cash on its balance sheet.

The $36 strike gives us over 16% of DSP.  The $0.60 premium gives us a ROIC of 1.67%.  Not bad for a three week holding period.

Good luck trading this week and keep in mind what I said earlier, I think we could see some near term weakness very soon.

Regards,

Troy

New NP Trades

Fellow Traders,

Wanted to update y’all on my recent trades.  Thus far this week I have established two new positions.

First up is Petroleo Brasileiro (PBR).  Yesterday I STO 3 JUN $32 puts at $0.65.   After loosely following its gyrations for the past several weeks (mainly down) I decided the time was right to sell some puts.  Like the proverbial broken clock which is guaranteed to be correct at least twice a day, my timing was actually correct this time.  Today, PBR bounced back up and the puts I sold for $0.65 yesterday, closed today at $0.39.  Of course tomorrow could be a down day and they could be back at $0.65 or more.  Anyway, a one-year chart on PBR shows why I like this trade.

PBR has bounced off support at $32 multiple times in the past year.  Barring a complete collapse in equities I believe it will do so again.  If I’m wrong I can roll the puts out further in time until I’m ready to have it put to me or I can accept assignment on June 18th and begin selling CCs.  Regardless, I will be happy to own PBR at $32.  It is one of the world’s great energy exploration and refining companies.   At $32 I would own it at less than 8x trailing earnings and a fraction over its current book value of $29.80.

Next up is MEMC Electronic Materials Inc. (WFR).  MEMC is a large manufacturer of polysilicon wafers.  It sells into both the semiconductor market as well as the solar energy market.  Therein lies part of the problem or opportunity depending upon your point of view.  Like PBR, WFR has sold off sharply over the past few months.  This is primarily attributable to the selloff of all solar related stocks.  WFR has fallen from $15 to just under $10 since mid-February.  It has now reached value territory, selling for < 7x prospective forward earnings and < book value ($10.11).  Here’s the chart for WFR:

I’ll be the first one to admit I may be a tad early on this one.  The stock has support around $10 but has previously fallen as low as $9.50 before bouncing back.  Time will tell if I should have waited a few more days but over the long haul I feel WFR will recover and this will prove to be good trade.  Here’s the trade I executed; with the stock trading around $10.10 I STO 5 JUN $10 puts at $0.43.

Before ending this post I want to point out one thing.  I opened both of these trades with half of the amount of capital I ultimately would be comfortable investing in either one.  Doing so gives me flexibility in case I’m wrong.  I did this because the market is clearly trying to decide where it wants to go next.  If it decides down is the way to go I want to be able to have capital in reserve should I need it to assist me in working my way out of a hole.

Regards,

Troy

Deep OTM NP Strategy – JUN Week 4

Fellow Traders,

Below are the Week 4 selections for the June expiration.

I have color coded the selections that I found of interest.  Let’s look at each one in turn and I’ll tell you a little about why they caught my eye.  First up is American Superconductor (AMSC).  AMSC caught my eye primarily because (1) it is rapidly approaching book value ($9.86) and (2) is has a ton of cash on its balance sheet ($4.79/share).  It closed Friday at $10.34.  Why so cheap you ask?  Because it’s largest customer refused to take any more deliveries.  This news caused a one day price drop from around $25 to $15 back in the first week of April.  The stock price has continued to drop.

Here’s the price chart.  Be forewarned, it’s ugly!

Now, I’m guessing you understand why the JUN $8 strike has such a high premium (5% ROIC with 26.5% DSP) .  This trade should only interest those traders who like the alternative energy industry and would like to potentially own AMSC at below book value.  With a chart that looks like this you have to expect there is a high probability the stock will continue to fall and you will have it put to you at expiration.  Gamblers (hint, not traders and certainly not investors) might want to place a small bet on it given the outsized premium.

Let’s move on to Daktronics (DAKT).  Here’s the chart for DAKT.  It doesn’t look quite as bad as AMSC.

