The Money Tree

Safely Generating Income in Retirement

Deep OTM NP Strategy – DEC Week 1

Posted by mounddweller on December 11, 2011

Fellow Traders,

This week we have 8 possible trades which meet the week 1 selection criteria of our Deep OTM NP Strategy.  They are listed below.

Of these 8 the 2 large cap stocks, Adobe Systems (ADBE) and Best Buy (BBY) caught my attention.  On the surface they are remarkably similar trades.  Their closing price on Friday differs only by 7 cents, they share the same strike price, and the bid price of each differ by only 2 cents.  However, as is often the case, “the devil is in the details.”

When one digs a little deeper however, one sees there is no comparison.  BBY is a better trade.  Two facts led me to this conclusion.  First, BBY trades at very reasonable 9.4x trailing earnings and 7.2x prospective earnings.  ADBE trades at over 15x trailing earnings.  Yahoo does not provide an estimate of prospective earnings.  Second, BBY pays a regular and growing dividend.  In the past 5 years the quarterly dividend has been increased from $0.10 to $0.16.

These things are important to me because of the current market environment.  I only want to trade in the very best underlying stocks that I can find.

As you can see BBY has support at $24 which is just below our $25 strike price.  This isn’t an ideal situation and if this trade had appeared in Week 3 or 4 of the DEC expiration month I probably would think long and hard before committing capital to it.  However, it is Week 1.  We have only 5 trading days to expiration.  Another mitigating factor is that BBY is near its March 2009 lows.  While it was significantly lower in November 2008 it quickly recovered.  I would feel comfortable owning BBY at $25.

Well, there you have it.  Best of luck to everyone is this last week before expiration.

Regards,

Troy

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