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Archive for October, 2011

Deep OTM NP Strategy – NOV Week 3

Posted by mounddweller on October 30, 2011

Fellow Traders,

The big move up this past week significantly reduced the number of opportunities from which to select our trades.  After filtering out stocks selected last week, and the usual biotechs and small cap Chinese stocks we were left with 21 possibilities.  From these I found two that I would like to highlight for you today.

First up is The Williams Companies (WMB).  The Williams Companies, Inc., through its subsidiaries, engages in finding,
producing, gathering, processing, and transporting natural gas primarily in the United States.

I did a ‘double take’ when I first came across this possible trade.  It seemed too good to be true.  Friday, the stock closed at $31.25.  It has risen sharply over the past month, having been as low as $23.35 when the market bottomed out on October 3rd.  The strike price selected is $20.  That’s why I did the ‘double take’.  It isn’t often you are presented with the opportunity to earn 0.75% ROIC on a trade with 3 weeks remaining to expiration and 36.48% DSP.  However, bells from the school of hard-knocks also began ringing.  Mr. Market very rarely misprices options.  For the premium to be this high there must be a significant amount of perceived risk that WMB could fall substantially in the next three weeks.  However, I found nothing ominous lurking in recent news headlines.  WMB will announce earnings between now and expiration so that could explain part of the premium but it doesn’t seem like it could or should account for all of it.

The $20 strike price is below the 52-wk low of $20.91.  As you can see in the 1-year chart presented below, WMB hasn’t been down around $20 in quite a while.

The 5-year chart is a little more illuminating.  With it you can see WMB has been much lower than $20 in the past 5 years.  However, it also shows WMB is a consistent payer of steadily rising dividends.  That is the primary reason I like this trade.  Over the past 5 years they have more than doubled their quarterly dividend payout from $0.09 to $0.20.  Thus, I can confidently enter this trade knowing that if the stock takes a tumble and I have WMB put to me at $20 I will have acquired a good stock to hold in my portfolio should I so choose.  Having the stock put to me at $20 would give me a current dividend yield of 4% and an opportunity to participate in continued growth of that dividend.

My second selection this week is McDermott International (MDR).  McDermott International, Inc. operates as an engineering, procurement, construction, and installation company worldwide. The company focuses on designing and executing complex offshore oil and gas projects.

Before I proceed any further I want to make clear that I consider MDR a speculative trade.  It is not one I would want to hold long-term as it does not pay a dividend.  However, I think there is a good opportunity to generate some extra cash flow with this trade.

MDR pre-announced a 3rd quarter earnings shortfall last week.  Mr. Market, not liking surprises, responded accordingly driving the stock down sharply.  Having closed at $14.63 on Wednesday it fell to as low as $9.34 intra-day on Thursday before bouncing back a little and closing at $10.97.  Friday, it closed at $10.86.

Their were two primary issues discussed during the company’s conference call.  One centered around unexpected one-time issues on existing projects that drove up the expenses incurred on those projects during the quarter.   The second issue discussed was the anticipated compression of 2012 margins.  Management indicated they thought this issue would be resolved heading into 2013.

Looking at the 1-year chart will show why I like MDR as a speculative trade.

Now that the bad news is out I think MDR will languish down here around $10-$11 for awhile.  Should we get the much discussed year end market rally it might even creep back up over time.  While you can’t see it in the above chart, which only shows closing prices, MDR actually went as low as $9.34 on Thursday but reclaimed over $1.50 from that low to close at $10.97.  To me that means Mr. Market realized it had over reacted and rebounded accordingly.  People, hearing the bad news, ran for the exits without really considering the longer term impact of what was being said.  All of this selling pressure pushed the stock down further than it should have gone.  Once the initial selling panic was over cooler minds prevailed and stepped in to buy the stock at very dressed prices.  As buyers reentered the market the price recovered.  Thus, I think a bottom is in and it is above our strike price of $9.

