The Money Tree

Safely Generating Income in Retirement

Deep OTM NP Strategy – OCT Week 4

Posted by mounddweller on September 25, 2011

Fellow Traders,

Lots going on this weekend and a huge number of selections delayed my completing the analysis needed to get this post out to you.  This week we have 223 selections from which to pick good NP trades.  Obviously 223 selections is way too many to list out in my post.  Thus, this week I’m going to try something new.  I’m going to post my spreadsheet out in the files section of the  CoveredCalls-NakedPuts_OptionStrategies group on Yahoo.  You can find it here:

Of the 223 selections listed I found 3 that interested me.   They are BBT, HPQ, and RIG.  None of these are risk-free trades.  Given what is going on in the world and the market’s corresponding volatility all of these could easily fall below the selected strike prices.  The reason I selected these three is because I felt they had already fallen a great deal and thus MIGHT be closer to finding a bottom than other stocks which are still closer to their recent highs.  Also, I believe these are all good quality stocks.  BBT is a great, well managed regional bank,  HPQ is facing all sorts of uncertainty and turmoil and now has its second new CEO in a very short time.  However, it is also a great franchise and has now been beaten down to levels not seen since May 2005.  RIG has been beaten down as the price of oil has fallen in anticpation of a slowing global economy.  It is close to lows last seen during the BP oil rig disaster and the market bottom of 2008.

Let’s look at each one of these a little bit closer.  First, BBT.  BB&T Corporation operates as a financial holding company for Branch Banking
and Trust Company that provides banking and trust services to individuals and businesses.  It was founded in 1906 and is headquartered in Winston-Salem, North Carolina.  BBT was a selection of mine fairly recently.  You can read my write-up about it here:  The current trade that met our selection criteria is the OCT $17 strike price.  BBT closed Friday at $20.86.  The premium on the $17 strike is $0.31 bid.  This gives us a 1.82% ROIC with 19.99% of down side protection (DSP).  The one-year chart for BBT is below.

Next is Hewlett Packard, HPQ.  H  P, as it is commonly known is a technology conglomerate.  It operates in many, many sectors of the technology industry.  It manufactures hardware, and software, and also provides consulting services.  It was founded in 1939 and is headquartered in Palo Alto, California.   Because of the internal turmoil and the uncertainty surrounding its future direction it is dirt cheap.  It trades at less than 6x trailing earnings and 5x estimated forward earnings.  It also trades at 1.18x book value.  It is rare for a company like HP to trade anywhere near book value.  Now as I’ve said many times none of this means a stock can’t fall further.  Also, it is also readily apparent that HP has yet to hit bottom and begin any kind of recovery.  Take a look at the one-year chart shown below.

The NP trade I’ve selected for HP is the OCT $18 strike.  The stock closed at $22.32 on Friday.  The $18 strike gives us 20.47% of DSP.  The premium of $0.25 gives us a 1.39% ROIC with 29 days to expiration.  The $18 strike is also below HP’s current book value of $19.39.  I firmly believe HP will eventually get its act together and the stock price will rise accordingly.  Thus, I am happy to own it at less than book value.

Last up is Transocean, RIG.  Transocean Ltd. provides offshore contract drilling services for oil and gas wells worldwide. It offers deepwater and harsh environment drilling, oil and gas drilling management, and drilling engineering and drilling project management services. The company also offers well and logistics services. It was founded in 1953 and is based in Zug, Switzerland.

Almost of the oilfield services companies have fallen off a cliff lately.  RIG is no exception.  Since March it has fallen 40% from a high of $85.35 to Friday’s closing price of $51.21.  It now trades well below its book value of $65.35.  It is also trading at less 9x estimated future earnings.  It recently implemented a new quarterly dividend policy.  It now pays an annual dividend of $3.16.  At Friday’s closing price, that is a yield of 6.1%.

The NP trade which meets our selection criteria is the OCT $42.50 put.  The premium is $0.80.  This gives us a 1.88% ROIC with 18.57% DSP.  RIG has not traded at the $42.50 strike price since January of 2005.

Well, that’s it for this week.  I encourage you to do your own deep due diligence on these three selections or any other that you find in the list before placing any trades.    Given the uncertainty in the market there is no telling how low any of these stocks may go and thus it is more important than ever that you be comfortable owning any company in which you place a trade.




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