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Safely Generating Income in Retirement

Archive for January, 2012

Dividend Superstars – Potential Trades

Posted by mounddweller on January 28, 2012

Fellow Traders,

As you know I recently announced a new strategy centered around strong, large-cap, “dividend superstar” companies.  Today I want to begin a series of posts which highlight stocks from the dividend superstar list which currently appear to have trade potential.

I will be selecting stocks using Ron Groenke’s VISIONS software.  Specifically, I will be looking for stocks which VISIONS has rated “Take Action” (TA).  This week the VISIONS scan of my dividend superstars list returned three possibilities, Best Buy (BBY), Infosys (INFY), and Tiffany (TIF).

Let’s first look at BBY.   Regular readers will remember I just recently successfully closed out a position in BBY.  You can read about it here: https://troysmoneytree.wordpress.com/2012/01/24/update-bby/

Friday, BBY closed at $25.44.  It has recovered from its 52-wk low of $21.79 which it hit back in October 2011.  It last reported earnings in December so it won’t report again until late March.  The trade which most appeals to me for BBY right now is the FEB $24 covered call.  The premium is $1.66.  Thus, the ROIC if assigned at expiration is 0.86%.  If unassigned the ROIC is 6.53%.

Next let’s look at Infosys (INFY).  INFY closed Friday at $54.31.  INFY has a 52-wk low of $46.12 which it hit back in September 2011.  Like BBY it has already announced quarterly earnings so we don’t have to worry about that.  For INFY, the best trade in my my opinion is the FEB $52.50 put.  It has a premium of $0.60.  This gives a ROIC of 1.14% with 3 weeks to expiration and down-side protection of 4.43%.

Last, but not least is Tiffany (TIF).  On Friday TIF closed at $63.49.  TIF has a 52-wk low of $54.58 which occurred in March 2011.  Like BBY and INFY, TIF has already announced quarterly earnings.  For TIF I like the FEB $60 put which is at $0.61 bid.  This gives a ROIC of just over 1.00% and DSP of 6.5%.

A final not before I close; there was a fourth stock which VISIONS rated TA.  It is CHRW.  However, I eliminated it from further consideration because it reports quarterly earnings on Tuesday, January 31.

If any of these selections interest you please conduct your own due-diligence.

Regards,

Troy

 

 

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Weekly NP Strategy – FEB 3 Expiration

Posted by mounddweller on January 26, 2012

Fellow Traders,

After a two-week hiatus I’m back with another round of weekly options.  Quite honestly I had lost some motivation to publish the list because it seemed to be producing the same results each week for several weeks in succession.

This week, however, the list has produced some names we have not seen previously or at least not in a while.  You can see this list here: http://finance.groups.yahoo.com/group/weeklyoptions/files/.

The list this week contains 73 possible trades.  Of these one stood “head and shoulders” in my mind above the rest.  That is ANF at the $44 strike price.  It is priced at $0.44 bid.  That gives you a 1% ROIC with 8 days to expiration.  ANF is a solid company.  However, investor sentiment has turned against it.  It is trading very near 52-wk lows.  The company has yet to announce its quarterly earnings.  This may be driving the high premium.  However, ANF isn’t scheduled to release its earnings until February 13 which is well after our expiration on February 3.

Check it out!

Regards,

Troy

 

 

 

 

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Update – PBR Trade

Posted by mounddweller on January 25, 2012

Fellow Traders,

I closed out my position in PBR today.  Specifically, I BTC 3 JUL $31 puts at $2.57.  As you can see from the list of transactions below I had been in PBR for quite some time (for me anyway).  I initiated my trade in PBR back in May 2011 by selling OTM naked puts at the $32 strike.  After these expired I wrote another round of puts at the $31 strike.  This was followed by a third round, again at the $31 strike.  It was at this point that PBR fell through support and I began rolling out my puts to avoid assignment.  I had to roll out my puts three times before I was finally able to close the position at a profit.

