Option trades: Naked puts on BP, AMGN, INTC, MSFT, CSCO, AMAT, HPQ, WMT, GM, MDT & more!
I sold quite a few naked put options over the last several weeks/months as increased volatility in both the market and individual stocks presented some interesting option premium selling opportunities. This uptick in volatility came at a good time, as many of my previous naked put option positions had just expired out of the money (OTM) during January and March options expirations, freeing up significant available cash.
And more recently as volatility has once again collapsed, I’m focusing on opportunities in specific stocks as they present themselves. With the market well up from just six months ago and the VIX down around 15 I remain otherwise wary and have been keeping many of these positions modest in size, leaving open the possibility of adding to them (or adjusting them) in the event of further opportunities down the road.
New positions:
Aflac [[AFL]] – On 3/15/11 I sold some August 40-strike put options for $2.10 against AFL as it sold off on the news of the earthquake/tsunami in Japan. Aflac, a leading health and life insurer, derives almost 75% of its revenues from Japan. The company has indicated that it doesn’t expect to be significantly impacted by claims from the earthquake; meanwhile it could benefit from a stronger yen if that trend continues.
Fundamentally its shares have a current average fair value estimate somewhere in the $50s. My cost basis if ultimately put the stock will be about $38.00 with a corresponding dividend yield of about 3.2%.
Amgen [[AMGN]] – On 4/21/11 I sold a January 52.5-strike put option for $3.40 against AMGN as the stock sold off following the company’s announcement that it will begin paying a dividend this year – a move that some investors took as negative on growth prospects.
Amgen is a leading biotechnology firm that develops “human therapeutics” for treatment against cancer, kidney disease, rheumatoid arthritis, bone disease, and other serious illnesses. As with most companies in this field, risks include regulatory changes and competitive drugs from other companies; positives include its leading position in the industry and A+ credit rating (Standard & Poor’s).
Fundamentally, even assuming a slower growth profile going forward, AMGN shares appear to be undervalued here, with a conservative average fair value estimate somewhere in the $60s. I’ve watched AMGN for many years and even sold (badly timed) puts on it at higher levels a few years ago. Its valuation in the low $50s seems compelling and the company’s dividend announcement – and plans to increase it “meaningfully” over time – sealed the deal for me. My cost basis if ultimately put the stock will be a little over $49 per share.
Applied Materials [[AMAT]] – On 4/7/11 I sold some October 14-strike put options for $0.85 against AMAT on weakness. Applied Materials is the world’s largest semiconductor equipment maker, and like many other big-name tech companies continues to trade at a reasonable valuation. Risks include the cyclical nature of the industry, competition, and technological changes, while positives include the company’s leading position in the industry, good balance sheet and A- credit rating (Standard & Poor’s).
My calculated average fair value estimate for AMAT is about $18. My net cost basis if ultimately put the stock would be $13.20, with a corresponding dividend yield of 2.4%
AT&T [[T]] – On 2/24/11 I sold some July 27-strike put options for $1.25 against T on weakness. AT&T is a major U.S. telephone and broadband service provider. Risks include competition within the industry and operating risks, while positives include its leading position in the industry, a strong balance sheet and above-average dividend.
Fair value estimates suggest a valuation for T in the upper $20s. The stock recently ran up to over $30 after the company announced plans to buy T-Mobile, which, if approved, could help the company improve mobile service and speed broadband Internet access. If I’m ultimately put the shares, my cost basis will be about $25.80 with a corresponding dividend yield of 6.7%.
BP Plc [[BP]] – On 3/10/11 I rolled up the January 35-strike naked put options I sold against BP on 5/25/10 and 6/9/10 as part of a risk reduction trade at the time by buying them back at $1.28 and selling the same month (January 2012) 42.5-strike naked put options for $3.30, for a $2.00 net credit. BP of course is a leading international oil and gas company that has been much in the news over the last year due to its leading role in the Gulf of Mexico oil spill.
