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Posts Tagged ‘GME’

New Short-term Trade – GME

Posted by mounddweller on May 17, 2010

NOTE:  What follows violates almost every single rule in Ron’s approach to trading covered calls and naked puts.  Procede with extreme caution.

For many months now I’ve been considering the opportunities that might exist in selling naked puts in the week of expiration.  Certainly this is not a new idea.  There’s even at least one book written on the subject; however, I don’t recommend you buy it.  I found it to be very technical and overly complicated.  Despite my disappoinment in the book I still think the idea has merit.  Consequently, this weekend I went in search of a couple of good opportunities with which to test the waters.

My objective in doing these types of trades will be to pick up some quick cash by selling what I feel are mispriced puts which have little risk of assignment.

The stock I chose for my first foray in this type of trade is GME.  I chose GME for a number of reasons but the most important one was that I am already familiar with the company and the stock.  I have successfully traded it twice before in the past year; albeit using a different strategy.

My criteria for placing this type of trade are as follows:

(1) ROIC > 0.5% or 36.5% annualized (in this trade it was 1.75%)

(2) Put Factor (PF) > 2 (in this case it was over 3)

(3) Dowside protection > 10% (in this trade it was only 9.02%)

Note:  These are preliminary criteria.   Since I’m experimenting with this strategy they are subject to change based on my actual results going forward.

Here are the specifics of the trade I executed earlier today: Sold 3 MAY GME $20 puts at $0.35

If you find this particular trade intriquing you can still get into it.  Using today’s closing prices it is even more appealing than when I first saw it over the weekend.  Today GME closed at $22.02.  With only 4 days to expiration the MAY $20 put is at $0.24/0.27.   Selling the puts at $0.24 generates a yield of 1.2% (annualized that is over 100%).  Ron’s PF is 4.09 and he estimates the probability of assignment is < 1.00%.

BEFORE EXECUTING THIS TRADE IT IS IMPORTANT TO NOTE THAT GME WILL REPORT FIRST QUARTER EARNINGS ON THURSDAY.  THAT IS WHY THE PREMIUMS ARE SO HIGH.  THERE IS A LARGE AMOUNT OF UNCERTAINTY AS TO WHAT THEY ARE GOING TO REPORT.  INDUSTRY SALES WERE DOWN SHARPLY IN APRIL.

Below are a VISIONS Stock Explorer screenprint and Price Chart for GME.  One look at the chart will show you why Ron would not endorse or support entering this type of trade.

 

I’m very much interested in hearing your thoughts on this trade.  Please comment and let me know what you think.  If you choose to execute this or a similar trade let me know how it turns out.

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March Expiration

Posted by mounddweller on March 23, 2010

All,

Sorry for the delay in posting a message. This past Saturday my PC crashed and I’m slowly trying to recover lost data. Every day something else I need comes up missing.

Enough about that, please recall I only had two open position in March. My WFR position was called away. I originally set-up this trade in December and over the past 3 months sold a series of calls and naked puts. My total return for the 3 month period was a little over 14%. Not bad.

My other open position is in GME. You’ll recall I sold APR $21 calls on it back in February after it had taken quite a tumble falling from around $22 down to around $18. It it now back up above $22. If the market holds I will be called away at APR expiration.

Best of luck to everyone this month. I hope to be back in a few days with some new trades.

Regards,
Troy

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GME – An Update

Posted by mounddweller on February 19, 2010

All,

I sold a new round of calls on GME today.  This is after having spent the better part of a week thinking through various scenarios and possible outcomes.  I initiated this position in late December, buying GME at $22.65.  I then sold the JAN $22.50 calls for $0.95.  These calls expired worthless.  I then sold NPs shortly after GME experienced a sharp sell-off.  This further reduced my cost basis.  Earlier this month I bought back the NPs for pennies on the dollar.  The result of all this activity was a reduction in my cost basis to $20.64.

As I mentioned above I considered several possible trades before making a final decision earlier today.  I looked at selling another round of NPs to further reduce my cost basis.  Specifically, I looked at the MAR and APR $18 puts.  However, I decided that wasn’t the most prudent course of action so I then began to look at selling another round of CCs.  The first strike price I considered was the MAR and APR $20s so that I could maximize the size of my premium and consequently the most reduction in my cost basis.  However, doing this would come at a price.  I had to decide if I would be happy be called away at $20 and recognizing a small loss (with the MAR $20s) or a very small profit (with the APR $20s).  I decided I didn’t like that outcome so I went back to the options tables and looked some more.

