Wednesday, August 28, 2019

YELP - Are call buyers right?

A reader pointed out this call and I can see it could be compelling.  Are the call buyers, who are willing to pay $1.10 for the right to buy YELP at $39, which is quite a high price, correct that YELP will go up that high? .  The call details are below.




Many users of calls to boost income could buy into this trade but caution is important.  I cannot tell you how many people get sucked into this type of trade and the stock tanks and you are stuck.

YELP's price may or may not tank, and you may be called away for a juicy over 20% gain after all YELP's 52 week high is $52.50  Then again, if YELP does tank, you have only the premium which will probably not make up for the capital loss.

Traders be careful.

M* MoneyMadam

Monday, August 26, 2019

MSFT calls and capital gains

This cat and mouse game is not about the Apple invention, the mouse, it is about Microsoft.  Tomorrow I am going to go after another MSFT call; here's why.

  • MSFT has growing revenues which are hard to find in the group of stocks in which I invest; stocks that pay a dividend.
  • Microsoft's P/E (price earnings ratio) of 30.5 reflects that growth.
  • MSFT's dividend yield is low not even beating the 2 year US Treasury.
  • Microsoft's ex-dividend date tends to fall one day before quarterly options expire

I like Microsoft but it is not one of the stocks I cannot afford to lose.  While I am basically an income investor, I do use growth in the portfolios I manage; Microsoft is evidence of that. But income is king and covered calls have provided a nice income.  

I will not add to MSFT tomorrow just to execute this trade.  I will use shares from my existing cost basis.  Below are the potential results of the a $150 strike, November 15, 2019 expiration.  























The above table illustrates your potential return if you bought at the close on Monday.  You can use my call calculator to change the basis and premium to determine your potential return when trading commences on Tuesday, August 27, 2019.

The next  table illustrates my potential return using the cost basis of the shares I will use to cover the call.   I may get to keep MSFT or  I could lose it.  If I lose it to the call buyer, I will have taken enormous profit.  And, should MSFT have a price correction that does not make it a poor fundamental play, I could add again and sell more calls on the new cost basis.





















The Cat and Mouse game.  I have been using this MSFT covered call strategy for the past 8 quarters and when the stock is at or above the strike price, the call buyer exercises the option to buy early.  This allows the buyer, who paid me the premium, to cash the dividend.   Therefore, a better measure of this call option would be to not include the dividend and see how it works out.






In the case of MSFT, the dividend is comforting but not consequential.  Capital gains and call premium income are good for ordinary income investors and sometimes you can find growth as well.

M*  MoneyMadam
Disclosure:  Long MSFT,  intending to sell calls

8/27/2019 Update to Post

Here is the actual trade executed this morning:  Sold $150 strike 11/15/2019 expiration for a premium of $1.60  




Monday, August 12, 2019

A case for Selling Calls for the Income Investor

Call income seems to accompany dividends as the best income tools for August.  Bond interest is so low and quality dividend stocks are so expensive.  Therefore, I sell covered calls on existing positions hoping I do not lose too much opportunity by having my stocks called away.

August is a pretty typical month for call expirations.  History tells us 90 percent of calls expire without action and 10 percent are assigned.   In the table below, I have 18 calls with August expiration dates.

As of today, I have 4 in the money which means the current stock price is above the strike price and 14 out of the money where the current stock price is below the strike price of the call. See the table below.



Only one of these stocks does not pay a dividend and that is YELP.  When I realized YELP was not going to perform quickly, I sold a call very close to the current price and my basis and am hoping it is called away which means the call buyer not only paid me a premium for the option but will also pay me the strike price.  That makes me even on the stock and the call premium in my pocket.

Three other stocks have low dividend yields, MSFT, NVDA and SWKS.  I consider a yield low if it is below the 2 year U.S. Treasury yield so SWKS with a yield of 1.99% may not be considered a low yield stock for some.

I like MSFT but with such a low dividend, as an income investor, I am willing to lose part of my position to the call buyer.  I am underwater on NVDA and will hope the China situation improves at some point.  I will continue to sell calls that are close to my basis so that I can unload NVDA in a similar fashion to YELP.

