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Archive for January, 2013

Position Update – KSS

Posted by mounddweller on January 25, 2013

Fellow Traders,

Don’t you love it when a trade works out exactly as planned!  Today I closed out my position in KSS by buying to close my FEB $40 puts at $0.05.  You’ll recall I originally sold these puts back on January 11 for $0.55.  So, with just a 14-day holding period I was able to earn 1.09% ROIC (net of all fees and commissions).

In my original post (https://troysmoneytree.wordpress.com/2013/01/12/new-position-kss/) I noted that the stock had fallen sharply and was rapidly approaching long-term support at $40.  I also noted the stock had begun to pull away from the lower bollinger band which was a good indicator that it was ready to begin moving back up.  You can see in the chart below (thanks Yahoo) that is exactly what happened.

With 3 weeks remaining to expiration and only $0.05 premium left I chose to take the money and run.

I’ll be back later with a write-up on my other trade, GDX which isn’t turning out quite so well.

Regards,

Troy

BLOG - KSS 3 Month Chrt 2

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New Position – KSS

Posted by mounddweller on January 12, 2013

Fellow Traders,

Friday, just before the market closed, I opened a new naked put trade.  I sold 3 FEB $40 puts on Kohl’s Corp (KSS) at $0.55.  With 32 days to expiration and 4.8% downside protection I am earning 1.375% ROIC or 15.7% annualized.

Kohl’s Corporation operates department stores in the United States. Its stores offer private, exclusive, and national branded apparel, footwear, and accessories for women, men, and children; soft home products, such as sheets and pillows; and housewares targeted to middle-income customers. As of September 26, 2012, it operated 1,146 stores in 49 states. The company also provides on-line shopping through its Website Kohls.com. Kohl’s Corporation was founded in 1962 and is headquartered in Menomonee Falls, Wisconsin.

For many years KSS was known as a high growth stock with a premium P/E ratio attached to it.  What once was a small, regional retailer has become a nationwide retailing powerhouse.  Last year Kohl’s generated almost $19B in revenue.  Certainly not Wal-Mart size but definitely not a mom and pop either.  Growing up in the heartland KSS has been very conservatively managed.  It generates strong operating margins, returns on assets and equity while maintaining a manageable debt load.  It’s net debt of $4B is easily financed by almost $1B in annual free cash flow.

A disappointing holiday shopping season has punished KSS.  In the past 3 months the stock has plunged 24% from a high just over $55 to a low of $41.35.  It now trades at < 10x earnings.

The 5-year chart and low valuation is what got me interested in initiating a trade in KSS.

BLOG - KSS 5 Year Chart

As you can see KSS has strong support at $40.  Other than the financial crisis in 2008, each time KSS has approached $40 it has bounced back.  I also looked at the 3 month chart.

BLOG - KSS 3 Month Chrt

In it you can see that after the lackluster Black Friday shopping results the stock was severely punished.  It fell hard and then continued to drift down further following along the lower Bollinger Band.  However, over the past couple of days it has pulled away from the lower Bollinger Band.  In my opinion this is a positive sign that may provide a good entry point for a naked put trade.

One last thought on why I decided to place this trade.  Kohl’s initiated paying a quarterly dividend a couple years ago.  It now pays a $0.32 quarterly dividend.  This dividend will likely be raised in March.  The stock now yields 3%.  If the timing of my trade is wrong and KSS resumes its fall and I ultimately decide to have the shares put to me I can take comfort in knowing that I will be paid to wait for its eventual recovery.

Regards,

Troy

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New Trade – GDX

Posted by mounddweller on January 10, 2013

Fellow Traders,

Today I executed a new trade in GDX.  GDX is the Market Vectors Gold Miners ETF.  This ETF holds positions in large-cap gold mining companies.  Below is a list of their current top 10 holdings (courtesy of Yahoo Finance).

