One of the changes I’ve made this year is to only sell half a position on my initial entry into a position and once again I’ve proven (I say this without pride) that seems to be the best approach in the current market. ITRI is getting spanked today as it’s down 3.7% as I write this and below the first level of support I was expecting to hold. It still has almost $2 to go before I get worried about a true breakdown. JPM is now below my strike too, but the premium has me in safe territory still. Even VXX is up over my single covered call strike. I’m glad I didn’t sell two yet.
QCOM delivered today’s vindication that selling half of a position is better than putting everything on the line at once. While QCOM was trading at $58.38 (almost an hour into the trading day when I thought it might be safer) I sold one QCOM April $57.50 naked put for $1.63 and received $162.04 after commissions. While QCOM was off its highs of the morning when I made the trade it was much higher than it was shortly afterwards. Pretty much, I was able to get my trade in just before it fell more than 1.5%. I’m not worried though because the out-of-the-money (OTM) strike and the premium combined to give me a 4.37% cushion and although semis are out of favor today, I like QCOM longer term and won’t mind taking an option assignment if this drop lasts longer than six weeks. Since I’ve only set myself up for buying 100 shares on assignment I think I’ll feel comfortable with writing (aka selling) a strangle with a new naked put and covered call once I own the shares.
Actually I don’t think I’ll be forced to buy because I think support is going to surface before QCOM goes too far south and we’ll see a pop higher. QCOM has a forward P/E ratio of only 17.23 has solid growth in the books (quarterly rev growth yoy 25.4%, quarterly earnings growth yoy 39.1%) and a bright future with all the smart phones and tablets it is included in. For anyone who isn’t already in QCOM and can handle the risk, consider going one strike lower at the April $55 strike for $1.25. That’s close to a 20% annualized gain if it works. My $57.50 strike trade today sets me up for a potential 25.2% annualized gain if it works, albeit with $2.12 more at risk.
This trade pulls me up to 100% invested finally. I only have one short March put and no March covered calls, so I should be able to extend my exposure easily over the coming weeks with farther OTM naked puts. Even if all of my April puts are assigned I have over half of my account in longer term options and won’t be on margin for a while, even if I’m susceptible to it from an overexposed, early assignment view.
CVS is looking somewhat attractive for puts again. I’m not quite there yet, but eying it again. MHS was noted in Barron’s this week as a good stock pick (forward P/E of 12.46, PEG of 0.93). It’s down 2.8% right now, so I guess it’s an even better buy now. The OTM puts aren’t looking too bad for April or even July if you want to stretch it out for more cushion and a slower erosion of time value.
Thanks for the suggestion. I had QCOM on my watchlist a long while back but let it slip out of my radar – which is unfortunate when I look at the 6-month chart.
I sold a single April 52.50 Naked Put today at $1.01 giving me a basis of $51.50 if assigned – below what it was before the last earnings and guidance raise.
I also purchased 2,000 PIC (traded on the London Stock Exchange). I think the recent drop is overdone, the company announced record profits and the orders aren’t cancelled – just pushed from 2011 to 2012. If they can secure a few more reasonably sized orders this year, the profit shouldn’t dissappoint and then they will flourish next year.
My FDX and EEM positions are looking good but earnings will be the big risk with FDX. If they meet or exceed expectations next week, I’ll be buying the Naked Puts back at a huge discount. Otherwise, I don’t mind owning FDX at a basis of $82.50.