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Archive for August 28th, 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

 

 

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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

 

 

 

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