The Money Tree

Safely Generating Income in Retirement

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.



One Response to “Deep OTM NP Strategy – AUG Week 2”

  1. […] Next up let’s look at Foster Wheeler (FWLT).  This is not the first time it has met our screening criteria and been selected for further analysis.  You can read my previous write-up here: […]

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