The Money Tree

Safely Generating Income in Retirement

Archive for August, 2011

Weekly NP Strategy

Posted by mounddweller on August 28, 2011

Fellow Traders,

Those of you who participate in Yahoo groups know that I have previously expressed an interest in trying my hand at trading weekly options.  Prior to a couple of weeks ago I had never executed any weekly option trades.  Over the past 3-4 weeks I have been gaining experience in trading these very short-lived options by selling OTM puts in what I considered to be very low risk companies like CSCO, MSFT, and INTC.

Having done that I now find myself wanting to develop a trading strategy using weekly options similar to my Deep OTM NP Strategy.  When I began posting about my Deep OTM NP Strategy I had already been behind the scenes testing it out for over 6 months.  With this new Weekly NP Strategy I’m going to give you the opportunity to ride along with me as I test it out.  So, before I proceed any further I want to make one thing very clear, THIS IS A WORK IN PROCESS!  I HAVEN’T BACK-TESTED THIS STRATEGY IN ANY WAY.  IT MAY BE A COLOSSAL FAILURE.  THUS, ANY TRADE MENTIONED MUST BE CONSIDERED PURELY SPECULATIVE.  AS ALWAYS, DO YOUR OWN DUE-DILIGENCE!

Now, with that rather loud and annoying disclaimer out of the way let me share with you what I’m considering for selection criteria as a first attempt in developing this strategy.  I’m looking at using my friend Patrick’s option screener (http://www.mtrig.com/default.aspx) to select weekly options which meet the following criteria:

(1) the strike price is at least 5% below the current trading price, and

(2) the return on invested capital (assuming it is a cash-secured put) is at least 0.5%.

That’s it.  Those are my only criteria.  From those I will look for specific trades that I feel provide the best chance for expiring OTM.  So without further delay let’s look at what running this screen produced.  Again, these are all puts that expire on Friday, September 2nd.

As you can see our screen returned quite a few selections, 77 to be exact.  That may be too many to evaluate every single week so we may have to tweek the selection criteria to whittle that down to a managable size.  However, we’ll wait a while before deciding to do that.  Once the VIX settles down the problem may take care of itself.  Lower volatility should limit the size of our potential selections.

Of the 77 selections produced by our screen 4 caught my eye.  Why did these appeal to me?  Well, 3 of the 4 potential trades are tied to stocks which have already been beaten down quite a bit.  BP, RIMM, and SU all have rather nasty looking 1-yr price charts.  All are either approaching or have recently bounced off of 52-wk lows.  So what about SLW?  Well, it is a stock that has substantial volatility and I just happen to like it’s longer term prospects so I’m willing to experiment with it a little bit.

So, let’s follow these this week and see how we do.  I may actually be brave and pick one to trade.  We’ll see what tomorrow brings first.

Best of luck in all of your other trades this week.

Regards,

Troy

 

 

Advertisements

Posted in Uncategorized | 2 Comments »

Deep OTM NP Strategy – SEP Week 3

Posted by mounddweller on August 28, 2011

Fellow Traders,

This week we have a decent number of selections from which to choose.  Unfortunately, I only found one of them to be of interest.

As you can see the one I selected is James River Coal (JRCC).  Why JRCC you ask?  Well, you can be sure it wasn’t because of the fantastic looking 1-yr price chart.  Take a look…

That, my friends, is ugly!  No, the reason I selected JRCC is because it is cheap.  It is trading at just 79% of its book value which is $13.07.  Can it get cheaper?  Of course it can!    However, our selected strike price of $8 give us 23% down-side protection (DSP) from Friday’s closing price.  At $8, JRCC would be trading at 61% of book value.

So why is JRCC so cheap?  Well, it missed analyst’s last quarterly earnings estimate by a wide margin.  Top line revenue growth was fine but the bottom line was not.  The guys over at The Motley Fool think the selling was over done and now is a good time to get into JRCC.  You can read their comments here: http://www.fool.com/investing/general/2011/08/10/james-river-coal-shares-plunged-what-you-need-to-k.aspx.

