So full disclosure, this is not a trade I'll be entering. I've a friend who was considering buying
BBRYbefore the current takeover rumors, so I said I'd detail a few ways to play it.
Trading on hot air?
Management have confirmed they're looking at offers, but the current price is based on pure speculation that they find an attractive one. To that end, there's every chance the mania will subside and the price will pull back a bit in the coming day's.
Rather than pay today's price, you could try your luck selling put options to pick it up at a lower price. As discussed in the previous link, it's a lot like setting a limit order below the current market price except you receive money for agreeing to buy the shares at a lower price.
The 13th Sept 2013 expiring
BBRYput option wih a $10.50 strike price is currently trading for a $0.23 option premium. You could sell 100 contracts and receive $230 in fast money today (100 put option contracts x 100 shares per contract x $0.23). If between now and the 13th of September
BBRYshares drop below $10.50 you'll then have to purchase 10,000 shares of
BBRY. That's a 2% return this week if you promise to buy the stock at almost 5% below the current market price.
If the price doesn't drop below $10.50 by the end of next week, you won't have any
BBRYshares. You will have a guaranteed 2% return, and you might be able to repeat the same trick again the following week to bank another 2%.
But I want to own the stock too
They hope to have something sorted by November. Whatever the offer is, you have to hope it's higher than the current stock price to be of any interest to anyone. One way to play it is to buy the 16th November 2013 expiring call option at the $11.00 strike. This gives you the right (but not obligation) to buy the stock any time between now and the 16th of November for $11.00. If the stock is trading at $14.00, you still only have to pay $11.00. If it's trading at $9.00, then you'd ignore the option and just pay $9.00 (assuming you still wanted it).
The option is currently trading at $1.38, so it's going to cost you $1,380 to reserve that privilege (100 call option contracts x 100 shares per contract x $1.38). That's offset at least $230 by the put options you'd sell from the previous section. You might be able to offset it further if you're able to keep repeating that put option strategy.
I'm slowly stacking my investment portfolio with strong companies that pay a reasonable dividend and have a history of growing that dividend. Johnson & Johnson (
Reasons to hold
The dividend is currently around ~3%, but more importantly it's been growing steadily between 5%-7% each year. They First there is the dividend. Even if the stock goes nowhere, I stand to make a 3.61% return right now just from the dividend income. It's hardly going to make me rich, but it's certainly better than letting my money sit in the bank.
Unfortunately I don't have a spare $10k lying around, but I'm hoping I will by October. So I've purchased 1 call option for JNJ, expiring 19th October 2013 at a strike of $92.50. At the time I bought it a month or two ago (I've been a bit slack posting this update) it $1.54, but
JNJhas since dropped and the same option last traded for $0.30. That means I paid $154 (1 option contract x 100 shares x $1.54 premium) to lock in a maximum price of $92.50 for
I could purchase the same today for a total of $30, or I could chose to lock in a lower strike price.
Should we get to the 19th of October and the
JNJis still below $92.50 then my option will expire worthless, and I'll just pay whatever the lower market price is to buy the stock directly (currently $86.41).
Haha, you're losing!
It's easy to consider this trade a loser so far, but I plan to own
JNJfor the long-haul and I'm willing to stomach some volatility in the interim. Had I had the funds available I would have purchased the stock weeks ago when it was around $92, and I would currently be sitting on a ~$600 loss. Instead I'm likely to lose $154 on my options trade, but I'll be buying to stock at a much cheaper price anyway. So either way it's a win.
Come on, you know this one. It's that car company that only makes gorgeous looking all-electric vehicles.
Reasons to hold
This one is pure speculation, I don't have anywhere near the same level of reasoning as I have previous trades. I think electric cars are the future, and this things look stunning. If they were slightly more convenient (I'm renting, I can't just install a supercharging station in the street) I'd probably have bought one already.
I'm seeing Tesla (
TSLA) as an all or nothing type of company. They're either set to explode and change the way we all think about fuelling our vehicles, or they'll disappear under the weight of their expectations and be a footnote in the history books.
I bought 1 option contract for the 17th of January 2015 at a strike price of $285 at $13.00, total cost was $1,300 (1 option contract x 100 shares x $13.00 premium). Note the expiry is almost 18 months away. If in that 18 months
TSLAmanages to double in value then I stand to make a tidy profit. For example if they do double and are trading at $338 in January 2015 then my gain stands to be approximately $4,000. That's because my strike price is $285, the stock price at the time $338, and so it's reasonable to assume someone would be willing to pay a $53 premium ($338 stock - $285 strike) for my option contract, netting me income of $5,300 ($53 option premium x 1 option contract x 100 shares). Alternatively I could exercise the option myself and then immediately sell the
TSLAstock I now own, the math would work out the same. From that $5,300 windfall you need to subtract the initial $1,300 outlay to buy the option. So net gain is $4k.
TSLAare trading at anything less than $285 in January 2015 then I've done my money.
Pembina Pipelines (
PPL) recently popped up on my radar while looking for an energy stock with good income potential over the medium term. I'd originally been considering Duke Energy (
DUK), but settled on this one instead.
