Wednesday, September 28, 2011

3m - adding a second lot....again.

MMM has been getting beat up the last few days.   With MMM trading down near $74, CCI stepped into the onslaught and sold one lot Oct $72.50 puts for $2.09.   A few scenarios:

Worse case  - the pummeling continues.  The stock fall below the chart support around $72.50 in the next three weeks, and CCI is the "proud" owner of a second lot of MMM shares at an effective price around $70.50.  Frequent readers will recall, we are already long one lot of MMM at $79.50.  Hence, overall we will be in the trade at an average price around $75.   MMM estimated earnings are $6.20/share this year, for a reasonable p/e of 12.1.   Analyst estimates for 2013 are currently closer to $7.  Those are probably optimistic, but at some point in time, I'm willing to bet that MMM will ultimately grind its earnings upward towards $7 per share in earnings, and/or get some multiple expansion.  If the stock is put to me, I'm comfortable with a cost basis of $75.  Perhaps q3 earnings in late October can provide a short-term catalyst, but I'm prepared to just sit on the trade, collect the 3% dividend and wait for better days for this blue chip stock. 

Best Case - The stock holds $72.50 support and/or bounces back after the quarter end.  Then CCI can pocket some or all of the nearly 3% option premium over 3 weeks.   With this volatile market, it is even possible that MMM trades back towards $80 in the short term, in which case we will consider taking the other side of this trade and selling calls against the first lot.

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