The Money Tree

Safely Generating Income in Retirement

Archive for June, 2012

New Position – CSCO

Posted by mounddweller on June 28, 2012

Fellow Traders,

Earlier today I entered a new naked put position in Cisco (CSCO).  Specifically, I sold to open (STO) 5 AUG $15 puts at $0.33.  Net of commissions I will earn a 2.054% ROIC with 53 days to expiration.  So, basically just over 1%/month.  My down-side protection is 7.7% and my net cost if I have CSCO put to me will be $14.67/share.

I want to own CSCO at $15 or less.  Thus, my plan is to continue selling these puts until assigned.  However, given the current market volatility I chose not to initiate a full position in one trade.  I would like to eventually own 1000-1500 shares of CSCO so by just initially selling 5 puts I leave myself with ‘wiggle room’ should the shares continue to decline.  If the market continues to decline by AUG expiration and my CSCO puts are ITM I may choose to roll them down and out and sell another new round of 5 puts at the $14 strike.

Why do I like CSCO at this price?  Well primarily because it is significantly under-valued.  It trades at about 8.5x forward earnings and has over $6/share in net cash on its balance sheet.  That means that net of cash it is trading at 5.2x forward earnings!  That’s dirt cheap for a company that is still growing, and has strong operating margins.  To top it all off, last year it began paying a small dividend which now equates to an annual yield of 1.9%.  The dividend payout ratio is a miniscule 19% so there is plenty of room for that to grow rapidly in the coming years, which is exactly what I expect it to do.

Below is a 5-year chart for CSCO.  You can easily see this is a very good entry point for establishing a long-term position.

Regards,

Troy

Advertisements

Posted in Troy's New Picks! | Tagged: , | Leave a Comment »

Position Update – AMAT

Posted by mounddweller on June 20, 2012

Fellow Traders,

I closed out my trade in AMAT today.  You’ll recall back on June 1st I opened the following trade:

STO 10 JAN13 $10 puts at $1.16.

Today, with the press release of AMAT hiring a new president, the stock gapped up at the open and stayed there despite downward pressure from the overall market.  I used this strength to close out my position.  Specifically, I…

BTC 10 JAN13 $10 puts at $0.53

Doing so generated a 6.02% ROIC in 19 days.  That equates to an annualized ROIC of 115.67%.  Now many people are probably wondering why I closed the position after only having it open 19 days and on a gap up in the stock price as well.  Clearly, the stock is exhibiting strength and may continue to climb even higher.  Here’s why I closed out the position:

(1) I captured over 50% of the total possible profit in the trade in just 19 days.  The JAN13 options have 231 days remaining to expiration.  I decided to lock in my already substantial profit.

(2) There is a good possibility AMAT will turn back down again before the end of the year.  If it does I can re-enter the trade and potentially capture even more premium.

You’ll recall I placed a similar trade in AMAT earlier this year.  In that trade I made over 7% ROIC in about 30 days.  Adding the two trades together I have collected over $990 in premiums.  This money will go a long way to reducing the net cost of the 1,000 – 2,000 shares of AMAT I’d like to eventually add to my long-term portfolio.

Regards,

Troy

 

 

Posted in Portfolio Updates | Tagged: , | Leave a Comment »

Update – EXC

Posted by mounddweller on June 10, 2012

Fellow Traders,

I want to update you on my long held position in EXC.  My frequent readers will recall that I’ve been rolling 3 puts at the $38 strike price since late February.  On Thursday of this past week I closed out that portion of my position in EXC.

EXC has been bouncing around quite a bit of late.  Since January it has been as high as $42 and as low as $36.70.  Since bottoming out around the first of June it had bounced back up to around $39.  Despite only having a week to expiration I decided on Thursday to take advantage of the big up-day and buy back my 3 short puts.  I was able to do so at $0.15.  I originally sold these puts back on May 18th for $0.75.  Thus, I made about 1.5% ROIC in 3 weeks time.

As I mentioned earlier I had been rolling these puts since my original sale back in February.  If we look at this entire series of put sales I made $392.34 net of all commissions on $11,400 in capital over about a 11 week time period.  By my rough calculations that’s just over 1% a month return on my invested capital.

One other thing I wanted to point out was the interesting price action on EXC on Thursday and Friday of last week.  As I mentioned earlier EXC had been rising since the first of the month.  On Thursday the stock gained an amazing 3.98%.  This is a BIG one-day jump for a boring utility.  I decided rather than wait another week to see if the put would expire worthless I would instead buy to close my open puts.  Wow, am I ever glad that I did because the next day EXC gave all those gains back and then some.  It closed Friday at $37.41.

