Thursday, March 31, 2011

Today's New Positions

I established 6 new CSP positions today. AVP & LOW declined today providing an opportunity to sell CSP's at my target buy price, which is about 30% below my fair value estimate.

Since I was holding over 78% in cash, I decided to sell some deep OTM CSP's on TLT for May expiration. TLT hasn't closed below $88 in several years so I sold 4 different strikes at $85, $86, $87, & $88. With the market overvalued, by the metrics I follow, if there's a correction, TLT should rise as investors flee to the safety of US Treasuries. If that occurs, these puts should expire in May, and free up the cash to pick up any new opportunities that arise.

As a result of today's trades, I'm currently 54% invested and 46% in cash, with 14 open positions, 4 CC positions and 10 CSP positions.

TLT - New Position




A new CSP position was established today on iShares Trust Barclays 20 Year Treasury Bond Fund (TLT). All prices include IB commissions.

This is the fifth position on TLT.







DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/31/2011TLTCSP Margin UsedCSP 200 TLT @ 88.00 ($17,600.00) 
3/31/2011TLTInitial Put OptionSTO 2 May11 88.00 Put @ 0.55  $110.57


Position Summary





Cost Basis($17,600.00)
Income Generated$110.57
Percent Income Generated0.63%
Annualized Income Generated4.59%
Net Profit If Assigned$110.57
Percent Return If Assigned0.63%
Annualized Return If Assigned4.59%
Days Held to Expiration50 days

TLT - New Position




A new CSP position was established today on iShares Trust Barclays 20 Year Treasury Bond Fund (TLT). All prices include IB commissions.

This is the fourth position on TBT.







DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/31/2011TLTCSP Margin UsedCSP 200 TLT @ 87.00 ($17,400.00) 
3/31/2011TLTInitial Put OptionSTO 2 May11 87.00 Put @ 0.36  $72.57


Position Summary





Cost Basis($17,400.00)
Income Generated$72.57
Percent Income Generated0.42%
Annualized Income Generated3.04%
Net Profit If Assigned$72.57
Percent Return If Assigned0.42%
Annualized Return If Assigned3.04%
Days Held to Expiration50 days

TLT - New Position




A new CSP position was established today on iShares Trust Barclays 20 Year Treasury Bond Fund (TLT). All prices include IB commissions.

This is the third position on TLT.







DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/31/2011TLTCSP Margin UsedCSP 200 TLT @ 86.00 ($17,200.00) 
3/31/2011TLTInitial Put OptionSTO 2 May11 86.00 Put @ 0.23  $46.57


Position Summary





Cost Basis($17,200.00)
Income Generated$46.57
Percent Income Generated0.27%
Annualized Income Generated1.98%
Net Profit If Assigned$46.57
Percent Return If Assigned0.27%
Annualized Return If Assigned1.98%
Days Held to Expiration50 days

TLT - New Position




A new CSP position was established today on iShares Trust Barclays 20 Year Treasury Bond Fund (TLT). All prices include IB commissions.

This is the second position on TLT.







DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/31/2011TLTCSP Margin UsedCSP 200 TLT @ 85.00 ($17,000.00) 
3/31/2011TLTInitial Put OptionSTO 2 May11 85.00 Put @ 0.12  $24.57


Position Summary





Cost Basis($17,000.00)
Income Generated$24.57
Percent Income Generated0.14%
Annualized Income Generated1.06%
Net Profit If Assigned$24.57
Percent Return If Assigned0.14%
Annualized Return If Assigned1.06%
Days Held to Expiration50 days

LOW - New Position




A new CSP position was established today on Lowes Companies Inc (LOW). All prices include IB commissions.











