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Posts Tagged ‘RMBS’

Deep OTM NP Strategy – MAY Week 5

Posted by mounddweller on April 16, 2011

Fellow Traders,

Below is the list of the trades meeting our Week 5 criteria.   We haven’t had a “Week 5” for quite some time so let me refamiliarize you with how this occurs and the criteria we use for the Week 5 selections.  First, a “Week 5” occurs only a couple times a year.  It occurs when there are literally 5 weeks between expiration dates on the options calendar.  Given the extra week to expiration (hence, an additional week of exposure to market and stock risk) we increase our requisite DSP to 20%.  The put factor (PF) remains the same at 2.0. 

As you can see we have 24 selections meeting our Week 5 criteria.  I have highlighted four that I found to be interesting and worth doing some DD on.  The two highlighted in green, AMSC and RMBS, are my best bets.  LFT and ANW, highlighted in orange, are in my mind much riskier but also worth a look.

American Superconductor (AMSC) had a precipitous fall earlier this week when its largest customer (70% of revenue) stopped taking delivery on any more AMSC product.  There’s nothing wrong with AMSC’s product, it appears their customer’s business is slowing down and they have too much AMSC product in inventory. 

Here’s why I like this AMSC trade.

(1) At a strike price of $10 you have over 23% of additional DSP on a stock that has already fallen 49% in the past week.

(2) The bad news is already priced into the stock.  While it could fall further, I have a hard time believing it will fall another 23% in 5 weeks.

(3) The book value of the stock is $9.86.  If you have the stock put to you at $10, you’ll own it at book value.

(4) Almost half of the $9.86 book value is cold, hard cash in the bank; not intangible or illiquid assets.

(5) After the big drop in price this week an insider stepped up to the plate and increased his holdings in AMSC by $50M.  I don’t think he would do that unless he thought it was a great buy at the current price.

Next up is Rambus (RMBS).  I’m not going to say much about it since it was in our selections last month as well and I wrote about it then.  The stock is up about 4% from where it was back in March.  Here’s why I like it:

(1) The ROIC at 2.83% is fantastic given the over 22% DSP.  However, this is due to RMBS announcing earnings next week.  Despite the impending earnings release I still like this trade. 

(2) The stock has not seen $16 since November of 2009.  Also, it has strong support at $16 as it bounced off of this level 4 times between August and November 2009.

(3) RMBS has a strong balance sheet with almost $4/share in net cash.

A quick note or two about the riskier plays I mentioned.  LFT is a Chinese mid-cap stock.  It sells software to financial services companies.  It has sold off hard due to fear of what could happen to its business should the Chinese real estate market falter.  That isn’t an insignificant risk given the government’s rise in interest rates to keep inflation at bay.

The other risky play is ANW.  It provides marine fuel logistics services.  What caught my eye about it is that it is trading at 0.8x book value.  While that doesn’t mean it can’t fall further it does tell me it is more likely to tread water at this level than fall much further to the selected $7.50 strike price.

Best of luck to all of you in the coming month. 

Regards,

Troy

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Deep OTM NP Strategy – APR Week 1

Posted by mounddweller on April 9, 2011

Fellow Traders,

Bad news!  Not a single new trade met our selection criteria this week.  That hasn’t happened before.  I suspect the culprit is the low amount of volatility in the market as measured by the VIX.  It closed Friday at 17.87.

While there weren’t any new selections a number of stocks from earlier selections this month did reappear.  The one that most interested me was RMBS.  It closed Friday at $19.35.  The APR $17 put has a bid price of $0.11.  Thus, with only 5 DTE you can get a 0.65% ROIC with 12.7% DSP.

If the bid price holds up at the open on Monday and I can sell for $0.11 I may sell a few of these.

Regards,

Troy

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Deep OTM NP Strategy – APR Week 4

Posted by mounddweller on March 20, 2011

Fellow Traders,

We have a total of 38 selections meeting our Week 4 criteria.  However, I don’t think all 38 are worthy of our risk capital.  As I mentioned in my MAR results post I think it is imperative, given the current market volatility, that we become more selective in what we choose to trade.  So, while I am posting the entire list of 38, I would like to highlight a few that caught my eye as having a good risk/reward profile.

Running down the list the first stock that caught my attention was Interdigital Communications (IDCC).  It closed Friday at $42.01.  The put I’m interested in is the $35 strike.  It has a bid price of $0.60 giving us a ROIC of 1.71% with 18.11% DSP.  Some will take one look at the chart and immediately wonder if I am out of my mind.  The stock had a strong run up from $25 to 57.50 and has since fallen sharply back to the low $40s.   But if you look closely you can see the stock is trying to find a bottom and that the money flow has bottomed out and is beginning to recover.  That technical indicator coupled with the stocks excellent fundamentals makes it a worthy candidate for an NP trade.  IDCC has a net margin of almost 40%!  Yes, you read that correctly, 40%.  It also boasts almost $12/share of cash sitting on its balance sheet.    It currently trades at about 12x trailing earnings.

