Wednesday, November 24, 2010

24 November 2010 It Was Profit and Bargain Week


24 November 2010 It Was Profit and Bargain Week

The economic data points had very few surprises this short week. That lead to some interesting roller coaster rides, but just like a roller coaster we ended up where we started.

GDP came in close to where we expected, existing homes sales did what we expected, Durable goods order did surprise to the downside (Sorry I missed that one.), and personal income and spending came in pretty close to what was expected.

We were busy on Tuesday getting things ready for the Thanksgiving holiday so I did not see details of what brought the market down. By the time we started trying to figure it out this morning it did not matter as it was almost a wash by the end of the day.

Pin Action in the Salve Lucrum Portfolio

OK because we took some profits of late and we are sitting on some cash, we are going to change tactics a bit. I have been watching earnings guidance statements of late and found a couple that look interesting. We are playing these with call options about 60-90 days out close to in the money. I have explained that in the past so I won’t bore you again but I will demonstrate what I mean with my first trade.

VAL The Valspar Corporation manufactures and distributes coatings, paints, and related products primarily in the United States, China, and Europe. The company's Coatings segment offers decorative and protective coatings for metal, wood, and plastic, primarily for sale to original equipment manufacturer customers. Its products include primers, top coats, varnishes, inks, sprays, stains, fillers, and other coatings used in a range of manufacturing industries, including building products, appliances, furniture, transportation, agricultural and construction equipment, metal packaging, and metal fabrication. This segment also provides coatings for interior and exterior use in metal packaging containers, such as food containers and beverage cans; coatings for aerosol and paint cans, crowns for glass bottles, plastic packaging, and bottle closures; and coil coatings that are applied to pre-engineered buildings and building components. In addition, it offers general industrial product line that includes a single source for powder, liquid, and electrodeposition coating technologies; and wood product line, which consists of decorative and protective coatings for wood furniture, building products, cabinets, and floors, as well as provides color design, manufacturing, and technical services for its customers. The company's Paints segment offers architectural paints, such as interior and exterior paints, stains, primers, varnishes, and high performance floor paints; and specialty decorative products, including enamels, aerosols, and faux finishes used in the do-it-yourself and professional markets. It also provides automotive refinish and aerosol spray paints. This segment distributes its products through home centers, mass merchants, hardware wholesalers, distributors, and independent dealers. In addition, the company offers specialty polymers, gelcoats, colorants, and furniture protection plans. The Valspar Corporation was founded in 1806 and is based in Minneapolis, Minnesota.

VAL had some very promising comments at their earnings release this week. Their fundamental are solid (not a nice and pretty as I usually gather.) In researching their option chains, I found a January 2011 35 dollar call option for 69 cents a contract. Remember a contract controls 100 shares of stock. For $69.00 I can control $3,387 worth of VAL. Volume and price has been following the positive statements. If I was buying this long I would be looking for a $36.00 stock by mid January. If I got that I would make about 6% on the $3,387.00. The same move in the stock will have a much more significant impact on the call option. If the stock moves toward 35 dollars a share my 69 cent contract will be worth about 1.25- 1.35. That would be a 95% gain.

The secret is to know when to get out. As you will see in one trade below it can be very tempting to get out early. However if you don’t your time value horizon collapses very quickly.

On similar news about future earnings we bought some call options in HRL. Hormel Foods Corporation, together with its subsidiaries, produces and markets various meat and food products in the United States and Internationally. It offers meat products, including fresh, frozen, cured, smoked, cooked, and canned meat. The company provides perishable meat products, which include fresh meats, sausages, hams, wieners, and bacon; poultry products that comprise JOTS products; and shelf-stable products, including canned luncheon meats, shelf-stable microwaveable entrees, stews, chilies, hash, meat spreads, flour and corn tortillas, salsas, and tortilla chips. It also offers nutritional food products and supplements, sugar and sugar substitutes, creamers, salt and pepper products, sauces and salad dressings, dessert and drink mixes, and industrial gelatin products. In addition, Hormel Foods offers refrigerated, microwaveable, multi-portion potato-/pasta-based side dish products. The company sells its products through its sales personnel, as well as through independent brokers and distributors. It was formerly known as George A. Hormel & Company and changed its name to Hormel Foods Corporation in January 1995. The company was founded in 1891 and is based in Austin, Minnesota.

These were March 2011 50 dollar call options and we got in at $1.78 per contract. So for every contract we bought, we are controlling $5,000 of Hormel stock for $1,78.

There were some nice pre-earnings announcements for DSW DSW Inc., together with its subsidiaries, operates as a footwear specialty retailer in the United States. It offers dress, casual, and athletic footwear for women and men, as well as accessories, handbags, and hosiery. The company also sells shoes and accessories through As of January 30, 2010, it operated 305 DSW shoe stores; and 356 leased shoe departments for other retailers. The company was formerly known as Shonac Corporation and changed its name to DSW Inc. in February 2005. DSW Inc. was incorporated in 1969 and is based in Columbus, Ohio. As of January 31, 2009, DSW Inc. operated as a subsidiary of Retail Ventures, Inc.

With the positive statements for 2011 we bought some April 2011 40 dollar call options for $1.00 a contract.

Just to show you this is not a for sure thing, we took a 44% loss on some call options yesterday on TEVA the Israeli based Pharm. We saw an upside of 37% on the call options but we missed our window and will suffer through the 44% loss.

Today we did take a beautiful 77% gain on some April 2011 call options for Amazon. Now I will be the first to say we are pulling out a bit early. When we did this trade and we mentioned here about 5 weeks ago, we were thinking about going long and buying the stock. At 110 a share it would tied up a lot of cash and we wanted to play the Holiday on line shopping season as well as the success of the Kindle I chose to go the options route and controlled a significant block of shares to see this 77% gain. If I had bought the stock I’d only be looking at about an 11% gain.

Since we can enjoy dividends as call option owners, we switched out long position in VLCCF, Knights Bridge Shipping from equities to an equal amount of call options contracts. The trade was neutral as we were dead even on the stock. It freed up some cash and we now have March 2011 20 dollar call options on VLCCF. If you are wondering we got the calls at 3.70 cents. The stock closed at 23.21 today so I will be in the money at 23.70 a share. That should be no problem. I am looking for a 40% gain by February on the calls.

We did the same exchange on our long position on our NAT GAS ETF UNG. However since this is just a play for the underlying commodity, we went way out to January 2012 and bought 7.00 call options for 85 cents each contract. We would be in the money at 7.85 cents. UNG closed today at $6.05.

And finally we are quite happy with our progress on MDR so we added to our position, but I was in an option groove so we bought some May 2011 MDR 15 dollar calls for 4.23 cents each contract. MDR closed today at 18.49 a share.

The view from our deck in Utah.  BEFORE the storm.

Happy Thanksgiving and Salve Lucrum


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