MDT, KCI, LNN, INTC options

Bought MDT Jan 2012 $35 strike calls for $6.60
Bought KCI Jan 2012 $30 strike calls for $10.50
Sold LNN Dec 2010 $30 strike puts $2.10.

The July INTC puts I wrote will expire unexercised this weekend.

MDT, LNN, PG, AAPL, GOOG, GSK, SPY

My goodness, what a week!

On the 28th I closed my outstanding puts on MDT and LNN, for $2.40 and $1.75, respectively.

On the 4th, I bought PG outright for $62 per share. I also bought 2012 calls on AAPL ($54.50 per share, strike @ $260) and GOOG ($91 per share, strike @ $510).

On the 5th, I bought GSK 2012 $40 strike calls for $2.80.

On the 7th, I bought AAPL 2012 $230 strike calls for $58.00. I also sold my GOOG stock (not the calls) because I believe my GOOG calls give me enough exposure to that stock.

Finally, I bought May 22 2010 $105 strike puts on SPY for $1.65. With just two weeks until expiration, that's a pure spec position. After the bizarro world action of the past week, I want a hedge.

Bought ROIC, Sold LNN puts

I put 0.4% of my portfolio in the optimistically acronymed ROIC at $10.25.

I also sold September $35 strike puts on LNN for $2.25 each. If the shares are put to me, I will have approximately 5% of my portfolio in LNN, at a net buy price of $32.75.

Sold LNN

Sold LNN for $37.99. I had a 18.6% profit on the position, and while it may climb higher, it's volatile (See the June, July, August, and October 2009 posts) and nearing fair value.

Sold GSK puts, December options expirations

I sold 3 GSK Feb 42.50 puts for $2.15.

December options contracts I wrote on LNN, KCI, and MOS expired unexercised.

My portfolio is currently 73% in stocks, 20% in investable cash, and 7% in cash securing puts.

Bought LNN, EBIX, Wrote MDT puts

I put 3% of my portfolio in LNN at $32, and another 3% in EBIX at $61.64. Sold 2 Jan $36 puts on MDT for $1.70.

LNN puts

I finally wrote puts on LNN. I wrote one contract December $35 puts, for $1.90/share. These puts will pay 5.4% [(1.90/35.00)*100 = 5.4]. I'd be happy to buy this stock at $33.10 ($35 - $1.90 = $33.10). It's currently trading around $43 after a recent price run up. This is a small cap (it's market cap is only around $525 million!) so it's price is extremely volatile. I think the market currently overvalues the stock, so I'm not willing to buy it outright.

LNN price movements

The puts on LNN I wrote that original e-mail about are paying well again. The stock price was $32 and December puts were paying $4.70 at that time. The stock price shot up to $36 when LNN released earnings; the puts no longer paid well. Now that the price has dropped, the puts are moving back to the $4.60--4.70. I, personally, will wait in hopes of LNN moving even lower. I may write puts at $25 at that time.

LNN discussion

The following is from a discussion I had about a new purchase; the other party is new to options. The stock was trading at $31--32 per share; it's currently at $34. The options trade I discuss has not, as of this writing, been accepted by a buyer. Since the stock price has increased, it is no longer as attractive (as valuable) to a buyer to ensure he can sell his stock for $30. This is a small cap stock and thinly traded; I'm keeping my order open in anticipation of LNN decreasing in price. If it continues to climb, I'll let it go; there's no profit in chasing diminishing returns.

<>

I think it would be a good idea to make some long stock picks before getting into options; without understanding how to buy a stock for long-term investment, it's tempting to use options to speculate, which is a bad idea. Just because an option pays a 10% premium doesn't mean it's a good buy! Anyway, here's information on the option order I put in today. This was a pick from Motley Fool Pro.

I've put in this trade, but it has not yet been accepted by a buyer. The stock is Lindsay Corporation (NYSE: LNN). The stock traded at about $32/ share today. I want this stock to end up as about 4% of my portfolio, which is currently about $225,000. So, 4% of $225,000 = a maximum of $9000 I can use to secure this put.

I would be happy buying this stock for $30 a share, but it wouldn't break my heart if I never owned shares, so I'm selling puts with a strike price of $30 a share. With my target allocation of $9000 in mind, that means I'm selling puts on 300 shares, which equals 3 contracts (each contract is for 100 shares, unless otherwise noted in the options chain. All orders are placed by contract rather than by share. I always double check to make sure I haven't accidently added an extra couple zeros!)

I write options in a time window of three-to-six months expiration time. That means today I'm looking at puts expiring in August, September, and December.

August $30 puts are currently paying $2.25 per share (that is, $225 per contract of 100 shares), September is at $2.95/ share, and
December is $4.70 per share.

That means the August puts will pay 7.5% ($2.25/$30),
September puts pay 9.8%, and
December puts pay 15.7%.

Puts have better payouts for longer expiration times; this is because you're "insuring" the stock for the buyer for a longer period of time. If something happens to the stock between now and, say, December, the buyer has limited his downside (he can sell at $30 a share no matter what) without limiting his upside (if the stock goes to $60, he reaps the benefits).

I've decided to write $30 puts expiring in December (the command is "sell to open"). I check to make sure I have enough cash in my account to secure the put, then click on the December $30 option (ticker +NRRXF ) in the option chain screen, which brings me to the screen for this option; it shows me the last buying and selling price for this option.

In this case, the last sale was at $4.80/ share on Thursday the 25th (today). It isn't unusual for no options to be traded for days on a small stock! The current bid for this option is $4.70/ share. The ask is $5.10/share; at least one person is willing to write this option for $5.10/share.

I place my own order; "sell to open three (3) contracts of +NRRXF, limit at $4.80/ share." That's $480 per contract, for a total return of $1440. Currently, that order is just sitting waiting for someone to accept it--like a stock order that has not yet reached your limit price.If someone accepts the contract, here's what will happen; my account will be immediately credited $1440. $9000 will be frozen, unavailable for withdrawal or stock purchases. However, it will remain in my money market account.

At the options expiration date, there are just two possibilities; either the stock will be selling at or above $30 in the open market, or it won't. If the stock is selling above $30/share, nothing happens; the option expires worthless to the buyer (except for the peace of mind it brought him) and I keep the options premium. If the stock is selling below $30, I still keep the premium, and the $9000 that was securing that put will be used to purchase 300 shares (3 contracts) of the stock. I don't have a choice there; if the stock has dropped to $5, I'm still obliged to buy it at $30.

The options premium can be considered as income, or as subsidizing the purchase of the stock. If the option expires, I'll pay $30 per share, but I was paid (hopefully) $4.80 per share; my net cost per share is $25.20 per share--compare this to purchasing out-right today for $32! The downside is the potential opportunity cost; if LNN jumps to $60 by December, I'll kick myself for not buying at $30. This is what I was talking about when I recommended using options with an investment mindset, rather than for speculation. It's important to know the company you're writing options on, so a significant change in share price won't be a surprise (barring a black swan event).