At $0.15 bid on the $9 put our ROIC is a robust 1.67% with 3 weeks to expiration and 18.51% of DSP.

Well, that’s all I have for you this week.  Happy Halloween to one and all.  Don’t let the little ghosts and goblins spook you too much tomorrow night.

Regards,

Troy

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Weekly NP Strategy – OCT 28 Results

Posted by mounddweller on October 28, 2011

Fellow Traders,

Last week I chose 3 trades from our Weekly NP Strategy selections.  You’ll recall my 3 chosen trades involved AA, HPQ, and SLW.  Let’s take a look and see how the trades turned out.

First up is Alcoa (AA).  When I selected AA it was trading at $9.95 and the OCT28 $9 put was trading at $0.05 bid.  Today, AA closed well OTM at $11.57.  Before commissions the ROIC for the 8 day holding period was 0.56%.  Annualized that comes out to 25.35%.

Next up is Hewlett Packard (HPQ).  You’ll recall HPQ has had a difficult time of late.  Shoddy management with poor decision making and a volatile market had driven it down to levels not seen in quite some time.  Because of this I felt comfortable selecting it as a potential trade.  When I selected HPQ it was trading at $24.74 and the OCT28 $23 put was trading at $0.21 bid.  HPQ closed today at $27.95.  Our 8 day ROIC was 0.91%.  Annualized this return is an outstanding 41.66%.

Last, we have Silver Wheaton (SLW).  SLW has been on a roller coster ride as well as it closely tracks the price of silver.  When I selected this trade SLW had closed at $29.09 and the OCT28 $25 put was at $0.15 bid.  Today SLW closed at $35.97.  The 8 day ROIC was 0.6%.  Annualized this comes out to a very respectable 27.38%.

Clearly, if one can consistently find trades like these a Weekly NP Strategy can generate a significant return.

Well, that’s it for today.  I’ll be back later this weekend with the Deep OTM NP Strategy NOV Week 3 selections.

Regards,

Troy

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Weekly NP Strategy

Posted by mounddweller on October 27, 2011

Fellow Traders,

As you might expect given the huge rally today I don’t have much in the way of good put trades to offer up.  127 trades met our Weekly NP Strategy criteria, only 1 caught my eye.  It is the NEM $60 which closed today at $0.30 bid.  The stock closed at $66.06.

I have loaded the spreadsheet with the complete list of 127 selections out on the Yahoo Weekly Options group board.  You can find it here: http://finance.groups.yahoo.com/group/weeklyoptions/files/.

Regards,

Troy

 

 

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Deep OTM NP Strategy – NOV Week 4

Posted by mounddweller on October 23, 2011

Fellow Traders,

There are a lot of selections for our Deep OTM NP Strategy this week. 378 of them in fact.  That’s way too many for me to easily post in my blog so as I’ve done before I have posted the entire list of selections out on the Yahoo CoveredCalls-NakedPuts_OptionStrategies group board.  You can find it here: http://finance.groups.yahoo.com/group/CoveredCalls-NakedPuts_OptionStrategies/files/.

I have 7 trades for you to consider.  They are presented below.  I have to say it is hard to be excited about any of the trades I selected.  Here’s why…the market has rallied significantly over the past several trading days.  This has occurred despite the tremendous overhang of the European debt crisis and being in the middle of earnings season.  Thus, I feel a correction could be right around the corner.  On the other hand you have a lot of analysts saying we’re going to have a year-end rally.  So bottom line, nobody knows what is going to happen.  Thus, given all this uncertainty I remain skeptical and very cautious.

There are two stocks in this list that I’d like to highlight.  They are Dow Chemical (DOW) and Freeport McMoran Copper & Gold (FCX).  I’m highlighting these two because they are highly sensitive to the economic cycle.  If the worldwide economy continues to slow these stocks will continue to fall.  If the economy stabilizes I believe both these stocks are worth a look.  Let’s look at the 5-yr charts for DOW and FCX.

