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This topic contains 15 replies, has 3 voices, and was last updated by  Erik Kobayashi-Solomon 4 months, 3 weeks ago.

  • #8795

    Carey
    Participant

    I understand the reasoning for no covered call list this month, but I am disappointed because I look forward to it. So I am going to offer a couple of suggestions I am looking at:

    1. IBM
    2. P&G
    3. BUD

    Especially because overall volatility is up, therefore selling calls looks like a good thing to me.

    These are all stocks that are undervalued to slightly undervalued per Morningstar; all pay almost 4% in dividends; all are real companies with real products that aren't going anywhere, and none are likely to do anything dramatic. My preference is to work both the dividend and option cycles. For example,

    IBM price 156.18
    next dividend approx May 10 ($1.50)
    possible options – June 160 for 5.79, or the 165 for 3.85

    You could also do a diagonal call spread, buy the Jan 2020 LEAP around 120 or so, then pair it with a series of sold calls like those above. Do it over and over if possible.

    My personal record is 6 sold calls on Intel before it finally got called.

    #8798

    Hi Carey,

    Thanks for the note and for the CCC suggestions. Those sound like good ones. I'll write them up into Tear Sheets… Especially like IBM, as that has generated a lot of income for me over the last year or so…

    Joe and I did a valuation of PG a while back. That too might be worth a valuation refresh. Would you be interested in doing a valuation of PG building off the work Joe and I did a while back?

    All the best,
    Erik

    #8833

    Hi Carey,

    Just a quick update on IBM. It looks like Big Blue will submit 2017 financials next week. They announced earnings at the end of January, but the numbers they publish with earnings are not complete enough to do a full valuation. I'd rather wait until the financials come out as it looks like they have restated prior revenue results for different segments, and I'd like to understand that well before publishing something.

    Here's what I do see:
    1. Actual 2017 revenues were $79.1 billion, compared to my worst and best forecasts of $76.7 billion and $79.0 billion, respectively. According to FT (https://www.ft.com/content/4d545650-fc8b-11e7-a492-2c9be7f3120a), IBM generated positive revenue growth in 4Q17 of 4%, three percentage points of which were due to currency effects. Triangulating all these, it looks like actual revenues were within my best- and worst-case forecast range.
    2. It looks like actual 2017 OCP was around $12 billion, for an OCP margin of 15%. This is just at my worst-case margin assumption (best-case being 17%).
    3. It's hard to tell what Expansionary Cash Flows were. Looks like on the order of $2.1 billion – $2.7 billion. This would put ECF as a % of OCP at somewhere between 17% and 22%. This is lower than my assumption of 25%, so FCFO would have come out a bit better than my worst-case projections in 2017.

    In my last valuation of IBM (https://frameworkinvesting.com/fwi-tear-sheet-ibm-ibm/), the best-case revenues, combined with worst-case profitability was associated with two valuation cases (depending on medium-term growth). The lower of these was $172 / share, the higher $184 / share.

    Based on this, your idea for a bond replacement in IBM looks like it still holds water. I'll publish a proper note about IBM once I have a chance to look at the financials.

    Thanks again for the ideas!

    Erik

    #8835

    Wilson
    Participant

    I'm not sure how the analyst comes up with a fair value of $98 for Procter. Using her assumptions for sales and operating margin, I come up with a FV closer to $70.

    #8951

    Wilson
    Participant

    I hope it is okay to mention put writes here.

    I have a few positions expiring this month. My best one has been Advanced Auto Parts (AAP). It is a turnaround story and possible takeout candidate. It has had huge price swings. I have sold vol on three separate occasions at a $100 strike px. Every time expiration came around, the stock was back around $100, so I just rolled it over. The shares has since run up, but if it trades down below $110, I might enter the trade again.

    Another one was Synaptic (SYNA). M* has it as a Best Idea, so I gave it a shot when it was trading at $50. Their analyst had a fair value of $64. It seemed fairly valued to me, but the premium was attractive (10% for 3 mths). (Also, I gave the guy the benefit of doubt since he recommended Qualcomm before Broadcom's takeover bid.) Of course, the stock immediately traded down after I wrote the puts, but has since recovered a bit. If the shares stays around $50, I will probably do the trade again.

