Making 30% Profit on 30 Stocks in 30 Days

As we have a lot of new members I'm going to repost the September 26th post where we decided the Dow was going to rally and we made a new virtual portfolio comprised of Dow components.

I decided to close the virtual portfolio last week as it was dull and I thought the Dow was going to turn down (it did) and all we left in for the past week were our protective DIA puts, which worked out well.  I strongly encourage new members to look at my original takes on these components, the original plays and how we adjusted them (although we adjusted few as the goal was to have an easy virtual portfolio).  Also, now that earnings are coming out – it's a fun way to see how good my predictions were!

Take a look at the one-month chart and think about the times you would have panicked as the stock moved up and down and pay particular attention to the prices on Expiration Day, October 19th (all contracts discussed without a date  in the below article were Octobers).

PLEASE DO NOT take this as being new plays – this is a repost of our article from the 26th which I never finished as we already had plays on WMT, UTX and XOM in other virtual portfolios (and VZ didn't thrill me as I liked T much better).  Anyway, it's a good chance to look back while the month is still fresh and think about how we trade our options in a volatile month:

REPRINT – REPRINT – REPRINT – REPRINT – REPRINT – REPRINT -REPRINT – REPRINT

Whee!  Here we go again!

All aboard the market train as the GM strike ends, oil prices rebound (XOM, another Dow component) so we’re in for a retest of 14,000.  I’m going to dispense with the news today as it doesn’t seem to affect the market anyway and let’s take a look at our 30 Dow components – perhaps we can find some bargains as the tide of index buyers lift all ships (plus they are nice and liquid so we can get our when it all hits the fan!).

Just for fun I’m going to make a Dow page, as it should be a fun group to watch if the global market catches fire.  We can allocate $3K per position in a $100K virtual portfolio and see how it goes.  These are plays for a Dow rally, with the assumption we are going to break and hold 14,000, otherwise we take the money and run:

AA – I don’t understand why the dumped China’s Chalco for $2Bn, perhaps they were guessing the top of the market…  Earnings were 7/9 and the company jumped from $42 to $48.   My pal Icahn owns 3.5M shares and the stock has taken a beating in Q3 and their forward p/e of under 11 is a good 30% below historical averages.  Did not buying AL put them at a huge disadvantage?  I say they’re still worth $40+ but let’s give them time and go long with the Jan ‘09 $35s for $7.40, selling the current $37.50s for $1.30.

AIG – Hmm, no hurricanes and they are still going down?  I suppose the concern was that they tie up a lot of their reserves in mortgage-backed securities but as long as everyone seems to have forgotten about that, we should too.  I like the May $70s here at $4.10, if they can’t break $73 by the month’s end we can consider selling calls against.

AXP – People keep confusing these guys with a credit card company but the majority of AXP’s revenues is purely transaction based.  I simply don’t remember these guys having a bad Q3 (last year was a 3% beat) and I think estimates are low here.  The Apr $60s are $4.70 but we’ll be out by January and we can sell the current $60s if they hit $2+ (now $1.20) as $62 has been tough resistance so it will be good to have some insurance there.

BA – We already have the Jan ‘09 $95s from the beginning of the month that are up 36% already in the LTP.  I expect a retest of the ATH at $107 but, if we don’t break that we may want to cover with the $105s, now $2.45, probably $4 on a good run but only selling on a failure.  As a new position, I’d go with the May $110s at $6.80 and I would sell the $105s if we don’t break it today and for no less than $2.  This is  a very cool chart showing some of Boeing’s production partners: 

C – They are all over Asia and paying a 4% dividend and they have gotten whacked over phantom sub-prime issues.  If they fall below $46, we’re out of this one and if they break $47.50 we should be off to the races so let’s go with Mar $47.50s at $2.65 with a stop at $2, where we will wait for the next bottom (maybe $40) and then buy LOTs of leaps.

CAT – We have the Jan ‘09 $80s, now $9.20 covered with the $75s, now $3.25 (these should stop out at $4).  As a new entry I would go naked and hope to get $2+ for the $80s, which is what we’ll flip the $75s to on a run.

DD – Low natural gas prices are good for these guys and no one talks about their biobutanol partnership with BP, which will roll out this fall in the UK.  They are also heavily involved in ethanol and they run a nice little company with a p/e of 14 that’s growing at a 10% clip.  Talk about no respect!  Earnings are on 10/23 and the last ones went pretty well – despite a 2% miss, the stock went from $46 to $50 so if those charges were indeed one-time, we could get a nice pop.  Let’s gamble on this one and spread the Nov/Oct $50s for net .75 since earnings come after expirations, not so good for our caller!