As you can see both of these stocks have remarkably similar charts.  Both fell into the single digits during the financial crisis in late 2008 and early 2009 only to soar 400-500% as the market recovered.  Both are bouncing after recently hitting 52-wk lows.  The strike prices for each of the trades on these stocks are at or below those recent lows.  In the case of DOW, the $22 strike price is near the recent low of $21.51.  For FCX the $29.50 strike price is below the recent low of $29.87.

Well, that’s it for this week.  Best of luck as we start this next trading cycle.

Regards,

Troy

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Deep OTM NP Strategy – OCT Results

Posted by mounddweller on October 21, 2011

Fellow Traders,

Another trading month has past and it was a successful one for our Deep OTM NP Strategy, albeit not as successful as in prior months.  This month we were presented with 500 trading oportunities.  Trading all 500 positions would have required $4,024,650 in capital.  Doing so would have generated $70,731.25 in premiums net of commissions.  However, volatility this month took its toll.  While the percentage of trades finishing OTM was high (473 of 500 for 94.6%) there were several of the 27 finishing ITM that had large losses.

Capital losses net of commissions totaled $25,909.85.  Thus, premiums net of capital losses came to $44,821.40.  This gives us a net ROIC of 1.11%, 11.61% annualized.  As I said, not great but still a solid profit.

This month I faired no better than the overall averages.  I selected 10 trades from the 500 presented that I thought had a high probability of finishing OTM.  9 finished OTM, with only AAWW finishing ITM.

Well, that’s it for this post.  I’ll be back later this weekend with a look at our NOV Week 4 selections.

Regards,

Troy

 

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Weekly NP Strategy – OCT 28 Exp

Posted by mounddweller on October 20, 2011

Fellow Traders,

I have three picks for you this week from our Weekly NP Strategy.  None have looming earning releases.  Here are my three choices this week:

First up is Alcoa (AA).  AA has already announced 3rd quarter earnings.  It has declined steadily since hitting a 52-wk high back in April.  It seems to have found a bottom, closing at $8.90 back on October 3rd.  Will it retest this low before expiration next week?  Who knows?  However, I think it is a fair bet.

Next up is Hewlett-Packard (HPQ).  It doesn’t announce earnings until November 21st.  HPQ as you’re probably aware has had a terrible year.  Since late February it has fallen from the high $40s to a low of $22.20 back on October 3rd.  HPQ closed today at $24.74.  We can sell the $23 strike for $0.21.  Almost 1% for one week of exposure on a stock that is already down 50% this year seems like a reasonable bet to me.

Last up is Silver Wheaton (SLW).  SLW doesn’t report earnings until early November.  It closed today at $29.73.  It has not closed below the selected $25 strike price since November 15th of last year.

Well, that’s it for this week.  I’ll be back this weekend to look at our monthly Deep OTM Strategy results and also look at our November selections.

Regards,

Troy

 

 

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Deep OTM NP Strategy – OCT Week 1

Posted by mounddweller on October 14, 2011

Fellow Traders,

Below is our final list of NP trades from our Deep OTM NP Strategy for the OCT expiration.  As you can see the run-up in the market coupled with it being the final week before expiration has greatly reduced the number of selections.  None of the 6 jump out at me as being a great trade.  If I were forced to pick one, I would go with CAKE.  The Cheesecake Factory is a well managed restaurant chain with a solid balance sheet and it is reasonably priced.

I’ll be back next weekend to wrap up and summarize our OCT results.  Until then be careful out there.  The big run-up this week could lead to a pullback next week.

Regards,

Troy

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Weekly NP Strategy – OCT 22 Exp

Posted by mounddweller on October 13, 2011

Fellow Traders,

Below are my selections for the Weekly NP Strategy this week.  There were over 1300 selections that met our basic criteria.  Obviously I didn’t have time to dig deep into all of them to pick the ones I liked.  Thus, the ones below were selected with minimal due-diligence.  I primarily selected large caps, paying a dividend, where the strike price is less than the recent market lows.

