Today is Thursday, May 17, 2012

Covered Calls

Why I bought and hedged Republic Services Inc. (RSG) and may buy Waste Management (WM)

The waste management industry looks like a pretty good speculation for long-term dividend speculators. Today, I bought some  Repubiic Services Inc. and sold covered calls on the stock, as explained below. I may buy some Waste Management (WM) too to complete my investment in the industry. 

A post on Facebook by Crista Huff who blogs at The Right Huff got me interested in the stock, and I did some research on it, which I described on her FB thread. Since FB has made linking to threads clunky, I'm pasting my comments on Christa's thread below. This also will allow me to review my thinking about RSG and WM later.

Pfizer (PFE) looks like a good long-term buy for income investors

While I believe the stock market is due for more of a correction in the face of a sluggish economic outlook, I'm looking for stocks that will pay nice dividends and will appreciate over the next five to 10 years. Thus, this morning, I bought a small position in Pfizer (PFE) and will add to that position over time unless something goes terribly wrong. Here's why:

Trading plan for covered calls, naked puts

Check out this interesting plan for trading covered calls (buy/writes) and naked puts.

 

Took profits on Oracle (ORCL) covered call trade

When my Oracle (ORCL) covered call trade showed that I could take almost as much money out of it today as I would be able to when the May call options expire on May 15, I bought back my ORCL May $18 strike calls and sold my ORCL common for a 30.5 cents per share profit on the trade. That was after all commissions.

If I’d held the trade until May 15 and the stock had been called, I would have made 31 cents a share, or about 31.3% annualized over 25 days. My 30.5 cents profit works out to about 85% annualized over the seven days I held the trade. If the stock had fallen below $18 between now and May 15, I would have made $1.05 a share, or an annualized return of 82%.

Now, I’ve got to find another trade.

Traders liked Oracle (ORCL)‘s purchase of Sun (JAVA); analysts seem to be less optimistic

Sometimes long-term investors let their common sense get in the way of making a good trade, and, so far, that’s what seems to be happening with Oracle (ORCL).

After ORCL announced that it is buying

Covered calls vs. naked puts

I’ve been looking at selling some naked puts. This article is food for thought.

US Bancorp (USB) soars 21%

US Bancorp (USB) had a big day after it announced its first quarter earnings, and many strong banks rose on Secretary of Treasury Tim Geithner’s seeming easing on his willingness to let USB and other strong TARP banks pay their TARP billions back to the government.

USB closed at $19.27, up $3.33 per share, or 20.9%. In after hours trading Tuesday, it gave a little back, sinking 17 cents to $19.10.

As previously disclosed, I bought USB back in

Proctor & Gamble (PG) rises with the market

Proctor & Gamble (PG) continues to impress and I continue to wait for it to correct with the market.

PG rose 1.26% to $51.37 and then added another 13 cents to $51.50 in after hours trading.

To me, the stock still looks too risky for a covered call trade, but I’ve been wrong before.

I don’t own PG.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

Oracle (ORCL) jumps 3.64%; gives it all back in after hours trading

After Tuesday’s close, Oracle (ORCL) was up 71 cents, or 3.64%.

And I was wondering why I’d sold covered calls on ORCL. After all, after Tuesday’s close, because of my hedge trade, I was up only 17.5 cents a share while the stock was up a buck a share. Covered call trades limit profits but not losses.

Then, in after hours trading, ORCL gave back the 71 cents and closed at Monday night’s close of $18.82.

What happened? Tuesday’s regular hour trading saw ORCL soar with the overall market. The after hours trading, I suspect, reflected the negative comments that ORCL seemed to be getting following its announcement that it’s acquiring Sun (JAVA).

Where do we go from here? As far as the markets are concerned, ORCL will still be at Tuesday’s close of $19.53. The question becomes, what will the market do with ORCL Wednesday.

Hard to predict, but I"m guessing the price will come down from Tuesday’s close of $19.53, because not everyone likes the JAVA deal as well as Tuesday’s trading suggested.