The second stock that caught my eye was LDK Solar (LDK).  This is a stock I successfully traded under similar circumstances back in late November.  Friday, the stock closed at $11.47.  The APR put at the $9 strike closed at $0.15.  This gives us a 1.67% ROIC with 22.84% DSP. 

The third stock I noticed is one that was on our list last month as well, Rambus (RMBS).  We all know the technology stocks have been taking a beating of late.  Rambus is no exception.  In the past few weeks it has fallen from just over $22 to almost $18.  Friday it closed at $19.06.  The $16 put is at $0.36 bid.  This yields an ROIC of 2.25% and 17.94% DSP.  The $16 stike is below the 52-wk low of $16.94.

I also found three other stocks on the list which I feel are worthy of your consideration.  They are AGO, TSL, and WFR.  AGO insures bonds, while TSL and WFR are solar related stocks.

Best of luck to everyone this month.  I think we are in for quite a ride. 

Regards,

Troy

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OTM NP Strategy – MAR Week 3

Posted by mounddweller on February 25, 2011

Fellow Traders,

Well, a little bit of excitement this week, huh?  Hope everyone was able to find a trade or two with the uptick in volatility.  Unfortunately, I did not.  I had several I was keeping my eye on but either never got filled or didn’t pull the trigger.  Anyway, enough about the past.  This post is all about the future, what looks good in the coming week for our Deep OTM NP Strategy.  Below are the selections for this week.

The first thing I hope you notice is that we actually had a large-cap stock meet our selection criteria.  It’s been quite some time since this last occured.  Lorillard (LO) is a tobacco company.  More about it later as it is my pick of the week.  Two other stocks caught my eye this week as well.  They are  Rambus (RMBS), a semiconductor company, and Riverbed Technology (RVBD) which manufacturers networking and communications equipment.

Now back to Lorillard (LO).   It, through its subsidiaries, engages in the manufacture and sale of cigarettes in the United States. The company offers 41 different product offerings under the Newport, Kent, True, Maverick, Old Gold, and Max brand names. It sells its products primarily to wholesale distributors, who in turn service retail outlets, chain store organizations, and government agencies, including the United States Armed Forces. The company was founded in 1760 and is based in Greensboro, North Carolina.

Did you catch that?  The company has been around since 1760!  Over 250 years!  If we get caught having to accept assignment I don’t think we have to worry about it going out of business.  Now, how did such a conservative, well managed company happen to pass our screens?  Glad you asked.  Lorillard and one of its competitors, RJ Reynolds, are suing the FDA  seeking to block consideration of an imminent advisory panel report that could recommend a ban on menthol-flavored cigarettes.  The advisory panels recommendation is due to be released on March 23 (note: this is after option expiration on 3/19).  Menthol flavored cigarettes constitute a very large chunk of LO’s revenue.  Hence, the recent drop in price (see chart below) and the increased option premiums.

I don’t think we have to worry about the FDA pulling mentholated cigarettes off the market.  According to Euromonitor International, mentholated cigarettes make up roughly 30 percent of U.S. annual cigarette sales ($83 billion).  Does it seem reasonable to you that the government will let this tax generating cash cow go the way of the Dodo bird.  Not likely!

As you can see from the graphic above the recommend strike price for the LO naked put trade is $65.  That’s over $5 below the 52-wk low of $70.24.  The MAR $65 put closed today at $0.98 bid, a ROIC of 1.51% with over 17% DSP. 

Next up is Rambus (RMBS).  Rambus Inc. designs, develops, and licenses chip interface technologies and architectures that are used in digital electronics products.  It sold off sharply earlier this week dropping almost 10% before bouncing back strongly on Friday.  The 52-wk low is $16.76, and our strike is at $18.  Rambus has already announced 4th quarter earnings so you won’t have that hanging over your heads.  Here’s the 1-year chart:

The last pick to catch my eye this week is Riverbed Technology (RVBD).   It provides solutions to the fundamental problems of wide-area distributed computing in the United States and internationally.   You don’t have to worry about earnings with it either as it announced it’s 4th quarter results back on 1/28.  The put we’re interested in is the MAR $32.50.  You’ll notice it is almost 23% below Friday’s closing price of  $41.79.  My cursory glance through the headlines could find no reason for the high premium on a put that is so far OTM.  If anyone has any insights, please share them by posting a comment below.  Here’s the chart for RVBD:

One final note for this week.  I want to put in a plug for my investing buddy, Patrick.  I use his search engine to find our selections each week.  Check out his site at http://www.mtrig.com/.   Note: I am not compensated in any way for recommending his site.

Regards,

Troy

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