Here’s what I found and what I ultimately decided to sell: 2 APR $21 calls at $0.50.

Net of commissions this trade reduces my cost basis to $20.19.  Thus, if assigned at $21 in APR I will have achieved an acceptable, albeit modest, return on my investment.  My ROIC will be around 4% over a 4 month holding period.  While not great, I’m willing to bet on an annualized basis (say 12%) it will exceed the overall market returns for the year.

Also, I would be remiss if I didn’t acknowledge the sage counsel I received on this trade from Ed, my good investing buddy.

I’ll be back later this weekend with an update to my open positions and historical results.  I’ll also be posting a message about possible new trades.

Regards,

Troy

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Update on GME

Posted by mounddweller on February 4, 2010

All,

Yesterday I BTC my GME FEB $19 puts for $0.14. You’ll recall I sold these puts the day after GME’s most recent earnings release. All in all, I think I did pretty well. As a stand-alone NP trade it worked out very well. I earned 4.26% ROIC in just under a month. That’s 57.63% annualized.

The trade also helped out my overall position in GME. You’ll recall I originally bought 200 shares back on 12/21 at $22.65 and immediately sold calls against them. Between the CCs and my NPs I have now reduced my net cost basis in GME down to $20.64. If we get a bounce back from this recent sell-off in the overall market I should be able to sell some MAR $21 or $22 calls, further reducing my cost basis. Or if the market doesn’t cooperate I can again sell some $19 puts.

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GME – An Opportunity

Posted by mounddweller on January 7, 2010

Hi All,

GMEs earnings announcement today presented me with a great opportunity to expand my position.  The stock sold off hard at the opening bell diving over $4.50 to trade as low as $19.42.  In seeing this big drop I did a quick read of the press release to ensure nothing was fundamentally wrong with the company then I started looking at puts.  My first look was at the JAN $19 puts.  However, with only 9 days to expiration it had little to offer.  It was priced at $0.35 bid.  That wouldn’t do. 

What I was looking for was a put that had enough premium that when the bounce I was expecting came I could buy it back for a quick profit.  Next up, the FEB $19 put.  Now here was a put I could like.  It was at $0.85 bid.  This was the one I wanted.

So, now knowing what I wanted to sell I began to closely watch the stock trade.  I was wanting to sell the put at the point of maximum pessimism.  This is something that, with practice, you can begin to sense and see in the trades.  The trick is in having the courage to pull the trigger when that point comes.  So many times in the past I have chickened out when the exact moment arrived.  Not today.  I pulled the trigger and sold 3 FEB $19 puts for $0.95.   Believe it or not, the stock almost immediately began to turn around.  Less than an hour later I could have bought my puts back for $0.45!    Did I?  No, I did not.  Why?  Well,  partly because I was being greedy.  Of course, the stock then bounced around the rest of the day and I didn’t get another chance to buy it back.  However, it looks like I might have another chance tomorrow as the stock was up in after-hours trading.

OK, so by selling the FEB $19 puts what did it do for me?  Well, first off I am getting a 5% ROIC  on my cash secured puts (0.95/19).  5% in 44 days to expiration is 41.44% annualized.  Also, if I’m successful in buying the puts back at a steep discount to my sales price or if I hold them and they expire OTM I will have significantly reduced the net cost of my existing long stock and short call position.  You’ll recall I bought the stock on 12/21 at $22.65 and sold the JAN $22.5 call for $0.96.  That makes my net cost $21.69.  

If I’m wrong and GME continues to sell off and I end up having the stock put to me at $19 I still am in a good position.  My net cost on the new position will be $18.05.  I’ll then own 500 shares with a total net cost of $19.51.

Regards,

Troy

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Two New Trades

Posted by mounddweller on December 21, 2009

Today I did buy/writes on both GME and NITE.  You’ll recall in the post from yesterday I said “Its a toss-up right now between GME and NITE.”  Well, instead of choosing between the two I decided to spread my risk and invest a little in both.  Below are the details of my transactions:

Gamestop (GME) – Bought 200 shares at $22.65.  Sold two JAN $22.50 calls at $0.96.  This makes my break-even point $21.69.  If assigned at expiration my return will be 3.58%.  If unassigned it will be 4.27%.

