New naked put option trades: NLY, ABT, O & TEF
I opened several new naked put option positions this week, one of which was a reaction to a surprise option assignment from last week’s option expiration. It turns out I was assigned the covered call options I’d sold against my long position in Realty Income (O) and my shares were called away.
I didn’t particularly mind this (see my comments below), but since I hadn’t otherwise been planning on selling the shares I took the opportunity to sell some naked put options against O to potentially re-establish a position at lower prices. In the meantime, as a correction/update to my last post, this means I made a net return of about 80% in O, including dividends and covered calls, in about 2-1/2 years.
New positions:
Abbott Laboratories [[ABT]] – On 3/26/10 I sold some January 2011 50-strike LEAPS put options against ABT as the stock sold off on weakness in the medical sector:
Abbott Laboratories is a leading diversified manufacturer of health care products in the U.S., and distributes pharmaceutical, nutritional, diagnostic and medical products in more than 130 countries worldwide. The company appears to have a relatively strong new product pipeline going forward and is AA-rated by Standard & Poors.
Currently trading at about $53 and yielding 3.3%, its shares appear to be correcting within a still intact intermediate-term uptrend. A break below the $50-$51 support level would suggest a more neutral/negative outlook.
From a valuation standpoint, ABT appears somewhat undervalued at current levels with fair value estimates ranging from slightly below $40 to as high as $99 with an average around $60. A clear positive is the company’s inclusion as a member of Standard & Poor’s Dividend Aristocrats – an index of companies within the S&P 500 that have increased dividends every year for at least 25 consecutive years.
According to DividendInvestor.com, the company has a five-year dividend growth rate of about 9%, which, if continued, would result in a doubling of the dividend payout within eight years or so. My cost basis, if ultimately put the stock would be about $46.50 with a corresponding initial dividend yield of about 3.8%.
Annaly Capital Management [[NLY]] – On 3/25/10 I sold some October 15-strike put options against NLY as the stock sold off on a recent dividend cut and analyst downgrade:
Annaly Capital Management is a mortgage real estate investment trust (or “mREIT”) that invests in high-quality mortgage-backed securities – U.S. residential mortgage-backed securities (MBS) issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae (Agency MBS). The company operates by borrowing money at short-term (and usually lower) interest rates to buy longer-duration securities from which it collects higher rates, profiting from the difference (“spread”) between the rates. A hedging strategy is used to manage interest rate risk.
Although it’s been over two years now since the Federal Reserve began easing, history suggests that yield curves could still remain steep for some time – a positive for mortgage REITs. If rates begin rising quickly, however, it could mean that earnings (and therefore the dividend payouts) of mortgage REITs may have peaked for this cycle.
Technically, the shares of NLY – currently trading at $17.50 and yielding about 15% – appear to be in an upward-biased intermediate-term consolidation within a longer-term uptrend. A break below $16.50-$17 would suggest a more neutral/negative picture.
Fundamentally NLY appears roughly reasonably valued to somewhat undervalued here, depending on the metric used and earnings (and economic) assumptions being made. Even assuming that earnings have peaked for this cycle – and more dividend cuts lie ahead – I’d be comfortable owning NLY at about $15 or below, which would be my cost basis if I’m ultimately put the shares.
Realty Income [[O]] – On 3/25/10 I sold some September 25-strike put options against O as the stock dipped a bit on market weakness:
Billing itself as “The Monthly Dividend Company,” Realty Income is a real estate investment trust (REIT) that owns and manages a portfolio of over 2,300 properties in 48 states. The company focuses on freestanding, single-tenant properties leased to retail chains under long-term net-lease agreements.
Currently trading at almost $31 and yielding 5.6%, shares of O have been performing extremely strongly recently – perhaps due in part to short covering and a recent dividend increase (O is a Dividend Achiever). It would probably take a move back below the $27-$28 level to change this picture to something less positive.
That said, with the stock trading at current levels it’s hard to be as positive on the fundamental picture. Valuation wise, O isn’t out of line with other retail REITs – most of which currently yield even less than O – but estimates of fair value based on funds from operations (FFO) and book value suggest it’s fully valued here. And an overall REIT sector yield that’s only 50 basis points above that of 10-year Treasuries (compared to a 20-year average of 100 basis points) also suggests that REITs may not exactly be screaming values here.
I was long shares in O from 2007 until they were called away this past options expiration when I was assigned the 30-strike covered calls I had sold against the position. I’d be comfortable re-entering the position at under $25, which would be my cost basis if I’m ultimately put the shares.
Telefonica S.A. [[TEF]] – On 3/22/10 I sold some September 65-strike put options against TEF on weakness:
Telefonica S.A. is a telecommunications company that provides fixed and mobile telephony services in 25 countries across Europe and Latin America. The company’s exposure to faster-growing economies like Brazil and Mexico is a plus, while currency and economic issues, as well as costs of potential acquisitions are possible risks.
Currently trading at about $72 and yielding 6%, its shares are in an intermediate-term downtrend but still looking positive longer term. The sharp sell-off from recent highs around $90 has created intermediate-term oversold conditions on the price oscillators, suggesting a potential bottom could be in the processs of forming.
Valuation wise, fair value estimates for TEF range from the low $60s to well over $100 suggesting that it may be currently somewhat undervalued here. Another positive is the company’s stated dividend policy of gradually increasing the semi-annual dividend. I’d be comfortable owning TEF in the low $60s (or below), which would be my cost basis (with a corresponding dividend yield – after an 18% Spanish withholding tax – of almost 6%) if I’m ultimately put the stock.
