3 More Stocks I’m Watching This December

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I recently wrote about three of the companies I needed to watch this month, but the work isn’t done.  As an investor who uses options to build a portfolio and earn income, it does take a bit more work than just buying a stock.  That extra work has been crucial in building my virtual portfolio, the “No Drip, No Mess” Portfolio, as well as earning a bit of income in the process. 

Using options gives me the opportunity to rethink the positions and begin to plan for any post-expiration follow ups.  This December I have a total of six positions that will expire, the final three of which I’ll be reviewing in this article.

Guess (NYSE: GES)

Shares of Guess are off about 10% since I decided to write a December $25 put to add shares of the retailer to my portfolio.  I thought shares were cheap when I wrote the put, but I did think that it was entirely possible that they’d continue to get cheaper.  With shares now around $23, it’s likely that I’ll be assigned.  Once that happens, I will in all likelihood turn around and write a covered straddle on the shares to earn some more income and potentially buy more shares even cheaper. 

Retailers are tricky, especially those that cater to fashion.  Guess has been struggling and recently saw both their CFO and COO resign.  To have the CFO suddenly depart is rarely a good sign, though we do know that he left to take the same position at Fossil (NASDAQ: FOSL). Over the past five years Fossil has vastly outperformed Guess, as shares have nearly doubled while Guess’ shares have been cut in half.  It's possible that his leaving is more than a change of scenery, so it is something I plan to keep my eye on.  

Guess will have one more earnings reports before my options expire.  That report could have a big impact on the outcome of this trade.  I’d be very surprised if this was a great report but stranger things have happened.

Interactive Brokers (NASDAQ: IBKR)

I wrote December $13 puts on IB in an attempt to begin a longer term options income position on the online broker.  With shares around $14 each, it looks like the trade will expire worthless.  Looking ahead I’ll either need to adjust my strike prices or hold off on another trade on IB, given the current options premiums offered. 

The company reported earnings about a month ago, and they saw earnings fall about 12% year over year with both their electronic brokerage and market making businesses coming under pressure.  The company cited subdued trading volumes and lower implied market volatility as the culprits.  Interactive Brokers is still one of the best managed brokerage companies, but there are no real catalysts on the horizon to send shares higher.  I continue to think that options are the way to play IB.

United Health (NYSE: UNH)

As you might have noticed, five out of the six expiring options trades are of the written put variety.  Not so with my United Health position.  I saw the coming election as an opportunity to open up a healthcare based hedge.  I thought that if Mitt Romney was elected, it could cause the company’s shares to actually fall due to increased uncertainty; instead the whole market has been falling after President Obama was reelected due to fiscal cliff fears. 

The trade was a bit more complex, as it had me buying a December $52.50 put and writing two $50 puts.  I was paid a net $75 credit to make the trade, and that’s mine to keep no matter the outcome.  With shares around $52 there are three possible outcomes:

  1. If shares rise above $52.50 all options expire worthless.  I still keep the $75 credit for my effort.
  2. If shares fall below $50 I will be assigned on one of the $50 puts while the other two puts are both assigned, which will net another $250 credit for my portfolio.
  3. If shares end between $52.50 and $50 then things get tricky.  Both of the $50 puts would expire worthless and I’d need to sell the $52.50 put before expiration in order to avoid being short shares.  I’d pick up an additional credit, assuming it is enough to cover that extra commission.

No matter the outcome, I plan to continue targeting shares of United Health in my portfolio.  They remain among the best run health insurers in the country and should benefit under the new healthcare system.  I like their strategy of selling non-core lower margin businesses like the sale of their South Carolina Medicaid business to WellCare (NYSE: WCG) while diversifying into the fast growing Brazilian market.  The Medicaid business is a better fit for WellCare, which targets government sponsored healthcare programs while giving United Health the freedom to invest in what could be an exciting new growth market.

Bottom Line

December will be a very busy month for my “No Drip, No Mess” Portfolio with the potential for six stocks to be officially added to the portfolio.  Odds are I won’t be assigned on all of them, but that is the intent behind each trade, so it’s an outcome that I’d be happy to see come to fruition. The only position that might require action is the United Healthcare trade, so I do plan on an updating if I need to adjust the position. Otherwise it's time again to sit back and stay patient.

latimerburned owns shares of Guess? and has an options position on United Health. The Motley Fool owns shares of Fossil and Guess?. Motley Fool newsletter services recommend Fossil, Guess?, Interactive Brokers, and UnitedHealth Group. 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!

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