Knight Capital (NITE) – Bought 300 shares at $15.17.  Sold three JAN $15.00 calls at $0.65.  This makes my break-even point $14.52.  If assigned at expiration my return will be 3.16%.  If unassigned it will be 4.33%.

Also wanted to give everyone a quick update on MEMC Electronic Materials (WFR).  You’ll recall I executed a buy/write on it last week.  I bought 500 shares at $12.77 and sold the DEC $13.00 for $0.22.  These calls expired OTM.  My original plan for this month was to sell the JAN $12.50 calls.  However, a fellow trader and friend (thanks Ed!) persuaded me to wait as he believes it is going to continue moving higher.  Thus, my plan now is to sell either the JAN or FEB $14 calls if WFR moves higher.  If it stalls out I will sell the JAN $12.50 and capture some ITM premium.

Merry Christmas to all,

Troy

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Can You Believe It – Choices!

Posted by mounddweller on December 19, 2009

Yes, it is true.  For the first time in months I feel like I have multiple stocks from which to pick my next trade.  As all of my regular readers know I haven’t been trading much of late.  Quite simply, I couldn’t find stocks that both met my VISIONS criteria AND had what I considered to be an acceptable risk/return ratio.

This month that has changed.  I have four, yes FOUR, stocks that I feel are worthy of consideration.  They are Gamestop (GME), Illumina (ILMN), Knight Capital (NITE), and MEMC Electronics (WFR).  Let me give you a brief description of each:

GameStop operates as a retailer of video game products and personal computer (PC) entertainment software. It sells new and used video game hardware; video game software; video game accessories, including controllers, memory cards, and other add-ons; PC entertainment software; and strategy guides and trading cards. The company sells its products through its 6200+ stores, as well as through an electronic commerce Website gamestop.com.

This is the second time I have considered a trade in GME.  Earlier this year (July/August) I executed a very successful CC and NP trade on GME. 

Illumina, Inc. engages in the development, manufacture, and marketing of integrated systems for the analysis of genetic variation and biological function.  It also is a stock I’ve traded previously.  However, in this case it was a trade I entered before I began using Ron’s VISIONS methodology and software.

Knight Capital Group, Inc., a financial services company, provides electronic and voice access to the capital markets across multiple asset classes for buy-side, sell-side, and corporate clients; and asset management for institutions and private clients in the United States. It operates in two segments, Global Markets and Asset Management.

And last, but not least there is MEMC Electronics.   MEMC Electronic Materials, Inc. designs, manufactures, and sells silicon wafers for the semiconductor industry worldwide. Its products include prime polished wafers, such as OPTIA and annealed products; epitaxial wafers consisting of thin silicon layer grown on the polished surface of the wafer; test/monitor wafers for testing semiconductor fabrication lines and processes; and silicon-on-insulator wafers used for the chip making process. The company’s products are used in the manufacture of various semiconductor devices, including microprocessor, memory, logic, and power devices, as well as the starting material for solar cells.

As you know I entered a trade in MEMC just a week or so ago.  My December calls expired worthless so I hopefully will be selling a second round of calls on it this coming week.  I am including it again in this analysis because I feel it is still at a good entry point for folks who didn’t join me in the trade last week.

Below is a spreadsheet showing the key metrics for each of the stocks under consideration.  Cells shaded in green are the best value among the four stocks for that particular metric.

As you can see NITE is the clear choice based simply on having the best metrics in 5 categories.  At 92, it has the best Gold$ score.  It also trades at closest to it’s book value, has an exceptional amount of net cash on its books, and has the best TAI score.  However, let’s not make a hasty decision.  Let’s have a look at the stock charts.

In my opinion, of the four stocks under consideration, ILMN has the best looking chart.  After selling off sharply late in October it has since stabilized and is now trending back up right in the middle of the V.

OK, now let’s see what our ATM call options look like.  Below is a list of the near month ATM options for each of the four stocks being considered.  None jump out at me as being far superior to the others.  The disadvantage with the ILMN stock price is that it is right in the middle between the next available strike prices.  The other three stocks all trade at or within mere pennies of the ATM strike price.  Thus, with ILMN you have to make a decision as to whether to write the ITM or OTM call.  WFR offers the best uncalled and second best called return, followed by GME.  NITE offers the least return but is by far the safest pick with the huge pile of net cash sitting on its balance sheet.

