“I work all night I work all day to pay the bills I have to pay”
I was speaking to a long time client today and we discussed “ideas”. He told me that because I had “ideas” I needed to work harder. As a conscripted servant how much harder could I work.? Apparently, into the night and more.
Lets look at current trade ideas that seem to work and do some analysis to justify their ownership. The list below are stocks that we like and meet our criteria for ownership. Each stock/trade has its own risk profile and you should carefully consider doing the trade relative to your own risk profile. I encourage everyone to do their own research and achieve their own comfort level for each and every trade idea. As always we have in place one, some, none or all the trades below in any of our client accounts.
The first group in BOLD I have provided trade analysis below.
I will process the remaining group in the next few days and provide analysis at that time.
I tried to list the Risks involved in doing each specific trade strategy. There are many risks as we all know. The greatest is that the stock price goes down. There are too many risks to list, so I listed the ones I thought about the most. Use your own judgment and investment skills. If there is something I missed let me know nicely. I believe all my numbers are correct, if you find an error it will prove just how human I am.
The options I show are the ones I like. You will notice that my horizon is very short term. There are a number of reasons for my short-term bias. Mostly, in the current environment, option premiums are day/dollar highest in the short term. Sounds interesting? Not really, because if I simply divide the premium, or amount of money I am paid to sell an option by the days to maturity, the most money per day is short term. Typically, I am not paid as much to go out further on the calendar. If I can continually earn more money in a one-month trade than say a two-month trade, I will do the one-month trade twice and earn more options premium.
Example: AJG spot price of $24.89/ - comparing selling calls twice two months in a row to selling a two month call
Selling two calls:
1) Today I buy AJG stock at $24.89/ and sell a one month Sept 25/strike call and earn 0.35¢ premium with a Stand Still Return (SSR) 1.41% un-annualized
2) The options I sold today will expire next month on Friday, September 17th
3) For the purpose of this example, on this day in the future the price of the stock is $24.89/ and the options expire worthless.
4) For examples sake let’s say that the price of the stock and the one months option on Monday September 20th are the same as they are today. The stock price is $24.89/ and the one month call’s earn 0.35¢.
5) So on this day, a month after I did the original trade, I now sell the current one month Oct 25 calls for the same 0.35¢ with a SSR of 1.41% un-annualized,.
6) I have now cumulatively earned 0.70¢ by selling identical calls two months in a row generating an un-annualized return of 2.81% for the two months.
Selling one call:
1) Today I buy AJG at $24.89/ and sell a two month October 25/strike price call and earn 0.55¢ premium with a Stand Still Return (SSR) 2.21% un-annualized.
2) Two months from now at expiration I have earned 0.55¢ in premium and generated a SSR of 2.21% un-annualized.
Summary:
When I sold the two calls I had to do an extra trade and employ some assumptions. The main assumption is that that the market for the stock and option stay unchanged. This strategy generated 40 basis points or 0.40% more then the second strategy on doing a two-month option. Clearly, the assumption that the market prices would stay the same is a big assumption. However, it is not the absolute price levels that are important but the relative price levels. Even if the prices of the assets (stock and option) change the impact is not as important as long as the ratio or SSR remains the same.
The list of potential stocks/trades is:
AJG
EPD
FL
LLY
MCHP
SCCO
WIN
ADP
ETP
FGP
APL
SYS
UVV
KO
PG
KMB
ABT
CVX
JNJ
AFL
STR
PH
CTWS
SMG
TMK
This represents a lot of work!
As a glutton for punishment (aka Portfolio manager) lets get going.
AJG - Arthur J Gallagher & Co.