Here’s the scoop on DAKT.  It missed analyst’s expectations when it reported quarterly results back in late February.   The stock sold off sharply and has yet to recover.  The company will report again on Wednesday, June 6.  Hence, the somewhat elevated premium (1.33% ROIC with 24% DSP).  Like AMSC, DAKT has a pristine balance sheet.  Net cash is $1.78/share.  Book value is $4.79/share.  My personal opinion (do your own DD and form your own opinion) on this one is that it is unlikely to hit the $7.50 strike price even if earnings are less than stellar.

Finally, last but not least is Enernoc (ENOC).  EnerNOC, Inc. engages in the development, implementation, and adoption of demand
response and energy management solutions for the electric power grid operators and utilities, as well as commercial, institutional, and industrial end-users of electricity in the United States.  Here is its chart.

This chart is why I like the ENOC trade.  A few weeks ago it hit a 52-wk low of $16.50.  Since then Money Flow has bottomed and is climbing.  Likewise the stock has come off the bottom, gapped up, and appears to want to recover some lost ground.  The JUN $15 strike is almost 10% below the 52-wk low and over 20% below Friday’s closing price.  With a premium of $0.25, the trade offers a 1.67% ROIC with over 22% DSP.  ENOC also has a pristine balance sheet with net cash equalling $3.98/share.

Well there you have it.  Look through the other selections as well.  Perhaps you’ll find something I missed or perhaps your tastes are different from mine.  Have a great week.

Regards,

Troy

Deep OTM NP Strategy – May 2011 Results

Fellow Traders,

Well, another month of options have expired.  This trading month had 5 weeks in it and produced 49 selections.  42 of the 49 (85.7%) trades finished OTM.  Before we look more closely at the 7 losers let’s look some more at the overall results.  To have traded all 49 of the selections would have required $373,750.00 in capital.  This would have produced premiums totalling $6,680.45 (net of commissions).  This results in a ROIC of 1.79%.

However, this month our premiums would have been gobbled up by losses.  We had a couple of positions that finished deep ITM.   Our biggest loser by far was Toreador Resources (TRGL).  At the time it showed up on our screen, 4 weeks before expiration, it was trading at $8.85.   The $7.50 strike price on the put offered a seemingly ample 18.08% of DSP.  However, the stock closed today at $5.15.  A person actively managing a position such as this clearly would not have waited until expiration to exit the position.

Coming in second on our list of the biggest losers was Biomimetic Therapeutic (BMTI).  It showed up on our Week 5 list with a price of $13.28.  The $10 strike price on the put offered 29.97% of DSP.   The stock closed today at $8.10.   Again, a trader actively managing this position clearly would have cut and run long before now.

Our remaining 5 losers (IO, LFT, RMBS, LPHI, and MBI) were relatively small.

Again, I want to highly recommend you do significant DD on any selection you choose to trade.  As you can see from the above results, while the overall ‘win’ percentage was high, a few losers can quickly eat up all your profits.

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

Regards,

Troy

CSCO – Expanded My Position

Fellow Traders,

My only trade today was to expand my position in CSCO.  You’ll recall I originally sold 5 puts at the $18 strike a few months ago.  Rather than have them put to me at expiration I have been rolling them out.  I am short the JUN $18 puts.  Had I been more on top of it I would have bought back those puts as CSCO approached $18 prior to its earnings announcement.   However, other distractions made me forget about their upcoming earnings release.  So today with CSCO now again trading below $17 I decided to expand my position and lower my average price if assigned by selling 5 JUL $16 puts at $0.33.

If I were to have all 1000 shares put to me after June and July expiration my net cost per share will be $16.27.  However, I have no intention of allowing that to happen.  My strategy with CSCO is to continue to roll the puts if they’re ITM at expiration until I can no longer do so for a net credit.  At that point I should have worked my average net cost down substantially and should do very well when CSCO eventually recovers.