CriteriaValue
Dividend Champions StatusChampion
Years of Consecutive Dividend Increases48
Years of Positive Free Cash Flow (last 10 years)10
Fair Value Estimate$36.00
Target Buy Price$25.00
Target Margin of Safety30.56%
Actual Buy Price$25.00
Actual Margin of Safety30.56%








DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/31/2011LOWCSP Margin UsedCSP 200 LOW @ 25.00 ($5,000.00) 
3/31/2011LOWInitial Put OptionSTO 2 May11 25.00 Put @ 0.50  $100.57


Position Summary





Cost Basis($5,000.00)
Income Generated$100.57
Percent Income Generated2.01%
Annualized Income Generated14.68%
Net Profit If Assigned$100.57
Percent Return If Assigned2.01%
Annualized Return If Assigned14.68%
Days Held to Expiration50 days

AVP - New Position




A new CSP position was established today on Avon Products Inc (AVP). All prices include IB commissions.











CriteriaValue
Dividend Champions StatusContender
Years of Consecutive Dividend Increases22
Years of Positive Free Cash Flow (last 10 years)10
Fair Value Estimate$36.00
Target Buy Price$25.00
Target Margin of Safety30.56%
Actual Buy Price$25.00
Actual Margin of Safety30.56%








DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/31/2011AVPCSP Margin UsedCSP 200 AVP @ 25.00 ($5,000.00) 
3/31/2011AVPInitial Put OptionSTO 2 May11 25.00 Put @ 0.43  $85.07


Position Summary





Cost Basis($5,000.00)
Income Generated$85.07
Percent Income Generated1.70%
Annualized Income Generated12.42%
Net Profit If Assigned$85.07
Percent Return If Assigned1.70%
Annualized Return If Assigned12.42%
Days Held to Expiration50 days

Wednesday, March 30, 2011

Today's Closed Positions

Today I decided to close 5 CSP positions, which actually expired on Mar expiration, and the cash to secure the puts was returned on 3/18. So, technically, these positions were already closed, as far as my broker was concerned.

However, I was waiting to decide whether to continue with these positions, by selling the same strike puts, or to close them out. Since the market has continued to rise and the puts were getting further OTM, I decided to just close these positions today.

The date of closure is 3/18, since, as stated above, these were technically closed positions, which were returned to cash on 3/18.

With the rising market, which is overvalued by the metrics I follow (see Market Valuation Meters on the right), it's getting harder to find good opportunities. As a result, I'm currently 22% invested and 78% in cash, with 8 open positions, 4 CC positions and 4 CSP positions.

WMT - Closed




The Wal-Mart Stores Inc (WMT) Mar11 50.00 Put expired on 3/18. Today I decided to close the position. All prices include IB commissions.

Position Summary





Cost Basis$5,000.00
Net Profit$40.99
Percent Return0.82%
Annualized Return4.16%
Days Held to Expiration72 days


Trade History










DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
1/5/2011WMTCSP Margin UsedCSP 100 WMT @ 50.00 ($5,000.00) 
1/5/2011WMTInitial Put OptionSTO 1 Jan11 24.00 Put @ 0.41Expired $40.99
3/18/2011WMTCSP Margin ReturnedCSP 100 WMT @ -50.00  $5,000.00
3/18/2011WMT Net Cost/Profit-Loss ($5,000.00)$40.99
DTE72 Percent Profit-Loss/Annualized 0.82%4.16%

MDT - Closed




The Medtronic Inc (MDT) Mar11 35.00 Put expired on 3/18. Today I decided to close the position. All prices include IB commissions.

Position Summary





Cost Basis$7,000.00
Net Profit$156.14
Percent Return2.23%
Annualized Return9.36%
Days Held to Expiration87 days


Trade History











DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
12/21/2010MDTCSP Margin UsedCSP 200 MDT @ 35.00 ($7,000.00) 
12/21/2010MDTInitial Put OptionSTO 2 Jan11 35.00 Put @ 0.31Expired $61.07
1/24/2011MDTContinued TradeSTO 2 Mar11 35.00 Put @ 0.48Expired $95.07
3/18/2011MDTCSP Margin ReturnedCSP 200 MDT @ -35.00  $7,000.00
3/18/2011MDT Net Cost/Profit-Loss ($7,000.00)$156.14
DTE87 Percent Profit-Loss/Annualized 2.23%9.36%

LOW - Closed




The Lowes Companies Inc (LOW) Mar11 23.00 Put expired on 3/18. Today I decided to close the position. All prices include IB commissions.