Closing spot $24.89/
P/E 19.45 Forward P/E 15.65
Dividend 5.2% ex-date 09/28
Sept 25’s 0.35¢ SSR 1.41%
Return to call 3.25% / $25.35
Break Even $24.54/share
Oct 25’s 0.55¢ SSR 2.21%
Risks
The stock is trading at a 1.81% premium to the 52 day average
The dividend is missed
EPD – Enterprise Products Partners LP
Closing spot $37.14/
P/E 19.08 Forward P/E 19.05
Dividend 6.30% ex-date 09/28
Sept 37.00’s 0.65¢/ net 0.51¢ or SSR 1.37%
Return to call 1.37% / $37.65
Break Even $36.63/share
Sept 38.00’s 0.20¢/ net 0.20¢ or SSR 0.54%
Oct 37.00’s 1.10¢/ net 0.96¢ or SSR 2.58%
Oct 38.00’s 0.60¢/ net 0.60¢ or SSR 1.62%
Risks
The stock is trading near its 52 day top price
Debt
Weak margins
FL – Footlocker Inc
Closing spot $12.09/
P/E 24.62 Forward P/E 11.74
Dividend 5.10% ex-date 10/10
Sept 12.50’s 0.35¢/ net 026¢ or SSR 2.89%
Return to call 6.29% / $13.20
Break Even $11.74/share
Oct 12.50’s 0.60¢/ net 0.60¢ or SSR 4.96%
Risks
Retail stock……
Weak operating margin
High P/E
Weak profile to “competitors”
LLY – Ely Lilly & Co.
Closing spot $33.95/
P/E 8.40 Forward P/E 7.66
Dividend 5.80% ex-date 11/11
Sept 34.00’s 0.65¢/ net 0.65¢ or SSR 1.91%
Return to call 2.06% / $35.30
Break Even $33.30/
Oct 34.00’s $1.10/ net $1.10 or SSR 3.27%
Return to call 3.42% /
Break even $32.84/
Risks
Drug company
MCHP – Microchip Technology Inc.
Closing spot $28.20/
P/E 19.04 Forward P/E 11.806
Dividend 4.80% ex-date 11/17
Sept 28.00’s 0.85¢/ net 0.65¢ or SSR 2.30%
Return to call 2.36%
Break Even $27.35/
Sept 29.00’s 0.40¢/ net 0.40¢ or SSR 1.42%
Return to call 4.26%
Break Even $27.80/
Oct 28.00’s $1.30/ net $1.20 or SSR 3.90%
Return to call 3.90%
Break Even $26.90/
October 29.00’s 0.80¢/ net 0.80¢ or SSR 2.84%
Return to call 5.67%
Break Even $27.40/
Risks
Growth of receivables
Neat top of 52 week range
SCCO – Southern Copper Corp.
Closing spot $28.48/
P/E 17.63 Forward P/E 10.67
Dividend 5.30% ex-date 11/10
Sept 28’s $1.30/ net 0.82¢ or SSR 2.88%
Return to call 2.88% / $29.78
Break Even $27.18/
Sept 29’s 0.80¢/ net 0.80¢ or SSR 2.81%
Return to call 4.63% / $29.80
Break Even $27.68/
Risks
Commodity price collapse
WIN – Windstream Corporation
Closing spot $11.18/
P/E 16.18 Forward P/E 13.63
Dividend 8.90% ex-date 09/28
Sept 11’s 0.31¢/ net 0.13¢ or SSR 1.16%
Return to call 1.16% / $11.49
Break Even $10.87/
Risks
High payout ratio
Debt
ADP – Automatic Data Processing
Closing spot $38.75/
P/E 16.11 Forward P/E 14.73
Dividend 3.5% ex-date 09/08
Sept 38’s $1.10 / net 0.35¢ or SSR 0.90%
Return to call 0.90% / $39.85
Break Even $37.65/
Sept 39’s 0.50¢ / net 0.50¢ or SSR 1.29%
Return to call 1.94% / $39.50
Break Even $38.25/
Oct 39’s 0.95¢ / net 0.95¢ or SSR 2.45%
Return to call 3.10% / $39.95
Break Even $37.80/
Risks
Looking for some – high beta?
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