Regards,

Troy

Deep OTM NP Strategy – May Week 1

Fellow Traders,

Yet another week has passed us by.  We’ve arrived at the last week before May options expiration.  As is usually the case in the final week we don’t have much to choose from.  Just 4 selections this week, one of which is a very unusual situation.  Here are the 4 selections:

The interesting selection this week is PNSN.  It is in the financial services industry.  It operates as a clearing house for futures trades as well as providing other trade settlement and data processing services.  If you look at a 1, 2, or 5 year chart on it you can see that it has fallen substantially across all those periods.  However, until earlier this week , it had found support at around $5/share.  The big catalyst that caused further selling this week was something it disclosed when it announced quarterly results.  It seems it had acquired some bonds from a horse-racing venue of which one its Directors was affiliated.  The bonds are no longer paying interest.  Long story short something smells rotten in Denmark (or I should say Dallas, since that’s where they’re HQ’d).  The Director has resigned and the company may put itself up for sale.

The opportunity for us put sellers is substantial.  The stock fell heavily on Wednesday and Thursday before recovering today.  It closed at $3.34.  The MAY $2.50 put is at $0.10 bid.  That’s a 4% ROIC with a one-week holding period.  Pretty enticing.  What makes the trade worth considering is that even if the bonds referenced above were totally written off, PNSN still has a tangible book value of around $3/share.  This bit of information comes from an analyst at Raymond James.  So, if the put opens on Monday at $0.10 bid it might just make a good 5-day bet.

Regards,

Troy

Deep OTM NP Strategy – May Week 2

Fellow Traders,

My apologies for getting this posted so late in the weekend.

This week’s sell-off in energy and silver has presented us with some trades on stocks we’ve not seen before.  On the list below you can see there are potential trades in Coeur DAlene Mines Cp (CDE), Hecla Mines (HL), and Crosstex Energy (XTXI). 

Of these three XTXI is the most interesting.  It seems unlikely that it would fall another 22% in the next two weeks.  However, if it did and you had the stock put to you, you could take comfort in knowing you owned a commodity producing asset that was willing to pay you a 4.8% annual dividend.  The downside to this trade is the meager premium.  At $0.05 per contract you would have to sell a lot of contracts to make it worth your while.

The other trade that appeals to me is NVDA.   With over $4/share in net cash, this stock has a rock-solid balance sheet.  It also is trading at a reasonable, albeit not cheap, 15x forward earnings.  The trade itself has over 13% downside protection with a ROIC of 1.41% with only 2 weeks to expiration.  One important thing to keep in mind is the company is scheduled to report quarterly results on May 12.  Given the strong results recently reported by INTC I wouldn’t expect a bad report from NVDA.  However, I don’t follow NVDA very closely so don’t place your bets based on my opinion; it’s not worth much.

Well, that’s it for this week.  Today is Mother’s Day.  Don’t forget to call your mom!

Regards,

Troy

Deep OTM NP Strategy – MAY Week 3

Fellow Traders,

A very uninteresting list this week.  When I first saw the list I thought it might have some exciting possibilities.  I thought this because there were several selections which showed up on our list for the very first time ever.   These selections included HUSA, NR, and OWW.  However, after the requisite due diligence none seemed to offer a high enough return relative to the degree of risk being taken.

Best of luck to everyone in their trades this week.

Regards,

Troy

NOK – Position Closed

Fellow Traders,

On Friday I closed out my position in NOK.  You’ll recall I initiated this position back on March 11th.  My objective in this trade was to capture Nokia’s dividend which, like a lot of foreign companies, is only paid once a year.  The ex-date for their annual dividend is May 4th.  I know what you’re thinking, Troy you sold too early, you’re not going to get the dividend.  Correct, I’m not.  Instead I applied the old adage, “a bird in hand is worth two in the bush!”  I decided to take advantage of the run-up in price and take the capital gain while I had it as opposed to collecting the dividend on May 4th and then perhaps having the stock fall back substantially.

Here are the transactions for this trade:

This turned out to be a wonderful trade.  In just 49 days I was able to generate a ROIC of 12.53%.  I consider that to be quite satisfactory.  This trade worked out so well that I am going to look for other foreign companies who pay substantial dividends once per year.  The strategy is simply to buy the stock a few weeks prior to the ex-date and ride the run-up as other traders drive up the price to get into the stock and capture the dividend.  If the stock rises substantially before the ex-date, take the money and run.  If it doesn’t, hold on to the stock, collect the dividend and then sell covered calls against it until the price recovers from the drop after going ex-dividend.

Regards,

Troy