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Dark Horse Trader's Hedge: Options That Glitter Are Gold?

Posted on the 18 January 2013 by Phil's Stock World @philstockworld

Dark Horse Trader's Hedge: Options that Glitter are Gold?

Options that Glitter are Gold?
There’s a lady who’s sure all that glitters is gold
And she’s buying a stairway to heaven
When she gets there she knows, if the stores are all closed
With a word she can get what she came for
Ooh, ooh and she’s buying a stairway to heaven
There’s a sign on the wall but she wants to be sure
‘Cause you know sometimes words have two meanings
In a tree by the brook, there’s a songbird who sings
Sometimes all of our thoughts are misgiven
Ooh, it makes me wonder

 Led Zeppelin (performed by Heart)

Happy New Year! 

2013 has provided some fireworks already as Congress demonstrated daily that “sometimes words have two meanings” and the market was volleyed by the “songbird who sings.”  The end result was a fiscal cliff deal that raised as many questions as answers.  Suffice to say that there is plenty of uncertainty remaining in the market which will provide plenty of volatility for the upcoming year.  Regardless of which party you support, there should be an obvious “sign on the wall but (we) want to be sure” coming up with the debt ceiling.

With all of this uncertainty as a backdrop, we have three option positions to consider tomorrow and one new long position to recommend. 

Huntsman Corporation (HUN) was originally recommended on September 8, 2012 at $14.64, combined with the sale of the Jan $15 call and Jan $15 put which expire tomorrow.  Our intent was to get long HUN by using this strategy, but it was proved again that “sometimes all of our thoughts are misgiven.”  HUN closed Thursday at $17.69 on January 17, 2013, leaving me wishing I had just recommended getting long by simply purchasing the stock.  Obviously, the stock moved higher much quicker than I anticipated . . .  “Ooh, it makes me wonder.”  So we will bid adieu to HUN for now with a +29.4% gain in four months based on the $0.10 dividend paid on 12/12/12 and expiration of the Jan $15 call and put which brought in $2.95.

SLM Corporation (SLM) was recommended on June 25, 2012 at $14.95, again combined with the sale of the Oct $16 call and Oct $16 put.  On October 9, 2012, we recommended rolling both the call and put to January strike of $17.50.  Had I written this article on January 10, 2013, I would look much smarter.  SLM had in fact traded right up to $17.66, and it appeared that we were headed for the perfect storm.  However, “all that glitters (isn’t) gold” after all, and we were slapped with a dose of reality when SLM announced earnings on Wednesday, January 16, 2013, and disappointed. I still like SLM for the long term and haven’t minded owning a full position (recall that this trade started by acquiring one-half of the desired shares).  Therefore, I am recommending accepting the put of the other half of the shares at $17.50.  Our cost basis in SLM after tomorrow is $12.53. 

This recap will take a second but stay with me:

Purchased half of the shares at $14.95 on June 25, 2012
Sold Oct $16 call for +$0.55
Sold Oct $16 put for +$1.88
Buy to close Oct $16 call on October 9, 2012 for -$0.85
Buy to close Oct $16 put on October 9, 2012 for -$0.15
Received dividend +$0.125 on September 9, 2012
Received dividend +$0.125 on December 9, 2012
Sold Jan $17.50 call +$.063
Sold Jan $17.50 put +$1.50&
Both January options expire for +$0

The culmination of all of this is that we have SLM with a +34.7% profit since June 2012.  With the short- term outlook having been altered by the earnings announcement, I am comfortable recommending that we sell an April $17 call for +$0.60.  We will earn another dividend of $0.125 while holding our position for better results.

Freeport McMoRan Copper and Gold, Inc., (FCX) is the last option position to review for Friday.  The thesis for adding FCX on March 19, 2012, was to proxy exposure to copper and gold.  FCX will announce earnings on Tuesday, January 22, 2013, and hopes to flip consecutive quarters of missing estimates.  Those estimates have been reduced in recent months from +$0.93 to +$0.81 to a current estimate of +$0.78.  There were updates and recommendations on how to manage the original trade on May 18, 2012, August 14, 2012, and November 13, 2012.  The last trade involved selling the Jan $40 call and Jan $40 put, which both expire tomorrow.  The call will expire worthless, and the put will be added to our original one-half position, giving us a current cost basis in FCX of $29.32.  Here is a recap:

Purchased ½ shares at $38.38 on March 19, 2012
Sold May $40 call for +$1.42
Sold May $40 put for $2.91
May $40 call expired at $0
Buy to close May $40 put for -$7.50
Dividend of +$0.31 on July 11, 2012
Sold August $40 put for +8.20 on May 18, 2012
Buy to close August $40 put for -$4.60 on August 14, 2012
Sold November $40 put for +$5.45 on August 14, 2012
Buy to close November $40 put for -$1.47
Dividend +$0.31 on October 11, 2012
Sold January $40 call for +1.63 on November 13, 2012
Sold January $40 put for +$3.20 on November 13, 2012
Both January $40 call and put will expire tomorrow with additional one-half shares purchased.

My preference is to recommend holding our position with no options through earnings announcement Tuesday and review afterwards.

Genworth Financial Inc (GNW) is the #1 stock for 2013, according to the Sabrient Baker’s Dozen, and also my recommendation for replacing HUN in our portfolio.  Our thesis on GNW is:

Genworth Financial, Inc. is a Fortune 500® company with roots tracing back to 1871. It has more than $100 billion in assets under management and a presence in more than 25 countries with 15 million customers. Working with its distribution partners, GNW provides products, services, and resources that help people secure their financial lives with annuities, life insurance, lifestyle protection insurance, long term care insurance, mortgage insurance, and reverse mortgages.

According to an article published by Reuters in October 2012, Genworth is said to be looking to sell it wealth management service, a move that will generate more cash and help strengthen its credit, which was downgraded following losses in the mortgage insurance unit. However, those losses have been written off; GNW has retained a large cash position and is currently undervalued in our opinion.

Reason for Selection:   Sabrient’s top stock is an “oldie but goodie.” GNW has been said to have the highest reserves of any firm in the industry and better-positioned portfolios. Analysts are revising their earnings estimates upward on this leading insurance company. It has great cash flows, $11.84/share in cash, and projected 2013 earnings of $1.22, up from $0.67 projected for 2012. Plus, it has a projected 5-year EPS growth rate of 16% that can be picked up for a forward P/E under 7.

I hope these trades help you on your personal “stairway to heaven” on earth.   Always remember that all options that glitter aren’t gold so we always need to be reviewing them.


Allow HUN Jan $15 call to be called away

Allow HUN Jan $15 put to expire

Allow SLM Jan $17.5 call to expire

Allow SLM Jan $17.5 put to be put to us (will result in Buy to open SLM automatically)

Allow FCX Jan $40 call to expire

Allow FCX Jan $40 put to be put to us (will result in buy to open FCX automatically

Buy to open GNW at the market (full number of shares)

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