Reasons to hold
PPLdividend is slightly higher than the
DUKone, and it has a long history of growing that dividend. However, all is not rosy because that growth has slowed in recent years. There are a bunch of projects in the pipeline that, should everything go to plan, will charge that growth rate again but in the interim I'll have to be happy to pocket a 4.8% yield. And the ex-div date for this quarter's dividend is this coming Friday.
Compared to it's peers, it's also the most attractively valued. A trailing P/E of 12.6x and a forward be of 14.5x makes it cheaper than
SOat the moment.
Overall the long-term view seems to be that
PPLhas much to look forward to, but has some short-term uncertainty about it. As a result I'm going to buy it but also look to maximize my short-term income.
Just before the last close trading I bought 300 shares of
PPL@ $30.70. When the market opens tomorrow I'll look to sell the 21st Sept 2013 call option at $31.00 for $0.22. I'm hoping that the recent trading range continues and that the stock doesn't trade at or above $31.00 before Friday. What would be great is if the stock traded just above $31.00 on Monday morning, because here's the result:
- $0.22 option premium x 300 shares = $66.00
- $0.3675 dividend payment x 300 shares = $110.25
- $0.30 capital gain ($31.00 sale price - $30.70 purchase price) x 300 shares = $90.00
A total gain of $266.25, or almost 3% for holding the stock for a week. The other likely outcomes are that the stock increases $0.30 to more than $31.00 and I get exercised early (the most probable outcome given there is a guaranteed dividend of $0.36 on Friday), or that the shares drop and I'm left holding them because the option isn't exercised.
I'm fine holding them as I'm hoping to ride them well into 2015 when their new projects come online. Whatever happens the trade is going to make between $156 and $266 in income this week.
Next on the block for stocks I'm planning to hold for the long-haul, Walmart (
Reasons to hold
It's best in show by pretty much every measure vs it's competitors (Costco and Target). It pays a higher dividend (2.5%), it grows that dividend at a higher rate, has better margins, and has a better return on equity.
It operates at a scale that is incomprehensible for many, and it does it with extreme efficiency. Anybody working in the Bay Area has likely been approached by one of their internal recruiters or seen them canvassing for applicants at various hangouts in SF. I've no idea what they're up to with WalmartLabs, but they're bringing their A-game to technical recruiting and that should make all of their competitors scared. In isolation that's probably not a reason to buy, but combined with everything else it definitely fills me with confidence in the company.
As with the previous
JNJtrade, I don't have the free cash available to buy in today. I want to make sure I don't miss the ride, and I'm willing to pay a premium now to lock it in. As a result I bought 1 call option expiring the 21st of December 2013 at a strike of $77.50 for $2.61. Total cost was $261 (1 option contract x 100 shares x $2.61 premium).
Much like that previous trade, I also took this out a month or two ago when
WMTwas trading higher, so the same trade today could be taken for a total of $76.
Come December, if
WMTis trading above $77.50 I'll exercise my option and buy 100 shares for $77.50. If it's below that, I'll let the option expire and just pay the cheaper market price.
I've got a short-list of companies that I'm looking to purchase and hold for a year or two. Intel (
INTC) is one of those companies.
Reasons to hold
First there is the dividend. Even if the stock goes nowhere, I stand to make a 3.61% return right now just from the dividend income. It's hardly going to make me rich, but it's certainly better than letting my money sit in the bank.
And by most fundamental measures, Intel is leading their sector. They're among the best when it comes to returns from reinvesting their earnings, have the highest gross margin, and the best operating margin. Yet their stock hasn't moved a huge amount in the past 3 years, mostly bouncing between $20 and $30.
A large part of that has been the decline of the PC business and the growth of mobile/tablet devices. I think that is all set to change. Their new low-power processors are among the best (Intel Haswell is what is in the recently announced 13" Macbook Air with 12 hour battery life) and they've finally landed contracts with tablet producers.
Early days, but I'm willing to sit on this for a while and I think the downside is limited thanks to the dividend.
So I bought 500 shares of
INTCtoday @ $25.34. But that's not very exciting, so lets spice it up a little bit by writing some covered calls.
Now that I own 500 shares, I can sell 5 option contracts (remember, each contract is for 100 shares), and pocket that money from someone else. The
Jul 20thcall at $27 was at $0.22 when I placed the trade. So I sold 5 call options, and netted $110 ($0.22 * 5 contracts * 100 shares per contract). My initial outlay to by the stock was $12,670 (500 shares * $25.34), so that's an immediate return of 0.86% (not considering brokerage costs). It doesn't sound like much but through the power of compounding interest, in some fantasy land where I could do this reliably each and every month it'd net an almost 11% return for the year.
What's the catch?
Every trade has risk, and on this one there are two to take into consideration:
- What happens if the share price drops significantly?
- What happens if the share price goes above $27?
It always sucks if shares you own drop in price, in this instance I don't particularly care too much. I'm willing, and hoping, to hold Intel for a year or two and I'm willing to ride out any rollercoaster action in between. So the first risk isn't really a risk given my objectives.
If it goes above $27, then I'm going to have to sell all my Intel stock. That really doesn't fit with my long-term objectives, but it means I'd make a 7.36% return in a month. I'd happily take that money and look to re-invest it Intel when I saw another buying opportunity, or put it into something else that is on my watchlist.