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MIKE PHILLIPS Mike Phillips is a seven-year employee of Power Financial Group, Inc. He is involved in the support and development of PowerOptions, an award winning Internet site for searching for stock option strategies and PowerOptionsApplied, an Internet site providing an option-trading... More
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Iron Condor: Neutral Strategy for Uncommon Profit
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  • WellPoint (WLP) 2.7% Potential Return with 5.2% Maximum Loss
    Investing with collars might be a good idea in this volatile market, and today looks like a good day to get in with the market bleeding red.  

    A collar is selling a call option against a stock and purchasing a put option for insurance or protection.  The income from selling the call option pays for the insurance protection of the put option.

    A candidate investment you might consider is a collar for WellPoint (WLP) which was found using PowerOptions collar search tool. Currenlty, WellPoint stock can be purchased for $64.49, a 2011 Oct 65 call option can be sold for $2.68 and a 2011 Oct 60 put option can be purchased for $1.49.  The collar has a potential assigned return of 2.7% and a maximum loss of 5.2% with only 30 days until expiration for realizing the potential profit.

    WellPoint oparates as a health benefits company.  The company has over 30 million medical members.  In its most recent conference call, the company indicated the commercial segment and the capital management areas of the company are doing well, but the Senior business was not performing as well as hoped.   The reason for the poor performance of the Senior business is a higher than expected Senior medical costs in Northern California.  The company had a lot of new Senior members as a result of competion leaving the market segment. 

    This problem should only be a temporary road bump, as WellPoint will take care to get costs in line with revenue for the Norther California area.

    In the conference call, the company anticipates their business model will continue to realize 10% annualized growth over the next few years.

    WellPoint's stock price is shown below:

    WellPoint Stock Price Chart

    WellPoint's stock has a nice support level around $55 and has recently taking a dip from its recent resistance level around $68.

    A profit loss for the WellPoint collar is shown below:



    As a bonus WellPoint pays a quarterly dividend of $0.25.

    Sep 22 10:39 AM | Link | Comment!
  • What's Up with SIRIUS’s Stock Options?

    The stock option volume for SIRIUS Satellite (SIRI) has been going orbital lately.  Maybe because the company added 257,000 net subscribers in the fourth quarter of 2009, which is pretty good. Or maybe it’s in anticipation of the company’s upcoming conference call in the next few weeks.  Maybe the company is a target for acquisition and there’s also some speculation the company may execute a reverse stock split.

    On the surface, a reverse stock split doesn’t seem like such a big deal, but with SIRIUS’s stock price less than $1.00, it might be a big deal for a couple of reasons.

    First, on a positive note, a reverse stock split would increase SIRIUS’s stock price, potentially into a price range where institutions might consider purchasing the stock. Second, on a negative note, the company’s stock price would then be in a range where short sellers could short the company’s stock.

    SIRIUS offers satellite radio services.  The company offers over 130 channels of digital-quality radio with formats encompassing sports, news, talk, entertainment, traffic, weather and data.  SIRIUS also provides 69 channels of commercial-free radio.

    SIRIUS’s programming includes Howard Stern, CNBC, CNN, Martha Stewart, BBC World Service, NPR and Radio Disney.  Around-the-clock traffic and weather reports for 20 markets are also available.

    SIRIUS also provides three channels of children’s TV with programs such as Nickelodeon, Disney Channel and Cartoon Network. 

    SIRIUS radios are available in many new automobiles, which has been a source of the company’s troubles over the last couple of years, as sales of automobiles plummeted. 

    SIRIUS’s low P/E of 6 is very attractive considering the company has a positive cash flow from operations, but the company has a very large debt-to-equity ratio, which is not so good.  On the downside, the company’s satellites have a limited useful life, so satellites will have to be replaced, which is very expensive.  The company will also face increasing competition from other forms and avenues of entertainment such as terrestrial radio, HD radio, mobile phones, iPods, MP3 devices and other next-generation technologies. As long as SIRIUS can continue to add more net new subscribers and also make the interest payments on its debt, the company should be able to survive.  But at this point it’s difficult to foresee whether SIRIUS will survive.

    The company’s stock price has been on the upswing over the last year, after falling off of a cliff in 2008.

    SIRI Chart

     

    SIRIUS’s stock options indicate something is up with SIRIUS and we’ll probably find out what it is over the next few weeks or months.  In the interest of fair disclosure, I’m long SIRI.  I usually don't invest in companies in SIRIUS's situation, but I just couldn't resist.



    Disclosure: Long SIRI
    Feb 02 1:21 PM | Link | Comment!
  • Kroger and Bare Escentuals

    There’s nothing related between Kroger (KR) and Bare Escentuals (BARE), just going to mention one of the companies, Bare Escentuals, we highlighted in a previous article on December 15, 2009 is going to be acquired by Shiseido. Shiseido is Japan’s largest cosmetic company and announced their plan to acquire Bare Escentuals on January 14, 2010, almost exactly one month after the large spike in call option volume occurred which we highlighted in the article. Bare Escentuals closed at $12.31 on December 15, 2009 and at $18.07 on January 15, 2010, a nice return of 47%.

    With the beaten down U.S. dollar and stock prices of U.S. companies, it would not be surprising to see a few more acquisitions of U.S. companies by foreign companies, as U.S. companies are valued at quite a discount from what they were a few years ago.

    Grocery retailer Kroger popped up on the stock option volume radar on Friday. In Kroger’s case, we don’t foresee an acquisition of Kroger by a foreign company or by any other company for that matter. However, “Kroger” and “high stock option volume” don’t often collide in the same sentence, so something is up.

    Maybe investors are looking at defensive stocks, but no other grocery retailers appeared on the high stock options volume radar on Friday.

    Kroger’s trailing twelve month [ttm] P/E of 86 is way out of kilter for a grocery retailer. For example Costco’s (COST) ttm P/E is currently at 23. Based on this, Kroger’s stock price should be around $6 instead of its current price of $21.77.

    The performance of Kroger’s stock price over the last couple of years has been dismal.
    KR Chart

    The stock option for Kroger experiencing the highest volume on Friday was the out-of-the-money April 22.50 call option, which has a bullish flavor.

    With Kroger’s high P/E, a collar might be in order for Kroger, a covered call protected by a put option. A collar for July looks attractive with a %if unchanged potential return of 3.3% and a %if assigned potential return of 6.8%. The call option of interest to short would be the July 22.5 and the put option to purchase would be the July 17.5. The maximum potential risk for this position is about 17%.

    The profit and loss chart for one contract of this collar position is shown below:

    KR Chart

    To enter the collar position an investor would purchase the stocks in multiples of 100 shares for their trading portfolio and sell one call option and purchase on put option for each 100 shares of stock purchased for their personal stock portfolio.

    Disclosure: No position in KR, BARE or COST.
    Jan 25 9:39 AM | Link | Comment!
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