While the bears may be celebrating the dip in the market this week, let's keep in mind that we are still on a very positive trend that will take more than a few days to break. The more bearish you are, the more you need to treat these dips as an opportunity to hedge something and the stocks we've selected for the Watch List are purposely stocks that we don't mind sticking with through thick and thin because they provide exceptional value AND good income-producing opportunities through dividends and option sales.
Our new Watch List is only 2 weeks old but is already performing very well with 10 of our 13 positions winning already, and that's not even counting the buffer we get from our hedged entries. 2 of the 3 losers were knocked out of winning positions on yesterday's dip – it's all about timing! Still, great progress but not so much so that some of the positions can't still be entered, I highlighted my comments at the end of each trade as to whether or not I still like them.
When I put up the list, I said:
The following stocks are from a list of stocks I feel are STILL undervalued and generally have not run up too much in the past year. These are not the popular names, mainly they are stocks that are under the radar and many are thinly traded so this is a members only list – keep in mind our own buying can move these stocks so chasing is not advised. Fortunately, with the buy/write strategy, we just need to get the right NET entry to initiate a position.
Even as great as these picks are, let’s be cautious as nothing will survive a huge market sell-off intact and that’s still a very real possibility. My top concern remains that Christmas will be a disaster for Retailers and that will begin a cascading failure that hits the REITs and the banks but, since that’s not going to happen for another 75 days – why not party with the market for now?
Now we have 60 days left to see how my macro prediction plays out but let's see how our individual choices are going and if there are still new entry opportunities:
AGNC (10/8 $27.61 (net $21.61/23.30), 10/24 $28.02) – March $25 puts and calls are now $5.70, net $22.32, which puts us up 3% so far. This position is better entered new if we have a big sell-off, $26 would be great.
CPLP (10/8 $9.57 (stock bought to cover at $10 with March $7.50 puts sold at $1 and March $10 calls sold at $1, net $8/7.75), 10/24 $10.16) – This one forced to cover but no reason to hold if below $10 (leaving just the short strangle). The goal is for a long-term hold so worth asking $1 more to roll caller to the June $10s – it could happen. I do like this trade as a new entry.
CUZ (10/10 $8.29, 10/24 $7.50) – We WANT to buy them for $6.50. Apr $7.50 puts sold for $1.05, now $1.20. DD or new entry at $1.25 on the short sale.
Important point about Double Downs. Double downs assume you are at a point in a scale where you CAN double down. Scaling in (see strategy section) assumes that you are entering a poisition, that has a total allocation of no more than 10% of your virtual portfolio (preferably 5%), in 20-25% incriments. So, if you have a $100KP and allocate $10K to a position, your initial entry is about $2K and can be doubled down without a problem. If you are already in 2x then you can DD to 4x but, if you are already in a 4x posiiton – DD to 8x is not usually wise as that probably puts the position over 10%.
If you keep that rule in mind BEFORE you move to 2x and BEFORE you move to 4x, you can keep yourself from making bad decisions, hopefully as early as 1x. So, with CUZ above, we enter with a short sale of 5 Apr $7.50 puts at $1.05 for a $525 credit (on a $100KP) and we're tying up (at 50%) $1,875 in margin, less the cash = $1,350. That makes a DD of 5 more at $1.25 another $625 in cash and we're now short 10 at $1,150 with a $3,750 margin for a requirement net of cash of $2,600. This is a position we could still comfortably DD, which we may consider if we hit our $6.50 target or we may just take the assignment and start our 2x stock position from there (net entry of $6,350 on 1,000 shares).
ENP (10/8 $17.43 (net $15.53/16.51) 10/24 $18.74) – The net of the March $17.50 calls and $15 puts is now $16.34 so a nice, quick 5% here). I would not chase this one as I'm still concerned oil may come back down in price (hoping actually for the sake of our economy).