While much of the uncertainty surrounding the company’s liabilities in the spill has diminished, the cloud overhanging the company has left the stock price depressed relative to other companies in the industry. Despite ongoing headline risk, I decided to increase my risk in this position given that I estimate its valuation in the high $50s – well above where it’s currently trading – and that I now stand to profit, rather than just break even, if the options expire OTM. My cost basis if ultimately put the stock will be about $40.50 with a corresponding dividend yield of about 4.15%.
China Mobile Ltd [[CHL]] – On 2/22/11 I sold some September 45-strike put options for $2.90 against CHL on weakness. As its name implies, China Mobile provides mobile telecommunications services in China and has a 70% share of this fast-growing market. Positives include the company’s leading position, strong cash flow and balance sheet, while potential negatives include competitive pressures and currency risk.
Fundamentally, CHL has an average fair value estimate somewhere around $50. My cost basis if ultimately put the stock will be about $42.20 with a corresponding dividend yield of about 3.88%.
Cisco Systems [[CSCO]] – On 3/15/11 I sold some October 17-strike put options for $1.35 against CSCO on continued weakness in the stock. This adds to an earlier position in CSCO naked put options in another account, which I adjusted on 3/11/11 by buying back the April 19-strike put options I was short and selling an equal number of October 18-strike put options for a net credit of about $0.37.
Cisco Systems is a worldwide leader in networking equipment – like routers and switching products – and services. Positives include its strong financial and industry position in this important and expanding market, while negatives include potential slower tech spending by corporations and government, and sales and pricing pressures from increased competition.
Cisco’s stock price has dramatically under performed over the last year after failing to meet investors’ earnings expectations for several quarters in a row. While CSCO may no longer be the growth story that it once was, its shares, currently trading at around $17, appear to be reflecting an overly pessimistic outlook – my current average fair value estimate is somewhere in the $20s. The company also just initiated a small, but easily growable dividend. My cost basis if ultimately put all the shares I’m short put options against will be just above $16 with a corresponding dividend yield of 1.5%.
Eni SpA [[E]] – On 2/22/11 I opportunistically sold an August 45-strike put option for $3.20 against E on weakness in the wake of news of escalating turmoil in Libya, where the company has significant operations. Based in Italy, Eni SpA is an integrated energy company that operates worldwide in several market segments, including oil and natural gas, petrochemicals, oil field services, and power generation. It is 30% owned by the Italian government, another potential negative.
Fundamentally, E appears to be roughly fairly valued at current levels (high $40s). My cost basis if ultimately put the stock will be just under $42 with a corresponding dividend yield of 4.8% (minus an Italian withholding tax).
Ensco plc [[ESV]] – On 4/12/11 I sold a September 48-strike put against ESV for $2.45 on weakness in the stock. Ensco plc is an offshore contract drilling company that provides both shallow and deepwater drilling services to the oil and gas industry worldwide.
Risks include lower energy prices, competition (from the likes of Transocean, Diamond Offshore, Noble and Rowan Companies) and general operating risk, while positives include its newer-than-average fleet of rigs, high operating margins, its expansion/diversification into deepwater drilling, and operations mainly in the Asia/Pacific region.
Valuation wise, a current fair value estimate for ESV appears to be around $60. If ultimately put the stock, my net cost basis will be about $45.56 per share with a corresponding dividend yield of a little over 3%.
Exelon [[EXC]] – On 3/15/11 and again on 4/8/11 I sold some September 40-strike put options against EXC, for $2.40 and $2.10, respectively, as it sold off on news of problems at Japan’s Fukushima Daiichi nuclear power plant following the earthquake and tsunami.
Exelon 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. – hence investors’ jitters over that sector of the industry following the events in Japan, and not helped by the hysteria and fear mongering promoted by much of the mainstream media.
Fundamentally over the intermediate term the company is expected to show flat or declining earnings until regulated price caps on its PECO subsidiary expire this year. A current fair valuation estimate for its stock value is probably somewhere close to where it’s trading (low $40s). However, EXC should do well longer term and its dividend appears sustainable in the meantime. As a result, I’d be comfortable owning the stock at under $38 – with a corresponding 5.5% dividend yield – if it’s ultimately put to me.
