Options trades: Naked puts and covered calls on LOW, WAG, RAI & more!
As the market continued to move higher this past week and as volatility – as measured by the VIX – approached 52-week lows, I bought back some more of my April-expiration naked put options that I’d originally sold last fall. They were now worth close to nothing and it made sense to take profits.
I also initiated two new short options positions (see below) – naked put options on a drugstore chain and covered call options on a tobacco company. Here are the put options I was short that I bought back:
- Cullen/Frost Bankers (CFR: 52.49 0.00%, yld: 3.35%) – I bought to close the April 40-strike put options I sold against CFR on 10/21/09 for a 4-month net return of about 2.9%.*
- Lowe’s Companies (LOW: 21.53 0.00%, yld: 1.76%) – I bought to close the April 17-strike put options I sold against LOW on 10/23/09 for a 4-month net return of about 3.7%.*
New positions
Reynolds American (RAI: 57.52 0.00%, yld: 6.27%) – On 3/5/10 I sold some January 2011 55-strike covered call options against a long position I have in RAI in my IRA as the stock – and the market – rallied back to recent highs:
Reynolds American is the #2 tobacco company in the U.S. behind Altria Group (MO). It sells five of the 10 best selling cigarette brands in the U.S. and is 42% owned by British American Tobacco (BTI).
Technically, the stock is in a strong intermediate-term uptrend but approaching what could be some stiff upside resistance in the $55 to $60 area. While this could suggest some choppy trading going forward, it would probably take a move below the $49-$50 level to change the intermediate-term picture to something more neutral/negative.
Fundamentally RAI appears currently about fairly valued here in the $55 to $60 range and offers a nice dividend yield of over 6.5%. My original entry price in RAI back in 2008 wasn’t great (just a little below these levels) and – after watching the stock drop into the low $30s during the subsequent market panic – I’m happy to now take the opportunity to sell covered calls to either reduce my cost basis in the position (if the options expire out of the money) or to close it out (i.e., have the stock called away) at a profit and await a better opportunity down the road.
Walgreen Co. (WAG: 28.49 0.00%, yld: 2.07%) – On 3/4/10 I sold some October 30-strike put options against WAG as the stock dipped on minor weakness:
Walgreens operates more than 7,000 drugstores across the U.S., Guam and Puerto Rico. Prescription drugs account for more than half of its sales, with the rest from over-the-counter medications and general merchandise. The company recently announced plans to acquire Duane Reade, a New York City-based drugstore chain of 257 stores that is expected to significantly boost its position in the country’s largest retail and drugstore market.
The stock has been weak since late last year, and sold off further most recently after the company reported disappointing January sales. In addition, the recent acquisition is expected to slightly reduce fiscal 2011 earnings. Still, the intermediate-term technical picture remains generally positive, and the stock is near oversold levels. A break below the $32-$33 support would suggest a more neutral/negative picture.
Fundamentally WAG appears attractive here, with current fair value estimates ranging from the low $30s up to over $60. In addition, the company offers good longer-term growth prospects and is a member of Standard & Poor’s Dividend Aristocrats – an index of companies 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 20%.
Also, according to the Wall Street Journal, the company is maintaining plans to buy back $2 billion in stock and has targeted a 35% dividend payout ratio – an increase from the current payout ratio of 24%. I’d be quite comfortable owning WAG in the low $30s or below, which would be my cost basis (with a corresponding 1.9% dividend yield) if I ultimately end up being put the stock.
* 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).
