The Money Tree

Safely Generating Income in Retirement

Posts Tagged ‘LPHI’

Deep OTM NP Strategy – February Results

Posted by mounddweller on February 18, 2011

Fellow Traders,

February results are in for our Deep OTM NP Strategy.  Overall our results were slightly better than those experienced in January.

This month we had 56 trades in our strategy to choose from.  After the market close on Friday (2/18), 50 of them closed OTM.  That’s a success rate of 89.3%.  I feel good about the “win rate” especially considering we are in the middle of earnings season.  Five of the six trades that finished ITM were the result of poor earnings releases.  The sixth, LPHI is a “special situation” as it is embroiled in a class action lawsuit.

Had you chosen to sell puts (using the capital allocation plan I outlined in an earlier post) on all 56 selected trades this month it would have required a capital balance of $423,600.  Remember, this assumes you are trading in a tax-advantaged retirement account which does not allow the use of margin.   Doing so would have generated total premiums of $6,136.05 (net of commissions).  This equates to a 1.45% ROIC, which is 18.23% annualized.

How did the losers impact our results?  Glad you asked.  We had 6 trades that finished ITM.  On Monday we will have to purchase these 6 stocks.  They are ENTR, LPHI, CHTP, SWIR, TKLC, and OMX.  Assuming we did nothing to mitigate our losses by either (1) buying to close the puts at the first sign of trouble, or (2) holding the stock after assignment and possibly selling CCs against it, our total capital losses (based on Friday’s closing prices) would equal $5,763.70.  The net result (premiums plus capital losses) would be a very small gain of $372.35.

However, once again (like last month) on most of the trades we had an opportunity to cut our losses at the first sign of trouble  and could have ended the month with a more substantial gain had we proactively managed the trades.  Let’s look at each of the six losers and see what our best course of action might have been.

ENTR:  We sold 10 FEB $10 puts at $0.20 back on 01/21/2011 when the stock was trading at $12.26.  It closed Friday at $9.65.  This leaves us with a capital loss of $0.35/share or $350.00 on 10 contracts.  However, we had plently of time to recognize the trade was in trouble and could have avoided the loss by not holding the contract to expiration.  The stock has steadily moved lower over the past few weeks.  On Tuesday, February 15th it finally closed below our $10 strike price.   Alternatively, we could have chosen to take assignment and hold the shares until they get back above $10.  It’s not unreasonable to assume this could occur over the course of the next week.  We could also accept assignment and immediately sell the MAR $10 calls which today closed at $0.50 bid.  Doing so would give us a cost basis of $9.30.

LPHI:  This was one of our biggest losers ($1,918.95).  However, it could have been easily avoided.  You’ll recall LPHI was one of our losing trades last month as well.  Common sense (which isn’t always so common) hopefully would have kept us from executing another trade in this stock.  As I mentioned earlier the company is facing a class-action lawsuit and allegations of fraud. 

CHTP:  On 1/30/2011 we sold 10 FEB $5.00 puts at $0.25.  CHTP was trading at $5.96.  Friday it closed at $4.32.  CHTP gapped down on 2/2/2011 closing at $5.02.  It then hovered around our $5.00 strike price for several days before resuming its fall again earlier this week.  Clearly the best course of action here would have been to close out the trade at a small loss after it failed to recover from its gap down on February 2nd.

SWIR:  On 2/4/2011, with the stock at $14.30, we sold 5 FEB $12.50 puts at $0.15.  On Friday the stock closed at $11.11.  On February 9th after announcing earnings it gapped down closing at $11.45.  There really wasn’t a good way to avoid this loss.  However, we could have slightly lessened the size of the loss by buying to close our puts when the stock gapped down on 2/9.

TKLC: On 2/4/2011 we sold 10 FEB $10 puts at $0.15.  The stock was at $11.58.  On February 10th it gapped down closing at $8.36.  Once again the culprit was a bad earnings release.  This was our biggest loser ($1,928.95).  I have egg on my face with this one as it was my favorite pick back on February 4th.  I still like the stock though.  It has zero debt, substantial cash reserves in the bank and now trades at less than book value.