    As for new ideas, I recently wrote ATM puts on Omnicom (OMC), Biogen (BIIB) and Shire (SHPG). All of them have a moat and are considered undervalued by M*.

    #8968

    Hi Wilson,

    Put writes are fair game as well. Thanks for the suggestions! I'll take a look at M*'s 5-star list as well as the Dataroma to see if we have some good candidates for covered calls / short puts this month.

    All the best,
    Erik

    #9403

    Wilson
    Participant

    The puts I wrote on SHPG are likely to expire worthless tomorrow. The shares shot up in recent weeks on news a large Japanese drug company was interested in buying them. While I am grateful I made money on the trade, it does highlight the downside of using this strategy. Instead of making $7 a contract, I could have made $25+ if I had just bought the stock!

    To replace SHPG, I am looking at Bristol-Myers (BMY). I have a position in them already and have traded it a bit over the past year. It has been almost a round trip for me. I kept the shares after it ran up to $70 on the hopes that Pfizer might buy them, but that isn't likely anymore. Also, Merck came out with data showing its cancer drug is more effective than BMY's, which caused the stock to decline further. The shares are undervalued again with 25% upside.

    I also followed Erik's advice on IBM. I wrote a covered call when it was trading at $155 last week, so that helped offset most of yesterday's decline in the stock and wrote a put to add to the position. I only have it as slightly undervalued though.

    #9532

    Wilson
    Participant

    I wrote a ATM covered call on BUD this morning. I was surprised the Sept 95 calls offered more premium than the puts. Is there a reason for this? The stock has a dividend yield of 4.45%.

    #9536

    Hi Wilson,

    Just looked at that and it is really weird. I don't trade on stock margin, but what you should be able to do is this:

    1. Buy BUD using margin
    2. Buy ATM put options
    3. Sell ATM call options

    This will allow you to earn the $100 spread per contract between the put and call prices less the amount of margin interest you pay through September… This is the oldest option transaction in the book, based on put-call parity pricing.

    It's really odd this is trading in this way! Thanks for pointing it out.

    #9618

    Wilson
    Participant

    Thanks, Erik. I'm going to keep that strategy in my back pocket for next time.

    Separately, Philip Morris Intl (PM) could be a good candidate for a covered call. Stock looks undervalued by ~25% after its big drop a few weeks ago and it has a dividend yield of 5.3%. There has also been some insider buying as well.

    #9623

    Hi Wilson,

    Thanks for the note on PMI. I'll take a look at it as I saw it suffered an enormous drop before. My dad bought all the tobacco stocks he could after his open heart surgery… Told me that the tobacco companies were going to pay for his convalescence…

    All the best,
    Erik

    #9693

    Wilson
    Participant

    I wrote puts on Comcast (CMCSA) yesterday.

    For CMCSA, at first I came up with a $42 FV like M*, but I decided to count their programming and talent costs as debt since they were noncancellable to be more conservative. The FV dropped to $36, still above where it is trading now. That's why I opted to write the puts instead of just buying the stock. In hindsight, I should have considered more carefully the possibility of a bidding war dragging down the shares, but I guess it was already priced in.
    Disney is up too, go figure! Sometimes it is better to be lucky than good. LOL

    #9764

    Wilson
    Participant

    Anybody care about Chinese stocks? I wrote some puts on BABA and BIDU this week to take advantage of the recent dip. Both look significantly undervalued to me.

    I owned Yahoo! a few years ago as a play on Alibaba and did pretty well. Unfortunately, I sold it shortly after it went public when Jim Chanos said he was shorting it.

    #9834

    Wilson
    Participant

    I’m having second thoughts on my BIDU trade. There is a story today that Google is planning to re-enter the Chinese market with a censored version of its search app in the near future. Will Baidu become the next Yahoo?

    #9916

    Carey
    Participant

    Looking at the new Covered call Monitor, I would offer a suggestion – add two columns to the sheet (yes, it is already wide). These would be for the Dividend Amount and Expected (Record) Date. I think these are important for selecting the proper expiration, and for monitoring your position vs the record date. I have these two extra entries for covered calls in my own tracking tool.

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