FirstEnergy Corp. [[FE]] – On 2/24/11 I sold some July 36-strike put options for $1.35 against FE on weakness. FirstEnergy operates seven electric utilities (using nuclear, natural gas, coal and renewable sources) in Ohio, Pennsylvania, and New Jersey. It’s currently in the process of acquiring smaller Allegheny Energy, an electric utility with primarily coal-fired plants in Pennsylvania, West Virginia, Maryland, and Virginia.
My view of this Ohio-Based electric utility is slightly more negative than when I first sold naked put options against it early last year, but not enough to keep me away. My cost basis if ultimately put the stock will be about $34.66 with a corresponding dividend yield of about 6.4%.
General Dynamics [[GD]] – On 4/4/11 I sold a November 70-strike put option for $5.00 against GD as the stock sold off following news of the fatal crash of one of its Gulfstream business jets during a flight test. General Dynamics is the world’s fifth largest defense contractor. Positives include a history of earnings and dividend growth as well as an A credit rating from Standard & Poor’s; negatives include reduced defense spending and a slower economy that could affect its business jet unit.
From a valuation perspective, current fair value estimates for GD range from about $65 to over $100, with an average somewhere around $90 per share. My cost basis if ultimately put the stock will be about $65 with a corresponding dividend yield of about 2.9%.
General Motors [[GM]] – On 3/7/11 I sold a September 29-strike put option for $2.00 against GM on continued weakness in the stock. General Motors is of course the Detroit-based automotive giant that recently emerged from bankruptcy with a leaner cost structure and reduced debt. Ongoing risks include the overhang of shares still held by the government, increased labor and materials costs, the cyclicality of the industry, and competition.
In recent years I wouldn’t have touched GM with a ten-foot pole – it was a financial disaster long before the economic crisis. The “new” GM, however, actually seems designed to make money. On a valuation basis it seems undervalued here (at about $30), with a current fair value estimate around $40 or higher. This represents a small position in my IRA, and my cost basis if ultimately put the stock will be $27 per share.
Getty Realty [[GTY]] – On 3/2/11 I sold some June 20-strike put options for $1.00 against this REIT as the stock fell sharply on the news that its largest tenant might miss its rental payment. Getty Realty owns and leases more than 1,100 gas service stations, adjacent convenience stores, and petroleum distribution terminals in the U.S., mainly in the northeast and mid-atlantic.
The main risk with GTY is its concentration in one market segment and large reliance on one customer. Positives include an above-average dividend yield and a stock pricing (in the low $20s) that may be largely reflecting the most likely risk. As with GM above, this represents a small position in my IRA, and my cost basis if ultimately put the stock will be $19 per share with a corresponding dividend yield of over 10%.
Hewlett Packard [[HPQ]] – On 2/23/11 I sold an August 40-strike put option for $2.05 against HPQ on continued weakness in the stock. Hewlett Packard is of course a leading maker of computer products. Risks include competition, operating risks, and potential ongoing management/strategic issues within the company; positives include the company’s leading position in the industry, reduced cost structure from cost cutting, and A credit rating (Standard & Poor’s).
This is yet another example of a quality large tech company whose share price is in the doldrums (currently about $41). Current fair value estimates range from the low $40s to over $100, with an average calculated value somewhere closer to $60. My cost basis if ultimately put the stock will be about $38 per share with a corresponding dividend yield of 1.3%.
HSBC Holdings plc [[HBC]] – On 3/1/11 I sold a September 50-strike put option for $2.85 against HBC on weakness. HSBC Holdings plc is one of the world’s largest banking groups with more than 7,500 locations in over 80 countries. Potential negatives include economic and regulatory risks, while positives include strong earnings fundamentals, a diverse and geographically diversified business mix and an AA- credit rating (Standard & Poor’s).
