Options trades: Sold puts on MT, LOW & HSC
I sold more put options this past week as volatility spiked higher amidst fears of a “double dip” in the economy and as stocks experienced further weakness. The latter was accompanied by a chorus of technical pundits predicting much lower prices to come, but the truth is the technical picture will continue to look bad until it doesn’t – “death crosses” and other such nonsense notwithstanding.
In the meantime I’ll continue to welcome lower equity prices and higher volatility as an opportunity to sell more “expensive” put options on quality stocks at lower strike prices (and better values). My latest options trades are all in stocks I’ve had short put option positions in before – in one case as recently as last month, when, to reduce risk, I bought back the naked put options I was short for a small profit.
New positions:
Arcelor Mittal [[MT]] – On 6/29/10 I sold some December 15-strike puts in my IRA account against MT on market weakness:
Based in Luxembourg, Arcelor Mittal is the world’s largest steel company, producing and selling finished and semi-finished carbon steel and stainless steel products in more than 60 countries. Key earnings risks include a slowdown in the global economy and competition from lower-cost producers; positives include predictions of continued economic growth (and steel demand), good cash flow and improved debt levels, and a reasonable valuation at current levels on a price-to-book basis.
Currently trading at about $27 and yielding 2.8%, shares of MT are in a clear intermediate-term downtrend and appear headed back toward the low $20s or perhaps lower. At the same time, they are oversold on an intermediate-term basis and are possibly setting up some positive divergences, which could suggest a potential bottom being formed in the coming days/weeks.
Fundamentally, fair valuation estimates for MT currently range from about $20 to $50, averaging somewhere in the $30s. My cost basis if ultimately put the shares will be under $14.50, with a corresponding dividend yield of almost 4.5% based on the current dividend payout minus a 15% Luxembourg withholding tax.
Harsco Corp. [[HSC]] – On 6/29/10 I sold some January 20-strike put options in my IRA account against HSC as it fell on market weakness:
A diversified global infrastructure play, Harsco provides industrial services and engineered products in three segments: Infrastructure, Metals, and Minerals & Rail. HSC is another leveraged play on the economy, and risks to earnings include the possibility of a global slowdown, production cuts at steel mills for which it’s a supplier, and a strong U.S. dollar; positives include its diversified global operations, good cash flow, and solid dividend record.
Currently trading at about $23 and yielding 3.5%, HSC is clearly in a strong intermediate-term downtrend and appears likely to have more work to do on the downside. At the same time, it’s currently oversold on an intermediate-term basis and further weakness will likely make it oversold longer-term as well, creating the conditions for a potential bottom being formed in the coming weeks.
Fundamentally HSC currently appears somewhat undervalued here with fair value estimates ranging from as low as $17 to over $60, averaging somewhere in the low $30s. I mentioned the company’s dividend record – Harsco is included as a Dividend Achiever, an index of companies that have increased their annual dividend payments for the last ten or more consecutive years.
I had an August 25-strike short put option position in HSC earlier this year that I bought back for a slight profit just last month as a risk reduction trade. Now I have the opportunity to re-enter a position in HSC at an even better price level while also collecting a higher option premium. If ultimately put the stock, my cost basis will be about $18.60 with a corresponding dividend yield of 4.4%.
Lowe’s Companies [[LOW]] – On 6/29/10 I sold some January 17.5-strike puts in my IRA account against LOW as it sold off on market weakness:
Lowe’s is the world’s second-largest home-improvement retailer, selling building materials and supplies, lumber, hardware and appliances in over 1,700 stores in North America. Earnings risks include a poor economy and continued poor housing market, competition, and operating execution risk; positives include long-term trends favoring the home improvement industry (e.g., aging homes and high home ownership), a strong balance sheet, and an excellent dividend growth record.
Trading at about $20 and yielding 2.2%, LOW shares have sold off sharply in recent weeks on news of weaker economic growth and home sales. The shares are now at intermediate-term oversold levels and at or near various support levels in the $18-$20 area, suggesting they may be nearing levels at which they could begin forming some sort of a bottom.
Fundamentally, LOW appears to be undervalued here, with current fair value estimates ranging from $19 to over $45, and an average fair value estimate of about $28. In terms of dividends, Lowe’s has the distinction of being a Dividend Aristocrat, with 48 years of consecutive dividend increases.
While its current dividend payout isn’t huge, the company has grown it at over a 20% annual pace in recent years – the latest being a 22% dividend increase announced in May. If I’m ultimately put the stock, my cost basis will under $16.50 per share, at a starting dividend yield – which could be expected to grow nicely over time – of about 2.7%.
An interesting group of stocks, as usual.
I notice that you haven’t posted the price achieved for the sale of the puts (and hence the income percentage isn’t available). although I appreciate you might consider this private information, it would be most helpful to see these details as I follow your trades.
An unrelated question: How do you produce your graphs? Are they from a software package, or obtained online?
Thanks and keep up the good work,
Steve
Steve,
You make a good point about the prices achieved from the put option sales and I’ll consider including them in future posts. The reasons I haven’t typically included them are twofold:
1.) I tend to focus on the “worst-case” scenario of being put the stock rather than the “best case” outcome of the expected return from a put option expiring OTM. (The latter is important, but secondary to the risk in the position for me.)
2.) The price achieved from a put option sale can be fairly accurately inferred from my indicated cost basis of ultimately being put the stock. For example, my indicated cost basis of “under $14.50″ for MT implies a put sale price of over $0.50 (in fact I sold them at $0.55, which would be an annual return of over 6% on a cash-secured basis if the options are held until expiration and expire OTM).
I generate the stock charts with MetaStock (http://www.equis.com/). It’s software I’ve used for many years and I find it useful for producing charts and running scans.
Thanks again for your interest.
We’re the Lowe’s put 17.5?
Ignore my question, I mis-read the post.
Actually my mistake – I had originally mistakenly listed the put strike as “17″ and since corrected it to 17.5. Sorry about that.
OK, thanks. I thought maybe I needed to stick with decaf. Thanks for the great blog!