BLOG - GDX Top 10 Holdings

While I have previously traded individual gold mining company stocks, this is the first time I have traded GDX.  Here’s what brought GDX to my attention.  I have been reading various stories about the recent weakness in the price of gold.  I also have read several articles about gold mining stocks being at record lows relative to the price of gold.  This got me to thinking that now would be a fairly good time, relative to down-side risk, to sell puts on gold mining companies.  I checked the charts for several gold mining companies and didn’t see any that jumped out at me.  However, I then decided to check GDX and its small cap sister ETF, GDXJ.

The GDX chart appeared to best fit what I was looking for.    GDX over the past 3 years has not traded below $40 and has traded as high as $65.  In the past few days it has traded around $45.  Thus, it is within 10-12% of its multi-year lows.  That limits down side risk.  Below is the one year chart for GDX (again courtesy of Yahoo Finance), showing the $40 lows.

BLOG - GDX 1 Year Chart

In this next chart which shows the past 3 months I have included the slow and fast stochastics.  Both indicate the ETF is extremely oversold.   What you can’t tell in the chart is that today the %K moved back up over %D indicating the sell-off might be over and a rally might be right around the corner.

BLOG - GDX 3 Month Chart

So, anticipating a rally might be about to occur I executed the following trade:  STO 3 GDX JAN25 $44 puts at $0.42.  GDX was trading at $45.20 when I sold my puts.  This gives me about 2.6% downside protection and a 0.95% ROIC with only 10 days to expiration.

Note, my expiration date on these puts is only two weeks out.  When looking at available expiration dates for selling GDX puts I stumbled across something new.  Previously I had never seen weekly options available with more than 8 days to expiration.  GDX had weekly options available for the next several weeks.  In fact they had weekly option expiration dates all the way out into February!  This is a put sellers dream!  Not only are GDX puts available in $1 strikes they are also available with multiple weekly expiration dates.  Talk about flexibility in both the set-up and management of your trade.  This is nirvana!

Has anyone found any other stocks or ETFs with this many available expiration dates?  If so, submit a commit and let me and my other readers know.

Regards,

Troy

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Position Update – EXC

Posted by mounddweller on January 2, 2013

Fellow Traders,

Long time readers will recall that I have a long-term holding in EXC.  I initiated my position in EXC back in April 2010 by selling naked puts at the $42.50 strike price.  Since then I have collected dividends, sold calls and puts, been assigned additional shares, and finally began reinvesting my dividends in new shares.  All of this trading activity over the past 32 months has resulted in me now owning approximately 529 shares with a net cost of $32.11.

I was feeling very good about my position in EXC until November when they announced that a dividend cut was a possibility within the next 6 months.  As you would expect the stock nose-dived on that announcement, falling from $37.50 to $28.50 in about a month.  Since bottoming out it has been hovering between $29-30.

Last week I decided there was little likelihood of EXC moving much higher until there is more certainty about if, when, and how much of a dividend cut is going to occur.  Thus, I started looking at the possibility of selling calls at the $30 strike.  While I was thinking about it (read “procrastinating”) EXC fell from the high $29s down to low $29s.  This caused the premium in the JAN $30 calls to totally evaporate.  I felt victimized once again by my inability to reach a decision and take decisive action.

However, the goons in Washington via their mangling of the fiscal cliff gave me a second chance.  The huge market rally today initially lifted all the boats, including EXC.  EXC jumped from a previous close of $29.74 to as high as $30.24 in the first 45 minutes of trading.  This caused the JAN $30 calls to rally as high as $0.60.  My gut told me this couldn’t last.  I felt people would eventually sell into this strength and push the stock back down under $30.  For a while it was a fight between my gut and my brain on deciding whether or not I should sell calls into this strength.  Thankfully my gut won.  Here’s the trade I made, with the stock at $30.18, I sold to open 5 JAN $30 calls at $0.55.  This netted me just over $264 and reduced my cost basis down to $31.61.

My gut instinct proved correct.  After peaking at $30.24 EXC gradually sold off, going as low as $29.66 and finishing the day at $29.82.

My plan going forward is to continue selling calls and/or put to further reduce my net cost.  I’m thinking that even if a dividend cut is announced the stock won’t fall much lower than $27.  At this point I could buy more shares (dollar cost averaging down) and still end up with a dividend yield of 4% or more.

Regards,

Troy

 

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