The Money Tree

Safely Generating Income in Retirement

Archive for May 24th, 2011

New NP Trades

Posted by mounddweller on May 24, 2011

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

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Posted in Portfolio Updates, Troy's New Picks! | Tagged: , , | 5 Comments »