Monday, December 20, 2010

Intel Options Jan 11 - 1

On Decemebr option expiration day, INTC closed within the $20-$22 ($21.46) range established by the December 18 options trades established in November. Hence both option position expiring and both yielded 1+% in a month!

The fundamentals on INTC remain basically the same as before. Technically, it looks like the 50dma is about to cross the 200dma around $20.85 and in general there is some support around that level.

Today I sold the Jan $21 puts for just over $.40 per share after commission (just under 2%). These options do span the potentially more volatile earnings announcement period. Implied vol is only about 21.

Worse case - the stock falls and I am forced to purchase at a net price of $20.60. This is slightly higher than the sub $20 acquisition price of risk capital for option purchases for most of the year but still seems prudent under current conditions. This purchase price would be at about a p/e of 10 the stock would be purchased right before an x-date (around 2/3) so they would quickly capture the dividend.

Best case (i.e. hopped for case) - the stock rises back towards $22 either quickly as managers may want INTC in their year end portfolios or in anticipation of good earnings around 1/13. If the stock does drift back toward $22 prior to earning announcement I would look to cover this option or possibly roll it out to February when a 1% gain is achieved.

Thursday, December 16, 2010

Positions - Alcoa (AA) Jan 11 Options - Cover Puts

With AA over $14.40 it was time to cover the $12.50 Jan puts. At $.08 over 80% of the premium has been received and it did not seem prudent to leave the capital to cover the puts at risk for such a small remaining reward.

The options were sold at $.51 and covered at $.08. After commissions, the result was over a 3% gain for a position held less than 4 weeks. That is nearly a 40% annualized return.

A 1/2 position covered by Jan $15 calls remain in place. Earning announcement scheduled for Jan 10. I remain bullish on the stock. The earning event will likely create some volatility which might create an opportunity to put back on the short put trade early in 2011.

Wednesday, December 15, 2010

Trade NYX - close options

NYX did fall back to (and below) its 200dma as projected

Bought the Dec 18 $30 calls that were sold 2 days ago at $.07. After commissions the trade yielded about $.24. About .8% for two days or something like 80% annualized.

The core trade remains in place.
Cost of $29/share, Collected to-date 1% div and .8% option play for 1.8% return.
This makes the break even below $28.50. That point will be a watch for a potential sale but will also monitor the position for a return to $30 toward the goal of low $30s exit.

Monday, December 13, 2010

Trade 3m (mmm) - cover calls

The stock bounced over 1% as hoped for when the position was initiated last week.

Sold Jan $85 calls for about $2.50.

- Stock stays flat from here or rises which would cause the stock to be called away at $85 in 5 weeks. That would result in $1 cap gain in the stock ($84 to $85) and $2.5 yield from this option play for a total of $3.50 of 4% in 5 weeks. (40+% annualized)

- Stock falls back to $84 support level, in which case I would intend to cover this option position once it achieves a profit of over 1% and then let the original $84 purchase stand on its own.

Trade - NYX covered calls

NYX hit $30 today. In addition, today was the div x-date so the position accrued .30 or 1% div today. These two triggers caused me to review the position

Fundamental story remains the same. The stock has moves straight up from $28.

Sold $30 Dec $18 calls (5 days until expiration)for $.35 with a implied vol of 25+.
Several scenario's.

Stock pins at $30 for the week. My most probably scenario. The "even number" nature of the price, the open option interest at $30, and a potential retracement towards 200dma ($25.4) could have the stock stick at around the $30 level this week. If the price falls, time decays and vol drops I would look for a chance to cover this position for a gain of .5% or more.

Stock continues to climb this week. - In this case the position will be called away at $30. That means cap gains from $29 to $30 3+%,1% div, 1% option profit. A 5% gain on this trade.

Stock plummets - the option will have provided a little downside protect and the core trade remains in place (for better or worse).

Friday, December 10, 2010

Trade 3m (mmm)

3m Price fell after this week's lowering of organic sales growth forecasts.
IMO this is a classic case of trying to under promise so they can then over deliver (UPOD).

