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.