January option trades and expiration: FCX, HOG, COP, NYX, VZ, WMT & more!

This turned out to be an eventful options expiration. Not only did I have a lot of short put and call options positions expiring – some dating back to the days of the market panic – but the day’s sell-off also triggered a number of new short put positions.

First, here are the results from the option positions that expired this month:

  • American Electric Power Co. [[AEP]] – The January 25-strike put options I sold against AEP on 7/7/09 expired out-of-the-money (OTM) for a 6-month net return of about 5%.*
  • AFLAC [[AFL]] – The January 12.5-strike put options I sold against AFL on 3/10/09 (as part of a defensive move of rolling out and down some August ’09 25-strike puts sold in January ’09 that were then deep in the money) expired OTM for a total 12-month net return of around 9%.*
  • Arcelor Mittal [[MT]] – The January 15-strike put options I sold against MT on 7/8/09 expired OTM for a 6-month net return of about 4.7%.*
  • ConocoPhillips [[COP]] – The January 30-strike put options I sold against COP on 7/8/09 expired OTM for a 6-month net return of about 4.7%.*
  • Emerson Electric [[EMR]] – The January 25-strike put options I sold against EMR on 7/7/09 expired OTM for a 6-month net return of about 5.9%.*
  • Freeport McMoran [[FCX]] – Some January 30-strike LEAPS put options I sold against FCX on 12/17/08 (as part of a defensive move of rolling out and down some February ’09 35-strike puts originally sold in late September ’08 that were then deep in the money) expired OTM for a total 16-month net return of around 15%.*
  • Ingersoll Rand [[IR]] – Some January 15-strike covered calls I sold against my long position in IR on 3/31/09 (as a way to exit the position after the company slashed its dividend) expired in-the-money (ITM) and my shares were called away for a 14-month net return (from the time put options were originally sold on IR to closing of the long stock position) of about 30%.
  • International Paper [[IP]] – Some January 15-strike covered calls I sold against my long position in IP on 4/24/09 (as a way to exit the position, which had been a real loser in every respect) expired ITM and my shares were called away for a loss in the position of about 60%.
  • Harley Davidson [[HOG]] – The January 2010 10-strike LEAPS put options I sold against HOG on 1/12/09 expired OTM for a 12-month net return of about 35%.*
  • Kimberly Clark [[KMB]] – The January 40-strike put options I sold against KMB on 5/27/09 expired OTM for a 7-1/2-month net return of about 2.5%.*
  • Kinder Morgan Energy Partners [[KMP]] – The January 50-strike LEAPS put options I sold against KMP on 1/22/09 (as part of a defensive move of rolling out and down some March ’09 52.5-strike puts originally sold in September ’08 that were then deep in the money) expired OTM for a total 15-month net return of around 13%.*
  • Magellan Midstream Holdings, L.P. – The January 25-strike covered calls I sold against my long position in MGG (since bought out by MMP) on 6/5/09 expired ITM, resulting in a 19-month net return of 16.7%, not including the 7-8% annual yield on cost I received in distributions during the time I held this position.
  • NYSE Euronext [[NYX]] – The January 15-strike put options I sold against NYX on 7/8/09 expired OTM for a 6-month net return of about 4.3%.*
  • Procter & Gamble [[PG]] – The January 45-strike put options I sold against PG on 8/6/09 expired OTM for a 5-month net return of about 2.7%.*
  • TEPPCO Partners L.P. – The January 30-strike put options I sold against TPP (since bought out by EPD) on 6/29/09 expired OTM for a 6-1/2-month net return of about 8%.*
  • Verizon [[VZ]] – The January 25-strike put options I sold against VZ on 8/17/09 expired OTM for a 5-month net return of about 2.9%.*

New positions
Cintas [[CTAS]] – On 1/15/10 I sold some August 22.5-strike put options against CTAS as it dipped on market weakness:

ctas_011510t

Currently trading at about $25 and yielding 1.8%, the shares of this uniform supplier are currently experiencing short-term weakness – the company recently reported weaker-than-expected second-quarter earnings due to lower sales as a result of job losses in the economy – within a still positive intermediate-term trend. A break below the $24-$25 level would suggest a more neutral or negative intermediate-term picture.

