Dark Horse Trader’s Hedge: Safety Dance on Buy/Writes for January
Tue, Jan 11, 10:52 AM ET, by Sabrient.com
Safety Dance on Buy/Writes for January: GCI, WFR, VECO, WRLD
by Scott at Sabrient
We can dance if we want to, we can leave your friends behind
Cause your friends don’t dance and if they don’t dance
Well they’re no friends of mine
I said, we can go where we want to, A place where they will never find
And we can act like we come from out of this world
Leave the real one far behind,
And we can dance
Say, we can act if want to, if we don’t nobody will
And you can act real rude and totally removed
And I can act like an imbecile
And say, we can dance, we can dance everything’s out control
Oh We can dance, we can dance they’re doin’ it from pole to pole
We can dance, we can dance everybody look at your hands
We can dance, we can dance everybody’s takin’ the chance
Oh well the safety dance
Ah yes the safety dance – Men Without Hats
We enter 2011 in an enviable position regarding the Dark Horse Traders' Hedge (DHTH) recommendations with expiring option contracts on January 21, 2011. All four positions have performed as or better than anticipated, allowing us to achieve our investment goals using Phil Davis' Buy/Write strategy. This allows us to "act if we want to" or take our profits off the table in a "safety dance."
We should review each position individually and plan our course of action over the next 9 days.
Gannett Co. (GCI) was recommended for purchase on July 26, 2010 at $14.52. GCI closed today (1/10) at $14.85 so a reader might ask why this is good news as the stock has moved a less than inspiring $0.33 since July 26. Recall that we recommended GCI because Sabrient had a STRONG BUY, with a Value score of 66 and a Fundamentals score of 96.8. We recommended buying 200 shares (using a virtual $100,000 portfolio) and selling 2 Jan 2011 $15 calls for $1.75 and 2 Jan 2011 $15 puts for $2.25. So we got into a strong Value stock and lowered our cost basis to $12.77 by using options.
On January 21, 2011 the time premium will have expired in both contracts allowing us to roll forward 3 months to earn additional premiums on GCI. DHTH will recommend buying back whichever side of the option position has value (if the stock is below $15 we will recommend buying back the put and if above $15 we will recommend buying back the call). Either way, we will have achieved our goals of entering GCI at a 15-20% discount to the stock price and roll our option positions to April 15, 2011 (Tax Day!) for approximately $2.65 in additional premiums (April $15 call $1.30 and April $15 put $1.35). So, we can dance onward with GCI lowering our cost basis to $10.12.
MEMC Electronic Materials (WFR) was recommended for purchase on August 11, 2010 at $10.31 . (As an aside, can anyone make sense out of the stock symbol WFR for MEMC Electronic Materials?) WFR closed today (1/10) at $11.59, and we continue to be positive on the stock. DHTH's original recommendation followed on the heels of significant insider buying activity.
Additionally, we recommended utilizing Phil Davis' Buy/Write Strategy to lower our cost basis to $9.29 by selling Jan 2011 $11 calls and puts. Much like the case with GCI, we will want to dance onward with WFR, and over the next 9 days we'll want to buy back the position that has value so we can recommend rolling into April Buy/Write positions. If the stock remains above $11 we will want to repurchase the Jan $11 calls once the premium has been earned. We will be able to record another roughly $2.03 in premium by selling the April $11 call ($1.33) and April $11 put ($.70). Assuming it will cost approximately $0.50 to buy back the January position, we will have lowered our cost basis in WFR to $7.81, which is definitely worth dancing about.
VEECO Instruments Inc. (VECO) was recommended for purchase on August 25, 2010 at $31.93, using Phil Davis Buy/Write Strategy on October 2010 contracts. On October 10, 2010, DHTH recommended rolling those contracts to January 2011, further reducing the cost basis to $20.51. With VECO closing at $47.05 and our recommended strikes being at $32, we believe it is time to play the "Safety Dance" and take our profits to another position. VECO has been very good to us but will be called away next Friday for $32 — having earned $11.50 in option premium since August 25, 2010 for a 36% profit in 5 months.
World Acceptance Corp. (WRLD) was recommended for purchase on October 28, 2010 at $41.67 . Using Phil Davis' Buy/Write Strategy, we also recommended using the January 2011 $45 calls and puts to lower our cost basis to $34.47. WRLD closed today (1/10) at $52.34. As with VECO, we are recommending the "Safety Dance" and allowing the stock to be called away next Friday at $45, giving us a very nice 25% profit in just 3 months.
Over the next 9 days I will be looking at opportunities to replace VECO and WRLD in the virtual portfolio, using Phil Davis' Buy/Write Strategy to enter value stocks at a 15-20% discount.
GCI – Over the next 9 days buy back the call or put portion of January $15 options at the market.
SELL GCI APR $15 (GCI110416C00015000) all for approximately $1.30
SELL GCI APR $15 (GCI110416P00015000) put for approximately $1.35
WFR – Over the next 9 days buy back the call or put portion of January $11 options at the market.
SELL WFR APR $15 (WFR110416C00011000) call for approximately $1.33
SELL WFR APR $15 (WFR110416P00011000) put for approximately $.70
VECO – Allow stock to be called away at $32
WRLD – Allow stock to be called away at $45
Dark Horse Trader’s Hedge
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
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