Four Stocks I was Watching This October
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If there’s one rub with using options as a tool for investing success, it’s that you need to monitor them a bit more than just buying or selling stocks. Personally, I think it’s worth the extra work because you can generate some very nice income. One thing that seasoned options investors have come to expect is that following the third Friday of each month you need to take some time and review the outcome of your now expired options trades.
For my virtual “No Drip, No Mess” Portfolio, I had four companies with an options overlay this month. Three of the four expired leaving me left with just the income those trades generated. While my primary goal was to use options as a vehicle to obtain shares, I can’t complain about making a little money while trying.
The one options trade that did result in being assigned shares was my first attempt at writing puts on Intel (NASDAQ: INTC). My October $25 put was assigned in part because Intel had a rough quarter. They announced that they were lowering their guidance to a revenue midpoint of just $13.2 billion from the previously guided $13.8 billion to $14.8 billion. The one ray of sunshine is that when they actually reported earnings they did $13.5 in revenue.
Before that third quarter earnings report came out I decided to double down on this cheap tech giant by writing a January $22.50, bringing my total potential allocation up to 4.75%. I thought that locking in shares 3% lower at the time with the 4% dividend yield worked out to a great reward against minimal risk. While those puts have a few months left on them they’re currently underwater. The cheaper Intel gets the more likely I am to increase my position further. My current thoughts are that as shares drift toward $20 I’d consider an overweight position via a third put write.
While shares of Intel got cheaper, those of my favorite energy company drifted higher. In the first official trade of the portfolio, I recommended writing puts on Linn Energy (NASDAQ: LINE). That October $35 put has now expired and with shares north of $40 each I need to reevaluate my options here.
Linn’s been a very busy company since that first trade. In the quarter they did an IPO for their LinnCo (NASDAQ: LNCO) subsidiary, which is structured as a C-Corp instead of the LLC structure of Linn. This means LinnCo investors will receive a 1099 on any dividend income instead of the cumbersome K-1’s that Linn unit holders are accustomed to. This is why I think it makes them the one energy IPO that’s perfect for your IRA.
In addition to the LinnCo IPO, the company engaged in quite the shopping spree. This is an important part of the company’s mission to acquire mature producing oil and gas assets. This year alone they’ve added $2.8 billion worth of assets, while in the past decade the company has made 54 acquisitions to the tune of $10 billion in capital deployed. This has enabled them to increase their distribution to unit holders by 81% since the IPO. I continue to think Linn’s a great way to invest in energy and will be considering all my options for adding shares to the portfolio.
While Intel and Linn are viewed as more core long-term income holdings, there are times when I’m simply looking to generate some income. That’s why I recommended strangling shares of Lowes (NYSE: LOW). It’s not that I don’t like the company; I just thought that the near 6% gain from a combination of capital gains, dividend income and options premiums in four months was pretty easy money. I was hoping that this could be a recurring trade on a fairly priced company, but with shares now north of $32 they are pretty much out of range my comfort zone for another income trade.
The biggest development over the past month was that Lowe’s dropped their $1.81 billion hostile takeover bid for Canada’s Rona. Neither Rona’s board nor Canadian politicians were keen to see their country’s largest home improvement retailer sold to Lowes. While Lowes said they’ll remain committed to the Canadian market, at their current valuation it’s hard for me to remain committed to owning their shares.
On the same themes of Canadian companies and valuations that are no longer attractive, it’s also time for me to bid adieu to Rogers Communication (NYSE: RCI). I attempted to write really attractive October $30 puts on the Canadian media and communications giant but a rising share price netted me half of my desired premium for this under-followed telecom. Despite dialing up a flat quarter, their shares have reached a level higher than my comfort level.
For the four October trades I’d allocated just over $14,000 worth of capital and generated just over $600 worth of virtual income. That’s a 4.3% return on the capital at risk, which isn’t too shabby. With the three expirations, I now have another $11,500 worth of capital I can put back to work while the capital that’s invested in Intel will be providing a 3.6% dividend going forward. Not a bad month if you ask me.
latimerburned owns shares of Linn Energy, LLC and Rogers Communications (USA) and has an options position on Intel. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel, Lowe's Companies, and Rogers Communications (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.