FOUR IN THE MONEY CALLS

The four income money calls are:   MSFT $135, WDC (Western Digital Corp.) $52.50, CVS $57.50, and YELP $34.   Expiration dates are August 16, 2019 except where noted.  My reasons for risking losing these stocks to the call buyer are:

  • MSFT - yield is too low
  • WDC - yield is good but not growing, EPS are less then dividend paid out but growing
  • CVS - (August 23 expiration)stock price is weak, I added to my shares that are underwater, and sold calls against the low buys
  • YELP - no dividend and stock price is not performing as hoped 

The downside of selling covered calls is two fold. one is lost opportunity.  The call buyer was right to pay you the money for the option to buy, they execute the call and then the stock soars and you miss out on the growth.    If you always look back and are cannot afford to lose a favorite stock, don't sell calls against your beloved stock.

The second risk is your shares are on call, the stock price tanks, you would like to get rid of the stock but cannot unless you pay money to buy back the call.   This risk is untenable for an income investor.  We don't pay out, we deposit funds.  The moral is to pick the underlying stock carefully.

FOURTEEN CALLS OUT OF THE MONEY

The 14 out of the money calls are listed below.  Each stock pays a decent dividend and I am willing to keep them.  I am hoping for additional volatility that may allow additional call selling.  But I am not in such a hurry to lose these stocks so I pick strike prices that I think are harder for the stock to attain before the call expires.  Expiration dates are 8/16/2019 except where noted.

  • MSFT - $145 low yield but upside potential for this very well run company 52 week high $141.68
  • COP - $67.50 nice dividend increases of 7+% recently  
  • LVS - $62, $65, $67.50 High yield with enough volatility that strike prices well above my basis are available.
  • M - $23 High yield with an improving balance sheet and very low P/E (price earnings ratio)
  • WSO - $180 Nice yield, with good fundamentals, headline risk due to global exposure provides strike prices well above my basis
  • SWKS - $82.50, $85 Decent yield, good balance sheet, nice volatility, I have been able to sell calls two - three times per year
  • WMT- $115 Walmart does not raise the dividend much and the yield is mediocre, strike prices near the 52 week high of $115.42 pay enough premium to make WMT a hold.
  • WDC - $55 High yield and improving fundamentals
  • SWKS- $81 (August 23 expiration) Decent yield but enough volatility to enjoy call premiums more than once a year
  • RDS.A - $63.50 (August 23 expiration) Very Good Yield, calls available only about once a year and I sell calls on only part of my position always above my basis and hopefully pick a strike price high enough that I am not called away.
  • NVDA- $185 (August 30 expiration) my worst performing stock of the group.  Not enough dividend to care if it is called away.   
In my case 22.22% of the calls are likely to be exercised versus the historical average of 10% but we still have to see what happens the rest of August.  This post illustrates how conservative income investors can use call options to boost their income during a time when quality dividend stocks are expensive and quality bonds are outrageously expensive.

M* MoneyMadam



Thursday, August 8, 2019

Novocure NVCR

This stock idea is totally out of range for TheMoneyMadam except for one metric and that is call option potential; that potential allows you to generate income on a non dividend stock.   If you believe in your pick you can concentrate on reaping gains from a growth stock while you work the calls.

This stock is in my portfolio because Alfred Ferol alerted me to the science behind their products.  It is my own analysis of the stock’s potential for growth and income that makes me agree that this stock is worth the risk for me.

Let’s begin with the underlying stock and then I will present several call options that make sense to me.

NOVOCURE, symbol NVCR


Novocure is actually a medical device company operating as a bio technology stock.  The company describes it this way.



treating cancer
with electric fields

Tumor Treating Fields uses alternating electric fields specifically tuned to target cancer cells. Once the electric fields enter the cancer cell, they attract and repel charged proteins during cancer cell division.



By using physics to influence biology, Novocure discovered another way to treat cancer.  Their mechanism of action is broadly applicable across a variety of solid tumors.  As you read through their clinical studies, you can see their therapy is used in conjunction with chemotherapy to extend survival.

REVENUE GROWTH Catalyst

Large market growth catalyst from improving life expectancy when used in common with chemotherapy is real.  Optune is the brand name of their tumor treating fields device for glioblastoma.  Use of tumor treating fields with Optune for Glioblastoma and mesothelioma is  FDA approved.  

Sales of FDA approved products are growing.  And, Medicare will start paying for the treatment effective September 1, 2019.  That alone should be a catalyst for growth.

FUTURE Growth Opportunities

From Novocure’s website:


The science of Tumor Treating Fields extends beyond glioblastoma. Novocure has ongoing or completed clinical trials investigating Tumor Treating Fields in mesothelioma, brain metastases, non-small cell lung cancer, pancreatic cancer, ovarian cancer and liver cancer.
2018 New Diagnoses that Novocure may be able to help treat.


























