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: 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

Hoobastank

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)."

Recommendations:

Buy to Cover HUSA at the market Monday, March 5, 2012

This Article's Word Cloud:   HUSA   January   June   March   RDWR   XRTX   again   another   away   back   basis   been   call   called   closed   closer   cost   didn   earnings   expire   exposure   good   have   like   long   many   next   option   options   over   premium   profit   reason   recommend   recommended   roll   selling   stock   take   that   things   this   time   today   weeks   will   wish   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: HUSA Provides The Reason to Take Profits, Option Review for March | 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.