The Money Tree

Safely Generating Income in Retirement

Posts Tagged ‘NITE’

New Trade – NITE again

Posted by mounddweller on January 19, 2010

I did a buy/write today on NITE.  Since I have recently written about NITE in other posts I won’t bore you with any details.  Here is the essential information for the trade:

Executed a buy/write on 300 shares of NITE with a net debit of $14.53.  If called away on February 20th I will have a ROIC of 3.1%.  My uncalled ROIC will be 4.47%.

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

Potential Trades

Posted by mounddweller on January 16, 2010

All,

When I first started my blog I spent considerable time and effort on expiration weekend identifying, evaluating, and presenting potential trades.  In addition when I executed a trade I was verbose in explaining each of my trades, how I went about selecting them, and why I liked them.  However, as time went on my posts became more matter of fact.  I simply presented the parameters behind my trade and at most a little commentary on why I liked it.  Well, with this post I am returning to my roots so to speak.  This post will give a detailed explanation of what I look for in a potential trade and how I go about conducting my due diligence.  So, let’s get started.

My search for potential trades always begins by running the Scout search engine in VISIONS.  Below is a screen shot of the search criteria that I use:

As you can see my initial search criteria casts a fairly wide net.   However, when I get down to finally selecting my trades my criteria are very specific.  Let’s look at my first pass criteria a little closer.  You’ll notice I choose to not look at any stocks trading for < $10.  There are a couple of reasons for this.  First, stocks trading for < $10 probably are that price for a reason.  But more importantly, unless the stock has options that trade in $1 increments, it is very hard to create a favorable trade in this price range.  For example, say a stock is trading at $8.75.  The two strike prices available to you are $7.5 and $10.  If you choose the ITM $7.50 more than likely your called return will be very small.  On the other hand if you choose the $10 strike the stock has to go up by over 14% before you have a chance at being called away.  In addition, the premium will likely be very small thus making for an unacceptable uncalled return. 

You’ll notice I didn’t specify a maximum stock price in my search criteria.  I don’t want to limit Scout in this regard.    However, it is rare that I’ll do a trade where the stock price exceeds $50.  This is because I want to avoid trading single contracts.  Rather, I want to trade stocks where I can initially write a minimum of two contracts, three is even better.  Thus, my stock price sweet spot is $15 – $30.  However, I will go as low as $10 and as high as $50.  The reason behind these limits is the overall size of my position.  I like to keep my initial entry into a stock at < $5K and my overall position size at < $10-12K.

The three other search criteria I focus on are market capitalization, trading volume, and bare cash.  I avoid trading small cap stocks, which I define as those with a market cap < $1B.  Why?  Quite simply because they tend to be more volatile and it is quite easy to have a good trade head south on you in a hurry.  I also look at trading volume.  Adequate trading volume means liquidity.  If something happens that changes my perspective on a trade I want to be able to get out fairly quickly.  This isn’t always possible with low volume stocks.  Last but far from least, I look at bare cash.  This, in my opinion, is one of the most important criteria.  Bare cash simply means the company has more cash than debt on its balance sheet.  This lets me sleep at night by knowing that if the trade goes against me I’m invested in a company that has cash available to weather the storm and is in no danger of declaring bankruptcy anytime soon.

OK, so there you have the basic rationale behind my initial search criteria.  Now, let’s look at what my search criteria found this week and in so doing we’ll also look at my second, more stringent set of selection criteria.  Below is the Scout report generated by VISIONS using the above screening criteria on the afternoon of Saturday, January 16th.

The first and most important thing to realize is that you can’t take the title of the “Scout Stocks to Buy Report” literally.  Not all of the stocks presented by Scout are suitable for entering a trade.  Further filtering, analysis, and due diligence is required.  To assist us in this process I’ve color coded the criteria I focus on.  Red is unacceptable, yellow is tolerable, and green is good.  For the most part, green values match the criteria Ron Groenke uses in his selection methodology.

The first criteria I use to filter potential trades is the TAI.  I only want to look at trades with TAI = TA.  As you can see of the 10 stocks returned by Scout only 4 meet this criteria.  They are APOL, NITE, ESI, and FSLR.  Note, of late stocks rated TA have been few and far between.  The 9 month run-up in prices since the March ’09 lows severely limited the number of stocks meeting Ron’s criteria.