Current fair value estimates suggest a price close to $60, higher than where it’s currently trading (mid $50s). My cost basis if ultimately put the stock will be a little over $47 per share with a corresponding dividend yield of about 3.8%.
Hudson City Bancorp [[HCBK]] – On 3/2/11 I sold some October 10-strike put options for $0.75 against HCBK on weakness. Hudson City Bancorp is a retail bank with more than 130 branches in the New York City metropolitan area. It’s a profitable bank with consistent earnings and a “solid credit quality” loan portfolio that managed to make it through the financial crisis without taking TARP funds. More recently however, it’s had to restructure its balance sheet to comply with regulations requiring it to reduce interest rate risk, as part of which the bank reported a first-quarter loss and reduced its dividend.
With a 2011 tangible book forecast of $9.66 (Standard & Poor’s) and estimated 2012 earnings of about $0.90 per share, HCBK seems about fairly priced at around $10 per share. When I originally sold the puts against HCBK I was hoping the dividend might be left alone, so now I may look to roll the position out and down sometime in the coming weeks/months. If not, and if I’m ultimately put the shares, my cost basis will be about $9.28 with a corresponding dividend yield of about 3.5%.
Intel [[INTC]] – On 3/8/11 I sold some October 20-strike put options for $1.35 against INTC in my IRA on stock weakness. Then on 4/4/11 I sold some October 18-strike puts for $0.98 against INTC in my regular account as the shares continued to slide.
Intel is of course the 800-lb. gorilla in the microprocessor chip space. Risks include competition, technology shifts (like declining PC sales) and the cyclical nature of the industry, while positives include the company’s leading industry position, its exposure to emerging markets and market segments (e.g., mobile, embedded, and cloud computing), and its A+ credit rating (Standard & Poor’s). The company just reported “blow-out” earnings, helped by PC sales in Asia.
Here is yet another example of a large, high-quality technology stock trading at what appears to be an attractive valuation. Its current average fair value estimate is in the mid to high $20s. My average cost basis if I’m ultimately assigned all my short options and put the stock will be $17.65 per share with a corresponding dividend yield of a little over 4%.
Itron [[ITRI]] – On 2/17/11 I sold an August 50-strike put option for $2.40 against ITRI as the stock sold off after the company announced that it didn’t expect the government to deploy any more funds for smart grid development. Itron is a leading supplier of intelligent metering and data acquisition communication products and services for electric, gas, and water utilities worldwide. Risks include competition and slower-than-expected adoption of smart grid technologies, while positives include the company’s leading position, improving balance sheet (according to Standard & Poor’s), and growth prospects.
Selling put options against ITRI represents an opportunistic value and diversification play on my part. Most fair value calculations place the stock price at $60 or above, so I would be comfortable owning the shares as a long-term growth play at under $48 per share, which would be my cost basis if I’m ultimately put the stock.
Microsoft [[MSFT]] – On 3/16/11 I sold some July 24-strike put options for $1.20 against MSFT on weakness in the stock. Microsoft of course is the world’s leading software company with its Windows PC operating system. Risks include slowing PC sales, reduced enterprise spending, and competition in existing and potential markets, while positives include the company’s leading industry position and bullet-proof balance sheet (the company has an AAA credit rating from Standard & Poor’s).
It’s the same old story. Currently trading in the mid $20s but with a current average fair valuation estimate somewhere in the mid $30s, MSFT is yet another unappreciated large-cap, quality tech company. My cost basis if ultimately put the stock will be under $23 per share with a corresponding dividend yield of about 2.8%.
Medtronic [[MDT]] – On 3/5/11 I sold some August 34-strike put options against MDT for $1.55 on weakness in the stock. Medtronic is a leading medical device maker in the pacemaker, defibrillator, orthopedic, and diabetes management markets. Risks include potential product recall/liability issues, and competition from the likes of Boston Scientific, Johnson & Johnson and St. Jude Medical; positives include the company’s leading global status in the industry and its history of consistent growth.
