The Money Tree

Safely Generating Income in Retirement

Deep OTM NP Strategy – OCT Week 5

Posted by mounddweller on September 17, 2011

Fellow Traders,

As promised I’m back with the Week 5 selections for our Deep OTM NP Strategy.  Please recall once a quarter we encounter a period with 5 weeks between expiration dates.  This is one of those occasions.  Thus, our selection criteria this week are different from the usual criteria in the first week after expiration.  Our criteria for this week is (1) minimum of 20% down side protection (DSP), and (2) a Put Factor (PF) greater than or equal to 2.0.

So let’s get to it.  This week, as is usual in the first week of a new period, we have a large number of possible trades to choose from.  192 to be exact.  So many in fact that I chose not to list the small caps on the blog.  None of the small caps were of any interest to me.  However, if you would like to see the complete list including the 67 potential small cap trades let me know and I’ll be happy to send you the list.

The first thing I hope you’ll notice is that of the 192 total possible trades I narrowed it down to just 4 that  I would be comfortable trading; 3 large caps and 1 mid cap.  Several others that I’ve selected and/or traded previously appeared on the list again this week but the set-up just didn’t seem right to me.  Part of this is due to the big run-up we had in the market this past week.  The S&P500 gained 6.5% this past week.  That, despite the continuing sovereign debt crisis in Europe, and our own woes here at home.   If I would have had this same list a week earlier I might have selected others as well.

Juniper Networks (JNPR) appears first on our list and coincidentally is my #1 choice this week.  I like this trade primarily because of its 1-year price chart.  You’ll notice it gapped down back in late July after reporting 2nd quarter earnings.  It missed analysts earnings estimates and experienced a slight drop in its operating margin.  Since then it continued to drift downward until finally finding support at $20.  Over the past several weeks it has cycled between $20 and $22 a share.  Friday, it closed at $20.15.  Thus, I think this presents a good entry point to sell the OCT $16 put.  Doing so give us another 22% of DSP.

Next up on the list is Arcelor Mittal (MT).  As most of you know it is one of the world’s largest steel manufacturers.  The shakiness of the global economy and MT’s high debt load have caused it sell off substantially, it is down almost 44% for the year.  What I see in MT is value.  It trades at about 5x forward earnings and less than half of book value.  It is not without risk though.  As I mentioned earlier it carries a substantial amount of debt on its balance sheet.  I chose MT because the $15 strike price is below the 52-wk low of $16.91 it hit this past week.  However, being number two on my list does not make it my second choice.  In fact, MT would be my 4th choice.

Third on the list is one I’m sure most of us are familiar with, Research in Motion (RIMM).  RIMM announced earnings this past week and Mr. Market did not take a liking to them.  RIMM fell sharply from around $30 to close Friday at $23.93.  Intra-day it had gotten as low as $22.74.  What I see in this trade is similar to that of MT.  The strike price of $19 is well below both Friday’s intra-day low as well as the 52-wk low of $21.60.  Also, RIMM despite all of the negative press is still a very profitable business.

Last, but not least, is our lone mid-cap selection, Atlas Air Worldwide Holdings (AAWW).  Atlas shares several characteristics with my other selections.  First, it is cheap, trading at only 7x forward earnings and just over book value.  The $37.50 strike price is below the 52-wk low of $39.66 and the book value of $41.29.  Second, despite hitting turbulence it remains profitable.

OK, that’s it.  Good luck out there this week and be careful.  I’m not thinking this rally is long lived.  At the first sign of renewed problems in Greece or Italy I believe we’ll be in for another rough ride to the downside.

Best Regards,


5 Responses to “Deep OTM NP Strategy – OCT Week 5”

  1. dealmakr said

    Hi Troy,

    Maybe another factor in your scans should include the earnings date. JNPR earnings report will probably hit the last week before expiration and if weak could prove to be another downdraft for the stock. Take a look at the premiums that you scanned for RIMM on the prior weekly series and you can see the elavated level for the short term puts prior to earnings. In writing NP’s earnings dates and the premiums reflected in the options may give a clue about the underlying volatility associated with taking the trade.


    • mounddweller said


      You are absolutely correct. One should always take earnings release dates into consideration before entering any option contract. Normally I do reference upcoming earnings release dates in my analysis. However, in this case it slipped my mind.

      I did some checking this morning and could not find a firm earnings release date for JNPR. Their last release, for the 2nd quarter, occurred on July 28. Assuming JNPR holds to a similar timeline I would expect their 3rd quarter release would occur in the last week of October, which is after OCT options expiration on 10/22. Thus, I think this will work out OK.

      Regardless of when the next earnings release actually occurs I still like JNPR at the $16 strike. Even in the darkest days of the last market meltdown in March 2009 JNPR didn’t spend much time below $15. It hit a low of $12.67 on March 2, but quickly rebounded to above $15 a short two weeks later.

      Kind Regards,

  2. Vijay Madnani said

    Any suggestions on how one can handle AAWW ? I am planning to roll out and down to Nov. 30.. Thx.>> vijay
    p.s… here is some breaking news on AAWW:

    Atlas Air Worldwide Provides Fleet Update
    Exercises termination rights for three early build 747-8 Freighters due to delays and performance considerations Now expects to receive nine 747-8Fs through 2013, five of which have been placed under long-term ACMI contracts Confirms first three deliveries of 747-8F aircraft scheduled for October and November 2011 will enter ACMI service with British Airways; first two deliveries scheduled for first half of 2012 will enter ACMI service with Panalpina Expects to retire remaining fleet of five older-generation 747-200 cargo aircraft in 2012 as planned; modern, more-efficient 747-400 cargo aircraft to provide continuing service 09/21 01:01 PM

    • mounddweller said


      I would take no action at this time. I think the severe drop today was a combination of two factors, (1) a knee-jerk reaction by existing shareholders because of the analyst downgrade, and (2) the sharp sell-off of the overall market after the Federal Reserve announced their latest stimulus boondoggle.

      Despite the steep drop today AAWW remains above our $37.50 strike price (just barely). I would continue to watch it closely but take no action until things shake out a bit more. As a matter of fact AAWW is currently up slightly in the after-market. Again, I would keep an eye on it for the next few days and see what happens before taking any action.

      Hope this helps. Just remember I can not give personalized investment advice. I’m not a registered investment advisor. I can only tell you what my thought process is when placed in a similar situation.


      • Vijay Madnani said


        Thanks for the rapid response. I was spooked because AAWW hit a new 52 week low on Volume that is 4.0* Above Avg. Volume.
        I hope the stock recovers from today’s losses… And yes, I do understand that you are only sharing your views and not giving any advice. I truly appreciate reading your blog and thank you for sharing your research with all of us.


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