Four Stocks I Watched This November
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As an investor, I like to overlay options on companies I know well in an effort to earn a little income while either buying shares cheaper or selling them a bit higher. Believe it or not, options can provide some fairly regular income. It’s a bit more work to keep up with than simple dividend paying stocks, but you’re compensation via the options premiums received make it worth the effort.
About a month before my various positions expire, I’ll highlight them as a reminder to watch them a bit closer over the coming month. For November, I had four stocks that I needed to be watching. Now with expiration day passed, it’s time for an update as well as a glimpse of what might lie ahead for these four stocks in my “No Drip, No Mess” Portfolio.”
Activision (NASDAQ: ATVI)
Back in June I wrote that those investors still on the fence about the future of video games might well consider straddling that fence by writing a covered straddle on Activation. This income trade had three parts consisting of buying shares and writing both puts and calls for income. At the end I’d either be buying more shares of Activision or selling those I’d just purchased. What was really nice is that the trade paid very well as I was able to net 8.5% worth of income.
Activision bounced right around my $12 strike price most of the time before settling at around $11 a share at expiration. That led to the puts being assigned, and I now hold a full 4.8% position. The plan is to eventually write covered calls on some of the shares to generate a bit more income. However, they are not viable at the moment as they just don’t pay a whole lot given the potential upside in the stock.
The company continues to perform while the stock just limps along. Sales of their newest Call of Duty game sold $500 million worth in the first 24 hours, setting the fourth consecutive sales record. Earnings were strong and they raised guidance. Eventually the market will see how great this company is performing and bid the stock higher. I plan to be around when that happens.
BHP Billiton (NYSE: BHP)
When I wrote that I wanted to buy this global mining giant I was hopeful that the slowdown in the global economy would enable me to pick up shares on the cheap by writing puts. I went with the November $50 puts they were priced well enough that I could earn about a 3% yield while potentially buying shares 20% cheaper. Unfortunately shares ended at around $69 each and there are no viable options at the moment to write another set of puts.
Business has been good enough at BHP despite the global slowdown. They were able to unload their non-core diamonds business while they’ve shelved a couple of other projects. I will continue to watch the company for future opportunities, but given the current uncertainty I’m just not willing to pay any price for their shares.
Plum Creek (NYSE: PCL)
One of my favorite boring business models is that of a Timber REIT. They clearly put an end to the saying that money does not grow on trees. When I decided I wanted to buy this great resource play I of course wanted to do so cheaper, so I wrote $35 strike puts. As it turned out, shares ended north of $41 and I have no viable options at the moment.
What I liked about Plum Creek is the inflation protection of timber and the dividends the company threw off. I also viewed the company as a play on an eventual housing rebound. However, given the current share price and my view that housing will turn, I’m currently looking at Weyerhaeuser (NYSE: WY) instead as their outsized exposure to housing should do really well when housing does rebound. Not only are they a large timber REIT but they also own several home builders and a large lumber business, giving them outsized exposure to housing. There will be more to come in the near future on Weyerhaeuser.
Seaspan (NYSE: SSW)
I’m no stranger to Seaspan, having previously said I wanted to buy this global shipping giant and then again stating that they offered one great dividend for the unchartered waters ahead. Both times I wrote $15 striking puts and that second round just expired. The company provided the most entertaining options expiration day so far as shares were tossed around a bit on the day of trading, bobbing on both sides of my $15 strike price all day. I have to admit it, I had the day off from my day job and I checked the price quite a few times to see where shares were ultimately land. In the end they landed just above my strike price meaning a second worthless expiration for my Seaspan experience.
The business of Seaspan continues to be rock solid even as shares are tossed around by the global economy. They reported solid earnings and continue to generate a lot more cash than they are distributing back to shareholders, which could mean another dividend boost is in the cards. With shares right around my $15 strike price you can be sure that I’ll be writing a third round of puts very soon.
While my intent with writing options is to buy the underlying company, in this round I ended up with just the income in three of the four trades. That’s not a bad outcome; in total I generated a 4.5% income yield on the capital employed. I now have most of that capital still available for this or other income trades. As you can see, using options is a great tool for investors who want to earn more income and don’t mind a little extra work.
latimerburned owns shares of Seaspan, and BHP Billiton Limited (ADR) and has a Synthetic Long on Activision Blizzard. The Motley Fool owns shares of Activision Blizzard, Seaspan, and Weyerhaeuser Company. Motley Fool newsletter services recommend Activision Blizzard and Seaspan. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!