Fundamentally MMM remains a blue chip company.
Technically there is support just below $84 on the charts and with the 200dma. Also more down side support at $80.

Bought MMM around $84 in expectation of few catalysts over the next few weeks to cause major movement in the stock and a near term bounce back to fill in chart gaps in high $80s.

Best Case - stock bounces back over $85 in the next few days. If it does, I plan to sell $85 calls which I would anticipate to be at about $2. If the stock stayed above $85 for the next month that would be a return of 3.5% over 5 weeks.

Worse Case - stock continue to drop..possible exit if it significantly breaks the $80 support level.

Tuesday, December 7, 2010

Positions - IBM - Business Case

Over the past four years IBM stock has moved up from a low of about $75 to nearly $150. That means a perfectly timed investment would have doubled in 5 years. While it is unrealistic to expect to have perfectly timed the bottom and top of this stock's performance, there were plenty of entry and exit points that offered a good potential return over the past years. Is there the potential for this stock to double again over the next four years? Let's look at some of the reasons the stock may have performed so well over the past years and see if those (or other conditions) might exist to drive another doubling of the stock price.

Financial Strength
IBM has always been considered a solid blue chip company with a strong balance sheet. The financial crisis of the past years was a real life stress test of any global company's financial strength. IBM weathered this storm incredibly well. It maintained its dividend, improved its balance sheet and always generated strong free cash flow. An investor can look at a variety of metrics and ratios to measure the strength of a companies finances, but perhaps the best testimony to the strength of the their balance sheet is that they were recently able to issue bonds at 1%. The market has spoken. IBM's financial strength is just as good if not better than it was years ago.

Business Model
One of the key trends in technology is cloud computing. When the industry pundits discuss cloud computing they want to focus on companies that provide high profile, but somewhat isolated pieces of the cloud such as Akami,, Rackspace, etc. When global companies think about cloud computing they think about scalable, core IT capabilities delivered seamlessly around the planet . Arguably, IBM provides a unique mix of products and services that meet the needs of global customers better/cheaper than anyone else. Other good companies like Accenture, HP, etc are still trying to cross the competitive moat represented by IBM's business model.

Earnings Predictibility
Several years ago IBM stated a goal of $10 in earnings by 2010. 2010 earnings will be about $11.50. IBM can make and achieve a multiple year forecast when many other tech firms don't seem to have visibility for the next quarter quarter because large piece of their revenue is tied to long-term, reliable contracts. Hence their backlog and shadow backlog is huge and very manageable. IBM's goal is $20 in earnings by 2015. Just like a few years ago, this goal seems achievable.

So four years ago IBM started with a strong balance sheet, a unique business model, and a well defined business goal and despite the “great recession” the stock doubled. Those same conditions exist today, and hence conceptually a doubling in price seems possible again. From a numbers perspective if IBM can achieve $20 a share in earnings on 2015 that represents about an 11.5% CAGR from today's level. With the current multiple of 12 that is a 4 year price target of about $240. If the multiple can expand to 15, the stock will have doubled again. Even if IBM does not achieve its goal and only get to $18/share in earnings and the market punishes IBM with a 10 multiple that would be a stock price of $180. That would not be a good result, but not terrible for a worse case scenario.

Trading plan: Hold IBM assuming it will compound at 11.5% over the next few years. If at any time the price increases to have hit a 20% CAGR lighten up on the position and wait for a pull-back to re-establish your position.

Disclosure: Long IBM

Thursday, December 2, 2010

Positions - Alcoa (AA) Jan 11 Options

Alcoa bounced over $14.

The last option trade of the $12.50 Jan puts is in the money by about 2%. We will leave this trade in place for awhile longer to try to get at least another 1% return.

Sold Jan $15 calls against the 1/2 position @$.35c for over a 2% yield on this position over 7 weeks. (nearly 15% annualized)

Bull case - Alcoa continues to rise over $15 resulting in both option trades expiring at full return and the core position being called away potentially limiting profits.

Target return - The stock settles in near $14 and both options can be closed at a profit.

Bear case - stock falls below $12.5 and will be forced to acquire the other half position at $12.5 less the profits from options.

