Live to Win With 3 Buy/Write Reviews

Includes: AAL, JBL, LDK
by: Dark Horse Traders' Hedge

Obsessive, Compulsive
Suffocates your mind
Confusion, delusions
Kill your dreams in time

You ask me how I took the pain
Crawled up from my lowest low
Step by step and day by day
‘Til there’s one last breathe to go

Live to win ‘til you die
‘Til the light dies in your eyes
Live to win, take it all
Just keep fighting ‘til you fall
– Paul Stanley

Confusion and delusions provide a fairly accurate backdrop as we go “step by step and day by day” toward June option expiration day (June 17, 2011). The stock market is possibly in its 6th consecutive losing week on the major indexes after having “crawled up from (the) lowest low” of 2008. Last week, as if suddenly awakened to the overall weakness in the economy, the market withered with each economic release reminding us that without hedging, the stock market will “kill your dreams in time.”

Fed Chairman Bernanke acknowledged the obvious in his remarks that the economy had weakened in recent weeks. His statement was further confirmed by the “Beige Book” release. Bernanke said the central bank would not consider the recovery well-established “until we see a sustained period of stronger job creation.” In other words, they will remain accommodating “til there’s one last breathe to go.”

Dark Horse Traders’ Hedge has 3 buy/write positions to review from the January 27, 2011 article “Money Changes Everything,” between now and June 17. For each position, we need to analyze the opportunity to roll the buy/write options, take delivery of additional shares or close/alter the position.

Jabil Circuit Inc. (NYSE:JBL)

JBL was recommend on January 27, 2011 at $20.56 acquiring ½ the desired shares and selling the June $21 call for $1.90 and the June $21 put for $2.40. JBL remains in the top 100 stocks ranked in the Sabrient VCU ranking system, so we want to continue our exposure to JBL as a long position without committing more cash to it at this point. The company continues to beat expectations with a +$0.54 vs +$0.51 expected gain in the most recent quarter. A forward p/e of 7.68 is well within the valuation range (see Earnings Buster article I and II).

As you will see, we have earned premiums since January 27, allowing us to lower our cost basis in JBL. With 7 trading days left, it appears we will be able to “take it all” from the June $21 call for $1.90. There is a small amount of meat left on the bone of the June $21 put, so we will want to look for an opportunity to close it between now and June 17.

Given the Wednesday closing price for JBL of $19.30, it will cost approximately $1.70 to buy back the June $21 put(s) sold for $2.40 and netting an additional $0.70 in premium. So as we look to roll the JBL buy/write, our current cost basis is $20.56 (purchase price) – $1.90 call premium – $0.70 net put premium or $17.96. The September $20 call will bring in approximately $1.35, and September $20 put, $2.10 for an additional $3.45 in premium on the position we started in January. My recommendation is to roll the option position rather than committing additional cash to the position by accepting delivery of the put(s).

US Airways Group, Inc. (LCC)

LCC gives me an opportunity to digress for a moment on a personal experience (my qualitative study based on a single observance). I recently had a 6:10am flight out of DFW on an airline whose identity will remain a secret other than to say it sounds like US Fareways and has a stock symbol with 2 letters after B but before D. This particular flight was boarded 30 minutes early, as usual, before the Captain came on and announced that we had a mechanical issue that could take up to an hour to repair and therefore we would de-board the plane. After a 45 minute attempt at finding some way to be comfortable in an airport “chair,” the boarding agent announced that this airline had borrowed the necessary part from the 8:30am flight (which already had me wondering what those poor travelers would do for their part), and so we were herded back onto the plane and into our uncomfortable seats.

It was immediately obvious that the plane had lost some passengers during the delay, because there were plenty of empty seats. This led me to think that once airborne, I might actually find some comfort before arriving in Phoenix. Just as we were getting settled, the Captain announced that this particular airline had now decided to cancel the 6:10am flight (now about 7:15am) because it didn’t have enough passengers. Once again we were herded off the plane to anxiously await the next great decision that might allow us to reach our destination that day. After a bit of confusion, the kind airline attendant announced that the next flight to Phoenix (being the 8:30am flight) was missing a part (now I wonder where that part went?) and so the plane assigned to the canceled 6:10am flight would replace the 8:30am flight, and everyone would need new boarding passes even if they were originally scheduled on the 8:30am flight. As if someone had announced free beer at a Cubs baseball game, most abandoned their kids and travel mates in an effort to get in that line. Somehow I was fortunate enough to have survived the onslaught and received a pass to board the same plane for the 3rd time that morning.

