Dark Horse Traders’ Hedge: Time to Review January Options like a Rolling Stone
Fri, Jan 13, 2:54 PM ET, by Walter Gault, Sabrient.com
Once upon a time you dressed so fine
You threw the bums a dime in your prime, didn’t you ?
People’d call, say, “Beware doll, you’re bound to fall”
You thought they were all kiddin’ you
You used to laugh about
Everybody that was hangin’ out
Now you don’t talk so loud
Now you don’t seem so proud
About having to be scrounging for your next meal.
How does it feel
How does it feel
To be without a home
Like a complete unknown
Like a rolling stone ?
Like a Rolling Stone–Bob Dylan
After watching the Republican Debates, I feel like we have "no direction home." I wonder what happened to the days when the President of the United States of America "used to ride on a chrome horse"? Somewhere along the way I have discovered that the President isn't "where it's at, after he took from (us) everything (they) could steal." So we are left to "be on (our) own." I recall a day when a Trillion was just a number we studied in school and couldn't imagine how much that was and now we spend 15 of them each year. I try to avoid getting off on a political tangent, so I will stop with saying that the solution seems "like a complete unknown" from anyone I have heard during the early stage of this election.
All things considered, we have done well with the options up for review on January 20, 2012, so we turn to the markets "Like a rolling stone."
In no particular order, Agilent Technologies, Inc. (A) was recommended on October 5, 2011 as a "bargain" at $31.97. We recommended using Phil Davis's buy-write strategy to make the "bargain" even better. Agilent reported 4th quarter earnings on November 16, 2011 which beat estimates by $0.03, but they were guided lower. The lower guidance changed the 5-year projected growth rate on earnings from 21% to 15%, and the stock is now 20% higher than when we recommended exposure, driving the Forward P/E to 11.21. The stock is trading today at $39 on news of a deal with Mitsubishi. The sum of all parts of our trade is that we bought Agilent on October 5, 2011 at $31.97, sold the Jan $33 call for $3.65 and sold the Jan $33 put for $4.50. Allowing our trade of Agilent to close on January 20, 2012, with our stock called away at $33, will earn us $8.15 in option premium and $1.03 in stock price (called strike is $33) for a net of $9.18 profit. The common thread in Bob Dylan's song is "How does it feel?"... ... .quite good.
The other recommendation on October 5, 2011 was a similar buy-write exposure to Rockwood Holdings (ROC), focusing in on value and "bargains" at the time. Recall that Rockwood had slid from a high of $62, and we were wanting exposure following upgrades from JP Morgan and Gradient Analytics at $36.19. Rockwood Holdings announced that they will deliver earnings on February 21 with analysts expecting them to earn $0.79 for the quarter. It doesn't appear that we will be exposed to the stock during that announcement because ROC is trading at $43.03, and we recommended selling the Jan $40 call for $3.80 and the Jan $40 put for $7.75. The sum of all parts on this trade nets a tidy profit of $11.55 in option premium and $3.81 in stock price with the stock being called away at $40. I gave some consideration to playing the "rolling stone" card on ROC and rolling our options to February (just ahead of the earnings announcement), but the option premiums have closed sharply since last October and there aren't enough reasons for us not to simply take our $15.31 ($11.55 + $3.81) and move on. "How does it feel?"... ... ..very good.
Radware Ltd. (RDWR) was originally recommended for long exposure on November 10, 2010 (no, that isn't a typo of 2010) at $33.39, and we updated the position on December 7, 2010. At that time there were a lot of rumors pushing RDWR around suggesting a buyout price of $47. The idea was that selling a Jan $35 2012 call for $9.45 would eventually be moot. The only thing moot about it today is that we will be able to recognize a $9.45 profit for our time with RDWR, trading today at $31.54. Radware announced today that it will host 4th quarter earnings call on February 1, 2012. The analyst expectation is $0.37/share with Zack's intiating coverage with a Buy in the last month, and 1 of 3 analysts raising current and next year estimates. We will want to go back into buy-write mode with RDWR following the expiration of our call on January 20, 2012. The recommendation is to sell the Mar $31 call ($1.95) and Mar $31 put (1.40) to bring in an additional $3.20. "How does it feel?" on RDWR, "Like a rolling stone" as we roll our options.
Jabil Circuit Inc. (JBL) was originally recommended on January 27, 2011 and played the "rolling stone" twice already. Jabil is and has been a "perfect" stock (much like GCI) for using Phil Davis's Buy-Write strategy over and over and over. First, let me review the purchase price and trades thus far, and then I will comment on why this stock is ripe to keep as a "rolling stone." Our original recommendation provided us with exposure to JBL at $20.56 and sold the Jun $20 call ($1.90) and Jun $20 put ($2.40). On June 9, 2011, we recommended closing the Jun $20 put ($1.70) and rolled to Sept $20 call ($1.35) and Sept $20 put ($.2.10). On September 16, 2011 we rolled again closing the Sept $20 put for ($2.45) and selling the Jan $20 call ($1.35) and Jan $20 put ($3.80). There is a fair amount of math to do here but sum of all trades is ($20.65 +1.90+$2.40-$1.70+$1.35+2.10-$2.45+$1.35+3.80) a cost basis today of $11.81 or nearly $10 lower than when we acquired the position all while the stock has moved north by less than $1. We will need to spend approximately $1.08 based on today's trading price to close the Jan $20 call this time and roll to Mar $21 call ($1.50) and Mar $21 put ($1.15) shaving another $1.57 off our cost basis and moving the call and put strike to $21. JBL is still worthy of long exposure based on our normal metrics of looking at 5 year projected earnings growth of 12% at a Forward P/E of 7.32 and Operating Cash Flow of $1.02 billion (Free Cash Flow of $505 million). "How does it feel?" on JBL, "Like a rolling stone."
China Petroleum & Chemical Corp (SNP) is a stock we have been writing Covered Calls on since recommending exposure on October 17, 2010 when we snapped it up at $96.54, and it coincidently reminds me of the October 27, 2010 article "Funeral for a friend." After recommending SNP In late 2010 using the covered call strategy, we have rolled "like a rolling stone" 5 times, but January 20, 2012 will likely be the last, at least for now. A quick recap on this position shows that we sold the Jan 2011 $100 call at the time we added long exposure for $4.40. On January 18, 2011, we recommended rolling to close the Jan $100 call for $1.95 and selling the Apr'11 $100 call for $6.60. Similarly, on April 13, 2011, we recommended closing the Apr $100 call for $3.35 and selling the July'11 $100 call for $7.00. Each time, we chipped away at the cost basis in SNP while continuing to hold exposure in the stock. On June 30, 2011, we played a familiar tune while closing the July call for $2.20 and selling the Oct'11 $100 call for $5.50. Shockingly, on October 21, 2011, we didn't have to buy the call back to roll and earned the entire $5.50 as SNP traded lower with the rest of the market. Our recommendation was to sell the Jan '12 $95 call for $4.70 which will spell the end to our exposure, for now, to SNP as the stock is trading today at $113.36. This is a good time to part ways with SNP (at least for now) as shares may come under pressure from the Battle for China Gas. When the dust settles on this trade, we will have acquired SNP at $96.54 and exited at $95 (assuming it is called away next week) while netting $20.50 ($4.40 -$1.95+ $6.60-$3.35+$7-$2.20+$5.50) in option premium. We have to account for the loss in stock price of $1.54, but a few nifty dividends received along the way offsets some of that. So once again we ask "How does it feel?" on SNP... ... .good.
LDK Solar, Inc. (LDK) was recommended on January 28, 2011, and when I ask "How does it feel?" the answer is not good (even lousy) but working on it. We recommended exposure to the solar space and LDK at $12.95. At the time we entered the position, we recommended Phil Davis's Buy-Write strategy by selling the Jun'11 $13 call ($2.09) and selling the Jun'11 $13 put ($2.11). At the time analysts, were expecting LDK to make a profit of $2.12 for 2011 and an earnings growth rate of 25%. By June 9, 2011, 19 Analysts were still suggesting a profit of $2.46 for 2011. We recommended rolling the options by closing the Jun'11 $13 put for a staggering $6.40 and recommended selling the Sep'11 $6 put for $0.75 rather than accept delivery of additional shares. The first put didn't work out well for us as we had to recommend repurchasing the Sep'11 $6 put for $1 on September 16, 2011. I am starting to understand what Bob Dylan meant when he says "Oh you never turn around, to see the frowns, on the jugglers and clowns, when they did, tricks for you, never understood, that it ain't no good, you shouldn't let other people, get their kicks for you" as those same analysts that were projecting $2.46 for 2011 are now projecting -$1.03 for 2011 and -$1.19 for 2012. Fortunately, the Jan '12 $5 put we sold for $2.05 appears like the first bright light in a while on this trade with LDK trading today at $5.12. I am recommending rolling to the Mar '12 $5 put at expiration next Friday for $1.08. Again, "How does it feel?" on LDK, "Like a complete unknown."
Xyratex Ltd. (XRTX), is a horse of a different color which has given us quite a ride since recommending exposure on December 21, 2010 at $15.35 and selling the Mar'11 $15 call ($1.80) and Mar'11 $15 put ($1.50). In a rare decision for me, we accepted delivery of the "put" shares on March 20, 2011 and took a wait and see attitude before recommending any further options believing that the stock would rebound from the lows of $7.58. Sure enough, on January 5, 2012, XRTX blew away estimates of $0.33 and delivered $0.77. The stock was on the rise prior to the earnings beat and closed today at $15.64 which puts me in the mood to turn to another trusted friend, covered calls. I recommend selling the Mar '12 $15 call for $1.30 to continue working our cost basis down. Our original entry price was $15.35 and put exercise price of $15, but we earned premiums of $3.30 ($1.80 call and $1.50 put) so before selling this call option our cost basis is $12.98. "How does it feel?" on XRTX... ... ... much better than it did.
Assuming nothing changes between now and option expiration date (next Friday) on these trades, we will be freeing up cash in the portfolio to add additional positions. I will post recommendations next weekend and will likely recommend a few buy-write positions on stocks in the Sabrient Baker's Dozen 2012.
Happy New Year, and I hope I can help you answer "how do you feel?" more positively in 2012.
Allow Agilent Technologies (A) to be called away at $33 earning call and put premium.
Allow Rockwood Holdings (ROC) to be called away at $40 earning call and put premium.
Sell to open RDWR Mar $31 call RDWR120317C00031000, at option expiration next Friday
Sell to open RDWR Mar $31 put RDWR120317P00031000, at option expiration next Friday
Buy to Close JBL Jan $20 call, at the market between now and option expiration next Friday
Sell to open JBL Mar $21 call JBL120317C00021000, at the market next Friday.
Sell to open JBL Mar $21 put JBL120317P000210000, at the market next Friday.
Allow China Petrolium Chemical & Petrolium (SNP) to be called away at $95.
Allow LDK Jan $5 put expire next Friday.
Sell to open LDK Mar $5 put LDK120317P00005000, at the market next Friday.
SDI Glossary: "Analyst" Definition
SDI Glossary: "Call" Definition
SDI Glossary: "Cash" Definition
SDI Glossary: "price" Definition
This Article's Word Cloud:
More articles: 1 2 3 4 5 6 7 next »