Likewise, during the quarterly earnings call, both the CEO and CFO were enthusiastic and said the shortfall was not due to higher operating costs at any of their mines.  Rather, the increased costs came from purchases of coal for their new Metallurgical coal blending process.  You can read the earnings call transcript here: http://seekingalpha.com/article/286118-james-river-coal-s-ceo-discusses-q2-2011-results-earnings-call-transcript?source=yahoo.

As I mentioned earlier the stock is cheap and not just from a balance sheet perspective.  It is also cheap relative from an income statement basis as well.  It is trading at < 7x trailing and anticipated earnings.

So, with 3 weeks to expiration, the SEP $8 put is going for $0.10 bid.  That gives us a 1.25% ROIC with over 23%  DSP.  In my opinion the bad news is already out so this might not be a bad trade.   Given it is trading at multi-year lows, it just seems to have limited further downside from here.

As always, do your own DD and trade accordingly.

Regards,

Troy

 

 

 

Posted in Deep OTM NP Strategy | Tagged: , | Leave a Comment »

Deep OTM NP Strategy – SEP Week 4

Posted by mounddweller on August 21, 2011

Fellow Traders,

Many of you may recall my surprise a couple of weeks ago when I announced that there were 88 selections to choose from that week.  Then again last week there were 78 selections.  Well, we’ve now blown those records clean out of the water.  This week there are 414 selections that met our Week 4 criteria.  That is way too many for me to include in a blog post.  Thus, this week I’m going to depart from my normal process and only list the selections that caught my eye and that I think are worthy of your further due diligence.  If anyone is interested in seeing the complete list just leave a comment to this post and I’ll send you a spreadsheet with all 414 selections.

The first thing you’ll notice is that all but one of the selections that interested me are all large-caps.  This is not an accident.  In this type of market I’m only interested in trading stocks that I have no doubt will be around long after this latest crisis has passed.

First up this week is AFLAC (AFL).  I wrote about AFL last week so to avoid repeating myself and boring you I won’t say much about it.  However, last week I shared with you the 1 year price chart.  This week I want to show you the 5-year price chart so you can get a sense for where the stock might go if we encounter another crisis like we had in 2008.

Next on our list is Applied Materials (AMAT).  AMAT provides manufacturing equipment, services, and software to the semiconductor,
flat panel display, solar photovoltaic (PV), and related industries worldwide.   Applied Materials, Inc. was founded in 1967 and is headquartered in Santa Clara, California.

I like AMAT a lot.  It is the very first stock I ever sold an option on.  I have wanted to circle back to it for a long time but felt it was too expensive.  Now it has appeared on my Deep OTM NP selection screen.  I’m going to give it a strong look.   AMAT has a strong balance sheet with $2.35/share in net cash.  It trades at 9.1x trailing earnings and 8.2x expected earnings and it pays $0.32 annually in dividends.  At the $9 strike price that is a 3.56% dividend yield.  I would be very happy owning it at $9.

Again, I’m going to show you the 5-yr price chart.  In this case you can see AMAT is not too far from it’s 2008 lows.  That doesn’t mean it can’t go lower than that but in my opinion it does make it less risky than some other stocks which remain a great distance from their 2008 lows.

BB&T (BBT) is the next selection that caught my eye.  It caught my eye for a couple of reasons.  First, earlier this week it was a featured selection in an investing newsletter to which I subscribe.  Second, the put option on BBT that we are interested in has 33% DSP and again is very close to lows encountered in the 2008 financial crisis.  The $13 strike price has a 1% ROIC.

BB&T Corporation operates as the financial holding company for Branch Banking and Trust Company that provides banking and trust services to small and mid-size businesses, public agencies, local governments, and individuals in the United States.   As of May 17, 2011, it operated approximately 1,800 financial centers in North Carolina, Virginia, Florida, Georgia, Maryland, South Carolina, Alabama, Kentucky, West Virginia, Tennessee, Texas, Washington D.C., and Indiana. The company was founded in 1906 and is headquartered in Winston-Salem, North
Carolina.

In the interest of time and the length of this post I am going to leave the rest of the list for you to review and do further research on.  However, for those of you interested in Gamestop (GME) I will remind you that I have written about it in my blog before.  Typing GME in the search box will provide you with a list of my prior posts.

Best of luck to everyone in their trades this week.