DIS – These guys killed us in the last $10KP but now they are squeezed between the 50 ($33.80) and 200 ($34.26) dma so an upside breakout would be a great sign.  HOWEVER, they did just break out to $34.95 and got rejected right back under the 200, which shouldn’t be so easy to fold but the 50 held yesterday and we’re coasting along there.   I’ll say this is another one we can play to stop out and take the Jan $35s at $1.45 but get out at $1.25.

GE – Why do I have no GE in my folder?  It’s in my retirement account but somehow I never reestablished it in the active virtual portfolios.  I guess they got high enough to scare me at $41.50 (I sold the $40s against my shares) so it’s hard to pull the trigger on a call here but I don’t have the heart to short them.  When in doubt, go long – the Jan ‘10 $45s are $4.17 and we can roll down to the $40s for another $1.50 if things go south.  Meanwhile we can sell the current $42.50s for .40 but I’ll be greedy and wait for .50+, not even going to consider selling until the Dow pulls back and makes me.

GM – Well I sure played them wrong with the $35 puts!  Sorry, I just can’t buy these guys.  They just spend $35Bn to save $3Bn a year (maybe) in benefit costs and they gave concessions to keep jobs in the US which means now they are committed to either building overseas plants they will have to unload or running even more excess capacity than they have now as they crank out cars they can barely get people to take with $3,000 rebates and 0% financing.  Forget it!  I am not going to place a buy on them…  I hope Uncle Rupert swaps them out for TM when he takes over so we can have a real automotive indicator in the Dow!

Oh wait, I’m sorry, I do have a play.  Sell some idiot the $35 calls at the open, if they keep going up, buy the Jan $37.50s to cover and we’ll roll the caller to the November whatevers.

HD – How LOW can they go?  Well, if he market takes off, $33 should about do it.  If the market heads further south, they will be a bargain around $25.  I guess we’d better give them until May with the $35s at $2.55 and give up at $2.

HON – Earnings are 10/19 and they have great growth but great growth is now expected of them.  They supply stuff for war and peace which means we don’t have to worry about the election so all they need to do is follow through from the last earnings report and they should take out the ATH at $62.50.  The 50 DMA for them is $57 so we can be aggressive with the Dec $57.50s at $3.85 and we can always sell the $60s, currently $1.12 ahead of earnings if we get a good run to capture the premium.

HPQ – Earnings growth (projected) is far outpacing price growth.  Global demand is hot, the weak dollar makes then one of our export stars and they STILL have a 50% share of the global printer market with 77% of the laser-printers.  As of last year HPQ also had 18.1% of the global PC market and shipments were growing at 23.8% – in other words, HP’s PC shipment growth was greater than Apples total PC shipments!    Yet Apple (my favorite company) has a market cap of $133Bn and a forward p/e of 34 ($19Bn in sales, $2Bn in profits) while HPQ gets no respect with a forward p/e of just 15.5 ($25Bn in sales, $1.8Bn in profits).  At PSW, we don’t complain about the market being unfair, we just take advantage of it!  I like the Jan ‘09 $50s, selling the $52.50s for .55.

IBM – I’ll keep this one short:  It’s IBM!  We had a discussion recently in chat on what the single stock to own as a mindless retirement investment would be and IBM was my choice, beating GE by a bit and beating Google by virtue of being a safer bet (but Google is likely to be worth much more).  Still IBM is cheap like HP, grows like HP and doesn’t sell those margin-killing PCs anymore.  With $91Bn in sales, IBM tosses $9.5Bn to the bottom line and is one of the last great R&D shops on the planet.  Needless to say I likel them long (we have them in the Happy 100) but for a small investment in this virtual portfolio, it’s the Jan $120s at $5.10, possibly selling the current $120s at $3.

INTC – Another monopoly you can’t help but love!  Oh yeah, there’s AMD – ROFL!  Intel’s 45-nanometer Penryn will be in my new PC this Christmas (hint, hint Tina!) and the Montevina laptops will deliver the best performance per-watt (just 25) by a mile.  That’s all yesterday’s news though as Intel recently demonstrated a 32-nanometer chip with close to 2 Billion transistors on a 300mm wafer – if that just sounds like a lot of techno babble let’s just say that this will make it possible for your computer to carry on a reasonable conversation with you in about 5 years.  My computer is telling me INTC is ready to break out over $26 to lead my predicted tech rally and the Nov $25s are just $1.69.

JNJ – these guys just had a great run on a "flight to safety" but they are also a great growth company.  Last earnings were not taken well despite the 5% beat so I feel more comfortable with a spread of the Jan $65s at $2.65 and the Oct $65s at $1.25 but I’ll put a sell-stop at $1.10 and hope to get $1.50.