If this treatment is successful, it is truly a gift for these patients. 
Novocure Fundamentals 

Novocure, like many biotech companies is in the developmental stage and that requires money.   Novocure raised money through their public offering and they have used debt.    

Novocure, unlike many biotech companies has a product approved by the FDA (Federal Drug Administration) and is approved by Medicare.  That means they have revenues.   

Novocure continues to burn cash but is improving cash flow.  With Medicare payment approval cash flow should increase.  The table below clearly presents revenue growth over the past 2 and 1/2 years.  This is without the benefit of Medicare payment approval.

  Revenue / EPS Summary *  
 
 Fiscal Quarter 2019
(Fiscal Year)
2018
(Fiscal Year)
2017
(Fiscal Year)
March      
   Revenue $73,309(t) $52,125(t) $34,880(t)
   EPS -0.13 (3/31/2019) -0.23 (3/31/2018) -0.21 (3/31/2017)
   Dividends N/A N/A N/A
June      
   Revenue $86,713(t) $61,514(t) $38,376(t)
   EPS -0.01 (6/30/2019) -0.17 (6/30/2018) -0.24 (6/30/2017)
   Dividends N/A N/A N/A
September      
   Revenue   $64,756(t) $50,109(t)
   EPS   -0.12 (9/30/2018) -0.12 (9/30/2017)
   Dividends   N/A N/A
December  (FYE)      
   Revenue   $69,674(t) $53,661(t)
   EPS   -0.17 (12/31/2018) -0.13 (12/31/2017)
   Dividends   N/A N/A
Totals      
   Revenue $160,022(t) $248,069(t) $177,026(t)
   EPS -0.14 -0.69 -0.7
   Dividends N/A N/A N/A
   Previous 3 Years
 
 
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Novocure is a developing biotechnology company and medical device manufacturer that has revenues but is burning cash as it continues the clinical trials to measure the effectiveness of their science in more cancers. 
This table presents Novocure's current fundamentals.



NVCR raised capital when they went public and have financed operations with debt.  If I have one concern it is the high D/E (debt to equity ratio.)  Even with established companies, I like to see D/E ratios of 1 or under.   Some argue that debt is cheap and there is some validity to that.  
I am forgiving that concern as I roll through the options calendar and take advantage of calls to create income.  See below

INCOME Potential through call options. 

I bought NVCR on Tuesday during the overall market swoon at $81.05.  Wednesday while NVCR was rebounding in sympathy with the overall market, I sold a September 20, $90 for $2.75.  That call options is presented first.  Today NVCR has even better calls and the second call option shows a call available today. 

August 7, 2019 Call
























August 8, 2019 Call
If you bought today here is what a $95.00 call would look like.





















But consider a more patient trade.  Buy last Tuesday at $81.05 and sell the $95 today and look at the gain.
























Over time, we have worked this stock.  You can see below a list of buys, sells, and calls.  Out of 3,400 shares we have 1,100 left.   So far we have invested around $134,000 and the value of that investment is about $187,000 of which about $92,000 is in the bank.   Call premiums represent a 3.58% yield.  



In summary, we have a company that has created a technology that helps patients on chemotherapy live longer.  They have growing revenues. It appears Novocure has been discovered by the investing community.    


M* MoneyMadam
Disclosure:  Long NVCR with calls


Wednesday, August 7, 2019

Telecom Ideas for yield in a down market

Listed below are four telecom companies to consider.   In this table you can see



China Mobile, symbol CHL, has no debt.  Verizon has the most debt.  BCE has highest P/E (price earnings ratio) and CHL jas the best revenue growth.   All have positive cash flow that exceeds dividends paid out.

All good considerations during this down market.


M* MoneyMadam

Long T, VZ, BCE adding CHT

Crazy Market

Some are suggesting KO and PG  (Coca Cola and Proctor and Gamble) are resilient.   I will not add KO due to the debt level where as PG has some interest.

Dividend Machine Fundamentals are in the table below.



I use these metrics to start my search.   Be in no hurry and pick your income stocks well.

M* MoneyMadam
Long PG

Tuesday, August 6, 2019

LEG for yield

I still like LEG.

https://seekingalpha.com/news/3487621-leggett-and-platt-declares-0_40-dividend#email_link

M* MoneyMadam