All in all I didn’t do too badly on this trade given the depth to which PBR plunged after falling through support between $31 and $32.  You can see I actually took the opportunity to sell additional puts at the $20 strike when the stock was down around $23.

Here’s a 1-year chart for PBR.

So, after holding onto this position for 247 days, why did I choose to close it out and not wait until it got closer to my JUL expiration?  Two reasons…(1) PBR and the overall market have had a significant run-up in the past several weeks.  I wanted to exit, with profit in hand, before the market and/or PBR reversed and I ended up giving back some of my gains.  (2) What had originally acted as support between $31 and $32 is now going to act as resistance.  Who knows if PBR will be able to punch back through and continue onto higher ground or fall back.

All in all I’m pretty proud of this trade because it shows that if one is patient and actively manages a position you can dig yourself out of a substantial hole.

Regards,

Troy

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Update – BBY

Posted by mounddweller on January 24, 2012

Fellow Traders,

I want to update you on my naked put trades in Best Buy (BBY).  You’ll recall back on December 28th I opened two positions in BBY.  In one I sold 2 JAN $22.50 puts at $0.56.  In the other I sold 3 MAR $20.00 puts, also at $0.56.  You can read more about these trades and my rationale for making them here: https://troysmoneytree.wordpress.com/2011/12/28/new-trade-bby/.

Like most of the market, BBY has gone up in the new year.  It was $23.06 when I placed my trades in late December.  Today it closed at $25.36.

The JAN $22.50 puts expired OTM this past weekend.  Over the past few days I had been keeping track of the premium on the MAR $20 puts.  I was looking for an opportunity to ‘take my money and run’ without leaving too much on the table.  That opportunity came yesterday.  I was able to buy back the MAR $20 puts for $0.11.  This allowed me to capture over 80% of the value in the puts in about one-third of the total time remaining prior to expiration.

Below are the results of my BBY trades:

As you can see this trade turned out nicely.  With a holding period of 26 days or less I earned about 2.50% ROIC.   Annualized it works out to around 35%.  Wouldn’t it be nice if all my trades could work out this nicely!

Regards,

Troy

Posted in Portfolio Updates | Tagged: , | 6 Comments »

Update – HGT

Posted by mounddweller on January 20, 2012

Fellow Traders,

I want to update you on my covered call trade in Hugoton Royalty Trust (HGT).  Yesterday, I closed out this trade at a substantial loss.  However, my dismal result was entirely preventable.  I made a couple of mistakes usually attributed to ‘newbies’, not guys like myself who have been trading and investing for 30 years.  You’d think after this long I would be immune to such bone-headed moves.

You may recall that I successfully traded HGT on 2 previous occasions.  This third time was looking to be equally successful before I made my mistakes.    Back in March 2011 I bought 500 shares of HGT and sold AUG calls.  These calls expired OTM and I sold another round of NOV calls.  These too expired OTM.  Shortly after the NOV expiration HGT began to trade a little lower.  I continued to keep an eye on it so I could sell another round of calls 4-6 months out.

Mistake #1 was not keeping up on what was going on in the natural gas market.  Natural gas prices have fallen sharply in recent weeks.  They now trade at generational lows.  Mistake #2, since my position in HGT was a trade and not a long-term holding, I should have exited the postition when HGT approached my break-even price.  Mistake #3 came a week or so ago when I compounded my problems by buying more shares thinking the stock couldn’t fall much further.  How many times have you heard “never try to catch a falling knife”?

After finally coming to my senses yesterday I sold my 1,000 shares of HGT for a sizable loss.  A loss of almost $3,700!  It is mistakes like that that wipe out the returns on many great trades.

Word to the wise…do NOT let small losses turn into big ones.  Admit your mistake in the trade and get out.

Am I going to swear off HGT and never trade it again?  No way!  I made some mistakes but the strategy is still sound.  Once HGT does find a bottom I will be back in it again collecting its monthly dividends and selling covered calls.