Regards,

Troy

 

Posted in Deep OTM NP Strategy | Tagged: , , , , , , , | 1 Comment »

New Weekly NP Trade – MSFT

Posted by mounddweller on August 19, 2011

Fellow Traders,

Today I placed another weekly trade.  I STO 5 AUG26 MSFT $23 puts at $0.24.  My ROIC (net of commissions) is 0.948% which equates to 49.45% annually.  MSFT was trading at $24.09 when my trade executed.

I like MSFT at $23.  It has support at this price.  However, given the current market volatility no support level should be considered rock solid.

Regards,

Troy

 

 

Posted in Portfolio Updates, Troy's New Picks! | Tagged: , | 1 Comment »

Deep OTM NP Strategy – AUG Results

Posted by mounddweller on August 19, 2011

Fellow Traders,

As one might expect given the recent market volatility the Deep OTM NP Strategy didn’t perform very well this month.  Over the past 5 weeks the Deep OTM NP Strategy presented us with 236 selections.  At expiration today 90 of those 236 possible trades finished ITM.  This equates to a 61.9% ‘win’ percentage.

Trading all 236 selections would have required a substantial cash outlay of $1.9 million (assumes cash secured puts, no margin).  Premiums net of commissions would have equaled $23,878.50.  This would have resulted in a net premium ROIC of 1.25% (13.47% annualized).  However, had you let all of your positions run to expiration you would have incurred a substantial loss of  capital.  Capital losses would have totalled (including commissions) $69,296.70.

However, had you only entered trades on the 10 selections I personally recommended you would have done far better.  Only 1 of my 10 selections finished ITM.  My lone loser was Riverbed Technologies (RVBD).  It was a selection in Week 5.

Well, AUG is in the history books.  I’ll be back later this weekend with selections for Week 4 of SEP.

Regards,

Troy

Posted in Deep OTM NP Strategy | 1 Comment »

New NP Trades

Posted by mounddweller on August 18, 2011

Fellow Traders,

I entered three new NP positions today.  One is a weekly, the other two have a regular SEP expiration.  Below are the details of my trades:

First, let’s look at my Gamestop (GME) trade.  Long-time readers of my blog know that I’ve traded GME several times over the past few years.  It is a stock I’m comfortable trading at the right price.  Yesterday, after the market close they announced quarterly earnings.  Analysts weren’t happy with what the initially saw in the press release and the stock sold off hard at the open this morning.  Luckily, I was paying attention at the right time.  I was able to sell the SEP $18 puts for $0.65.  This all happened within the first hour of trading this morning.  Later in the day analysts (probably after the earnings conference call) formed a different opinion and the stock recovered swiftly, closing at $21.43 up 4.94%!  My ROIC for this trade is a very nice 3.49% with 16% DSP (based on the closing price of $21.43).

Next up is INTC.  I’ve been wanting to get back into an INTC trade for sometime now and finally today the opportunity presented itself.  I STO 5 AUG26 $19 puts at $0.20.  In my humble opinion INTC is a great buy at $19 so I have no qualms selling puts at that level regardless of market conditions.   If INTC holds above $19 my one-week ROIC will be 0.94%.  Annualized that’s north of 50%.

Last, but certainly not least, is another blue-chipper, JNJ.  I STO 2 JNJ SEP $57.50 puts at $0.62.  My ROIC for this trade is right at 1.00% with 8.96% DSP.  The reason I like this trade comes from my review of the 2-year price chart.  JNJ exhibited strong support at $57.50 during the sell-off last summer.

Other stocks I’m keeping an eye on for a possible NP trade are: T, ABT, MDT, CSCO, AFL, WMT.  You’ll notice all are solid blue-chip companies.  Now is not the time to gamble with anything but the very best.

Regards,

Troy

 

 

Posted in Portfolio Updates | Tagged: , , , | Leave a Comment »

Deep OTM NP Strategy – AUG Week 1

Posted by mounddweller on August 13, 2011

Fellow Traders,

Well, here we are in the final week before AUG expiration.  Like last week, we have a plethora of choices in our Deep OTM NP Strategy.  This week there are 78 trades which passed our screening criteria.  Below are all of the trades which passed our screening criteria.