Position Summary





Cost Basis$4,600.00
Net Profit$56.57
Percent Return1.23%
Annualized Return11.81%
Days Held to Expiration38 days


Trade History










DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
2/8/2011LOWCSP Margin UsedCSP 200 LOW @ 23.00 ($4,600.00) 
2/8/2011LOWInitial Put OptionSTO 2 Mar11 23.00 Put @ 0.28Expired $56.57
3/18/2011LOWCSP Margin ReturnedCSP 200 LOW @ -23.00  $4,600.00
3/18/2011LOW Net Cost/Profit-Loss ($4,600.00)$56.57
DTE38 Percent Profit-Loss/Annualized 1.23%11.81%

CL - Closed




The Colgate-Palmolive Company (CL) Mar11 75.00 Put expired on 3/18. Today I decided to close the position. All prices include IB commissions.

Position Summary





Cost Basis$7,500.00
Net Profit$297.97
Percent Return3.97%
Annualized Return8.19%
Days Held to Expiration177 days


Trade History












DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
9/22/2010CLCSP Margin UsedCSP 100 CL @ 75.00 ($7,500.00) 
9/22/2010CLInitial Put OptionSTO 1 Nov10 75.00 Put @ 1.11Expired $110.99
11/22/2010CLContinued TradeSTO 1 Jan11 75.00 Put @ 1.10Expired $109.99
1/27/2011CLContinued TradeSTO 1 Mar11 75.00 Put @ 0.77Expired $76.99
3/18/2011CLCSP Margin ReturnedCSP 100 CL @ -75.00  $7,500.00
3/18/2011CL Net Cost/Profit-Loss ($7,500.00)$297.97
DTE177 Percent Profit-Loss/Annualized 3.97%8.19%

ABT - Closed




The Abbott Laboratories (ABT) Mar11 44.00 Put expired on 3/18. Today I decided to close the position. All prices include IB commissions.

Position Summary





Cost Basis$4,400.00
Net Profit$33.99
Percent Return0.77%
Annualized Return7.42%
Days Held to Expiration38 days


Trade History










DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
2/8/2011ABTCSP Margin UsedCSP 100 ABT @ 44.00 ($4,400.00) 
2/8/2011ABTInitial Put OptionSTO 1 Mar11 44.00 Put @ 0.34Expired $33.99
3/18/2011ABTCSP Margin ReturnedCSP 100 ABT @ -44.00  $4,400.00
3/18/2011ABT Net Cost/Profit-Loss ($4,400.00)$33.99
DTE38 Percent Profit-Loss/Annualized 0.77%7.42%

Sunday, March 27, 2011

How to Determine the Value of a Stock




For the past several years I've used Morningstar's Premium service for stock valuation. Morningstar uses a Discounted Cash Flow model to determine Fair Value (i.e. intrinsic value), which can get quite complex. In his book, The Intelligent Investor, Benjamin Graham describes a simpler formula to determine intrinsic value.

Formula: V = EPS x (8.5 + 2G) * (4.4 / Y)

where:


  • V: Intrinsic Value
  • EPS: the company’s last 12-month earnings per share
  • 8.5: the constant represents the appropriate P/E ratio for a no-growth company as proposed by Graham
  • G: the company’s future long-term (five years) earnings growth estimate
  • 4.4: the average yield of high-grade corporate bonds in 1962, when this model was introduced
  • Y: the current yield on AAA corporate bonds


I use the modified formula from Old School Value, which uses a P/E of 7 for a no-growth company and a multiplier of 1.5G rather than 2G, since these are more conservative.

Modified Formula: V = EPS x (7 + 1.5G) * (4.4 / Y)

The original formula uses the last 12-month EPS (TTM), however, like Old School Value, I normalize EPS over a 10 year period, which estimates future EPS for the next 5 years, using a linear forecast based on the previous 10 years, and then takes the median of the previous 5 years and next 5 years to arrive at a normalized EPS. For estimated future 5yr growth rate I use 3 different sources, 1) Yahoo Finance, 2) Morningstar, and 3) MSN Money. I found that each site has a different 5yr estimate, so I use an average of these estimates.

