Self Directed Investor Inc
SDI: "Empowering investors with ideas and education"
Symbol Lookup »  
Topics:ChinaETFsEarningsEconomyEnergyForexGoldIncomeLessonsIdeasTrading

  • Other news: News from PR Newswire
| More

Dark Horse Traders’ Hedge: Time to Evaluate Buy/Write on GCI, MIPS and SNP

Thu, Oct 20, 8:34 PM ET, by Scott Brown, Sabrient.com

Time to Evaluate Buy/Write on GCI, MIPS and SNP

By Scott Brown, President, Sabrient Systems

Time, why you punish me?

Like a wave bashing into the shore

You wash away my dreams

Time, why you walk away?

Like a friend with somewhere to go

You left me crying

Can you teach me about tomorrow

And all the pain and sorrow running free

Cause tomorrow's just another day and I don't believe in time

Hootie and The Blowfish

Philosophically, I agree with the intended meaning of the lyrics of "Time" by Hootie and The Blowfish. As someone who is closer to AARP than to college graduation, which is receding rapidly in the rear view mirror, "Time, why you walk away?" is taking on a whole new meaning. However as an investor who sells "time" through options, I tend to project the lyrics "Time, why you punish me?" at those who buy options.

Alas, we have three positions we sold "time" on and need to evaluate them "like a friend with somewhere to go." Typically, the stock market follows the adage "Tomorrow's just another day and I don't believe in time"—except as it relates to options and, particularly, option expiration date. So with that in mind, we need to make some decisions tomorrow.

One last sidebar on lyrics: "You left me crying . . . and all the pain and sorrow running free." This thought takes me to the news out of the Greek Parliament today giving final approval to an austerity law cutting wages and hiking taxes. There is an old, somewhat morbid, saying about "The beatings will continue until moral improves," and I suppose it sadly meets reality here. This weekend's 3 days of emergency meetings by European "leaders" likely won't shed any new light on how—or if—the 22-month crisis will be solved, but is worth paying attention to as a backdrop to our recommendations. It is a good idea to continue to hold exposure to the VXX as a hedge against any shockwaves from the meeting.

Gannett Communications, Inc. (GCI) was recommended (speaking of "Time") way back on July 26, 2010 and is an excellent example of how selling time turns a value stock into a yield stock. The past doesn't really play a role in our decision about what to do with the options we hold for tomorrow's expiration date, but is worth discussing as a case study on how the buy/write strategy unfolds.

The premise in July 2010 was that we believed GCI was a value stock at that time, and one we were willing to have exposure to on the long side. Consistent with our approach to using the selling of time through options, we recommended buying one-half the number of shares we were willing to own at $14.52 and selling a Jan 2011 $15 call ($1.75) and put ($2.25) for exposure to the other one-half position. In theory, if the shares were "put" to us in Jan 2011 we would take in the time premium and then hold the full number of shares we were willing to own in July 2010.

As you will see, in practice, with all things being equal, we normally roll the options forward to future expiration dates and capture the premiums. Rather than putting you through my rambling as to how each position was reviewed, I will include a table and links to the published article on each. The point is to demonstrate how you can sell time and make a profit on a stock that has otherwise dropped $4 in share price while owning it, as we've done with GCI.

    • January 12, 2011
      • Cover Jan 11 $15 put for $.49
      • Jan 11 $15 call expires (net earned on Jan 11 buy/write $3.51)
    • April 7, 2011
      • Cover Apr 11 $15 put for $.37
      • Apr 11 $15 call expires (net earned on Apr 11 buy/write $1.93)
    • June 30, 2011
      • Cover Jul 11 $15 put for $.84
      • Jul 11 $15 call expires (net earned on Jul 11 buy/write $1.81)

      The options expiring Friday, October 21 are the Oct 11 $15 put (sold for $2.10) and Oct 11 $15 call (sold for $.84). Obviously, with GCI closing at $10.60 on Thursday, October 20, the call will expire again.

      GCI remains a solid value stock trading at a forward P/E of 4.86, with a projected 5-year earnings growth of 6% and $682 million of leveraged positive cash flow. The Phil Davis Buy/Write Strategy works the best on GARP or value stocks. The premise is to enter one-half of the position at a discount to the current market (for us, this was July 26, 2010) and earn a time premium, working our cost basis close to zero; then just sell covered calls on the stock quarter after quarter until it is called away or we change our mind on the underlying value.