The remainder of my flight was fairly uneventful, but I do have one other quick observation to share as some poor passengers in Phoenix were introduced to a new airline policy I hadn’t encountered to date. Two gates down from my connection into Santa Barbara, another airline attendant came on the speaker with the same voice you hear in medical commercials as they list the possible side effects like they are reading the dessert menu at a 5 star restaurant. She informed the lucky passengers that their Captain has “called out” (another word for not showing up) for their 9:27am departure, but fortunately another Captain called in at 9:23am to take his place. She went on to say that airline policy provided the replacement Captain 2 hours to report and (as if this was a negative) they couldn’t board the plane until he arrived (gosh I would really like to wait on him in my 3 by 3 seat on the airplane without a/c). Please forgive my digression into my personal qualitative analysis.

So, from a quantitative and valuation perspective (hoping my personal experience was not indicative of the overall customer experience), LCC was and is a stock that we want exposure from (at least for now). LCC was recommended in January as a buy/write entering ½ the desired position at $11.05 and selling the June $11 call for $1.31 and June $11 put for $1.29. No action needs to be taken with respect to the call, as it will expire worthless (barring some major rally) on June 17. The stock closed at $8.28, which based on estimates, provides us exposure to forward earnings at a multiple of 3.94. The buy/write in January was intended to enter the position at a 20% discount to the stock price at that time.

This strategy is particularly good in flat or up trending markets. In a down trending market it is important to make sure hedges are in place (shorts such as RAIL, STI and USG to name a few) and to resist committing additional cash to long positions until we believe the market has stabilized. My recommendation on LCC is to buy back the June $11 put(s) for approximately $2.60 which equals the premium brought in from the June $11 call ($1.31) and June $11 put ($1.29). This results in ½ the desired position in LCC at $11.05, and it doesn’t commit additional cash to the position at this time. Analysts are expecting a +$.94 quarter which should provide us (all things being equal) a higher price to hopefully put a buy/write back in place on LCC.

LDK Solar Co, Ltd. (NYSE:LDK)

LDK is the 3rd and final buy/write option expiring in June. We recommended entering ½ the desired position in January at $12.95 and selling the June $13 call for $2.09 and the June $13 put for $2.11. Again, no action necessary on the call as it will expire worthless and allow us to recognize the $2.09 premium. However, the put position fits the “You ask me how I took the pain” lyric. LDK closed at $6.57 which is approaching the March 2009 lows of $4.55.

Despite offering an outlook for Q2 revenue that fell below analyst expectations, Brean Murry Carret & Co. analyst Wayne Chang reiterated a buy rating while lowering the price target from $20 to $12. Chang raised his estimate for this year’s EPS to $2.96 from $2.77 and $3.11 for 2012.

Lazard Capital reiterated a neutral rating while raising their 2011 estimate to $1.95 and further commented that “the risk/reward is becoming increasingly more attractive at these levels.” The consensus estimate from 19 analysts is for $2.46 in 2011, and that is plenty to warrant exposure to LDK whose forward p/e is 2.81.

That said, we don’t want to recommend investing more cash into the market until we get more stability, so LDK is a case of “Just keep fighting ‘til you fall.” The recommendation is to buy back the June $13 put for approximately $6.40 which increases our cost basis by $2.20 ($6.40 repurchase put – $2.09 call – $2.11 put) and leaves us with ½ the desired exposure to LDK. I don’t recommend covering the position with a call at this low level, but I do recommend selling a Sept $6 put for approximately $0.75, equal to the other ½ desired number of shares.


Buy to cover JBL June $21 put (JBL110618P00021000) at the market before June 17, 2011

Sell to open JBL Sept $20 call (JBL110917C00020000) at the market

Sell to open JBL Sept $20 put (JBL110917P00020000) at the market

Buy to cover LCC June $11 call (LCC110618P00011000) at the market before June 17, 2011

Buy to cover LDK June $13 put (LDK110618P00013000) at the market before June 17, 2011

Sell to open LDK Sept $6 put (LDK110917P00006000) at the market

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.