 

What to do, what to do? For me, it comes down to choosing either GME or NITE.  Why?  Well, I already have a position in WFR that I need to sell a second round of calls on so I don’t want to pick it and end up with too large a position in one company.  With GME I get a company I’m very familiar with and which I have successfully traded before.  With NITE I get a company selling for less than its net cash.  In this market, that ‘safety net’ is very appealing.  While I like ILMN’s chart I don’t like its fundamentals.  It sells for over 28 times earnings and almost 3.5 times book value.  I also don’t like having to choose between the ITM or OTM call.

So what am I going to do?  Well, I’m going to wait and see what Monday brings.  Its a toss-up right now between GME and NITE.  Perhaps the market will make the decision for me on Monday with one or the other moving sharply one way or the other.

What do you think?  Reply to this post and let me know which one you like and why.

Merry Christmas,

Troy

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August Month-end Wrap Up

Posted by mounddweller on August 23, 2009

Well, what a month!  Almost everything in my CC/NP was called away, including my position in FRX which had been open for over 6 months.  Below is a quick recap of what transpired this month.

FRX – As I mentioned above, after 7 months of selling CC and NP on FRX I finally had the stock called away from me.  I originally entered this position in January at $25.60/share.  Over the months I had additional shares put to me at $22.50.  In addition, I sold CCs almost every month.  The end result was a total return of 18.51%, or 30.56% annualized.

GME – Sold ITM calls and OTM puts last month.  Despite the sell-off after they announced earnings I still ended up in the ‘sweet spot’  having my calls assigned and my puts expire worthless.  My one-month return was 5.37%, or 56.03% annnualized.

IPI, O, and TK – Sold NPs on these stocks.  All expired worthless.  My one-month returns were 2.1%, 2.31%, and 1.8% respectively.

My only remaining open position is my NP position in UNG.  For a description of what transpired with it see my post from earlier this evening.

I’ll be back shortly with another post regarding what new trades look intersting for the week ahead.

Regards,

Troy

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New CC Trade – GME

Posted by mounddweller on July 20, 2009

Can you believe it?  I actually executed a new CC trade today!  This is my first new CC trade since January!  You contrarians out there be sure to note todays date as I have probably just called the top of this bear market rally.  Knowing my luck lately, I will have gotten  into a new position about the time everyone else starts heading for the exits.

Oh well.  For what it’s worth here’s why I like this trade.  GME has been on my watchlist for quite some time.  Why?  Because they sell what everyone wants right now…cheap entertainment.  Of course Mr. Market doesn’t agree with me because he has pushed down the price of GME from a recent high of $32.82 in April to a low of $20.02 on July 13th.

For those of you who don’t have kids, you probably don’t know that GME is THE PLACE to buy/sell new and used video games.  I think as we get closer to the holiday season Mr. Market is going to wake up to the fact that while lots of people are reining in their spending, none of them are going to go so far as to put lumps of coal into their kids Christmas stockings this year.   Thus, I anticipate strong sales in the latter half of the year at GME.  This should result in a rebound in the price of GME stock.

OK.  Now let’s look at this trade using my Trading Plan evaluation criteria.  First the pluses.  GME has huge operating margins and generates enormous cash flow.  The shares are also cheap, selling at a single digit P/E of 9.2.  The minuses?  Well,  the one thing that sticks out for me is their lack of bare cash.  Long-term debt exceeds cash on the balance sheet.  However, in my mind, this is more than compensated for by the huge amounts of free cash flow.

GME - Trading Plan Criteria

Now let’s look at the chart.  You can see that this isn’t a picture perfect trade from a Groenke / VISIONS standpoint.  While the stock has been in the V for 23 days, has a Gold$ score of 80, and is well under the BL of $24.56 the trend has only recently reversed and started going back up.  Thus, I was conservative and executed an ITM covered call.  I wanted to hedge my bets just in case the stock should resume its decline.  For you more adventorous types out there I will point out that the ATM calls earlier today were yielding a very generous 6.2%.

VISIONS - GME Chart

OK, I’ve rambled on long enough.  Here are the specifics of my trade.  I basically did what Ron likes to call his “double up” strategy.  I first did a buy/write asking for a debit of $20.17 or better.    This translated into me being filled on GME at $22.27 and selling the AUG $21 calls at $2.11.  If called away at $21 in August my ROIC will be 3.77%.  After getting filled on my buy/write trade I also sold the AUG $20 naked puts for $0.55.  If the NPs expire OTM my ROIC will be 2.75%.

What do y’all think?  Do you like the trade?  Why or why not?

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