Simply Puts

The market’s sideways action and declining volatility while remaining near its recent highs didn’t make for a lot of tempting put-selling opportunities during May and June. But that has started to change recently as the market has pulled back, and as a result I’ve stepped up my put selling activity (see below).

I’m well aware that more downside seems likely (although how much is anyone’s guess), so I’ve been focusing mostly – although not entirely – on longer-term (i.e., January expiration) options at strike prices near or below the March lows. If/when the market drops further, I hope to sell a lot more options expiring in the September to December time frame.

New positions
Anglo American plc (AAUK: 0.00 0.00%, yld: N/A%) – On Friday I bought back the September 10-strike covered calls I’d sold against my long position in AAUK earlier this year and rolled the option position out and up by selling December 12.5-strike calls against the stock:

After AAUK eliminated its dividend earlier this year I was content with selling the near-strike calls (at the time) against it and having the stock probably get ultimately called away for a small loss. However, the merger bid from Swiss mining group Xstrata and speculation about other potential takeover bids has boosted the stock to levels that made it seem worthwhile to consider adjusting my options position.

While I’m still no longer interested in owning the stock long term, now if the stock is ultimately called (which seems likely given current speculation, but who knows) I’ll have broken even on the transaction. If it isn’t, I’ll at least have lowered my cost basis and will look to repeat the process.

Arcelor Mittal (MT: 42.01 -1.01%, yld: 1.77%) – Last Wednesday I sold some January 15-strike puts against MT on market weakness:

The shares of this steel maker are in a short-term downtrend within a still-positive intermediate-term uptrend, although – as with the market in general – they may well be in a longer-term sideways/bottoming process. Conservative estimates of 2009/10 earnings suggest the stock could fall back to or below its March lows, but as with cyclical stocks of this nature the best time to buy is usually when the earnings outlook is poor.

MT currently pays a $0.64 annual dividend. This is down significantly from 2008’s payout, but would still offer a significant yield at a stock price near or below the March lows, which would be my cost basis if I’m ultimately put the stock.

American Electric Power Co. (AEP: 34.22 +0.20%, yld: 4.80%) – Last Tuesday I sold some January 25-strike puts against AEP on market weakness:

The shares of this electric utility are currently in an intermediate-term uptrend, although its longer-term trend still appears down. I’m interested in increasing my exposure to the utility sector, and am looking to take advantage of opportunities such as AEP, which has been weighed down recently by disappointing earnings results. It’s probably not especially undervalued at current levels (about $28-$29), but – barring any significant changes in its fundamentals – I wouldn’t mind owning it below $25.

ConocoPhillips (COP: 51.30 -0.33%, yld: 3.77%) – Last Wednesday I sold some January 30-strike puts against COP on market weakness:

COP, along with much of the oil and gas sector, has fallen significantly from its recent highs and may even be on its way to revisiting its March lows. I’m looking to take advantage of weakness in this sector to increase my exposure, and COP is high on my list of watchlist buy candidates. Assuming the lowest current forecast earnings estimates for 2009, COP is likely to be (conservatively) fairly valued somewhere in the mid $30s and I would be happy to own it anywhere below that level.

Emerson Electric (EMR: 47.95 -0.08%, yld: 2.77%) – Last Tuesday I sold some January 25-strike puts against EMR on market weakness:

EMR is clearly in a short-term downtrend within what appears to be a sideways to up intermediate-term trend. I wouldn’t mind owning shares of this industrial equipment and services provider at $25 or below. It has a long history of growing its dividend (which is a little over 4% at the current stock price of $31/share) and is one of my long-term watchlist buy candidates.

NYSE Euronext (NYX: 28.53 +1.57%, yld: 4.27%) – Last Wednesday I sold some January 15-strike puts against NYX on market weakness:

The shares of this stock market exchange are off their recent highs, but still in an intermediate-term uptrend, which itself may be part of a longer-term sideways/bottoming process. A move from here down to the $20 level would not be at all surprising. The stock currently yields almost 5%, and I wouldn’t mind being put the shares down in the $15-$20/share range given what appears to be a good long-term total return potential.

Penn West Energy Trust (PWE: 21.57 -0.32%, yld: 8.55%) – Last Wednesday I sold some August 10-strike puts against PWE on weakness:

As with other oil and gas producers, the shares of this Canadian Royalty Trust have come under increased pressure recently with the latest decline in oil prices. Assuming oil prices don’t completely collapse from here, the current weakness may be a reasonable opportunity to begin increasing exposure in this sector. PWE currently pays a monthly dividend of about $0.12 USD, which amounts to a double-digit annual yield at current price levels.

Note: While the Canadian tax policy affecting these trusts is scheduled to change in 2011, PWE has indicated that its accumulated “tax pools” should allow it to continue operating essentially as a trust for a period beyond the start of the tax change. Following that period, PWE has indicated that it expects to continue operation as a relatively high-yielding corporation going forward.

TEPPCO Partners LP (TPP: 36.27 0.00%, yld: 8.00%) – On 6/29 I sold some January 30-strike puts on TPP when the company announced that it had reached an agreement to be bought by Enterprise Products Partners LP (EPD: 33.88 -0.32%, yld: 6.46%):

TPP is clearly in a strong – but extended – intermediate-term uptrend, and the buy-out news might be expected to support a positive bias going forward. I already own units of both of these oil and gas pipeline Master Limited Partnerships (MLPs), and decided I wouldn’t mind owning more of what would ultimately be one of the larger players in the space if I’m ultimately assigned the options. If not, I’ll have reduced my cost basis in my original position. TPP’s distribution yield even at these levels is over 9%.

Tsakos Energy Navigation Limited (TNP: 15.90 +0.76%, yld: 7.29%) – On 6/23/09 I sold some September 12.5-strike puts against TNP on weakness:

The shares of this oil and gas shipper have retraced most of their run-up since their March lows, and are currently yielding over 11%. While the dividend payout of stocks of this type are pass-through in nature – they go up and down with earnings – there’s plenty of room for the yield to remain significant at these or lower price levels even following a dividend cut.

The stock appears undervalued by some measures when compared to historical values, while valuation analysis using worst-case earnings estimates for 2009/10 suggest further downside risk. I’m comfortable initiating a position at about $12 or below, which would be my cost basis if put the stock.

Universal Corp. (UVV: 53.80 -1.05%, yld: 3.40%) – On 6/23/09 I sold some August 30-strike puts against UVV on weakness:

The shares of this leaf tobacco processor and distributor currently remain in an intermediate-term uptrend, but – as with the market in general – are experiencing near-term weakness. A break below the $32 level would suggest a more neutral outlook.

Valuation analysis of UVV suggests that it’s somewhat undervalued at current levels, and of course would be even more so at the $28-$29 level that would be my cost basis if I end up being put the stock. UVV currently pays an annual dividend of $1.84 (an over 5% yield at the current price of about $34/share).