The Money Tree

Safely Generating Income in Retirement

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.




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