Current fair value estimates for MDT average somewhere in the mid $40s. My cost basis if ultimately put the stock will be about $32.50 with a corresponding dividend yield of about 2.8%.
Nokia [[NOK]] – On 2/11/11 I sold some July 9-strike put options for $0.89 against NOK on continued weakness in the stock. Located in Finland, Nokia is a leading maker of cell phones and also a supplier of mobile and fixed telecom networks. Risks continue to be competition in the mobile phone market and uncertainty over the company’s ability to manage its way in this environment, while positives include the company’s resources and its A- credit rating (Standard & Poor’s).
While the company recently managed to beat first-quarter earnings estimates, its outlook forecast was not inspiring and questions remain over its future in both the basic phone and smartphone markets. NOK appears roughly fairly valued at about where its currently trading ($8-$9 per share) but I’m keeping this one on a “short leash” and may decide to roll out and down my short put option position in the coming weeks. If not, and if I’m ultimately put the shares, my cost basis will be about $8.15.
Teva Pharmaceutical Industries [[TEVA]] – On 4/12/11 I sold a September 47.5-strike put option for $2.56 against TEVA on weakness. Then on 4/21/11 I sold a January 45-strike put option for $3.90 against TEVA as it sold off sharply following news of favorable trial results of a competitor’s multiple sclerosis drug.
A leading global generic pharmaceuticals company Teva Pharmaceutical Industries also develops and makes proprietary drugs, which account for over 12% of its sales. Risks include ongoing competition in the industry, and legal and regulatory issues, while positives include the industry’s growth prospects, and the company’s leading position in the industry, solid historical operating history and A- credit rating (Standard & Poor’s).
The current average fair value estimate for TEVA is almost $70 per share – well above its current trading price of $45 – although this may not yet fully account for the potential impact of reduced sales of its MS treatments. Even factoring this in, S&P’s reduced price target for TEVA is $54 per share. My cost basis if ultimately put the stock will be a little over $43 per share with a corresponding dividend yield of about 2% (minus a 20% withholding tax for non-Israeli residents).
Wal-Mart Stores [[WMT]] – On 2/23/10 I sold a September 52.5-strike put option for $2.78 against WMT on weakness. Wal-Mart is the world’s #1 retailer, operating more than 8,400 discount stores, wholesale clubs and combination discount/grocery stores. In addition to its operations in North America, the company has operations in Asia, Europe and South America, with its international division accounting for 25% of sales.
Positives include the company’s solid earnings and cash flow, strong operating history, AA credit rating (Standard & Poor’s) and dominant market share. Risks include weak economic conditions that could impact the company’s primary customers, bad publicity (“headline risk”), pricing pressures from competition, and currency exchange fluctuations.
Currently, WMT is trading at the low end of its calculated fair valuation estimates, which range from the low-to-mid $50s up to the high $60s. I wouldn’t mind owning some WMT below $50 and will likely sell more puts against it on further weakness. My cost basis if ultimately put the stock will be a little over $49.70 per share with a corresponding dividend yield of almost 3%.
Zhongpin Inc. [[HOGS]] – On 4/11/11 and 4/12/11 I sold some September 12.50-strike put options for an average price of $0.91 against HOGS on price weakness in the stock. Zhongpin Inc. is one of China’s largest pork and food processors, whose high-quality products are sold and distributed on both a wholesale and retail basis. Risks include share dilution and increasing debt, food supply disruptions, and risks particular to investing in this emerging market, while positives include the company’s profitable history, expansion plans and high growth prospects.
HOGS caught my attention when it was recommended by value-oriented money manager Robert Kleinschmidt on Consuelo Mack’s Wealthtrack as the “one investment every investor should own” (YouTube video (26:33)). Indeed, at a current price around $15, HOGS appears to be trading well below its calculated fair value of somewhere in the $20s. As a diversification and growth play in my IRA, I wouldn’t mind owning it at $11.60 per share, which would be my cost basis if ultimately put the shares.
