The Money Tree

Safely Generating Income in Retirement

Posts Tagged ‘LEAPS’

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:

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.




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

New Trade – AMAT

Posted by mounddweller on December 21, 2011

Fellow Traders,

I have a new trade to tell you about.  Earlier this afternoon I executed the following:

STO 5 AMAT JAN ’13 $10 puts at $1.57.

I haven’t executed a trade like this in the entire 3 years I have been publishing my blog.  However, I have done similar trades a time or two prior to beginning my blog.

Before I begin discussing why I executed this trade let’s take a moment to get you familiar with Applied Materials (AMAT).  Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic (PV), and related industries worldwide.   It was founded in 1967 and is headquartered in Santa Clara, California.

As you can see from the financial data provided below AMAT operates in a highly cyclical industry.  It is either feast or famine.  Lately, it has been a feast but as we’ll see when we look at the price chart, Mr. Market believes a famine is right around the corner.

The cyclicality of the business is evident in the sales numbers.  Sales were low during the recession in 2002/2003.  They accelerated rapidly coming out of the recession in 2004 and expanded along with the economy until the financial crisis in 2008/2009.  Then it was back off to the races again in 2010.  That has continued into 2011.

You’ll also notice AMAT enjoys fat profit margins when times are good but can fall into negative territory when the economy slows down.  However, AMAT being the well managed company it is plans for the lean times by keeping debt low and cash levels high.  Debt to Equity is a very reasonable 22.00% and cash, net of debt, is $4.29B or $3.27/share.

Now, let’s take a look at the 3-year price chart.

As I mentioned earlier Mr. Market is anticipating a slow-down in the economy and thus is dumping cyclical, high tech companies like AMAT.  In addition, AMAT generates a portion of its revenue from the solar photovoltaic industry, which has been decimated in recent months.  Both of these factors have combined to knock AMAT down from a 52-wk high of $16.93 to the 52-wk low of $9.70 which was hit on October 4.

On the 3-year price chart you can see AMAT hasn’t been this low since March 9, 2009 when it closed at $8.58.  If you take a moment to look at a longer price chart you’ll notice that AMAT prior to March 2009 hadn’t been under $10 since 1998!

So, by now you’ve surely determined one of the primary reasons I like this trade.  AMAT is trading at historic lows!  The risk/reward ratio is solidly in my favor.

Here’s another reason.  Back in 2005 AMAT began paying modest quarterly dividends.  Every year since then they have increased the dividend.  It is now $0.32/year.  Hence, it is currently yielding 3.2%.  Not bad for a cyclical tech stock.  That is on par with MSFT and INTC.  If they continue their recent pattern the dividend will go up again in May 2012.

Last, but not least, another reason I like the trade is of course the size of the premium.  I sold the JAN ’13 $10 puts for $1.57.  My annualized ROIC is 14.51%.  At that rate I am able to double my money every 5 years.  Note also that my net cost if I have the stock put to me next year will be $8.43.  This is below the March 2009 market lows!  And, assuming AMAT continues paying the current dividend of $0.32 my dividend yield would then be 3.80%.

Well, there you have it.  One final point, you may have noticed I only sold 5 contracts.  My strategy here is to sell more if AMAT continues to drop.  I will keep an eye on the premiums for the JUL $8 or $9 strikes.  If, at some point in the year I can sell either of those for a 15% annualized ROIC I will do it.




Posted in Portfolio Updates, Troy's New Picks! | Tagged: , , | 2 Comments »

Options Screener

Posted by mounddweller on April 28, 2011

Fellow Traders,

Those of you who regularly keep up with the comments section of my posts know that recently I have been exchanging messages with a new reader, Vijay.  Vijay would like to develop a Deep OTM NP Strategy of his own using LEAPS.  One of the criteria he uses to search for potential trades is the greek, Delta.  Some of you may already know that Delta is often used as a close approximation for the probability that an option will finish ITM. 

While I personally don’t use any of the greeks to screen for good trades I know other successful traders who do.  One of these is my investing buddy, Patrick, over at   The reason I mention Patrick is because he has built a terrific option screener with many selection criteria available to the user, including the greek Delta which he labels as POA (Probability of Assignment).  Below you’ll find a screen shot of his screener.  Vijay, I used your < 20% POA value as one of my selection criteria.  You’ll note the screener returned over 1200 options meeting that criteria.  I also limited the screen to focus only on large-cap stocks.

If you like what you see, give my buddy Patrick a shout.  FYI, I receive no compensation from Patrick for commenting on or endorsing his site.



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AT&T (T) – Position Closed

Posted by mounddweller on January 7, 2011

Earlier this week I closed out my long-held trade in AT&T (T).  Let me give you a brief history of this trade.  I initiated this trade before I found Ron Groenke and began using his VISIONS software.  My original plan for the trade was to buy the stock, sell a LEAP call against these shares and collect the dividends until called away or the call expired.  Then repeat the process by selling another LEAP call the following year.  Well, as you might expect, my ‘perfect’ trade didn’t play out as planned. 

We all know what happened in 2008.  By late summer/early fall the market began to fall.  By January 2009 my originall LEAP calls did expire worthless but because of the steep drop in the price of AT&T I was unable to write another LEAP call at my original strike price.  At this point I had a number of options (pun intended) available to me to try to recover and manage the position.  However, given it’s relatively small size I instead let it lanquish in my account and for another 17 months did nothing but collect the quarterly dividend.

About midway through 2009 I decided I had to do something.  I had to either accept the loss in capital and move on, or more actively manage the position and attempt to recover my original capital.  I decided the best course of action was to sell puts on additional shares until assigned.  I did one round of naked puts but then decided to just buy additional shares outright because I felt the stock had bottomed.   Finally, in the fall of 2010, I decided to sell the OTM JAN $29 calls. 

It was these JAN $29 calls that lead to me closing out my position.  Earlier this week, someone decided they needed AT&T’s next dividend more than I did.  My calls were assigned early on the day before T went ex-dividend.  I think I got the better end of the deal though as T has since fallen below my strike price of $29. 

At the end of the day I’m pleased at how the trade turned out.  By being patient I was able to turn what could have been a loss into a $934 gain.  My annualized ROIC of 3.53% is nothing to write home about, but it sure beats the $1400 loss I was looking at when T bottomed out in March 2009.

Here is the complete history of this trade:

I like AT&T.  It has a great, stable and reliable dividend.  Thus, I am looking to reenter a position in T.  Earlier today I tried to sell the FEB $28 puts at $0.45.  Unfortunately, my trade did not fill.  I am going to continue following it closely next week in the hope I can find and get filled at a suitable entry point.

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