Best of luck trading in the coming week.

Regards,

Troy

 

 

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Deep OTM NP Strategy – OCT Week 2

Posted by mounddweller on October 8, 2011

Fellow Traders,

This week we have 15 selections which meet our Week 2 criteria (>12.5% DSP, >2.0 PF).  Of these I have selected 3 for your further consideration.

The first thing you’ll notice is that none of these are household names.  However, this is not unusual this late in our monthly expiration cycle.  Since we do not reconsider stocks that have already appeared on our list earlier in the month it is to be expected that later in the month we will have smaller, lesser known companies from which to choose.

Given my penchant for conservative picks some of you might find my selections this week to be a little out of character.  And you would be partially correct.  These selections do not fit my normal ‘modus operandi’.  However, they are also not wildly speculative either.  I have selected them with the following criteria in mind:

(1) strong technical support at or above the strike price

(2) reasonable debt levels relative to cash on hand

(3) profitable with a low P/E ratio

(4) DSP well above our minimum 12.5% selection criteria.

So, with those things in mind let’s look at each of my 3 selections.  First up is Flextronics (FLEX).  Flextronics International Ltd. provides design and electronics manufacturing services to original equipment manufacturers. The company offers its services to a range of products in the infrastructure, mobile communication devices, computing, consumer digital devices, industrial, semiconductor capital equipment, clean technology, aerospace and defense, white goods, automotive and marine, and medical devices markets.   It was founded in 1990 and is headquartered in Singapore.

FLEX has support at the chosen $5 strike price.  It bounced off this price back in August, hitting a 52-wk low of $5.05.  It has about $650 million in debt net of cash.  This is a little high but FLEX has good free cash flow so it is manageable.  FLEX trades at less than 8x trailing earnings and 6x estimated earnings.  The $5 strike offers 1.2% ROIC with 18.62% DSP.

Next up is Harman International (HAR).  Harman International Industries, Incorporated engages in the development, manufacture, and marketing of audio products and electronic systems primarily in the United States, Germany, and other parts of Europe.  It was founded in 1980 and is headquartered in Stamford, Connecticut.

HAR has support at the chosen $25 strike price.  It bounced near this price back earlier this week, hitting a 52-wk low of $25.53.  It has about $539 million in net cash.  This equates to $7.71 in cash per share.  HAR trades at 16x trailing earnings and 8.55x estimated earnings.  The $25 strike offers 1.0% ROIC with 18.69% DSP.

Last up is Allegiant Travel (ALGT).  Allegiant Travel Company, through its subsidiaries, operates as a leisure travel company in the United States. It focuses on transporting travelers in small cities to leisure destinations, Las Vegas, Orlando, Phoenix, Tampa/St. Petersburg, Los Angeles, and Ft. Lauderdale in the continental United States.   It is headquartered in Las Vegas, NV.

ALGT has support at the chosen $40 strike price.  While this is above the 52-wk low of $38.12 is has recently found support multiple times at or above the $40 strike price.  It has about $175 million in net cash.  This equates to $9.18 in cash per share.  ALGT trades at 16.65x trailing earnings and 12.61x estimated earnings.  The $40 strike offers .83% ROIC with 16.14% DSP.

Well, that’s it for this week.  Best of luck trading in the coming week.

Regards,

Troy

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Weekly NP Strategy – OCT 7 Expiration Results

Posted by mounddweller on October 8, 2011

Fellow Traders,

Last week you’ll recall I suggested  5 NP trades that looked worthy of your further due diligence and possible selection.  I suggested trades in the following:

CSCO at the $15 strike,

HPQ at the $21 or $22 strikes,

MSFT at the $24 strike, and

SLW at the $25 strike.

I’m happy to report each of these trades finished OTM by a significant margin.  Thus far, knock on wood, since launching this strategy I haven’t suggested a single losing trade.  The markets are being kind to me.  Let’s hope it continues.

Regards,

Troy

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