Determining intrinsic value, no matter which method/formula is used, relies on estimating earnings and earnings growth, which is nothing more than an educated guess, so it's important to discount whatever valuation you determine. This is a Graham concept known as Margin of Safety. Purchasing stocks with a sufficient Margin of Safety below Fair Value helps to protect against being wrong on the earnings estimates/growth. How much of a Margin of Safety to require depends on your confidence level in the company and the estimates you use. I typically use a Margin of Safety range between 20%-40% below Fair Value.

Once I have all the input parameters I plug them into my spreadsheet, which is a modified version of the one at Old School Value, and calculate the Fair Value and Target Buy Price. I then compare the results to Morningstar's valuation.

Let's look at an example for Abbott Laboratories (ABT) using the modified Graham Formula:










InputValue
10yr Normalized Earnings$3.75
Average 5yr Growth Rate9.29%
20yr AAA Corp Bond Rate5.44%
Desired Margin of Safety20%
ResultsValue
Fair Value$64.00
Target Buy Price$51.00


To compare the Graham Formula to Morningstar's valuation I input Morningstar's Fair Value and Target Buy Price and solve for the implied 5yr growth rate. Here's the same example using Morningstar's Fair Value:










InputValue
M* Fair Value$68.00
M* Target Buy Price$54.00
M* Margin of Safety20%
10yr Normalized Earnings$3.75
20yr AAA Corp Bond Rate5.44%
ResultsValue
Implied 5yr Growth Rate10.28%


As you can see, both valuations are very close, with only a 1% difference in the 5yr growth rate.

Let's do another example, this time for Lowes (LOW) using the modified Graham Formula:










InputValue
10yr Normalized Earnings$1.94
Average 5yr Growth Rate14.60%
20yr AAA Corp Bond Rate5.44%
Desired Margin of Safety30%
ResultsValue
Fair Value$45.00
Target Buy Price$32.00


Here's the same example using the Morningstar's Fair Value:










InputValue
M* Fair Value$36.00
M* Target Buy Price$25.00
M* Margin of Safety30%
10yr Normalized Earnings$3.75
20yr AAA Corp Bond Rate5.44%
ResultsValue
Implied 5yr Growth Rate10.68%


Here you can see that there's almost a $10 difference in Fair Value and a 4% difference in the 5yr growth rate. That's still pretty close. One way to deal with differences is to use an average of both results which would be:






ResultsValue
Average Fair Value$41.00
Average Target Buy Price$33.00
Average 5yr Growth Rate12.64%


Now let's look at Pfizer (PFE), where the valuations are very different. Here's the modified Graham Formula:










InputValue
10yr Normalized Earnings$1.22
Average 5yr Growth Rate2.38%
20yr AAA Corp Bond Rate5.44%
Desired Margin of Safety30%
ResultsValue
Fair Value$10.00
Target Buy Price$7.00


Here's the same example using the Morningstar's Fair Value:










InputValue
M* Fair Value$26.00
M* Target Buy Price$18.00
M* Margin of Safety30%
10yr Normalized Earnings$1.22
20yr AAA Corp Bond Rate5.44%
ResultsValue
Implied 5yr Growth Rate12.84%


Morningstar's implied 5yr growth rate is about 10 times greater than the average 5yr estimates. That's a very big difference. Either Morningstar overestimated the growth rate or the analysts underestimated it. Again, you can use the average of both results:






ResultsValue
Average Fair Value$18.00
Average Target Buy Price$13.00
Average 5yr Growth Rate7.63%


So, there you have it. A fairly simple way to determine stock valuation and target buy price thanks to Ben Graham. It may not be an exact science, but it's definitely worth the effort.

Sunday, March 20, 2011

SYK - Closed




The Stryker Corp (SYK) Mar11 50.00 Call was exercised and the position was closed. All prices include IB commissions.

