Keep in mind that each day that goes by, the value of short term options change. The key components for options pricing are: time, strike and volatility. We can only control two of these components, time and strike. I know someone is thinking – HE IS WRONG THERE ARE SOOO MANY MORE THINGS YOU CAN ADD! Let us keep in mind that we can nuance these conversations to death. The goal is to stick to the KISS theory – Keep It Simple Stupid. With that thought you will notice a few changes to the way I am presenting the ideas below. The column format has been added for side-by-side comparison. With rare exception I show two scenarios, usually using the same strike with one the current month and the other the next month out. I have added Ration, this is the ratio of the one premium to the other. This is a quick and dirty value analysis where I simply divide one value by the other. When the ration of the scenario on the left is 2 or more it represents a better value. The Days earning is simply the Stand Still Return (SSR) on the option divided by the days to expiration. It is expressed in basis points. The biggest change is the addition of the RVI. RVI stands for Relative Value Indicator.
RVI is a relatively simple formula that shows position of the value indicated (Spot, Strike, Call) to the stocks 52 week trading range. Honestly, as a total return value manager it should be meaningless. If I like a stock I like a stock. However, the technician in me rises up and I want something to indicate rich/cheap on some level. It is really another potential red flag indicator to make me think again about the risk on investing and challenge my confidence and convictions.
Here is the analysis:
*Note: the tables shown are embedded .jpg files. This means that you can: 1) double left click them with your mouse to enlarge them, or 2) right click them with your mouse and choose to open them in a new window or tab, print, save, etc.
Risks –This is a pharmaceutical - there are always potential risks of product liability, etc, etc.
Risks – Insurance companies have their own risk profiles as do all industries. The crazy goose could go psycho but the real risks are premium pricing and competition. It is so easy for consumers to switch providers on line. The convenience is incredible. However, as with so many things people tend to pay the bill and move on. Furthermore, we are short term and it is very unlikely a major shift to customers would happen is such a short time.
APL is the only stock that I have included three option scenarios, one for September and two for October. October did not offer the $17.50 strike so I showed the strike prices on either side, the $17’s and $18’s. The RVI’s are very high. The stock price range for 52 weeks is $5.50 to $18.80 with the spot at $17.25. As I mentioned above the technician in me comes out and this is a perfect example. The return profile is so attractive, however, the price relative to its historic range is high. The downside breakevens are generous, 2.9-7.25%. I like the industry as I have a bias for tolling fees and annuity income. I believe this is an inherent bias when seeking dividends. I do have my concerns but the payouts are so attractive.
Risks – As with APL, the annuity income is desirable. The RVI’s are reasonable and the SSR;s are high. We will capture a dividend, however the amount of dividend is in question. If it is maintained at 3.5% the return contribution is 0.88%. Not bad.
Risk – the overall SSR is low. However, the stock is high income and again has the kind of stuff an income manager has to like.
Risks – The overall industry is having its “issues”. Agree or disagree with the problems there are a few things that make sense: oil is here to stay for a while, the cost for the sector to do business has/will increase, they are in a oligopoly industry with huge barriers to entry. Failures are expensive and cost shareholders.
Risks – Again a service industry stock. This series of stocks has a lot of energy related participants. The risks are shared without regard to their contributions. EPD has relatively high P/E’s and high RVI’s.
Risks – This is one of the areas where we bend the rules. Commodities as inflation hedges in this environment are key. Without getting into a long dissertation on inflation and the indicators raging toward double digit’s, we like gold a lot. There is no dividend paid on the SPDR’s. What we have found is the pure play on gold is better than taking exposure through gold stocks. There are few true gold stocks and they all come with their issues. Be it ADR characteristics, management or other factors the pure play is often the best. The SSR is high as is the RVI.
alt=""id="BLOGGER_PHOTO_ID_5511540504547338754" />Comment: Second largest member of the stable/consumerb goods sector. JNJ is a perennial favorite.
Comment: Smallest member of the stable/performing sector of consumer goods.
Comment: Largest member of the stable/performing sector of consumer goods.
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Comment: Note the SSR improves dramaticaly going out one months with the same strike price. The RVI is very low. We like energy companies especially these with mid stream capabilities and natural gas exposure like STR. STR is a small player in a market dominated by giants. they offer a nice dividend and their price appears to be depressed by association.
Comment: Food is good and they supply it and related services. Overall their is excellent, high SSR, low RVI and a dividend to be paid at the end of September. Note that the options have two different months and strike prices.
Comment: UVV recently fell back to earth after stellar performance. It is hard not to like the 5%+ dividend. The options premiums are ok but gathered up with the
low RVI and high dividend it is attractive.
Comment: TYC seems to have always delivered with high volatility (options pricing component & stock price). We have been active with this stock for years and it has never disappointed although its management has. It is the junior player in a sector of dissimilar competitors. We like the annuity components of its business. The SSR is all around good.
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