Regards,

Troy

 

 

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Update – AMAT

Posted by mounddweller on January 20, 2012

Fellow Traders,

Today I closed my naked put position in Applied Materials (AMAT).  You’ll recall back on December 21st I sold 5 JAN ’13 puts at the $10 strike price.  The premium I received was $1.57/share.  You can read all about AMAT and the reasoning behind the trade here: https://troysmoneytree.wordpress.com/2011/12/21/new-trade-amat/.

So, why did I close the position after just 30 days?  Well, quite simply, I wanted to take advantage in the recent run up in stock prices in general and AMAT in particular.  Back when I entered the trade AMAT was selling for $10.21.  Today it closed at $12.47.  Yes, AMAT like a lot of other stocks in this market has been on a tear of late.  It is up 22.13% in 30 days.  This strong performance had reduced the premium on my naked puts by over 50%.  Thus, I felt  it might be a great opportunity to lock in a gain.

Let’s look at how I did.  As I said earlier I sold the naked puts for $1.57.  Today, I bought them back for $0.75.  Thus, net of commissions, I made $388.10 in 30 days on $5,000 of capital.  My ROIC was 7.76%.  Annualized, my ROIC was 94.44%.  Not bad, huh?

My plan going forward is too continue to watch AMAT.  This market is not going to go straight up.  At some point we will get a correction.  At that time I will evaluate whether it makes since to re-enter this trade.

Regards,

Troy

 

Posted in Portfolio Updates | Tagged: , , | 1 Comment »

New Trade – WAG

Posted by mounddweller on January 14, 2012

Fellow Traders,

On Friday, I executed a new NP trade in one of my ‘dividend superstars’, Walgreen’s (WAG).   Walgreen Co., together with its subsidiaries, operates a chain of drugstores in the United States. It sells prescription and non-prescription drugs; and general merchandise, which include household products, convenience and fresh foods, personal care, beauty care, candy, photofinishing products, and seasonal items, as well as home medical equipment, contact lens, vitamins and supplements, and other health and wellness solutions. The company offers its products through drugstores, mail, telephone, and online. It also provides specialty pharmacy services; customers infusion therapy services consisting of administration of intravenous medications for cancer treatments, chronic pain, heart failure, and other infections and disorders; and clinical services, such as laboratory monitoring, medication profile review, nutritional assessments, and patient and caregiver education. In addition, it operates Take Care Clinics to treat patients, give prescriptions, and administer immunizations and other vaccines. As of January 4, 2012, Walgreen Co. operated 7,811 drugstores in 50 states, the District of Columbia, and Puerto Rico. The company was founded in 1901 and is based in Deerfield, Illinois.  It currently pays a quarterly dividend of $0.225 ($0.90 per annum).  At Friday’s closing price of $32.63, it currently yields 2.7%.  Walgreen’s has increased its dividend for 36 consectutive years.

Below you’ll find a plethora of financial information about Walgreen’s.

I want to call attention to several pieces of the information.  First, sales have increased every year for the past 10 years.  Net margin, not untypical in retail operations is thin.  However, it is consistently in the 3.5 – 3.8% range.  It dipped slightly during the recession in 2008/9.  Debt/Equity is very manageable and the P/E ratio is well below its 10 year average.  For traders wanting to accumulate a long-term holding in WAG it is important to point out that its dividend payout ratio is a low 27%.  There is ample room for continued growth in the dividend, even if revenue and net income growth were to stagnate for an extended period of time.

Now let’s take a look at the price chart.  I have chosen to show you the 3 year chart so that you can see what happened to the stock during the financial crisis and thus see what might transpire should the sovereign debt situation in Europe blow-up and send the market into a tail-spin.

During the last crisis, on March 9, WAG bottomed out at $21.39.  More recently, on November 23, it hit a 52-wk low of $30.34.  Its 52-wk high occured last March 15 when it hit $47.11.