      In this real life example, by accepting the put on the other one-half position at $15 we will now own the number of shares we were willing to own on July 26, 2010 with a cost basis of $4.56. (Here's the math: $14.52 paid for one-half on 7/26/10 + $15 paid tomorrow, 10/21, for one-half - $3.51 earned Jan 2011 – $1.93 earned Apr 2011 – $1.81 earned June 2011 – $2.95 earned Oct 2011.)

      If I didn't garble my message too much, the takeaway here is that we wanted exposure to GCI in July 2010 at $14.52. GCI closed today at $10.60, which on a typical buy-and-hold strategy would have resulted in a -27% return to date. By being a seller of time/options, we have earned nearly $10 in option premiums while having the exposure we desired. At this point, we have the full number of shares we have been willing to own, and now we can turn the position to a pure covered call and enjoy a +1.9% forward dividend yield.

      The recommendation is to sell the Jan 2012 $11 call for $0.85, which drops our cost basis below $4. If you are just now considering entering GCI, you would want to use the Jan 12 $10 call and Jan 12 $10 put.

      MIPS Technologies, Inc. (MIPS) was recommended on April 28, 2011 at $8.17 for very different reasons than GCI. At that time, MIPS had just missed earnings and had guided lower, culminating in a 24% haircut to the share price. We were interested in utilizing the Buy/Write Strategy to get exposure to the mobile-computing market through MIPS. Much like the market, we can never be sure where the bottoms or tops are in stocks or the market, so we try to maintain a hedge to provide alpha in any market (see article Any Way the Wind Blows).

      MIPS is a much different proposition that GCI. MIPS is considered a growth stock with 5-year projected earnings growth of 19% and a forward P/E at today's (10/20/11) closing price of $5.02. Given this profile and the premise behind attempting to get long exposure to MIPS at a 15-20% discount in April 2011, our current recommendation is to recognize the Oct 11 $9 call premium ($.80) and Oct 11 $9 put premium ($1.60) and accept ownership of the full number of shares. This allows us to hold the shares as a growth component of our diversified and hedged portfolio. As the market and the company turn the earnings corner, we can re-evaluate the options available to earn "time" premium on MIPS.

      China Petroleum & Chemical Corp. (SNP) was recommended on October 20, 2010 at $96.54 using a simple covered call approach to earn premium on having long exposure to an energy stock. SNP closed today at $91.43 and still has a company profile which is attractive for our portfolio: a forward P/E of 5.51, operating cash flow of $22.1 billion, and a forward dividend yield of 2.9% (Remember when that would be disappointing?). The negative leveraged free cash flow of -$260 million is a slight concern, but the company has $2.3 billion in cash. Again, I will provide a bullet review of the covered calls and recommendations since Oct 2010.

      • January 18, 2011: Cover Jan 11 $100 call for $1.95 (sold for $4.40, net profit $2.45)
      • April 13, 2011 : Cover Apr 11 $100 call for $3.35 (sold for $6.30, net profit $2.95)
      • June 30, 2011: Cover Jul 11 $100 call for $2.20 (sold for $7, net profit $4.80)

      The current Oct 11 $100 call will expire tomorrow with no action necessary yielding a net profit of $5.50. This real life example on SNP demonstrates how we can sell "time" without utilizing the put option to again earn premium on a stock that otherwise has traded down from $96.54 (purchase price) to $91.43 (today's close). Through the use of covered calls we have managed the cost basis down to $80.84 and will simply continue to roll. I recommend selling the Jan 12 $95 call for $4.70 and review again at that time.

      Keep in mind that "Time" doesn't always have to "punish (us)" if we are on the correct side of selling time.

      Recommendations:

      Accept delivery of GCI shares at $15 share from Oct 11 $15 put.

      Sell to open GCI Jan 12 $11 call (GCI120121C00011000) at the market Friday, October 21, 2011.

      Accept delivery of MIPS shares at $9 share from Oct 11 $9 put.