Tuesday, November 23, 2010

Positions - Alcoa (AA) Jan 11 Options

The Nov $14 calls expired completing the November Options trade. In total this trade yielded over 1% from options play in about 6 weeks.

On Nov. 23 after news of Korean hostilities lowered AA's price down to $13, sold the January 11 $12.50 puts for .$51 cents. Price of the stock was just below $13 and implied vol was about 35

Worse case - if the stock falls more will be acquired about a cost $12 which is below book value and at the target acquisition price.

Best Case - Stock stays flat or rebounds staying (above $12.3 200 dma)and the option expires at a profit of approx 4% over 2 months or a 24% annualized return.

Probably case - Stock returns to low $13 and vol drops allowing an opportunity to take profits on a shorter term basis.

Tuesday, November 16, 2010

Intel Options - Dec 10 - 2

Intel below $21 on big down day in the market.

Add 1/5 position of $20 puts for Dec 18 for $.24 with volatility elevated.

Worse case the stock continues to fall and final lot will be acquired at net cost below $19.8 (below $20 acquisition target). Also is stock falls the covered call recently acquired will expire providing more down side risk.

Best Case - Intc bounces back from global market pressures more quickly and this option can return 1+% over 5 weeks or nearly 10% annualized.

Friday, November 12, 2010

Trade - Initiate NYX position

Bought two lots of NYXE on down market day with an average cost of $29.03.

Fundamentally - book value of $26.36 provides a good floor, forward pe of 10 seems attractive, nearly 4% div. Trading volume assumed to increase as traders/investors adjust end of year positions.

Technically - Support at 200dma 0f $28.8, chart level support around $28, and BV of $26.36. Also near bottom of KC.

Best Case: $34
Most Likely Case: return to over $30

Friday, November 5, 2010

Intel Options - Dec 10 - 1

Intel over $21!!!

Sold 1/5 position 12/18 $22 calls for $.29

If stock called away at $22 that is 10% gain on $20 cost basis stock plus over 1% cov call profit.

More likely - stock will retest 200dma around $20.70. If this occurs should be able to take profits on this position (maybe 1%) and consider selling puts at that time.

Wednesday, November 3, 2010

Unitin (UTR) - complete purchase

UTR earnings came out near expectations with few surprises. In addition the election and QE2 announcements are now behind us.

Purchased the second half of the position at $23.97.

Next steps
- X - Dividend date next week for .9% !!!
- Exit - Below $22 - 8% loss and support on chart
- Target Price $30. Mostly on expanding multiple

- Alert at $26 for 10% and hit 200dma or at year end for review.

Thursday, October 28, 2010

Positions - Alcoa (AA) Nov 10 Options - 2

Alcoa earnings were positive and stock moved up.

On 10/18 covered the 11/20 $11 puts at $.08 for a 1.6% return on this portion of capital in 2 weeks or over 40% annualized return.

Left the $14 covered call in play.

Positions - Alcoa (AA) Nov 10 Options

On 10/4/10 prior to earnings put on Sold $11 1120 puts @ $.26 backed by the half portion of capital allocated to this position while also selling $14 calls @ $.14.

Best,Best Case - Sock goes over $14 or over 25% on the half position already owned or 12.5% of total capital.

Good case - stock stays between $11 and $14 returning $.40 or 1.8% of risk capital in 7 weeks or over 12% annualized.

Realistic Case - Stock stays range bound extracting most of $.40 return in short time period.

Worse case - Stock plummets and the other half position is acquired at $10.60 well below book value

Commentary - Nov 10 - Time to Sell Before the News

Since the spring of 2009 the overriding theme for this investor has been 12 by 11. That is S&P 1200 by 2011. The basis for this belief has been that the S&P 500 would bounce back to $80 in earnings in 2010 or 2011 and with a low risk free rate of return those earnings would at some point get a 15 multiple for a 1200 target. It was surprising to me that $80 in earnings seemed to be accepted fairly quickly by the "experts" this year and that the S&P 500 reached the 1200 mark so early in 2010. However, that was the right level to sell this spring and it seems to be the level to lighten up again right now