Next up is the Gold$ score.  Like Ron, I look for stocks with a Gold$ score > 80.  Two of the three variables used to calculate the Gold$ can also be found in the Scout report.  They are the number of consectutive up days and the number of days the stock has traded in the V.  The third variable is best evaluated by looking at the VISIONS stock chart.  We’ll be looking at those shortly.  As you can see of the four stocks which passed our first screen only 2 have a Gold$ > 80.  ESI’s Gold$ Score is 70, while FSLR has a Gold$ of only 38.  You’ll also notice ESI’s closing stock price on Friday, $99.96, exceeds Ron’s buy limit (BL) of $97.18.  For these reasons I would eliminate ESI from further consideration.  Thus, after looking at two criteria, TAI and Gold$ we are left with two candidates, APOL and NITE.

Let’s look at the remaining criteria on the spreadsheet to determine if one or the other clearly is a better pick than the other.  APOL has a perfect Gold$ score of 100 while NITE is right behind it with a 90.  How about Bare Cash?  Well, both have a goodly amount of bare cash.  However, what I like to do is look at the amount of bare cash as a percentage of the stock’s market capitalization.  NITE is the clear  winner in this category as the bulk of its market cap. is in cash.  Conversely, APOL has < 10% of its market cap in cash.  The two stocks are tied in the remaining criteria, Best Fit and Quarterly Earnings. 

So let’s move on to the stock charts and see what they can tell us.  But before we do I first want to discuss the price of APOL.  You’ll recall earlier I said that I don’t like to trade stocks whose price is > $50.  However, in this case I’m willing to make an exception.  Why, simply because we don’t have a wide variety of stocks to choose from.  With only two stocks meeting our other criteria I’m not going to eliminate one just because it is > $50, especially when it has a Gold$ of 100.  Now, on to the stock charts.

First up, APOL.

This is a very good looking chart.  Of course, with a Gold$ of 100, I really didn’t think it would look bad.  Before making a final decision we might want to determine what caused the huge sell-off in at the beginning of November.  I suspect it is disappointing 3rd quarter earnings but we’ll look it up and confirm. 

Let’s move on and look at our other candidate, NITE.

As you can see the chart for NITE is very similar to that of APOL.  Like APOL, NITE experienced a significant drop a couple of months ago.  And, again like APOL it has carved out a bottom and is beginning to move back up. 

OK, so looking at the charts didn’t give us a clear winner.  Let’s move on and look at some of the Key Statistics tracked by Yahoo.  I’ve recorded these in a spreadsheet along with the stats from our other two candidates that we previously eliminated.

The one statistic that catches my eye here is the price/book.  NITE is a clear winner trading at close to book value while APOL is much higher at over 6 times book value.  Again, however, I’m not ready to eliminate APOL from consideration.  On to the final step.  Let’s look at what options are available to us.

In the above spreadsheet I’ve highlighted the near month ATM calls for both APOL and NITE.  These are the options that I always look at first.  If these don’t appeal to me I’ll then look at near month ITM or OTM options.  If I don’t find anything there then I’ll look at the next month out.  In this case, the near month ATM calls are not unappealing.  I’ll take a closer look at them.  It is clear that the APOL options are the better choice.  They have a superior called and uncalled return.  In addition, they also give superior downside protection.

So, after all of this analysis what am I going to do?  Well, based purely on the numbers reviewed in my analysis I believe APOL is the better trade.  However, remember I don’t like to trade stocks priced above $50.  Thus, I am inclined to select NITE as my next trade. 

Now, you’ll recall I also placed a trade in NITE last month.  It finished ITM so I should find that it has been called away when I log into my account tomorrow.  Thus, given my familiarity with NITE, it is one more reason that I’m inclined to choose it over APOL.

That concludes my analysis of these potential trades.  I hope you have found this to be worth your time to read.  I’ll be back tomorrow with another post updating everyone on how my January trades turned out.

Regards,

Troy

Posted in Potential Trades | Tagged: , , , | 1 Comment »

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

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

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

Posted in Potential Trades | Tagged: , , , , | 3 Comments »