By Scott Brown at Sabrient
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Oh We can dance, we can dance they’re doin’ it from pole to pole
We can dance, we can dance everybody look at your hands
We can dance, we can dance everybody’s takin’ the chance
Dance, Safety dance
Oh well the safety dance – Men Without Hats
We enter 2011 with options expiring in the Dark Horse Traders’ Hedge (DHTH) VIRTUAL portfolio on January 21, 2011. These four positions have performed well, allowing us to achieve our goals using Phil’s Buy/Write strategy. This allows us to take some profits off the table in a “safety dance.”
Gannett Co. (NYSE:GCI) was purchased in our virtual portfolio on July 26, 2010 at $14.52. GCI closed today (1/10) at $14.85 so a reader might ask why this is good news as the stock has moved only $0.33 since July 26. Recall that we liked GCI because Sabrient had a STRONG BUY, with a Value score of 66 and a Fundamentals score of 97. We bought 200 shares (using a virtual $100,000 portfolio) and sold 2 Jan 2011 $15 calls for $1.75 and 2 Jan 2011 $15 puts for $2.25. So we got into a strong Value stock and lowered our cost basis to $12.77 by using options.
On January 21, 2011 the options will expire allowing us to roll forward 3 months to earn additional premiums on GCI. DHTH will buy back whichever side of the option position has value (if the stock is below $15 we will buy the put back, and if above $15 we will buy back the call). Either way, we will have entered GCI at a 15-20% discount to the stock price and we will roll our option positions to April 15, 2011 (Tax Day!) for approximately $2.65 in additional premiums (April $15 call $1.30 and April $15 put $1.35). So, we can dance onward with GCI, lowering our cost basis to $10.12.
MEMC Electronic Materials (WFR) was purchased in our virtual portfolio on August 11, 2010 at $10.31 following significant insider buying . (As an aside, can anyone make sense out of the stock symbol WFR for MEMC Electronic Materials?) WFR closed today (1/10) at $11.59, and we continue to be positive on the stock.
Additionally, we used Phil’s Buy/Write Strategy to lower our cost basis to $9.29 by selling Jan 2011 $11 calls and puts. Much like the case with GCI, we will want to dance onward with WFR, and over the next 9 days we’ll want to buy back the position that has value and roll into April Buy/Write positions. If the stock remains above $11 we will want to repurchase the Jan $11 calls. We will be able to record another roughly $2.03 in premium by selling the April $11 call ($1.33) and April $11 put ($.70). Assuming it will cost approximately $0.50 to buy back the January call, we will have lowered our cost basis in WFR to $7.81, which is definitely worth dancing about.
VEECO Instruments Inc. (NASDAQ:VECO) was purchased in our virtual portfolio on August 25, 2010 at $31.93, using Phil's Buy/Write Strategy with October 2010 contracts. On October 10, 2010, DHTH rolled those contracts to January 2011, further reducing the cost basis to $20.51. With VECO closing at $47.05 and our strikes being at $32, we believe it is time to play the “Safety Dance” and take our profits to another position. VECO will be called away next Friday for $32 — having earned $11.50 in option premium since August 25, 2010 for a 36% profit in 5 months.
World Acceptance Corp. (NASDAQ:WRLD) was purchased on October 28, 2010 at $41.67. Using Phil's Buy/Write Strategy, we also bought the January 2011 $45 calls and puts to lower our cost basis to $34.47. WRLD closed today (1/10) at $52.34. As with VECO, we are doing the “Safety Dance” and allowing the stock to be called away next Friday at $45, giving us a very nice 25% profit in just 3 months.
Over the next 9 days I will be looking at opportunities to replace VECO and WRLD in the virtual portfolio, using Phil Davis’ Buy/Write Strategy to enter value stocks at a 15-20% discount.
GCI – Over the next 9 days buy back the call or put portion of January $15 options at the market.
SELL GCI APR $15 (GCI110416C00015000) call for approximately $1.30
SELL GCI APR $15 (GCI110416P00015000) put for approximately $1.35
WFR – Over the next 9 days buy back the call or put portion of January $11 options at the market.
SELL WFR APR $15 (WFR110416C00011000) call for approximately $1.33
SELL WFR APR $15 (WFR110416P00011000) put for approximately $.70
VECO – Allow stock to be called away at $32
WRLD – Allow stock to be called away at $45
Dark Horse Trader’s Hedge
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.