Comment by phil

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phil
December 8th, 2017 at 11:27 am

CHL/8800 – Just down with the Chinese stocks, good and bad.  I always like buying them at $50 so this is a nice opportunity for our buy list.  Unfortunately, options only go out to June but you can sell the $50 puts for $2.80, which gives you a nice $47.20 net entry.  



T/Yodi – Lots of ways to play it since they pay a very reliable $1.96 dividend (5.4%), which is a shame to walk away from.  

When I play something like T, which is a good value with a p/e of 17.5 but high in it's channel as the historic p/e is more like 12, I do expect a normalization back to $32.50 at some point.  So, step on is deciding how much T I REALLY want to own at $32.50.  If, ultimately, you are comfortable with 1,000 shares, there's still several ways to go.

• By 500 shares of T at $36.34 ($18,170) 
• Sell 5 2020 $33 puts for $3.40 ($1,700) 
• Sell 5 2020 $35 calls for $3.60 ($1,800)

That one puts me into 500 shares at net $14,670 ($29.34) and I expect to collect $1.96 x 2 ($3.92) over 2 years to drop my basis to $25.42 and a profit of $9.58 (37.7%) if called away at $35.  Of course, we'd work it from there.  If we get assigned 500 more at $33, our average cost would be $29.21, so that's our break-even going that way.  

We could, on the other hand, simply sell 25 of the 2020 $33 puts for $3.40 ($8,500) and our break-even is $29.60, though we'd be obligated to buy 1,500 more shares going that way.  We could take the lesser gain and keep the risk at 1,000 assigned – collecting "just" $3,400 for not owning T.  In either case, the stock with the short puts and calls looks better.

Or, we could do an artificial buy/write:

• Sell 10 T 2020 30 puts for $2.15 ($2,150) 
• Buy 10 T 2020 $28 calls for $8.50 ($8,500) 
• Sell 10 T 2020 $35 calls for $3.60 ($3,600) 

Here the net is $2,750 on the $7,000 spread and, if assigned, we'd own 1,000 shares of T at $32.75 and our upside is only $5,250 so, again, not better than owning the stock.

So, given the choices, I'd go for the ownership play.  HOWEVER, this is a good example of one I woudn't play at all because I can do far, far better if I wait for a move to the bottom of the channel, hopefully with better option premiums to sell.

Therefore, the best option here is #4 – WAITING PATIENTLY!!! 



Looks pretty attractive, right?  Well, it shows you how warped the current market has made your view of what constitutes a "bargain".  



When I see a chart like this I wonder if the move up was justified so I look at earnings for 2013, 14, 15 and compare them to 2016 and 2017 to see if maybe they do deserve to be 20% higher than they were.



So 2013 was an unusually good year but the average of the 3 is $2.43, which is less than they made last year.  They do seem on track to hit $2.90 this year and no reason to expect they won't next year so yes, we would have to call it 20% better than it was, which means $35-37.50 should hold over the long run.

That means, however, we can now consider a more aggressive play, like:

• Sell 7 T 2020 $35 puts for $4.40 ($3,080) 
• Buy 20 T 2020 $33 calls for $4.70 ($9,400) 
• Sell 20 T 2020 $40 calls for $2.70 ($5,400) 

That one is net $920 on the $14,000 spread so now we have considerable $13,100 upside potential, but at a much more aggressive target. 

On the whole, I'd still wait but, if T goes down such that I can sell the $33 puts and buy the $30/37 bull call spread for that price – that would then be my preferred way to play – especially considering my fallback would be owning 700 shares of T at $30.90, which I would be very happy to DD on at any low price.  

CBI/QC – Another one for the watch list.  You know I live CBI, now $17.50 and still cheap.  You can sell 5 2020 $15 puts for $4.70 ($2,350) and buy 10 of the $10 ($9.30)/20 ($5) bull call spreads for $4.30 ($4,300) to net into the $10,000 spread that's $7,500 in the money for $1,950.  The upside at $20 is $8,050 (412%) and your worst case is owning 500 shares at $15.  



FTR/Jet – Glad we doubled down back then!