      Sell to open SNP Jan 12 $95 call (SNP120121C00095000) at the market Friday, October 21, 2011.


      SDI Glossary: "price" Definition
      This Article's Word Cloud:   April   Cover   July   MIPS   October   This   Time   away   basis   call   cash   cost   covered   earn   earned   earnings   exposure   forward   from   growth   half   have   hold   just   market   number   options   position   premium   price   profit   recommended   selling   share   shares   sold   stock   that   this   time   today   tomorrow   value   were   which   will   willing   with   would   write

      | More

      Sector Detector: Santa tries to "sleigh" the fiscal cliff
      Thu, Dec 13, 8:16 AM ET, by Sabrient.com

      . ...

      Dark Horse Traders' Hedge: It's Been a Long Way Down For Apple
      Wed, Dec 12, 6:35 PM ET, by Sabrient.com

      . ...

      What the Market Wants: Historical Tax Rates Provide Clarity
      Mon, Dec 10, 8:15 PM ET, by Sabrient.com

      . ...

      Sabrient and Gradient Release Earnings Quality Rank (EQR), a New Quantitative Tool
      Mon, Dec 10, 11:16 AM ET, by Sabrient.com

      . ...

      Sector Detector: Tech shows best valuations as budget negotiation continues
      Thu, Dec 6, 8:16 AM ET, by Sabrient.com

      . ...

      Scott Brown to Reveal Sabrient's Top Stocks on BNN
      Wed, Dec 5, 2:15 PM ET, by Sabrient.com

      . ...

      What the Market Wants: Shame on Washington!
      Mon, Dec 3, 6:46 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Big Unemployment Numbers Across the Pond Remains the Big EU News
      Mon, Dec 3, 1:46 PM ET, by Sabrient.com

      . ...

      Sector Detector: Rankings stay neutral while charts take a bullish turn
      Thu, Nov 29, 8:16 AM ET, by Sabrient.com

      . ...

      What the Market Wants: From Rush to Risk to Worry
      Mon, Nov 26, 6:35 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Britain Adds More Drama to the EU Circus
      Mon, Nov 26, 10:56 AM ET, by Sabrient.com

      . ...

      What the Market Wants: A $64 Trillion Dilemma
      Mon, Nov 19, 6:16 PM ET, by Sabrient.com

      . ...

      ETF Periscope: A Short Week On Wall Street Might Be a Good Week to Go Short
      Mon, Nov 19, 5:35 PM ET, by Sabrient.com

      . ...

      Sector Detector: Jaded public needs a new hero
      Wed, Nov 14, 8:16 AM ET, by Sabrient.com

      . ...

      Sabrient's Equity Valuation and Ranking Now Available on Bloomberg's App Portal
      Tue, Nov 13, 11:45 AM ET, by Sabrient.com

      . ...

      What the Market Wants: The Devil You Know
      Mon, Nov 12, 7:35 PM ET, by Sabrient.com

      . ...

      Dark Horse Traders' Hedge: Ride out the Storm with FCX, Option Review
      Mon, Nov 12, 7:16 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Bad Economic Numbers Mean a Good Time to Short the Eurozone
      Mon, Nov 12, 3:35 PM ET, by Sabrient.com

      . ...

      Sector Detector: Focus returns to corporate earnings and Europe
      Thu, Nov 8, 8:16 AM ET, by Sabrient.com

      . ...

      What the Market Wants: After Tomorrow, Another Uncertainty Bites The Dust
      Mon, Nov 5, 8:35 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Elections the Flame, Wall Street the Moth
      Mon, Nov 5, 1:36 PM ET, by Sabrient.com

      . ...

      Sector Detector: Stocks attempt to launch a pre-election rally
      Fri, Nov 2, 8:16 AM ET, by Sabrient.com

      . ...

      What the Market Wants: Frankenstorm Scares the Markets Closed
      Wed, Oct 31, 6:36 PM ET, by Sabrient.com

      . ...

      What the Market Wants: Frankenstorm!
      Mon, Oct 29, 7:15 PM ET, by Sabrient.com

      . ...

      ETF Periscope: With Companies Sitting On Massive Cash, Expect Blisters On Bottom Lines
      Mon, Oct 29, 12:55 PM ET, by Sabrient.com

      . ...