From the 78 possible trades I have selected 3 that I think are worth further consideration.  All three are reasonably well-known companies.  Two are large-caps and one is a mid-cap.

First up is AFLAC (AFL).  AFLAC, through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance.  The company offers cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities in Japan. It also offers accident/disability plans, cancer plans, short-term disability plans, sickness and hospital indemnity plans, hospital intensive care plans, fixed-benefit dental plans, vision care plans, long-term care plans, and life insurance products in the United States. Aflac Incorporated sells its products through sales associates, independent corporate/individual agencies, and affiliated corporate agencies. The company was founded in 1955 and is headquartered in Columbus, Georgia.

I have had my eye on AFLAC for several weeks now.  It is a well-known and well respected company.  However, because a large portion of its business is derived from operations in Japan, it had fallen significantly in response to the potential impact of the natural disaster which occurred earlier this year.  It looked like a bargain to me at $44.  It looks like an even better bargain now at $37.  However, what has held me back from making an outright purchase of AFLAC is its 5-year price chart.  During the financial crisis of 2008/09 AFL fell to as low as $14.58.

On the positive side of the ledger AFL trades at a forward P/E of 5.73.  Further, over the past 5 years AFLAC has consistently increased its quarterly dividend, from $0.13 to $0.30.

Below is a 1-yr price chart for AFL.  As you can see it isn’t a pretty picture.

With a chart like this I’m sure many of you are wondering why I would consider this as a potential trading opportunity.  For me it comes down to three things, (1) the stock is already at a depressed price, (2) the strike price of $33 is below the lows encountered last week during the huge sell-off in the market, and (3) I really wouldn’t mind owning AFL at $33.

Next up is DELL.  Dell Inc. provides integrated technology solutions in the information technology (IT) industry worldwide. The company designs, develops, manufactures, markets, sells, and supports mobility products, including laptops, netbooks, tablets, and smartphones; desktops PCs; and servers and networking products.   It was founded in 1984 and is headquartered in Round Rock, TX.

What I like about Dell is it’s fundamentals.  It trades at 7.7x prospective earnings.  Over half of it current market cap of around $28B  is in cold, hard cash sitting in the  bank.  While it does have over $7.6B in long-term debt this is easily covered by very strong cash flow.   Free cash flow for the trailing 12-month period is a robust $2.34B.

In the 1-year price chart we can see that Dell has support at our strike price of $13.  Also, the strike price is just below the recent low of $13.49 recorded last week.

My last featured selection for this week is Sotheby’s (BID).  Sotheby’s, together with its subsidiaries, operates as an auctioneer of fine
and decorative art, jewelry, and collectibles primarily in the United States, the United Kingdom, China, and France. The company operates in three segments: Auction, Finance, and Dealer. The Auction segment functions as an agent offering authenticated works of art for sale at auction. It also involves in brokering private sales of artwork. The Finance segment provides collectors and dealers with financing, which is secured by works of art that the company has in its possession or permits the borrower to possess. The Dealer segment invests in and resells artworks. It also operates as an art dealer for Dutch and Flemish Old Master paintings, as well as French impressionist and post-impressionist paintings. In addition, this segment sells works of art directly to private collectors and museums, as well as acts as a broker in private purchases and sales of art. Additionally, it operates a retail wine shop in New York City, as well as offers a range of wines online. The company was founded in 1744 and is headquartered in New York, New York.

Did you catch that last sentence?  Sotheby’s was founded in 1744.  It has been around forever, and has survived the Revolutionary War, the Civil War, the Great Depression, two World Wars and countless other crisis.  Therefore, it seems highly unlikely to me that the current economic turmoil in Europe and the US will cause it much harm.

It currently trades just under 11x forecasted earnings and has strong operating margins.  It also has around $3/share in net cash on it’s balance sheet.  Like our other selections this week the chosen strike price is below lows encountered last week during the huge sell-off.  Here is the 1-year chart for BID.

Well, there you have it.  78 possible trades and three featured selections.  Best of luck to everyone in their trading this week.  I feel we could be in for another rough ride so buckle up tight.

