HPQ - Earnings Trade Gone Wild

Hewlett Packard  (HPQ) reports earnings after the bell today.  Option prices for the stock are incredibly high.  More like a start-up than a dow component.  It is understandable that there is more than average uncertainty in this earnings announcement but option implied volatility over 100.....that does not seem "rational".

CCI still holding a losing position.  Here are the "wild" trades placed against half my position today with HPQ trading around $16.80

• Sold the March 16, $18 call for a $.33 credit after commissions
• Sold the Feb. 22 $17.00 put and bought the Feb. 22 $16.50 put for a credit of $.22 credit after commissions. (As an aside, something to ponder: a weekly option, with 1 day until expiration, with $.50 width strikes, with volatility over 180.   That is not your father's stock market..lol)

There are too many scenarios to document them all, but here are a few thoughts.

• CCI collected $.55 in credits... mine to "keep".
• Worse Case  - My thesis is that HPQ has missed and lower estimates so many times that management will not let that happen again....but I've been wrong about that before and could be again.  If earnings are disappointing the stock will very likely fall below the $16.50 strike.  In that case, CCI will make the $.55 form the option trade, and lose the $.50 width of the strike on the put spread.  That means pocketing a whole $.05/contract  and continuing to have the "opportunity" to hold this "blue chip" stock.
• Best Case - Earnings are received positively and the stock goes up past $18 and stays there. In this case half our position will be called away at an effective price of $18.55 ($18 price plus $.55 option credit)
• Middle Case - There are many scenarios in-between these extremes.  Scenarios where the stock manages to hover between $17 and $18 will allow the opportunity to take most of the option profits and live to fight another day.  Not a bad outcome.

Took Profits in HPQ Covered Calls

Long time readers will recall that CCI's portfolio  is "blessed" with a long position in Hewlett Packard.

As discussed here, on Jan 14 (one month ago to the day)  CCI sold two lots of Feb $17 calls for a credit of $.63/contract.     With HPQ trading around $17 today and 1 day until expiration, CCI closed the position pocketing a gain of $.49/contract.  A small get back on the overall loss in this position.

CCI still looking to exit this position.  HPQ reports earnings next Thursday.  CCI is considering re-establishing an option position just prior to that event.  Stay tuned.

Selling Calls Against HPQ Position

Long time readers will recall that CCI's portfolio  is "blessed" with a long position in HPQ.

hpq traded up the past few days allegedly on break up rumors.  Further, HPQ traded up even more today in sympathy of rumors/stories about dell potentially having some PE firms looking to buy it out.   CCI figured all this noise presented as good as opportunity as any to try to exit and/or squeeze some money back from this position.  Hence CCI sold two lots of Feb $17 calls for a credit of $.63 today.   If the stock holds on to this gain it will be called away at an effective price of $17.63, and it will likely be time to move on.  Conversely if the stock pulls back from its current spike we should have the opportunity to harvest all or some of the $.63 (or 3.7%) premium collected.

CISCO Position Closed....Certainly a Winner

Frequent readers will recall that CCI has had a long standing trade on in Cisco (CSCO).  Specifically owning the Jan 14 $10 LEAP and writing calls against the position.  As discussed in this post from late November the last activity was to sell  the Dec $19 calls against this position.

With Cisco trading over $20 this week, CCI closed this position.  The trade benefited from the lucky timing ....(oops I meant my brilliant analysis) of establish the position when Cisco was trading around $16 and watching the stock run up 25% to $20. The leverage from buying the LEAP vs. the stock turned that appreciated gain on the LEAP to a sweet $55%.  The covered calls sold against this position muted those gains by nearly 10%.  However, writing those calls provided some downside protection to the position in the event that the stock had not moved in the right direction.

The closing of this trade marks the 4th time CCI has cycled through this type of position in Cisco. In total CCI has made a very, very nice 83% gain over about the last 20 months. 

Certainly a winner!

CCI currently has no position in Cisco.  If Cisco were to pull back we would consider re-establishing this  this type of trade in the future.