Fundamentally, despite somewhat lowered earnings estimates, CTAS appears to be still reasonably valued here. Given its long history of dividend growth (CTAS is recognized as a “Dividend Achiever“) and still-intact long-term overall growth prospects, I would be very comfortable owning it in the low $20s, which would be my cost basis if ultimately put the stock.

Exelon [[EXC]] – On 1/15/10 I sold some July 40-strike put options against EXC as it dipped on market weakness:

exc_011510t

Exelon is an electric utility that distributes gas and electricity in Illinois and Pennsylvania, and also sells power to other utilities. It’s the largest operator of nuclear plants in the U.S., which could prove positive in the longer-term if the U.S. ever gets its act together on nuclear energy.

Fundamentally over the intermediate term the company is expected to show flat or slightly declining earnings until regulated price caps on its PECO subsidiary expire next year. Current fair valuation estimates for its stock range from somewhere in the $30s up to the $80s, with an average calculated fair value at just about where it’s trading now (~$49 and yielding 4.3%).

Given EXC’s earnings prospects over the nearer term, I’d be cautious at these levels even though the stock is down almost 50% from its highs. At the same time, EXC should do well longer term and its dividend appears sustainable in the meantime. As a result, I’d be comfortable owning the stock below $40 – with a corresponding 5%+ dividend yield – if it’s ultimately put to me.

Mine Safety Appliances [[MSA]] – On 1/15/10 I sold some June 20-strike put options against MSA as it dipped on market weakness:

msa_011510t

Mine Safety Appliances makes protective equipment used by workers in the mining, fire service, homeland security, construction, and other industries, as well as the military. Trading at about $26 and yielding 3.7%, its shares remain in an intermediate-term uptrend from their March ’09 lows, but have been relatively flat since August ’09. A break below $23-$24 would suggest a more neutral/negative picture.

Valuation wise, current fair value estimates for MSA range from about $15 to over $43, with $28 the average. The company has a long history of consistent dividend growth, and its earnings growth estimates are 10% over the next five years. I’d be comfortable owning the stock below $20 – with a corresponding dividend yield of almost 5% – if it’s ultimately put to me.

Verizon Communications [[VZ]] – On 1/15/10 I sold some July 27-strike put options against VZ as it dipped on market weakness:

vz_011510t

Trading at around $31 and yielding over 6%, the shares of this telecom services provider have been trading essentially sideways since late 2008. The current intermediate-term technical picture appears somewhat neutral, with an upward bias. A break below about the $28-$29 level would have more negative implications.

Fundamentally, the shares appear to be roughly fairly valued here, with current fair value estimates using a variety of methods ranging from as low as $13 up to $40. I’d be comfortable owning VZ below $27 – with a corresponding dividend yield of over 7% – if it’s ultimately put to me.

Wal-Mart Stores [[WMT]] – On 1/14/10 I sold some January 2011 50-strike LEAPS put options against WMT on weakness in my IRA:

wmt_011510t

WMT is one of the few stocks showing up on my stock valuation spreadsheet as still undervalued (though not by a huge amount) in the current market. Currently trading at about $54 and yielding 2%, the shares of this giant discount retailer are in a clear intermediate-term uptrend. It would probably take a move back below the $50-$51 level to change this positive picture.

From a fundamental perspective, current fair value estimates for WMT range from $45 up to almost $70. I wanted to put some cash to work in my IRA, and by selling the $50 LEAPS put options I’ll either generate a decent 5.5% return on the position (based on the premium received from the sale of the options against the unmargined capital set aside to pay for the possible purchase of the stock if the options are ultimately assigned) or end up buying the stock at an attractive net cost basis of about $47.5 and corresponding 2.3% dividend yield.

* As always, the return on cash-secured put sales was based on the premium received from the sale of the options (minus commissions) against the unmargined capital set aside to pay for their possible assignment (i.e., my being put the shares of the stock).

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