FLY (10/8 $9.10, 10/24 $9.27) has no options and I was hoping to see them retest $7 so I’m not very excited about buying them at $9 but let’s keep an eye on them as they have a great business leasing aircraft and their competitors have a lot of troubles, which should help them long-term.
GPW (10/10 $25, now $24.93) is a nice little (and I emphasize little) power company that pays a 5.75% dividend on $25 shares (no options). The kicker for them is they MAY qualify for state aid in building their new plants as they continue to expand and that could give them a boost as would an acquirer paying just a fraction over the $250M market cap. Still fine to enter.
NRF (10/13 $3.51, 10/24 $3.58) is a small REIT but a lender, not an operator and they are based in NY dealing with mainly corporate clients so, hopefully, based a little steadier than most. They are at a bad spot for options right now at $3.51 as they only have $2.50 and $5 strikes but even the 65% reduced dividend of .10 is 11.4%. The company has $260M in cash and $3.3Bn in properties (never trust those values) with just $1.9Bn in debt. They do keep selling stock to raise cash and A/P has run up and bears watching so this is a scale-in but they could easily double up if CRE really does recover. They had a big spike to $3.73 and then rejected, $3.48 has held well for a new entry.
PDS (10/13 $6.89 (buy/write at net $5.46/5.23) – 10/24 $7.44) Dec $7.50 puts are now .70 and not worth chasing for a naked sale (target $1.15). Buy/write with March $5/$7.50 spread for $1.40 is well on track with stock up and spread at $1.30 but also a no chase as the basis would be much higher on a new entry and I'm worried the sector will turn.
PGH (10/13 $10.26 (buy/write at net $8.06/9.03), 10/24 $10.18) – Almost dividend day, which is like a monthly Christmas on this stock (.09) and the Apr $10 spread is down to $2 (down .20) but it's still a nice entry on one of my favorite long-term monthly dividend payers.
PRM (10/13 $2.51, 10/24 $2.57) – makes those little free apartment and home for rent/sale guides that you get for free in diners. Like every publisher in America, they are getting killed and they were all the way down under $1 last time we picked them but $2.57 is still a good price for them as a stock to stick under your pillow and forget about for a couple of years (but a DD or TD (triple down) at $1 of course). Still a good entry.
SB (10/13 $8.10, 10/24 $8.05) – is a very boring shipper that pays a very boring 7% dividend and has no options at $8.10. They have made .58 to .76 a share in Q3 ‘08 through Q2 ‘09 and little is expected of them. It’s a good upside play on the overall economy but, if we turn down, there is a serious glut of cargo capacity that will hurt everyone. Still a good entry.
TNK (10/8 $8.71 (buy/write at $4.71/7.36, 10/24 $8.69) – The spread can still be filled by the patient: Selling the May $7.50 calls for $1.50 (no less or you are likely to get called away) and the May $10 puts for $2.50. If you are not so sure, you can sell the May $7.50 puts for $1 and that’s net $6.21/6.86 but you can see why my logic is that, for .50 more, we may as well go for the 59% calll away at $10 rather than the 21% call away at $7.50. Still good if you can fill the spread.
WHX (10/13 $16.17, 10/24 $16.91) is an interesting little REIT. They are a subsidiary of WLL that seems to be nothing more than a vehicle to funnel profits off land leases out of the parent company to be distributed out as dividends through WHX. That makes the income fairly uncertain as it seems tied to oil revenues but they have no debt at all and the dividends work out to over 15% so worth a small position. Sadly – no options… Big rejection off $18 so a good chance to reload but let's give them a chance to prove they can hold $15.50 this time.
Note on stocks: Also in the Strategy Section but not something we talk about often is that, with uncovered stocks, you should be as thrilled with a 5% gain as you are with a 20% gain on options. Once you get a 10% gain, like a 50% gain on options, you should be looking for the exits and a 20% gain is just silly. I know this is a very old-fashioned attitude that's a holdover from the days when the market didn't move up and down 200 points a day but I see so many people who hold stocks far longer than they should, I thought it would be worth mentioning.