Cisco Covered Calls Launched... Yet Again

Long time readers will recall that CCI has been selling calls against $10 LEAPs in Cisco (CSCO) for awhile. The last post on these trades (click here) was in September when Oct $19 calls were sold.   Somehow it appears that CCI forgot to post the trade when that position was covered in October (my bad).  Overall that trade netted $.20/contract.  This  resulted in a 2.5% gain in a few weeks based on the leverage from the LEAP position.  Overall 6% in premium has been collected since Sept.

With Cisco rising back to $19 today, CCI sold the Dec $19 calls against the position for a credit of $.30/contract today.  CCI is expecting CSCO to pause/pull back after its recent run up, and would intend for this option premium to be harvested in the short term...yet again.   However, if the stock continues to rise  it might be time to exit both legs of the trade for a very impressive, leveraged profit. 

Stay tuned.

CSCO - Trying Those Covered Calls.....Again

As discussed here , CCI just harvested some covered call option premium on CSCO.

With CSCO falling the past few days, we are back in. This time we were able to sell the $19 Oct covered call for $.30 on Tues.  Since then, CSCO has continued to fall and the option is now in the money.  A little more of a drop in the stock price and/or time decay and it will be time to harvest this gain.

Harvesting Option Premium in Cisco Covered Calls

About two weeks ago, as discussed here, CCI sold Oct. 20 covered calls against a Jan 14 LEAP option in Cisco. (CSCO).

With Cisco trading back around $19 today, CCI bought back these calls for  $.13 including commissions.
A modest gain of $.25/contract.  Given the leverage of the LEAP holding that is a respectable 3.4% return on capital in 2 weeks (Yes, that is near 100% annualized).  More importantly, this is just another addition to the gains on this position, and it is likely the opportunity to do this type of trade again will present itself several times before Jan of 2014.

Rolled Cisco LEAPS

Frequent readers of CCI will recall that the portfolio has owned LEAPS in Cisco (CSCO) for a long time.
The primary logic for holding this position has been a belief that Cisco's solid balance sheet should provide a floor on the stock, but their competitive market space will make it hard for the stock to soar. Meanwhile, market noise around this former tech. darling creates a reasonable high volatility environment which creates rich option premiums to harvest.  Hence CCI has been selling shorter dated, OTM covered calls against these long dated calls to harvest this premium if CSCO goes sideways.


In August, when Cisco was trading back down  near the $17 level where this position was initially entered, CCI rolled the Jan 13 $10 call out to the Jan 14 $10 call.  Those calls were trading under 7.00 and  this roll was done for nearly no additional capital (about $.05/contract).    This provides another potential year of duration to continue to execute this strategy.
Since August, Cisco has had a nice move back up over $19.  With that move, CCI sold Oct $20 calls against this position for $.41.   If Cisco stalls or pull back we will harvest this premium of about 6 % (.41/7).  If Cisco continues to rise over $20 we may consider exiting the position and taking profits.

Intel puts expire as Intel goes up 4%

In this post early in the week, CCI discussed why we were prepared to add to Intel if the stock fell under $25. So the weekly $25 puts were sold as a potential entry point for this trade.

Intel (intc) was up about 4% in the last two days.  The put sale returned about 1%.

1% in 3 days never sucks, but wish we had just bought the stock.

Willing to add to Intel at these levels.

Regular readers will recall that CCI has been bullish on Intel for awhile.  This last article  on Intel (INTC) set my price target for the stock at $30.  Intel reported earnings last week that met expectations largely on 15% growth  in the server market. (i.e. intel powers the cloud). However, they  lowered growth expectations on continued pc slow growth and unproven capabilities in the mobile market place.  The stock had peaked near $29 a few months ago but is now back to $25.

It seems like time to re-evaluate my longer term view of Intel, but in the interim the valuation just seems too compelling to ignore trading around the current position.  At the most basic level of analysis:

• They still seem on track to earn around $2.50/share.  
• Putting a reasonable 12 multiple on the stock
• Still gets to the $30 price target.
• Oh, by the way, it pays a 3.5% dividend with a rock solid balance sheet 

Hence, with Intel trading around $25 today, CCI sold a  lot of the July weekly $25 puts for $.27/contract.
There are essentially two outcomes each with about a 50/50 chance.