Regards,

Troy

 

Posted in Deep OTM NP Strategy | Tagged: , , , | Leave a Comment »

PBR – An Update

Posted by mounddweller on August 11, 2011

Fellow Traders,

Want to update you on my recent PBR trade.  As you may recall I have been selling NPs on PBR for the past 3 months, first at the $32 strike price and most recently at the $31 strike price.  I opened my third round of NPs on PBR back on 7/18.  PBR was trading around $32.30 and I sold the $31 put for $0.58.   With the recent market gyrations PBR had went from OTM to deep ITM.  It had fallen to as low as $25.94.  With AUG expiration right around the corner I didn’t think there was much chance for it to recover and finish above $31.  Thus, I began looking for opportunities to roll out for a net credit.  With a stock like PBR this is easier said than done.  I quickly found the PBR market maker liked big, fat spreads between his bid and ask prices.  This coupled with being deep ITM meant that the net credit for the SEP $31 puts was very small.  Going out to OCT at the time didn’t appear to be much better.  The market maker was only offering a net credit of $0.40.  As PBR recovered a little in price the net credit offered would go up to $0.50 or $0.55.  The net-credit available at the mid-point was a more reasonable $0.60.  Hence, on Tuesday I put in a limit order to roll-out to the OCT $31 puts at a net-credit of $0.60.  The market closed Tuesday without my trade going through.  The big sell-off on Wednesday eliminated any possibility of getting a good trade.  Thus, I was pleasantly surprised and pleased when the market opened higher this morning.   Between the strong upward movement in the price of PBR and the market maker being a little less greedy I was finally able to roll-out for a net-credit I considered fair.  Below is the trade I was finally able to execute:

BTC 3 AUG $31 puts at $3.60

STO 3 OCT $31 puts at $4.30

If my OCT $31 puts expire OTM I will have earned $362.70 (net of commissions) which equates to a 15.3% annualized ROIC.

For those of you looking for some exposure to the oil and gas industry I would encourage you to take a look at PBR.  The stock closed today at just over $28.  It is trading at less than book value.  The big decline in Brazilian stocks and the recent weakness in oil prices have combined to present a significant opportunity to pick up one of the world’s great oil companies at a fire-sale price.   I am considering expanding the size of my position in PBR by selling additional puts on the next big down day in the market.

Regards,

Troy

 

Posted in Portfolio Updates | Tagged: , | Leave a Comment »

Deep OTM NP Strategy – AUG Week 2

Posted by mounddweller on August 6, 2011

Fellow Traders,

Well here I sit, totally frustrated.  After working on my post to you for over an hour I lost all of my work.  I’m back to staring at a blank screen.  Let me quickly recap my previous thoughts.  The increase in volaltility has shown up in our Deep OTM NP Strategy.  This week we have 88, yes I said 88, possible trades to  choose from.  Not all are weak small-caps either.  Many of them are large-cap companies that most, if not all, of you have heard of previously.

As you can see I have selected three for your further consideration; CMI, SLW, and FWLT.  My rationale in selecting these three differs from my usual approach.  As you know, most of the time my picks from the list tend to have favorable technical analysis profiles.  The strike prices are often below 52-wk lows or other lines of visible support.  In addition, they almost always have rock solid balance sheets.  That’s not to say one or more of the three I selected this week don’t meet those criteria its just that wasn’t my primary reason for selecting them.  No, the reason I selected these this week is because I like their long-term growth prospects.  With the world going crazy it is entirely possible the stocks I chose could finish significantly ITM and thus we might have to own them for a long time if we didn’t want to take the short-term loss.  Thus, I only chose trades on companies I felt had a bright future ahead of them.

First up is Cummins Engine (CMI).  Cummins is the world-wide leader in manufacturing large diesel and natural gas powered engines.  It has been around for almost 100 years and is headquartered in Columbus, Indiana (my home state).  Cummins trades at decent P/E multiples, has no net debt, and as I mentioned earlier has strong prospects for continued growth both domestically and internationally.  The $80 strike price offers 14% DSP with 1.19% ROIC.

Next up is an old friend of mine, Silver Wheaton (SLW).  I bought SLW a few years back before it practically became a house-hold name.  I bought it at $10, sold half after it doubled to $20, sold covered calls along the way and eventually had it called away from me at $30.  It eventually peaked earlier this year at $47.60.  Friday it closed at $34.15.