JPM – These guys REALLY need to be replaced by GS – then we’d have Dow 15,000 in no time!  If the BSC-Buffett rumor is true, they should get a lift, if it’s not true, they are still ridiculously undervalued with a CURRENT p/e of 9.74 vs. BSC at 10.67.  Earnings are 10/17, two days before expiration and expectations are modest so let’s gamble on this one with the current $45s at $1.85 and also make this a gamble in the $25KP with 5 and a pre-roll of 5 $47.50s at .65.  XXX

KO – John Belushi warned us 25 years ago: "No coke, Pepsi!" and he was right by a mile!  We already have PEP Apr $72.50s from last week and we should cover those gains by selling the current $72.50s for $1.50.  Pepsi is a much better growth company than Coke but this is a Dow list so I unenthusiastically select the Feb $57.50s for $2.60, selling the current $57.50s for $1.

MCD – The world’s largest vendor of Coke, how convenient!  They also had a big "flight to safety" run this month so we’ll look for them to consolidate under $55 while the MA’s catch up.  Even though I think they may go back down to $52.50, I sure don’t mind owning the Jan ‘09 $55 at $6.10 and selling the current $55s at $1.15.

MMM – A slow moving Dow gainer, they make scary up and down moves and I really don’t like buying at the ATH but if they Dow is going up, so are they.  The spread of the Jan $95s at $3.10 and the Oct $95s at $1.10 is a reasonable play for my wishy-washy interest in this one.

MO – My most hated Dow component.  Once you are found guilty of racketeering in a Federal court perhaps they should remove you from America’s primary stock index.  I mean really, what does that say about this country’s business ethics?  So on moral grounds I refuse to play this company…

MRK – Speaking of companies that have been tried and convicted as accessories to murder…  Ah well, at least they do try to cure some things (well, cure is a strong word as they don’t really want to cure anything – so let’s say that they like to find a daily pill that eases the symptoms but never actually improves your condition but costs A LOT of money).  Well this scam never gets old but we sure do, and our population is aging so fast the government is going to have to step in and start buying us pills!  All this public health-care nonsense has spooked investors but I don’t think MRK cares if they sell a pill that costs 6 cents to make for $1 to 5M people or for 0.50 to 10M people.  National health care means 43M uninsured people who thought they were healthy enough will find out they need pills or they will die – that’s good for MRK no matter what.  I’m expecting a major break-out in in this sector so the Jan ‘09 $55s at $5.35 are a nice way to wait, selling the Jan ‘08 $55s for $1.90 while we wait.

MSFT – Wow, it’s felon’s corner over in the M’s isn’t it?  I think Bill Gates left just to make sure everyone could see that he really did a lot to make that company great because it’s been one misstep after another under Ballmer.  Still, they are like one of those wrestler villains that everyone hates but nobody is crazy enough to bet against and anytime they are under the prior year’s high ($31) in a company that’s growing top and bottom line revenues faster than 10% – it’s a buy.  We already have a big winner with these guys from last week but, as a new play, earnings are after expiration (10/25) so I feel pretty safe with the April $30s at $2, selling the current $30s for .50.

PFE –  A slightly more ethical version of MRK with half (yes HALF) the p/e.  I like them better from a chart position too so let’s load up on the March $25s at $1.25 and sell the current $25s for .35, being mindful of the 200 dma at 25.25, over which we want to take out that caller!  With this kind of return (30%) in one month, I think selling against just 1/2 and hoping for a run before selling more is prudent.  Let’s do that with 10 in the $10KP and 20 in the $25KP XXX

PG – Also in the middle of a flight to safety fun this month.  The growth supports the run and these guys won’t be fully valued until they hit about $90 and Gillette has been a great addition for them, proving they can integrate a global brand leader smoothly and efficiently so, even in a recession, I still like these guys.  If the Dow keeps going up we may as well just jump on the momentum train with the Jan $70s at $2, selling the current $70s, now $1.32 if the stock falls back below $70 only.

T – Oh sure, NOW they go up!  These guys killed us in the last $10KP and it’s hard to buy them now that they are up 10% from our loss but, as Steven Colbert explains in this video, AT&T is an unstoppable juggernaut that laughs at government attempts to break them up.  Earnings are on the 23rd and they never miss so not much chance of an upside surprise.  This is a risky way to play but let’s assume there’s some disappointment and go for the Apr $45s for $2.20 and aggressively sell the current $42.50s for $1 as we can roll (but hopefully won’t have to) to an earnings (10/23) pumped Nov $45 (currently .72) if it keeps heading higher and collecting .70 in premium on our $2.20 investment is a good thing.  Let’s do that with 5 in the $10KP and 10 in the $25KP XXX

STILL IN PROGRESS!

FINAL RESULTS – FINAL RESULTS – FINAL RESULTS