I now am now long 500+ shares.  I intend to continue to monitor EXC closely and possibly begin selling another round of puts at the $37 strike price.

Regards,

Troy

 

 

 

Posted in Portfolio Updates | Tagged: , | Leave a Comment »

What Others are Trading – June 2012

Posted by mounddweller on June 1, 2012

Fellow Traders,

We started this month off with a bang.  What looks good to you?  What have you recently traded?  What’s on your watch list?  Post a comment to this message and let us know.

Regards,

Troy

 

 

 

Posted in Your Picks | 5 Comments »

New Trade – AMAT

Posted by mounddweller on June 1, 2012

Fellow Traders,

Yes, believe it or not I actually executed more than one trade in a single day.  Hard to believe, I know.  Anyway, you’ll recall in my post last week that I mentioned that AMAT was approaching a price point at which I was interested in owning shares.  I like AMAT at $10 or less.  Thus, with the big sell-off in the overall market today and the corresponding increase in volatility I took the opportunity to sell puts on AMAT.  Here are the specifics of my trade:

STO 10 AMAT JAN13 $10 puts at $1.16.  This gives me a 11.6% ROIC with 232 days to expiration.  Annualized that equates to 18.25%.  Given that I executed the trade with AMAT trading at $10.10 my only down-side protection is the premium I received.  However, given that I want to own AMAT long-term and think $10 is a fair price I’m not worried about down-side protection.

You’ll recall I executed a similar trade late last year.  Back in December I sold 5 JAN13 $10 puts for $1.57.  The market rebounded sharply shortly thereafter and I was able to buy them back for only $0.75.  If you take the premium I received from that trade and add it to the premium I received on my most recent trade you’ll find that if I have the stock put to me at $10 my true net cost will be $8,465 or $8.47/share.   This compares very favorably to the 5-year low of $8.35 which occurred back on November 17, 2008.

Note: observant readers may have noticed a discrepancy between the per share net cost I quoted in this post vs. the value I posted last week.  The number I posted last week was off slightly because I calculated it assuming I had traded 10 puts.  In actuality my trade back in December was only 5 puts.

So, why do I like Applied Materials?  Well, first let’s look at the fundamentals.  AMAT trades at 9.88x trailing and 8.63x forward earnings.  It has about $220M in net cash on the balance sheet and generated $1.15B in free cash flow over the past 12 months.  It also pays a quarterly dividend of $0.09/share.   AMAT has increased that dividend by 50% over the past 5 years.  At my net cost of $8.47 the dividend yield will be 4.25%.  Not bad for a high-tech, growth stock.

The 5-year chart is below.  You can see the stock has support at $10 but if it doesn’t hold my net cost compares favorably with the multi-year lows from 2008.

Well, there you have it.  I’ll be back later this weekend with another post about other opportunities I’m keeping an eye on.

Regards,

Troy

Posted in Troy's New Picks! | Tagged: , | Leave a Comment »

New Trade – GME

Posted by mounddweller on June 1, 2012

Fellow Traders,

Wow!  Volatility has returned has it not?  The bad job creation numbers released today by Uncle Sam gave Mr. Market an excuse to sell-off in a big way.  However, that’s not the reason for me writing this post.  Rather, I want to tell you about a trade I placed earlier today.

Today I entered a new trade in an old favorite of mine, Gamestop (GME).  Long-time readers of my blog will recall that I have successfully traded GME several times over the past few years.  Let me briefly give you the specifics of my trade then I’ll explain why I did it.

Here’s my trade: STO 6 GME JUN $18 puts at $0.27.   That’s a 1.5% ROIC with just 15 days to expiration and 7.7% DSP.

So why did I do this trade?  Well, first let’s look at Gamestop’s fundamentals.   It has a trailing P/E of 8.02 and a forward P/E of 5.68.  It is trading at 85% of it’s book value ($22.57).  GME has zero debt and $2.49/share of cash sitting on the balance sheet.  And last, but not least it pays an annual dividend of $0.60/share (3.1% at todays closing price).

Now, let’s take a look at the technical side of the equation.  The 52-wk low is $18.13 which was hit just a couple weeks ago on May 18.  The 5-yr low occurred back on February 22, 2010 at $17.20.  Below is a 3 year chart.  You can see GME has strong support at $18.  It has bounced off of this level several times.

I’ll wrap up my post by saying I believe Gamestop is a solid company with good future business prospects.  I would be happy to own it at $18.

Regards,

Troy

Posted in Troy's New Picks! | Tagged: , | 1 Comment »