So I’m feeling a bit better about my trades Monday than I did a few hours ago.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

 

Oracle (ORCL) takes Sun (JAVA), stock drops, offers nice covered call trade

When big companies make big acquisitions, the stock of the acquiring company often declines, because some 70% of such deals don’t work out so well for the acquiring shareholders.

Thus, Oracle (ORCL) sank on Monday’s opening after it announced that it is acquiring Sun Microsystems (JAVA) for about $7 billion. That the market was in retreat on bearish banking news and correcting after some six weeks of advances didn’t help ORCL’s stock.

It happens that I already owned some ORCL leaps call options, and have followed the company for years. It has a strong record of quickly and profitably integrating its many acquisitions over the years.

So I decided to buy ORCL for $18.53 and sell ORCL May 18 call options for $1.05. It closed Monday at $18.82.

My thinking is that even if ORCL falls some more and puts me under water, I’ve got an immediate return of 5.63%, which also serves as a cushion for up to a 5.63% decline in the stock price from my purchase price.

After commissions, my annualized return on the 25-day option if ORCL falls below $18 and isn’t called would be 82.2%. If the stock stays above $18 and is called, I’ll make 31 cents a share, which would be an annualized return of 31.3%, which wouldn’t be a bad month’s work.

Some people spend hours looking for trades. In fact, so do I sometimes. But in this case, I just reacted to the acquisition news and checked out the buy/write opportunities offered by ORCL. Only time will tell if the trade works out.

My feeling is that over the next few years, assuming the politicians don’t screw things up too much, ORCL will appreciate. In the meantime, I’ll sell covered calls against it every month and collect its 20 cents annual dividend, which also could rise over time.

A gallery of charts for ORCL. Stockcharts.com. JAVA’s charts are here.
ORCL’s key statistics: Yahoo.com.
ORCL’s option quotes: Yahoo.com.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.

Proctor & Gamble (PG) ups dividend 10%; offers decent covered call opportunity

Barron’s magazine features Proctor & Gamble’s 10% increase in its dividend as an indication the company is feeling pretty good about its future.

It looks like a pretty good buy-write (covered call) trade assuming the market won’t correct very much during the next month. If traders are looking for a correction, they shouldn’t write covered calls, which don’t perform well in down markets.

So here’s how I have researched the stock beyond reading the Barron’s piece and a similar comment on www.seekingalpha.com:

 

How to use covered calls to replace US Bancorp’s (USB) cut dividend

Barron’s explains how to use covered calls to generate income lost when a company cuts its dividend, as many banks and companies have over the last couple of years.

Since Barron’s used US Bancorp (USB), a stock I own, as its example, I’ll use it, too. And I’ll comment on the article.

Trading covered calls involves

‘Show me the money’ isn’t worth the price

After a careful browse of Ronald Groenke’s Show me the money; covered calls and naked puts for a monthly cash income, which is advertised in Forbes,  I decided the book was light on insights and high on hyping the author’s web site and advisory service.

So I didn’t buy it.

Anyone interested in trading options should recognize that learning to trade will require that they pay a substantial tuition in terms of early losses.

And they should invest in a book that covers the topic in depth.

I recommend McMillan on Options and his Options as a strategic investment.

Also, check out the Covered Call Advisor and My Covered Call Blog. It’s also worth joining the covered call group at Yahoo.com that is shown at the top of the page on My Covered Call Blog.

 

Financials (WFC, AXP, USB) are depressed stocks held by Warren Buffett’s Berkshire Hathaway (BRK.A)

When stock market gurus like Warren Buffett make bad bets and get caught in bear markets, their fame works against them because their stumbles are very public.

This week’s Barron’s joins Bespoke and others that are highlighting the investment problems of Buffett’s Berkshire Hathaway (BRK.A, BRK.B).

Buffett is deep into financials. Barron’s notes

Why I closed my profitable Apple (AAPL) covered call trade

Today I bought back my Apple (AAPL) January $90 strike covered calls and then sold my Apple stock.  After owning the stock and the covered call (buy write)  position for 62 days, I made a 30% annualized return on a trade that I had hoped would produce a 50% to 81% return, as I explained here.