Position Summary





Cost Basis$5,000.00
Net Profit$635.74
Percent Return12.71%
Annualized Return15.42%
Days Held to Expiration301 days


Trade History



















DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
5/21/2010SYKCSP Margin UsedCSP 100 SYK @ 50.00 ($5,000.00) 
5/21/2010SYKInitial Put OptionSTO 1 Sep10 50.00 Put @ 2.55Exercised $254.54
9/17/2010SYKCSP Margin ReturnedCSP 100 SYK @ -50.00 $5,000.00 
9/17/2010SYKStock AssignedEX 1 Sep10 50.00 Put @ -50.00Called($5,000.00) 
9/24/2010SYKContinued TradeSTO 1 Nov10 50.00 Call @ 1.45Closed $145.24
10/29/2010SYKDividend ReceivedDIV 100 Dividend @ 0.15  $15.00
11/18/2010SYKBuy Back and Roll OutBTC 1 Nov10 50.00 Call @ -1.44  ($143.76)
11/18/2010SYKContinued TradeSTO 1 Dec10 50.00 Call @ 2.21Closed $221.24
12/13/2010SYKBuy Back and Roll OutBTC 1 Dec10 50.00 Call @ -3.26  ($325.76)
12/13/2010SYKContinued TradeSTO 1 Mar11 50.00 Call @ 4.51Exercised $451.24
1/31/2011SYKDividend ReceivedDIV 100 Dividend @ 0.18  $18.00
3/18/2011SYKStock CalledEX 1 Mar11 50.00 Call @ 50.00  $5,000.00
3/18/2011SYK Net Cost/Profit-Loss ($5,000.00)$635.74
DTE301 Percent Profit-Loss/Annualized 12.71%15.42%

Friday, March 18, 2011

TLT - Adjustment




The following adjustment was made today on iShares Trust Barclays 20 Year Treasury Bond Fund (TLT). All prices include IB commissions.







DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/18/2011TLTBuy Back and Roll OutBTC 1 Mar11 98.00 Put @ -4.81  ($481.01)
3/18/2011TLTContinued TradeSTO 1 Jun11 98.00 Put @ 6.82  $681.87


Current Position Summary





Cost Basis($9,800.00)
Income Generated$555.04
Percent Income Generated5.66%
Annualized Income Generated8.08%
Net Profit If Assigned$555.04
Percent Return If Assigned5.66%
Annualized Return If Assigned8.08%
Days Held to Expiration256 days


Trade History

















DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
10/4/2010TLTCSP Margin UsedCSP 100 TLT @ 98.00 ($9,800.00) 
10/4/2010TLTInitial Put OptionSTO 1 Nov10 98.00 Put @ 0.49Closed $48.99
11/18/2010TLTBuy Back and Roll OutBTC 1 Nov10 98.00 Put @ -2.25  ($224.96)
11/18/2010TLTContinued TradeSTO 1 Dec10 98.00 Put @ 3.39Closed $339.04
12/8/2010TLTBuy Back and Roll OutBTC 1 Dec10 98.00 Put @ -4.96  ($495.96)
12/8/2010TLTContinued TradeSTO 1 Jan11 98.00 Put @ 5.74Closed $573.99
12/28/2010TLTBuy Back and Roll OutBTC 1 Jan11 98.00 Put @ -6.71  ($670.96)
12/28/2010TLTContinued TradeSTO 1 Mar11 98.00 Put @ 7.84Closed $784.04
3/18/2011TLTBuy Back and Roll OutBTC 1 Mar11 98.00 Put @ -4.81  ($481.01)
3/18/2011TLTContinued TradeSTO 1 Jun11 98.00 Put @ 6.82  $681.87
6/17/2011TLT Totals ($9,800.00)$555.04
DTE256 Percent Income/Annualized 5.66%8.08%

TBT - Adjustment




The following adjustment was made on today on ProShares UltraShort 20+ Year Treasury (TBT). All prices include IB commissions.







DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/18/2011TBTBuy Back and Roll Out/UpBTC 2 Mar11 41.00 Call @ -0.01  ($2.00)
3/18/2011TBTInterim TradeSTO 2 Apr11 40.00 Call @ 0.19  $38.57


Current Position Summary





Cost Basis($9,200.00)
Income Generated$666.30
Percent Income Generated7.24%
Annualized Income Generated7.38%
Net Profit If Assigned($533.70)
Percent Return If Assigned-5.80%
Annualized Return If Assigned-5.91%
Days Held to Expiration358 days


Trade History





















DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
4/22/2010TBTCSP Margin UsedCSP 200 TBT @ 46.00 ($9,200.00) 
4/22/2010TBTInitial Put OptionSTO 2 May10 46.00 Put @ 0.55Closed $110.57
5/21/2010TBTBuy Back and Roll OutBTC 2 May10 46.00 Put @ -7.24  ($1,448.13)
5/21/2010TBTContinued TradeSTO 2 Sep10 46.00 Put @ 8.14Exercised $1,628.57
9/8/2010TBTCSP Margin ReturnedCSP 100 TBT @ -46.00 $4,600.00 
9/8/2010TBTStock AssignedEX 1 Sep10 46.00 Put @ -46.00 ($4,600.00) 
9/9/2010TBTInterim TradeSTO 2 Oct10 37.00 Call @ 0.27Expired $54.57
10/21/2010TBTInterim TradeSTO 2 Nov10 37.00 Call @ 0.27Closed $54.67
11/18/2010TBTBuy Back and Roll Out/UpBTC 2 Nov10 37.00 Call @ -0.23  ($46.33)
11/18/2010TBTInterim TradeSTO 2 Dec10 38.00 Call @ 0.91Closed $182.57
12/13/2010TBTBuy Back and Roll Out/UpBTC 2 Dec10 38.00 Call @ -1.83  ($365.43)
12/13/2010TBTInterim TradeSTO 2 Mar11 41.00 Call @ 2.29Closed $458.67
3/18/2011TBTBuy Back and Roll Out/UpBTC 2 Mar11 41.00 Call @ -0.01  ($2.00)
3/18/2011TBTInterim TradeSTO 2 Apr11 40.00 Call @ 0.19  $38.57
4/15/2011TBT Totals ($9,200.00)$666.30
DTE358 Percent Income/Annualized 7.24%7.38%

JNJ - Adjustment




The following adjustment was made today on Johnson and Johnson (JNJ). All prices include IB commissions.








CriteriaValue
Dividend Champions StatusChampion
Years of Consecutive Dividend Increases48
Years of Positive Free Cash Flow (last 10 years)10
Ratio of P/E at Cost / 5yr Average P/E0.81
Discount to Morningstar's Fair Value Estimate22.08%








DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
3/18/2011JNJBuy Back and Roll OutBTC 1 Mar11 60.00 Put @ -1.63  ($163.01)
3/18/2011JNJContinued TradeSTO 1 Apr11 60.00 Put @ 1.89  $188.99


Current Position Summary





Cost Basis($6,000.00)
Income Generated$120.02
Percent Income Generated2.00%
Annualized Income Generated9.13%
Net Profit If Assigned$120.02
Percent Return If Assigned2.00%
Annualized Return If Assigned9.13%
Days Held to Expiration80 days


Trade History











DateStockDescriptionTransactionStatusStock InvestmentIncome Generated
1/25/2011JNJCSP Margin UsedCSP 100 JNJ @ 60.00 ($6,000.00) 
1/25/2011JNJInitial Put OptionSTO 1 Mar11 60.00 Put @ 0.94Closed $94.04
3/18/2011JNJBuy Back and Roll OutBTC 1 Mar11 60.00 Put @ -1.63  ($163.01)
3/18/2011JNJContinued TradeSTO 1 Apr11 60.00 Put @ 1.89  $188.99
4/15/2011JNJ Totals ($6,000.00)$120.02
DTE80 Percent Income/Annualized 2.00%9.13%