OMX:  We sold 5 FEB $15 puts at $0.15 back on 2/13/2011 when the stock was trading at $17.00.  It closed Friday at $14.69.  This leaves us with a capital loss of $0.31/share or $163.95 on 5 contracts.   Like most of our other losers it gapped down earlier this week after announcing earnings.  Given the closing price of $14.69  the best course of action would seem to be accept assignment and immediately sell the MAR $15 calls which today closed at $0.50 bid.  Doing so would give us a cost basis of $14.35.

Well, there you have it my friends.  I’ll be back later this weekend with another post to announce the first round of March selections in our Deep OTM NP Strategy.  I’d be interested in hearing if anyone selected any of the picks from my strategy in February.  If you’d like please post your results as a comment to this message.

Regards,

Troy

Advertisements

Posted in Deep OTM NP Strategy | Tagged: , , , , , , | Leave a Comment »

Deep OTM NP Strategy – January Results

Posted by mounddweller on January 22, 2011

Fellow Traders,

It was a ‘so-so’ month for our Deep OTM NP Strategy.  Certainly it was not an auspicious start for 2011 nor for the beginning of posting this trading strategy on my blog.  Enough of the lamenting let’s get on with reviewing the results.

This month we had 27 trades in our strategy to choose from.  After the market close on Friday (1/21), 23 of them closed OTM.  That’s a success rate of 85%.  Certainly not bad given the types of stocks that meet our trading criteria.  In the current market environment most of our trades involve small and mid-cap stocks with less than stellar fundamentals.  However, it is not nearly as good as the 96% success rate I was experiencing last year before I began publishing my results.

Had you chosen to sell puts (using the capital allocation plan I outlined in an earlier post) on all 27 selected trades this month it would have required a capital balance of $175,925.  Remember, this assumes you are trading in a tax-advantaged retirement account which does not allow the use of margin.   Doing so would have generated total premiums of $2,756.60 (net of commissions).  This equates to a 1.57% ROIC, which is 16.82% annualized.

But wait, you say, what about the losers?  Yes, my friends we have to account for our capital losses.  We had 4 trades that finished ITM.  On Monday we will have to purchase these 4 stocks.  They are PSDV, LPHI, SVU, and CREE.  Assuming we did nothing to mitigate our losses by either (1) buying to close the puts at the first sign of trouble, or (2) holding the stock after assignment and possibly selling CCs against it, our total capital losses (based on Friday’s closing prices) would equal $2,764.80.  The net result (premiums plus capital losses) would be a very small loss of $8.20.

However, as I mentioned above we have several options (pun intended) available to us to mitigate that loss and perhaps we could have ended the month with a significant gain had we proactively managed the trades.  Let’s look at each of the four losers and see what our best course of action might have been.

First up, let’s look at PSDV.  We sold 10 JAN $5 puts back on 12/19/2010 when the stock was trading at $5.70.  It closed Friday at $4.53.  This left us with a capital loss of $0.47/share or $470.00 on 10 contracts.  However, we had plently of time to recognize the trade was in trouble and could have avoided the loss by not holding the contract to expiration.  The stock gapped down on 12/27.  Over the ensuing 3 1/2 weeks we would have had many opportunities to close the trade with a small loss or possibly even a profit.  Alternatively, we could have chosen to take assignment and hold the shares until they get back above $5.  It’s not unreasonable to assume this could occur over the course of the next week.

Next is LPHI.  Unfortunately, there wasn’t much opportunity to avoid this sizeable loss.  The stock dropped almost $2.50 on 1/20, just one day before expiration.  Given the significant gap between the closing price on Friday ($11.82) and our strike price of $14.75 there also appears to be little sense in waiting for an uptick in price before selling the stock.  In this situation in my opinion the best course of action is to just suck it up and take the loss by selling the shares on Monday.  This trade represented the bulk of our capital losses ($1,473.95 of $2,764.80).