In fact, instead of stubbornly waiting for the S&P 500 to hit 1200 it seems like it is time to lighten up on equities right now. The recent run-up seems to have been propelled by the "rumors" of QE2, Republican victories, and solid q3 earnings. It is very likely that by the end of next week all the "rumors" will be "news". Players in the market may likely look at that news and disappointingly realize that QE2 is mostly pushing on a rope, Washington is still mostly dysfunctional, and earnings catalysts have passed. The news cycle may switch back to anemic economic growth numbers, structural unemployment, demoralizing news from a bi-partisan deficit commission, talked down 2011 corporate estimates, etc. Hence this investor is selling on/before the actual qe2 and election news hits.

With the threat of higher interest rates at some point making a bond "bubble" a possibility, the proceeds from sales will sit in boring,non-productive cash for the short-term. If my forecast is good and the market pulls back there will be a chance to put the money back to work at a better level in a month or two.

Wednesday, October 27, 2010

Intel Options - Nov 10 - 2

As Intel returned to $20, Sold the $20 1120 puts for $.50 cents to achieve the "realistic case" as planned.

The return on this transaction was 1.65% in about 2 weeks or over 40% annualized.

Based on Intel price action the next step is to either replace the short-put position for $20 or $19 to utilize the last 1/5 position of the risk capital assigned to the position and/or to consider some covered call positions,

Sunday, October 24, 2010

Positions - Alcoa (AA)

Macro Story - Aluminum is a key commodity and Alcoa is a major provider

Fundamentals - Book value $13, tangible assets, high volatility

Technical - Some support around $10

Risks - Too tied to metals price and global growth makes it highly cyclical

General Strategy - Acquisition under book value begin to unwind positions at $14.

Money Management - Capital allocation divided into 2 positions.

Initial Position: As of the initiation of this blog a 1/2 position was established at an average price of just under $10.

Thursday, October 21, 2010

Unitrin (UTR) - business case, initial entry

Given the recent down draft in the financial sector due to foreclosure noise, it seems perhaps some non bank financial industry stocks may have been unduely punushed in the process. Hence time to increase exposure to some non-ban, financial stocks.

Unitrin came to my attention via a variety of screens and articles.
Fundamentals - trading under book value, 3.6% div with only 25% div payout ratio
Technical - support around $24

Bought 1/2 position at $24.50 on 10/19/10.

Wait to see earnings results on 11/1 for potential acquisition of second half of the position.

Target exit price: $28-30

Tuesday, October 19, 2010

Intel Options - Nov 10

Another solid earnings report for q3. Business case still seems intact.

On 10/13/10 sold 101120 $20 P for $.86

Best Case - Stock rallies over $20 yielding 4% in 5 weeks or approx 40% annualized.

Realistic Case - Stock drifts towards $20 and an opportunity to close this position at a modest, short term profit will present itself.

Worst Case - Aquire 5th position at about $19.15 still well under the $20 aquisition target price.

Thursday, October 7, 2010

Intel 2010 Options - Oct 10

On 07/14/10 Sold 101016 19P for .52 after commission.

Best Case - Option Expires worthless making 2.7% return ($.52/$19.00) over 3 months or over 10% annualized.

Worst Case - Add to INTC position at a price of about $18.50 which is well below the target acquisition price of $20

Result: Stock failed to move positively despite initial good earnings. Subsequent warning coming from weak PC demand dropped the price even below the $19 exercise price. However, the stock did bounce back over the $19 by options expiration resulting in best case outcome

Intel - Business Case

Macro Story - Premier fab facilities

Fundamentals - Great cash flow, low PE, 3% div

Technical - Some support at $18

Risks - Too tied to PCs, although probably the chip of choice for the cloud.

General Strategy - Potential P/E expansion to provide gradual capital gains while generating income via 3% div and 6+% via put selling and covered call writing. Aggressive acquisition and holding when price is under $20 and begin to unwind positions at $22.

Money Management - Capital allocation divided into 5 positions.

Initial Position: As of the initiation of this blog 4 position were established at an average price of just under $20.