DARK HORSE TRADERS' HEDGE: 3 Stocks to Lift You Up
Wed, Jun 29, 7:35 PM ET, by Scott Brown, Sabrient.com
Shaken to the ground, fear is wrapped around me
Fighting for my life
Shattered by the truth, scattered like the ashes
All that’s left of you and I, I realized
All you wanted was something real
And now I’m haunted
Lift me, lift me up – Paul Stanley
As the calendar turns to July, we now are confronted with the backdrop of Greece rioting in the streets as they are "shattered by the truth" of Greece's Austerity Plan. As if on cue from Paul Stanley's song "now (their) haunted) and "shaken to the ground" leaving them "fighting for (their) life." Back in the US "scattered like the ashes" is the economic story, and today's news that Bank of America has agreed to pay $9 billion to clear up its mortgage mess. But alas, the US Market continues to "lift (us)" with a 3rd consecutive positive day as if all of this is just great news.
"All we wanted was something real" and let's face it, Greece Austerity, the BofA $9 billion settlement and Lehman's (remember them?) new bankruptcy filing is about as real as it gets. Toss in a unemployment situation that isn't getting better, disappointing news on personal income and spending (shocking how those go hand in hand J), which leads to poor retail sales (gasp), and a housing market that is languishing (see BofA article above for a possible cause J). So we can clearly see why the indexes have traded higher the past 3 days.
Another "something real" to consider is that in just two days, the spout known affectionately as QE2 will be turned off, bringing an end to second quarter window dressing for institutions. Well, the "lift me" part of the story is that we have buy/write strategies to roll and short positions that hedge against the "reality" that is becoming real.
China Petroleum & Chemical Corp (SNP) has been very good to us after buying the stock as a covered call on October 18, 2010 at $96.54 and initially selling a Jan $100 call for $4.40. To the beat of Joan Jett we rolled the Jan $100 call on January 18, 2011 by closing the Jan's for $1.95 and selling Apr $100 call for $6.30. SNP remained solid and range bound as hoped, so on April 13, 2011 we played that same song and repurchased the Apr $100 call for $3.35 and sold the July $100 call for $7.
SNP is trading at $100.65 intraday today which is provides us another opportunity to cash in premium and keep on rolling. Between now and the July Option Expiration of July 15, we will want to roll out of the July $100 call, trading at $2.20 (all things being equal we would like to eat a bit more off this premium as it will fall quickly in the next 3 weeks) and sell Oct $100 (SNP111022C00100000) at approximately $5.50. The net cost basis in SNP after rolling the covered call will be ($96.54 (purchase price) – $2.45 earned on Jan $100 – $2.95 earned on Apr $100 – approx. $4.80 (or more depending on timing of roll) earned on July $100 – $5.50 for Oct $100) $80.84. In simple terms we will have held SNP for 1 year and earned 20% in call premium while the stock traded from $96.54 to $100.65 (today). Now that is something real.
Gannett Co. Inc. (GCI) has proven to be a perfect value stock for Phil Davis Buy/Write strategy. If you have followed since July 26, 2010 when we added GCI as a buy/write at $14.52, you will agree. GCI closed today at $14.16, or $0.36 lower than our initial purchase, however the buy/write has turned this flat stock into a sizable winner for DHTH. We began with Jan $15 call for $1.75 and Jan $15 put for $2.25. In the January article, Safety Dance, we allowed the Jan $15 call to expire worthless earning us the full $1.75 and closed the Jan $15 put for $0.49 recognizing $1.76 profit on the put side. GCI buy/write was then rolled to Apr $15 call for $.95 and Apr $15 put for $1.35. Following along to the April article, Which Stocks to Love Today and Tomorrow, we were able to recognize all of the Apr $15 call premium of $0.95 as it again expired worthless, and we recommended buying back the Apr $15 put for $0.37 enabling us to recognize an additional $0.98 from the Apr $15 put. In that same article we rolled to the July $15 call for $1.20 and the July $15 put for $1.40. The July $15 call appears headed toward another expiration for the full amount, and the put has a bit more for us to earn, but using today's close should cost approximately $0.84 (all things remaining equal over the next 3 weeks).
Let's break out the calculator and analyze our current position: $14.52 (purchase price – $1.75 Jan $15 call – $1.76 Jan $15 put – $0.95 Apr $15 call – $0.98 Apr $15 put – $1.20 July $15 call – $0.56 (could change as we approach expiration) July $15 put = $7.32 basis. And the really good news is we get to play again simply rolling into the Oct $15 call (GCI111022C00015000) for approximately $0.85 and Oct $15 put (GCI111022P00015000) for approx. $2.10. GCI, as I mentioned in the first sentence, has been a perfect stock for Phil Davis Buy/Write strategy as we have taken a stock that in a year has traded from $14.52 down to $14.16, but we have yielded $7.20 profit. Now that is something real, again.
Lastly, we need to review MEMC Electronic Materials, Inc. (WFR) which we originally recommended on August 11, 2010. WFR was entered at $10.31 using Phil Davis Buy/Write strategy selling the Jan $11 calls for $1.02 and Jan $11 puts for $1.67. In this case, the puts expired worthless in January allowing us to recognize the full $1.67 and we rolled the Jan $11 calls by buying them back for $0.36 in the same Safety Dance article. In January we rolled to the Apr $11 calls for $1.08 and Apr $11 puts for $0.71. Again WFR traded above our strike price, and so we recognized the full $0.71 in put premium in April 2011 and rolled the Apr $11 calls for $0.90 here. We recommended selling the July $12 calls for $1.09 and July $12 puts for $1.15. This time WFR has fallen on weaker times and the underlying stock has dropped to $8.33 close today. Turning to the trusty calculator again: $10.31 (purchase price) – $.66 (net on Jan $11 calls) – $1.67 (Jan $11 puts) – $.28 (net Apr $11 calls) – $.71 (Apr $11 puts) – $1.09 (July $12 calls) – $1.15 July $12 puts = $4.75 but we are faced with the decision between now and July 15 about accepting delivery of the July $12 puts or buying back. Accepting delivery would give us a cost basis on 100% of the stock we originally wanted to own in August 2010 for $8.37. There are two schools of thought on investing more capital into the markets at this point given all the "good" news I referred to at the beginning of this article. Buying back the puts and not accepting delivery would cost approximately $4 and thereby provide a basis on Â½ the shares desired at $8.75 ($4.75 net of all premiums + buy back). My recommendation is to conserve cash through the dog days of summer and buy back the July $12 puts but I like the stock at these prices so don't believe you are going wrong either way.
SNP Covered Call
Buy to Close SNP July $100 call before July 15, 2011
Sell to Open SNP (covered call) OCT $100 call
Buy to Close GCI July $15 put before July 15, 2011
Sell to Open GCI Oct $15 call
Sell to Open GCI Oct $15 put
Buy to Close WFR July $12 put before July 15, 2011
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.
SDI Glossary: "Call" Definition
SDI Glossary: "price" Definition
SDI Glossary: "Option" Definition
SDI Glossary: "Stock" Definition
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