Our third loser was SVU.  Recall on 1/7/2011 we sold 10 JAN $7.50 puts on SVU.  SVU was trading at $8.66.  Friday it closed at $7.33.  SVU gapped down on 1/11/2011 closing at $7.59.  Again, like PSDV, we had a couple of weeks to get out of this trade if we wanted to.  Even if we hadn’t we still aren’t in a bad position.  Having closed only $0.17 below our strike price it is very likely we will have been able to sell it above $7.50 at somepoint on Monday.

Our last loser was CREE.  On 1/14/2011, with the stock at $63.77, we sold 1 JAN $57.50 put.  On Friday the stock closed at $51.26.  It had gapped down earlier in the week, falling from $62.71 to $53.63.  Their really wasn’t a good way to avoid this loss.  However, we could have lessened the size of the loss by buying to close our puts when the stock gapped down on 1/19. 

Well, there you have it my friends.  I’ll be back later this weekend with another post to announce the first round of February selections in our Deep OTM NP Strategy.  I’d be interested in hearing if anyone selected any of the picks from my strategy in January.  If you’d like please post your results as a comment to this message.

Regards,

Troy

Posted in Deep OTM NP Strategy | Tagged: , , , , | 5 Comments »

UPDATE – NP Strategy – JAN Week 4

Posted by mounddweller on December 27, 2010

Friends,

Just a quick couple of notes on my NP Strategy selections, VRGY and LPHI. VRGY also has a $10 strike price that looks very attractive. This morning it is trading at a bid/ask of $0.10/$0.15 and has traded as high as $0.18. Anything above $0.15 would work for me. At $0.15 you would have a 1.5% ROIC with 23.5% downside protection.

Now, an update on LPHI. Earlier this morning I read the WSJ article about LPHI. It does not cast LPHI in a very favorable light. I also read the LPHI CEO’s rebuttal. My advice would be to proceed with caution. The $14.75 strike price that appeared in our selection results has a very wide bid/ask spread of $0.20/$0.75. I see that as a ‘red flag’. I am going to hold off selling any puts on LPHI until I see how this shakes out. I recommend you do the same.

Regards,
Troy

Posted in Deep OTM NP Strategy | Tagged: , , | 2 Comments »

First Post – New NP Strategy – JAN Week 4 Selections

Posted by mounddweller on December 24, 2010

All,

Below are this week’s selections for the Deep OTM NP Strategy.  Please recall the selection criteria for this week are (1) downside protection of at least 17.5%, and (2) a Put Factor (PF) >= 2.0. 

Of the three selections meeting our criteria, LPHI and VRGY peaked my interest.  LPHI closed yesterday (12/23) at $18.71.  It is almost midway between it’s 52-wk high of $24.50 and the 52-wk low of $14.69.  Note the proximity of the strike price to the 52-wk low.  I like that!  Other items that appeal to me are that it pays a 5% dividend and has a P/E of 9.26.    So, why the high premium on a deep OTM put for a stock that sports a high dividend and a low P/E?  Well, the best I can figure is it is tied to a recent story in the WSJ.  The WSJ questioned some of LPHI’s business practices.  Earlier this week LPHI’s CEO issued a rebuttal to the story.  Bottom line, despite the negative press I like this trade. 

Now let’s look at VRGY.  The fundamentals, while not bad, are not near as good as LPHI.  It doesn’t pay a dividend and has a much higher P/E.  It also is trading much closer to it’s 52-wk high of $13.79 than the 52-wk low of $7.48.   What’s appealing about VRGY is that it is a takeover target.  Advantest has said they would like to buy VRGY for $15/share.  This is a sweetened bid from an earlier price that was rejected as too low.  In my mind this limits the potential for the stock to decrease substantially betwen now and expiration on January 21st.

Before closing, just wanted to mention why THC doesn’t appeal to me.  With a premium of only $0.05 you would need to sell a substantial number of contracts to make it worth your while.  That, coupled with the relatively low 1% ROIC, makes it a less attractive trade.

Well, that’s it for this week.  Best of luck in the last week of 2010.

Regards,

Troy

Posted in Deep OTM NP Strategy | Tagged: , , , | Leave a Comment »