Options trades: Naked puts on HYG, QCOM, FE, MDT & more!
I sold more naked put options this week (see below) as the market plunged and option volatility exploded. A couple of the new short put option positions were triggered by some existing limit orders during Thursday’s intraday plunge before I had a chance to react, but I was able to adjust some others – before they too triggered – to take advantage of the dramatic price action.
Later, I also used the new elevated volatility levels and expanded option premiums to adjust – and lower my risk in – a short put option position (see below) that was trading increasingly further into the money. I may look to do this with some other positions if it looks like I can either lower my cost basis/risk or improve my potential return on a position.
So far the sell-off appears to be a not-all-that-unusual correction of a market up-move that was overdue for one. Obviously it can go lower – for example a simple 50% retracement of the up-move from the 2009 lows would bring the S&P 500 down to the 950-1000 level. But the ~28% retracement we’ve seen so far has already done a good job of scaring market participants, many of whom seem to have forgotten that the market sometimes goes down – and often very quickly and by a lot.
Adjusted positions:
Total S.A. [[TOT]] – On 5/7/10 I rolled out the November 50-strike put options I’d sold against TOT on 4/27/10 by buying them back (at a loss) and selling some January 45-strike put options for a net overall break even (i.e., the premium I received for the 45-strike options covered the loss taken on the 50-strike options). This lowers my risk in the position and reduces my net cost basis if ultimately put the stock to an even more reasonable $45.
New positions:
Diebold [[DBD]] – On 5/6/10 I sold some November 25-strike put options against DBD in my IRA when my existing limit order triggered during the market’s intraday plunge:
Diebold produces automatic teller machines and other self-service transaction systems, as well as electronic and physical security systems, including vaults and security systems, for financial institutions. Risks include competition (from the likes of NCR), as well as continued weakness in new bank branch construction; positives include significant global exposure – including in Brazil and India – and a continuing “modest” share buyback program.
Currently trading at about $29 and yielding 3.7%, the shares have been selling off sharply since the company reported better-than-expected Q1 earnings on lighter-than-expected revenue. Despite the sell-off, the intermediate-term trend would still have to be characterized as neutral given the price swings the stock has experienced. A break below about $27 would make this picture more negative.
From a valuation standpoint, current fair value estimates for DBD range from the low $20s up to as high as $50, with the average being around the mid $30s. In terms of dividends, Diebold has raised its dividend for 56 consecutive years, and has earned a five star rating at DividendInvestor.com. My net cost basis if ultimately put the stock will be under $24 with a corresponding 4%+ yield.
FirstEnergy [[FE]] – On 5/3/10 I sold some October 35-strike put options against FE when my limit order triggered during an intraday price dip:
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 – through an all-stock deal – smaller Allegheny Energy (AYE), an electric utility with primarily coal-fired plants in Pennsylvania, West Virginia, Maryland, and Virginia.
Investors appear skeptical of the synergies FirstEnergy expects to accrue from the deal, as well as the debt burden it will take on to make the acquisition. In addition to implementation risk, a much greater exposure to coal-based energy – and possible associated regulations – is also a concern; on the other hand, if the merger works out as planned it could potentially be very positive for earnings over the longer term.
Technically, the shares of FE – which are trading at $35 and yielding almost 6.3% – are in a clear intermediate-term downtrend and appear headed lower. While currently oversold, they aren’t yet exhibiting any positive divergences on an intermediate-term basis, but are doing so on a longer-term basis, suggesting a potential bottoming process in the coming weeks/months.
Valuation wise, FE appears undervalued here based on estimated earnings and earnings growth going forward, with an average estimated fair value somewhere in the $40s. In addition, the dividend appears safe, and could potentially grow at some point if the merger goes through and is ultimately accretive. My cost basis if put the stock will be about $33.5 with a corresponding dividend yield of over 6.5%.
iShares High Yield Corporate Bond ETF [[HYG]] – On 5/6/10 I sold a December 80-strike put option against HYG when my existing limit order triggered during the market’s intraday plunge:
HYG corresponds to an index of the most liquid U.S.-dollar-denominated high-yield corporate bonds sold in the U.S. and currently includes over 300 holdings, including issues from companies like NRG Energy, HCA and Windstream. The biggest risk here is another credit crisis and/or economic downturn that would result in rising defaults; positives include the diversified holdings and a projected falling default rate over the next 12 months.
Trading at about $84.5 and yielding about 9%, the shares are still presenting a somewhat neutral intermediate-term picture. However, the recent sharp weakness – unless recovered quickly – would suggest a somewhat more negative outlook.
At the same time, the shares have reached intermediate-term oversold levels, which could portend a bottoming process in the coming days/weeks. My cost basis if ultimately put the shares will be $75, with a corresponding dividend yield of over 10%.
Medtronic [[MDT]] – On 5/6/10 I sold some January 35-strike put options against MDT in my IRA during the market’s intraday plunge:
Medtronic is a leading medical device maker whose product lines include implantable cardiac rhythm devices, spinal and biologics products, cardiovascular technologies, neuromodulation systems, diabetes systems and surgical products. Risks include questions about healthcare reform, 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.
Currently trading at about $41 and yielding 2%, its shares are presenting a relatively neutral intermediate-term picture, despite the recent sharp sell-off. More downside action in the coming days would tilt this to negative, but also likely create intermediate-term oversold conditions, which could suggest some kind of bottoming process.
From a valuation standpoint, MDT appears roughly fairly valued to somewhat undervalued here, with a current average fair value estimate of about $45. The company is a 5-star dividend performer according to DividendInvestor.com, with 32 years of consecutive dividend increases and a five-year dividend growth rate of 19%. My cost basis if ultimately put the stock will be about $32.50 with a corresponding dividend yield of about 2.5%.
Qualcomm [[QCOM]] – On 5/6/10 I sold some January 27.5-strike put options against QCOM in my IRA during the market’s intraday plunge:
As the developer of the CDMA (code division multiple access) digital wireless technology used in cell phones worldwide, Qualcomm supplies chipsets and software to wireless handset makers, and generates revenue by licensing its intellectual property. Potential negatives include reduced royalty revenues from commoditization of 3G/CDMA technology, weak demand from Europe, and patent litigation risks, while positives include its strong position in the industry, increasing diversification into other areas going forward, and healthy balance sheet.
Trading at $36.5 and yielding 2.0%, QCOM’s shares are in an intermediate-term downtrend, with the most recent weakness occurring after the company guided lower for the current quarter. That said, the price action is currently exhibiting positive divergences on the price oscillators at oversold levels, which could be positive if the stock can hold above the $33-$34 level. If not, this would continue to present a negative picture.
At current levels (~$37) QCOM seems about fairly valued to perhaps somewhat undervalued based on current conservative fair value estimates. In addition, the company has increased its dividend for six consecutive years at a double-digit rate and just announced its latest increase – from $0.17 to $0.19 per quarter. My cost basis if ultimately put the stock will be $25.75 with a corresponding yield of almost 3%.