• The stock will hold $25 over the next three days and we earn 1% in 3 days.
• The stock stays below $25 and we are the proud owner of another lot of Intel at an effective price of $24.73. The stock will go x-dividend in early August earning another $.21 lowering the break even point almost another 1% to $24.52.  In this case, CCI is willing to hold this position for awhile and hope for better days.

Selling Puts in Intel and Others

With the market down and option implied volatility up, now might be a good time to consider selling naked puts in stocks you might want to own.   If stocks keep going down you might get the stock put to you, hopefully at a discounted price, or if the market levels off in the next month a few percent return can be made.

My seeking alpha article  describes  potential put sales in GLW, MET, and INTC.
I've discussed the idea of adding to Intel before at recent posts at this blog.

Intel covered call premium harvested.

With the market pull back, CCI closed the Intel (INTC) June $30 covered call position discussed here.
This trade yielded a boring 1% return in less than a month. This added into the sizable pot of unrealized capital gains, dividends, and option premium earned on this stock.

It doesn't seem like there is any real change to the Intel story.  (They did just increase their dividend!).  A modest multiple, on a key industry provider, with perhaps the largest competitive  "moat" anywhere, with a strong balance sheet still seems like a solid investment.  Further, if they ever get a mobile strategy in place, there could be more upside.   Here is a link to an article from Morningstar that seems to share a positive view of Intel's competitive position in the market.

Holding for now, but if the pull back continues towards $26,  we will likely sell a lot of puts in Intel to potentially add to the position.

Harvesting Cisco Option Premium....Again

Frequent readers will recall CCI has a small, one-lot position in Cisco (CSCO)  via the Jan 13 $10 Calls (LEAPS).   The intent is to try to generate income against this leveraged position via selling calls against it. This position was described in more detail at a post done on Feb 9 that can be found here.

Earlier this year, one cycle of covered calls successfully yielded a modest $.21/contract gain as described here in March

With today's market pull back, CCI covered the second cycle of covered calls for a cost of $.13 after commissions.  This cycle of covered calls generated $.35 / contract gain.

In total that is a $.56/contract gain.  With the leverage provided by the LEAPS being bought at $8.37, that is a realized gain 6.7%. over two option cycles this year.

The $10 Jan Leap has an unrealized gain of 8.6% at this time.  Cisco reports earnings on Wednesday so this position will likely fluctuate next week, but CCI plans to hold this for awhile longer.

If Cisco's price or option volatility were to spike early next week going into earnings, we might sell the July $21 calls again this position again.  However, more likely we will wait to see the status or earnings before determining next steps for this position.     

"Proud"New Owner of HPQ

As discussed here, CCI sold one lot of April $26 puts in Hewlett Packard for $.73.  With HPQ trading at $24.51 on Friday, CCI is the proud new owner of another lot of HPQ shares at an effective price of $25.27.

I continue to believe in my thesis that HPQ will remain range bound for awhile and hopefully that means this lot of shares has been added to the portfolio at an attractive price.  If/when HPQ moves back toward the top its trading range CCI intends to sell some calls against this position. 

FYI, HPQ earnings are not until May 23.

Google Stock Split: Buy, Sell or Hold

As part of Google's earnings announcement this week, they also announced a somewhat unusual stock split apparently aimed at allowing the founders to better retain voting control over the company.   There are a variety of opinions about if this is good or bad.  CCI weighs in with my opinion in the article below.

http://seekingalpha.com/article/504711-google-stock-split-into-more-classes-buy-sell-or-hold

Intel Covered Calls Going into Earnings

Intel (INTC) reports earnings after the bell today.   With the stock trading around $28.50, CCI sold one lot of June $30 calls against the portfolio's position for $.41 after commissions.  Several reasons for this activity.

