A very ugly open to June as the May jobs reports comes in much worse than expected and stocks had the worse day of the year on Friday. As I have done previously with Cisco Systems (NASDAQ:CSCO) and Oracle (NYSE:ORCL) this week, I initiated an option strategy on Corning (NYSE:GLW) during Friday's selloff. I believe discretion is the better part of valor in this market and I am happy to take a robust effective yield while the market goes through a tough environment over the medium term. Corning also offers a very low valuation and looks like it has technical support near these levels.
Option Strategy: Sell the January 2013 $12.50 puts on GLW for $1.35.
Outcome 1: Corning stays above $12.50 at the expiration of the option on January 19th and the investor picks up the $1.35 premium for an effective annual return of around 17%
Outcome 2: Corning dives below $12.50 and the stock gets "put" to the investor for a cost adjusted $11.15 a share ($12.50 - $1.35).
Four reasons GLW will stay above $12.50 a share:
- The stock is selling at the very bottom of its five year valuation range based on P/B, P/E, P/S and P/CF.
- The company has a robust balance sheet with almost $3 a share in net cash on the books (more than 25% of market capitalization. It also yields 2.3%.
- The stock sells for just 91% of book value and for just 8.5 times forward earnings (less than 6.5 times forward PE if you take out cash)
- The stock has held pretty steady over this latest selloff and has outperformed the S&P over the last week (See Chart)