So, I’m sure inquiring minds want to know why the stock has sold off in the past several months.  The short answer is two words, Express Scripts.  Express Scripts is a pharmacy benefit manager.  Walgreens previously filled a lot of prescriptions for Express Scripts customers.  However, the two companies were unable to agree on new contract terms before the old contract expired at the end of 2011.  Mr. Market fears Walgreen’s will lose a substantial amount of business in its pharmacy department if they lose Express Script’s customers.  I’m of the opinion they may see a temporary decline but that they will eventually figure out a way to continue growing without the benefit of Express Script’s business.  Walgreen has been in business for over 110 years.  During this time there have been many, many BIG changes in the medical industry.  Walgreen’s has adapted and will adapt again.  This confidence in Walgreen’s long-term viability led me to place the following trade:

STO 4 WAG FEB $30 puts at $0.38.

My ROIC, net of commissions, for this trade is 1.18%.  At Friday’s closing price of $32.63 I have down-side protection of 9.22% with 35 days to expiration.  If my puts are ITM at expiration I can choose to either roll them out to either March or April, or I can except assignment.  If I accept assignment I will own 400 shares of WAG with a net cost of $29.62.  My initial dividend yield would then be 3.04%.

Let me know your thoughts or questions by posting a comment below.

Regards,

Troy

Posted in Troy's New Picks! | Tagged: , | 4 Comments »

New Trade – EXC

Posted by mounddweller on January 3, 2012

Fellow Traders,

I entered a new trade in Exelon (EXC) today.  Actually, I entered two trades but only one got filled.  Many of my long-time readers know that I have had a position in EXC since April 2010.  I started out by selling naked puts at the $42.50 strike price.  I had the stock put to me at that price.  Since then I have sold covered calls and collected dividends on those original 200 shares.  I have also sold naked puts from time to time in an effort to acquire another 300 shares.

Today, EXC along with a whole host of other utility stocks took a substantial hit despite the overall market rising strongly.  I took advantage of this by deciding to sell another round of naked puts.  Specifically, I did the following:

STO 3 FEB $40 puts at $0.65.

I wavered between selling the JAN $41 puts at $0.40 and the FEB $40 at $0.65.  In the end I decided to go with the FEB $40 strike because it was closer to a stronger line of support.

Today, I also tried to BTC my JAN $44 calls.  However, this trade went unfilled as I had a limit order in to buy at $0.05.  Had I been willing to pay $0.10 I most likely would have been able to close out that trade.

Including my latest NP trade today I have been able to reduce my net cost over the past 21 months from $42.50 to $32.31.  That is a 23.98% ROIC.  My goal in this trade is to eventually own 500-800 shares of EXC with a ZERO net cost.  Granted I have a long way to go to accomplish that goal but I feel I’ve gotten a good start.

Regards,

Troy

Posted in Portfolio Updates | Tagged: , | 3 Comments »

What Others are Trading – January 2012

Posted by mounddweller on January 1, 2012

Fellow Traders,

Good morning and happy new year!  I’m starting the year off right by not procrastinating.  Usually, as many of my long-time readers will attest, I’m late in getting this monthly message posted.   This message is your vehicle to letting the rest of my readers know what you’ve been trading.  What’s been working well for you, what’s not?

A special callout to ‘dealmakr’.  We haven’t heard from you in a while.  Hope all is well with you.  Let us know what you’ve been trading.  Also, a special callout to Rich whom I believe is one of my very first readers.  How did your year turn-out?  Any change in plans as we move forward into 2012?

One final note.  This post is the first as I begin my fourth year of blogging.  I received an email from WordPress yesterday with statistics from the past year.  In the past year ‘troymoneytree’ was viewed over 19,000 times by people spread across 6 continents!  That is truly amazing to me.  People all over the world are interested in what I have to say about investing.   I hope and pray my words and ideas continue to inspire people to learn more about the world of options trading for income and about being self-sufficient in managing their financial assets.

Best to all in 2012.  HAPPY NEW YEAR!

Regards,

Troy

Posted in Your Picks | 7 Comments »