Silver Wheaton Corp., together with its subsidiaries, operates as a silver streaming company worldwide. The company has 14 long-term silver purchase agreements and 2 long-term precious metal purchase agreements whereby it acquires silver and gold production from the silver miners located in Mexico, the United States, Canada, Greece, Sweden, Peru, Chile, Argentina, and Portugal.  Low overhead allows it to have very high margins.  It essentially is able to ‘buy’ silver at $4/ounce and immediately turn around and sell it for $40.

SLW had several strike prices pass our selection criteria filter.  The $30 strike selected is simply the one which had the highest PF.  You’ll notice SLW has reasonable support around $30 as it has fallen to this price and rebounded more than once in the past year.  However, if you want to go a little further OTM all of the strike prices down to $26 have a PF > 2.0.

Last up for this week we have Foster Wheeler (FWLT).  Foster Wheeler AG provides construction and engineering services to oil and
gas, oil refining, chemical/petrochemical, pharmaceutical, environmental, power generation, and power plant operation and maintenance industries worldwide. The company’s Global Engineering and Construction Group designs, engineers, and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, gas-to-liquids facilities, power generation and distribution facilities, and gasification facilities and processing facilities associated with the metals and mining sector, as well as oil refining, chemical and petrochemical, and pharmaceutical and biotechnology facilities. It also owns refinery residue upgrading technologies, a hydrogen production process, and sulfur recovery technology. In addition, this group designs and supplies direct-fired furnaces, including fired
heaters and waste heat recovery generators; provides environmental remediation services with related technical, engineering, design, and regulatory services; and engages in the development, engineering, construction, ownership, and operation of power generation and waste-to-energy facilities in Europe. The  company’s Global Power Group designs, manufactures, and erects steam generating and auxiliary equipment for electric power generating stations, district heating, and industrial facilities, as well as offers related site services, including construction and erection, maintenance engineering, plant upgrading, and life extensions; owns and/or operates cogeneration, independent power production, and waste-to-energy facilities, as well as power generation facilities for the process and petrochemical industries; and conducts research
and development in the areas of combustion, solid, fluid and gas dynamics, heat transfer, materials, and solid mechanics. The company was founded in 1894 and is based in Geneva, Switzerland.

Wow, that was a long description wasn’t it?  Basically if it involves engineering and construction of energy or power generation structures they do it.  FWLT has been falling since hitting a 52-wk high of $39.75 back in late February.  Friday, it closed at $24.20.  The $21 strike price offers 14.17% DSP with a ROIC of 1.1%.  The strike price is just above the 52-wk low of $20.92.

 

Well folks, there you have it.  Lots to look through and think about before the opening bell on Monday morning.  Best of luck to all of you in the coming week.  Try hard  not to let emotion drive your trading activity.  It is very hard, I know.  I succumb to it frequently and most of the time I pay dearly for it.

Regards,

Troy

Posted in Deep OTM NP Strategy, Troy's New Picks! | Tagged: , , , | 1 Comment »

CSCO – New Position

Posted by mounddweller on August 4, 2011

Fellow Traders,

Today I traded my very first weekly option.  I took advantage of the huge sell-off by selling 6 CSCO AUG 12th $14 puts at $0.18.  At the time CSCO was trading at $15.02.  However, it closed the day at $14.82.

Net of commissions my ROIC with 7 days to expiration is 1.15%.  Annualized that comes out to a ROIC of 59.87%!  My downside protection (based on the price at trade execution) is 6.79%.

Why did I pick the AUG 12th $14 strike?

(1) CSCO’s low during the last financial crisis in March of 2009 was $14.13 (a tad higher than my chosen strike price)

(2) Lots of flexibility – if CSCO is < $14 next Friday I can roll out to the next Friday (regular AUG expiration) or go all the way out to SEP or OCT.

(3) The regular AUG expiration $14 put was trading at $0.22 vs. the $0.18 I got for the weekly.  Twice as much market risk with only 22% more premium.  I’ll take my chances with the weekly!

 

 

Posted in Portfolio Updates | Tagged: , , | Leave a Comment »