The Money Tree

Safely Generating Income in Retirement

Deep OTM NP Strategy – DEC Week 3

Posted by mounddweller on November 26, 2011

Fellow Traders,

This week we have 56 new trades which meet our selection criteria.  Of these I found 2 that are worthy of further due-diligence.  They are Agilent (A) and Foster Wheeler (FWLT).

Let’s first look at Agilent.  Agilent Technologies, Inc. provides bio-analytical and electronic measurement solutions to the communications, electronics, life sciences, and chemical analysis industries in the United States and internationally.  It was founded in 1999 and is headquartered in Santa Clara, California.

Agilent has strong fundamentals.  It trades at less than 12x historical earnings and 10x prospective earnings.  It has an net profit margin of 15% and a ROE of 26.8%.  Agilent also has a net cash position of $1.35B.  Now let’s look at the 3-yr price chart.

Our trade is at the $29 strike price.  As you can see this is below recent support at around $30.  The $29 strike has a premium of $0.48 giving us a ROIC of 1.66% with DSP 15.7%.

I see two negatives with this trade.  First, A doesn’t pay a dividend.  With the volatility in this market I would prefer to stick with stocks that pay a dividend.  Second, if A were to fall below it’s recent support at $30 it could fall much further.  As you can see the 3-yr low is down around $12.

Next up let’s look at Foster Wheeler (FWLT).  This is not the first time it has met our screening criteria and been selected for further analysis.  You can read my previous write-up here: https://troysmoneytree.wordpress.com/2011/08/06/deep-otm-np-strategy-aug-week-2/.

Foster Wheeler AG provides construction and engineering services to oil and gas, oil refining, chemical/petrochemical, pharmaceutical, environmental, power generation, and power plant operation and maintenance industries worldwide.  It was founded in 1894 and is based in Geneva, Switzerland.

FWLT also has strong fundamentals.  It trades at just under 14x historical earnings and 10x prospective earnings.  It also is sitting on a substantial pile of cash to help it through any downturns in the global economy.  It’s net cash position is $6.81/share.

Looking at the chart here’s what I like.  First, $15 strike price is below the recent low of $16.40.  Also, it is close to the 3-yr lows encountered in 2009.  Our $15 put has a premium of $0.25 giving us a ROIC of 1.67%.  It also has DSP of 15.7%.  Like Agilent, Foster Wheeler doesn’t pay a dividend.  As I mentioned earlier, that’s a negative in my mind especially in this volatile market.

For those of you who would like to review the entire list of 56 possible trades you can find it here: http://finance.groups.yahoo.com/group/CoveredCalls-NakedPuts_OptionStrategies/files/.

Regards,

Troy

Advertisements

One Response to “Deep OTM NP Strategy – DEC Week 3”

  1. These are excellent reviews and analysis Troy. I, like you, would prefer stocks with dividends in the present market climate. Meanwhile you could consider going for less premium by moving lower with your strikes. Thanks again Troy for these great ideas!
    Teddi http://www.fullyinformed.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

 
%d bloggers like this: