Dark Horse Traders’ Hedge: HUSA Provides The Reason to Take Profits, Option Review for March
Fri, Mar 2, 8:14 PM ET, by Scott Brown, Sabrient.com
I'm not a perfect person
There's many things I wish I didn't do
But I continue learning
I never meant to do those things to you
And so I have to say before I go
That I just want you to know
I've found a reason for me
To change who I used to be
A reason to start over new
And the reason is you
Houston American Energy Corporation (HUSA) has been a good hedge for our long positions. Our short interest in HUSA is well-documented starting on July 1, 2010 at $9.91. HUSA provided us with the opportunity to take a quick +12% gain ahead of their "earnings" report on August 13, 2010. Not to be counted out, HUSA bounced on what I would call poor quality earnings and gave us a second chance to short again on August 18, 2010 at $10.54. The volatile market of 2010 and a company with a lot of unanswered questions afforded us the opportunity to cover with another +15% profit in just 2 days, on August 20, 2010 at $9.35. September 13, 2010 provided us the chance to say "hello again" to HUSA by shorting at $9.93. Once again, the volatility of HUSA offered us the chance to "take it on the run" on September 16, 2010 when we bought to cover. Finally, we recommended a 4th entry into HUSA as a short on September 23, 2010 to the back drop of "don't stop believing" at $10.06.
One thing to understand is that "earnings quality" stocks can sometimes take months or years to play out, and they often give rise to the feeling that "there's many things I wish I didn't do." However, the good news is that most "earnings quality" issues do eventually play themselves out in the market "and so I have to say before I go" that "the reason is you (HUSA)." The company did their best to dance around the issue in their March 1 press release, but the cap on this well was "As a result of these developments, the decision has been made that without the ability to effectively test the lower zones, the most prudent course of action is to plug back the well and to further evaluate the C-7 and C-9 Formations." HUSA had a trading halt mid-day Thursday but that didn't stop a near -40% drop below $7. This gives us "a reason to start over new" and recommend closing the 4th position in HUSA with another +20% profit.
We have 6 option positions to consider in March and it makes sense to discuss our strategy with 10 trading days left before expiration. Seagate Technology (STX) is pretty much a foregone conclusion that the stock will be called away and the puts expire in our favor. We recommended using the buy/write strategy on January 29, 2012. In retrospect, buy and hold would have been a more profitable decision which reiterates the "There's many things I wish I didn't do" theory. STX is trading at $27.45 today, but we recommended selling the March $21 call and Mar $21 put for the sum of $2.05. It would appear that the puts will expire and the stock will be called at $21 providing a tidy +10% profit for the 60-day hold.
Jabil Circuit, Inc, (JBL), which has been in the virtual portfolio since January 27, 2011, appears to be headed for the same fate. JBL closed today at $25.97. Our most recent "rolling stone" article on January 13, 2012 recommended a 4th quarterly roll of the buy/write options to a March $21 call and put. Without repeating the history (published In Jan 13 article) of option trades, we have used option trades to lower our cost basis in JBL to $12.89. Therefore, when the stock is called away at $21 on Friday, March 16, 2012 we will close the position with a profit of +39% profit. This is a good example of how the buy/write strategy and selling time premium can enhance returns on a stock we like for long exposure. Buy and hold on JBL from January 27, 2011 would have netted us a +26% profit.
Radware, LTD, (RDWR), is an expiring option that we will want to monitor closely over the next 2 weeks. Recall that we originally recommended exposure to RDWR as a long position on November 11, 2010 at $33.39. RDWR gives us a perfect example of how options and selling time premium can enhance the returns of a stock we like. The stock closed today at $33.23, so for all intents and purposes, unchanged. However, we collected $1.30 in net premiums on the original buy/write and another $9 from selling the Jan 12 $35 call on December 7, 2010. After expiration in January 2012, we recommended rolling to the March 12 $31 call ($2.10) and put ($1.40). Our cost basis is $19.59 after earning the time premium from options. The company has beat expectations the last 4 quarters on the good side, but the metric of growth versus forward P/E isn't what I would like. Therefore, I think it is wise to follow the stock over the next 2 weeks. If it remains over $33, I am likely to recommend letting the put expire and stock be called away at $31 to close out a nice profit. On the other hand, if RDWR drops closer to $31 in the next 2 weeks whereby both options could be rolled for less than $.50 cost, then I will recommend rolling to June. I will post my recommendation Thursday, March 15, 2012.
Xyratex, LTD. (XRTX), has had an amazing run after blowing out earnings in the last quarter. We have had long exposure to XRTX since December 17, 2010, entering at $15.39. Through buy/write options and the current covered call we have lowered our cost basis to $11.58 while facing the prospect of having the stock called away at $15. Much like RDWR, I would recommend watching XRTX closely in the next 2 weeks. XRTX closed today at $16.67. Unless the stock drifts back closer to $15, my recommendation will be to avoid chasing the option and accepting the call at $15. We can find better GARP stocks at this point to replace XRTX if it gets called away.
Western Refining Inc. (WNR), has worked out just about perfectly based on the scenario laid out on January 27, 2012 "with arms wide open." At that time, we wanted to gain exposure to WNR and recommended buying the stock at $15.75 and selling the March $16 call ($1.35) and March $16 put ($1). WNR closed today at $19.05. I will give a recommendation on how to roll this option to June as we get closer to March 16, 2012. More than likely, we will allow the put to expire and pocket the $1 in premium and buy back the call to roll to a higher strike call and put in June.
Lastly, we have been working our cost basis in LDK Solar Co. (LDK) down by selling puts since entering the stock with a buy/write on January 28, 2011. Thus far, LDK also fits the mold of "there's many things I wish I didn't do, but I continue learning." I recommended selling the March $5 put on January 20, 2012 which appears at this time to be a good decision. LDK closed today at $5.59 and should expire in 2 weeks allowing us to claim $1.08 in option premiums and roll to the June $5 put for another $1 in premium.
So, take the profits on HUSA at the open Monday, and if it ever finds its way back to $10 we will visit shorting HUSA again "and the reason is you (HUSA)."
Buy to Cover HUSA at the market Monday, March 5, 2012
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