On Oct. 17, I bought AAPL for $97.73 a share. I sold AAPL January $90 calls short for $19.90 a share, or 20.36% of my stock purchase price. This means I have a 20% downside cushion. If the stock closes on January 16, 2009, above my break even price of $77, I make money. If the stock closes a bit below the $90 strike price, I make up to an 81% annualize return. If the stock closes above $90 on the day the call option contract for 100 shares expires in January, the call option will be exercised (called) and my annualized return will be 50%. This is regardless of whether the stock closes at $90.01 or $120. I might roll the stock up to prevent having it called, but that’s the topic of another blog, if I need to do that.

Today, I bought back the AAPL January 90 covered calls for $7.15 a share, which gave me a profit of $12.75 a share. I sold AAPL common for $90.17, which gave me a loss of $7.56. Thus, my net profit was $12.75-7.56, or $5.19 per share. This gave me a 5.2% profit on the trade, or 30.63% annualized: (5.2%/62 days) x 365 days.  While a 30.63% profit annualized isn’t as good as I had in mind when I put on this very hedged trade at the depth of the current bear market, it’s still pretty good.  And there are times you should take your profits while you can and find something else to trade.  I sold Apple for three strong fundamental reasons despite its recent technical strength.  First, earlier this week a report that Apple’s Mac sales slowed considerably last month caught my attention.  The wsj.com’s impact graphs:

Sales of Macs in U.S. stores last month declined 1% from a year ago, while industry-wide PC sales rose 2%, according to research firm NPD Group Inc., which tracks retail sales.  NPD analyst Steve Baker blamed a 35% drop in sales of desktop Macs, noting growth in Apple’s laptops still outpaced rivals.  The decline marks a sharp reversal for Apple, which has enjoyed robust demand this year for its Macs, even as spending on Windows-based PCs slowed along with sales of other electronics like flat-panel TVs. To drive sales of its iPhone, analysts expect Apple to begin selling it at Wal-Mart Stores Inc., possibly at a discount.  Some analysts are worried that sales will slow after the holidays as consumers pull back. On Monday, Goldman Sachs analyst David Bailey cut his estimate for Apple’s 2009 profit, warning “some nicks have started to emerge.” Mr. Bailey warned the company faces “a tougher environment” in the first two quarters of next year, when he believes consumer demand will further deteriorate.

Second, Apple set rumors about the health of its famous CEO, Steve Jobs, soaring when it announced that he won’t give his traditional keynote address at the MacWorld trade show in San Francisco early next month. His pancreatic cancer has been in remission, but the news that he won’t make his highly anticipated speech has speculators wondering about his health.  Worse, Apple continued its historic policy of not talking about Jobs’ health. Although he relented last summer and tried to reassure his groupies, the return of his secretive nature has people worried, especially people who own Apple’s stock and think it might tank if the company loses its leader.  As a speculator and journalist, I get very nervous when important sources clam up and refuse to come clean about what they’re doing or, in the case of Jobs, about his health. Since he’s the CEO of APPL, a publicly-owned company, Jobs’ health is everyone’s business, not just his.  Since he’s determined to protect his privacy, I’m determined to not be vulnerable to a surprise announcement that he’s sick or dead or just retiring. Not in this volatile market, and not when the economic outlook is not good news for companies like Apple that sell premium priced products. I bought a new MacBook Pro last week, and I’ve bought almost 200 Macs for my business since 1986. So I’m an Apple product fan, if not a supporter of Apple’s secretive ways.  The third reason I sold Apple was that like me, a few analysts have concluded the future for Apple is tied to our slumping economy and downgraded the stock.  Apple sank as low as $88.02 today before recovering to close at $89.16, down 6.57% on the day. Check out the news about AAPL at finance.yahoo.com, Reuters.com or other sites.  That APPL has a very strong following by, among others, its customers and speculators who’ve made a lot of money on the stock or have lost a bundle on it and are hoping it will rally. This may keep the stock from falling further. But Apple’s already demonstrated this year that even groupie stocks are vulnerable to changing market and economic conditions, which is another reason I decided to take my profit while I could.  For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.