• As discussed here $30 has been my target price fro awhile. Hence, barring some major change in "the story",  this is a level to lighten-up on the position.
• The stock has had a nice big run.   Even if it continues higher after positive earnings it seems highly unlikely to run way past $30 in the short term.
• If Intel misses earnings or it meets earnings and there is a "sell the news" reaction this position will earn about 1.3% in 2 months.  Just adding a small amount of juice to a nice winner, with little real risk.

* * *
FYI, Intel earnings just came out and seem to be slightly above estimates and hence about in-line with expectations.  As seems to be the usual story, the stock is down in the after markets. Hence, at the moment this covered call hedge seems like it will add a little profit to the position.  I plan to look closer at the earnings results and conference call to determine next steps, but generally what look to be solid numbers continues to make me bullish on Intel and hope to see the stock get over $30 with time.

A belated option trade on Google earnings

 CCI was a little late getting this posted, so unfortunately the opportunity for readers to follow along with this trade has passed.  However, hopefully it can still be informative.

This week CCI established an option position to somewhat hedge the portfolio's position in Google (goog) prior to the earning announcement this past Thursday.  The rationale and specifics of the iron condor option position is described at a seeking alpha article here. 

CCI felt that the bulls and bears in Google would find enough good and bad news respectively in Google's earnings announcement that the stock would trade between $590 and $660 after earnings.  That is indeed what happened and this trade achieved max profit as the stock did not move significantly on earnings.

Selling Covered Calls on Cisco....Again

With Cisco (CSCO) trading back near its 52 week high, CCI continued with the plan of selling covered calls against a Jan 13 $10 call  position.

Specifically, CCI sold the May $21 calls for a credit of $.48/contract after commissions.   A few scenarios:

•  If the stock does break out over $21 in the next two months the combined leveraged from the gain in the LEAP and the covered calls sales to date will be up approx 40%.
• If the stock stalls out or falls in the next two months, the covered call will yield 2.3% (before leverage) to soften the blow of the any market pullback. 

Harvesting option premium in CSCO

Frequent readers will recall CCI has a small, one-lot position in Cisco (CSCO)  via the Jan 13 $10 Calls (LEAPS).   The intent has been to try to generate income against this leveraged position via selling calls against it. This position was described in more detail at a post done on Feb 9 that can be found here.

Cisco has pulled back more than 3%  in the last week or two.  Seems like that is just the normal churn of the marketplace.  However this pullback and the normal time decay in the option market meant that the April $21 covered calls had fallen to just $.10.   That is not a whole lot of  premium left to harvest over the 6 weeks until expiration so CCI covered the April $21 calls today.  

Overall, this cycle of covered calls generated a  $.21/share. That is a very modest 1% gain of the stock price and a slightly less modest 2.5% gain when calculated against the reduced capital requirement of the LEAPS.  Of course,  that is 5% or 12.5% return on an annualized basis and consistent with the goal for this position of generating income via option premium. 

As a big bonus the LEAP itself is up a very, very  nice 14%.   However, with over $8/share of cash stashed around the globe and what seems like a stable business CCI continues to believe this stock is a good candidate for this type of strategy.   Hence CCI plans to hold the Jan $10 call for awhile.  If CSCO rallies back towards $20 look for CCI to reestablish a covered call against this LEAP  and if it falls towards $19 CCI may add a second lot to the portfolio.

HPQ - I told you so....Now What?

HPQ reported earnings on Wed.  Not to say "I told you so".......but.......
Earnings met short-term expectations and then Meg Whitman spent the rest of the day lowering longer term expectations.

The weekly options earnings trade discussed here expired on Friday max gain.  With HPQ trading around $27, the March $29 covered calls discussed here  were deep in the money, and CCI covered them today at $.04. 

Now that I'm done patting myself on the back on those two good trades, it is time to go back to figuring out the next steps for the portfolio's underwater HPQ position.    This article at seeking alpha describes why I think an investor's strategy can continue to be  "trade the range" . 

As discussed there, CCI sold a lot of Apr $26 puts for $.73/contract on Friday.   An investor can get an even better price today.