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May 23
2011 / May Put Options Expiry Results
Stocks: Clorox; Exxon; Intel; Johnson & Johnson;
McDonald's; Microsoft; Pepsi; Visa
May Put Options Expiry Results and The Strategy Going
Forward
On Friday with May
put options
expiry, I had another exceptional month. As you may recall I
wrote an article just a few days ago on
Defensive Stock Investing.
I wrote it for very good reason. With the move by smart
money out of commodities, they are pushing many of my stocks
into overvalued prices. This will mean a change in my
overall strategy. Before going further, it is important to
remember that my goal for the year is 12% return for my
entire stock portfolio. My US stock portfolio is presently
at 8%. This means I must earn an additional 4% on my
portfolio for the balance of the year. With 7 months left
that means half a percent a month for the remaining 7 months
will more than meet my 12% goal.
With that in mind here are the
changes I will be doing for my stocks going forward.
Before delving into what I plan to do next,
I must mention that
it appears obvious to me that stocks are rapidly becoming
over valued. With stocks like Pepsi trading at 19 times
earnings and YUM now at 23 times earnings I will be
surprised if there is no pullback in stocks sooner rather
than later. This pullback
could be more severe than many investors are prepared for.
The number of bulls are very high and the bears are hard to
find. This is always a bad sign. I hope that many investors
do not get trapped into buying many of these stocks at such
elevated prices. Remember also that there is no way that the
market is ready for a deepening of the European crisis,
which by the way will push up the US dollar and hurt profits
on many international companies. All of this could mean a
nasty summer. I will be careful to pinpoint at what strikes
to sell put options throughout the summer months in order to
try to take advantage of downturns and protect against being
assigned too early into the summer.
Here is what I will be doing
with my selling put options strategy for the next several
months:
Those stocks that have stronger put options
premiums and are not as over valued, I will put more
emphasis on. Those stocks that are over valued will mean
poorer option put premiums at the lower strikes I want to stay
at. Therefore I will sell less of those stocks' put options.
As well some that are really over valued I
have closed and will not be selling any put options at this time.
Remember cash too is a strategy when it comes to investing.
Last, I will take advantage of every pullback opportunity to
sell put options on my favorite stocks, in order to bring in larger
premiums on downturns, and still stay away from the strikes
that I believe are within over valued territory.
Exxon is a
bright spot in my trades as it has pulled back 10%
from its most recent high and allowed me to stay
with the 77.50 and 80.00 strikes. If you recall from
my XOM trade comments back in Feb, I expressed
concern with the stock above 83.00, but back at
80.00 I believe the stock has good opportunity to
recover to 80.00 should the stock fall lower.
Therefore I can continue to put additional capital
into my Exxon trade which will assist those trades
that are not generating enough income. Back on Jan
31 the stock moved above $80.00 and has only briefly
pulled below it. Looking at my chart below, anywhere
below $79.50 will suffice for my trades. Therefore
on any pullback next week I will sell up to 10 put
contracts.
Examining
the 6 month chart below, I can see that support for
the stock is not really at $80 or 79.50, but lower,
around the 70.00 strike. Any move down to that level
($70.00) would make a compelling case for buying the stock or
selling in the money puts.
You can
read the entire trade here.
VISA has been a stellar performer for the past 3 years. You
can view each of the years here.
VISA YEAR 2009;
VISA YEAR 2010
and VISA Year 2011.
I had become a bit concerned with the recent rise in VISA
but the last few sessions and then today's (May 23) big pullback has
presented me with a great opportunity to sell the VISA June
2011 $72.50 put for better than 1%. I increased the amount
of put contracts from 5 to 8 in order to take advantage of
the great premium price and as I will be reducing the amount
of capital being used in other stocks.
You can
view today's VISA trade here.
YUM BRANDS provided a very good opportunity on Friday to
close my June $48.00 puts and today (May 23) I sold the July 50 puts.
You can
read the trade here. I sold just 5 naked puts and I will
hold off on the remaining 5 put contracts until I see if the
stock will pull back a bit more in the next session or two.
PEPSICO has
been a great trade but now the stock is over valued. My May
$62.50 puts expired however with the stock above $70.00 and
trading at 19X earnings I feel this stock needs to have a
good pullback to get premiums on the $62.50 to $65 put
strikes back up. This trade is now on hold and I will use
the capital with another stock.
MICROSOFT
has been under pressure ever since the SKYPE purchase. On
Friday in the morning, I bought and closed my May 25 puts
and then watched as the stock fell lower. Today (May 23) the
stock continued it's journey lower and I sold into June at
the same strike - $25.00. You can
view
all the trades for the past couple of sessions, here.
along with my reasons for selling the 25 strike. If I was
worried about Microsoft I would not be selling puts but
would be waiting to see if the stock falls further or can
hold and gradually move back up. If I wanted to sell puts
but was not too worried I probably would be selling at the
23 strike. I have a reverse
naked put ladder on Microsoft right now which you can read
about here..
MCDONALDS
is remaining very strong and it has risen too high for my
naked puts. On Friday my May $75 naked puts expired and I
closed my June 67.50 puts, leaving no capital now in
McDonalds. Once the stock pulls back, then I will recommence
selling naked puts.
SUMMARY
Caution is definitely warranted. I believe
that many stocks have now become over valued and will pull
back 15% or more should enough bad news arrive and there is
plenty of bad news out there. The rise in the US dollar will
pressure risky assets like stocks and make for a more
volatile trade. Below is the VIX for the past year. Do you
notice the steady decline right until the end of April and
now we are in a very gradual uptrend. Until many investors
see what the end of QE2 brings, the European issues, Japan
and China all signal, it will be choppy and could see a
number of sharp up and down days.
I believe it is impossible for anyone to
predict with any great success where the market is heading.
I do believe in using SPY
puts for hedging which you can read about here. For
Canadian investors I am using puts on the XIU for hedging
and will see how that works out this year.
Remember HOLDING CASH IS A STRATEGY. As of May 23 2011 I
have $439,806.25 invested in my various sold puts. With May
Options expiry the in the money naked puts on Intel all
ended up out of the money. This leaves just $41,234.00 in
the money and all of it is Microsoft.
All of this leaves $169,653.75 of my capital not invested
which is 27.8% of my total portfolio. As well I have
$54,657.75 of this year's profit, also not invested. So with
a total cash base of 224,311.50 not in the market, I am very
well positioned to take advantage of any new opportunities
and looking at the market, I believe new opportunities will
be arriving this summer as I expect the market to remain
weak through until perhaps August.