      Sector Detector: Stocks can't overcome weak quarterly reports
      Thu, Oct 25, 8:16 AM ET, by Sabrient.com

      . ...

      What the Market Wants: Looking for Certainty Amidst Uncertainty
      Mon, Oct 22, 7:25 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Watch Out Below If Earnings Disappoint This Week
      Mon, Oct 22, 2:36 PM ET, by Sabrient.com

      . ...

      Sector Detector: Stocks back in rally mode even without Tech leadership
      Thu, Oct 18, 8:15 AM ET, by Sabrient.com

      . ...

      What the Market Wants: Uncertainty Reigns in the Market
      Mon, Oct 15, 6:53 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Eurozone and Earnings Duke It Out for This Week's Market Mover Title
      Mon, Oct 15, 11:16 AM ET, by Sabrient.com

      . ...

      Sector Detector: Earnings season launches under cloud of low expectations
      Thu, Oct 11, 8:16 AM ET, by Sabrient.com

      . ...

      Jobs, Food Stamps, Conspiracies (Market Shadows' Fun With Numbers)
      Tue, Oct 9, 4:56 PM ET, by Sabrient.com

      . ...

      Glimpse into the Future (Market Shadows' Fun With Numbers)
      Tue, Oct 9, 4:45 PM ET, by Sabrient.com

      . ...

      What the Market Wants: Fasten Your Money Belts
      Mon, Oct 8, 8:16 PM ET, by Sabrient.com

      . ...

      Ride Sally Ride (SLM) in Option Review, Add Cooper Tire (CTB)
      Mon, Oct 8, 7:45 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Ladies and Gentlemen, Start Your Earnings Season
      Mon, Oct 8, 10:56 AM ET, by Sabrient.com

      . ...

      Sector Detector: Bulls keep their powder dry as presidential debates begin
      Thu, Oct 4, 8:16 AM ET, by Sabrient.com

      . ...

      What the Market Wants: Fly to Safety (and not on American Airlines)
      Mon, Oct 1, 7:16 PM ET, by Sabrient.com

      . ...

      Options Trade on GBX and MIPS
      Mon, Oct 1, 12:36 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Spain Remains a Pain For Wall Street
      Mon, Oct 1, 11:15 AM ET, by Sabrient.com

      . ...

      5 Stocks Billionaires Are Crazy About
      Fri, Sep 28, 12:35 PM ET, by Sabrient.com

      . ...

      Sector Detector: Investors Watch Romney's Hunt for Red October
      Thu, Sep 27, 8:15 AM ET, by Sabrient.com

      . ...

      Broken Mirrors
      Tue, Sep 25, 9:45 PM ET, by Sabrient.com

      . ...

      What the Market Wants: Caution is the Word of the Week
      Mon, Sep 24, 7:25 PM ET, by Sabrient.com

      . ...

      David Brown Quoted in MarketWatch Article
      Mon, Sep 24, 1:16 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Is Wall Street Floating Along On An Equity Bubble?
      Mon, Sep 24, 11:16 AM ET, by Sabrient.com

      . ...

      Sector Detector: Stocks finally break out from 3-month rising channel
      Thu, Sep 20, 8:15 AM ET, by Sabrient.com

      . ...

      What the Market Wants: QE3 can Likely Produce 10% Short-term Gain
      Mon, Sep 17, 5:55 PM ET, by Sabrient.com

      . ...

      ETF Periscope: Bernanke's Open End Bond Purchases May Snag at the Fiscal Cliff
      Mon, Sep 17, 11:15 AM ET, by Sabrient.com

      . ...

        More articles:  1 2 3 4 5 6 7 next »

      ABOUT US »   ADVERTISE »   CONTACT US »   TERMS OF USE & PRIVACY POLICY »

      Dark Horse Traders’ Hedge: Time to Evaluate Buy/Write on GCI, MIPS and SNP | Self Directed Investor | Copyright © 2008 - 2014, All Rights Reserved

      Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

      SDI is associated with: ValueForum.com -- a subscription-based online social networking forum of over 1000 individual investors. | MarketNewsVideo.com -- videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock quote content appearing on SDI is at least 20 minutes delayed and is powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.