3 More Stocks from My December Watch List

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

In my last post I covered three of the six options trades from my “No Drip, No Mess” Portfolio that were expiring in December.  In this post I’ll cover the last three positions that I was watching this month.  While options do create a little extra work each month, the extra income makes them well worth it.

I guess I didn’t get my shares
Despite the fact that shares of Guess (NYSE: GES) finished $0.27 below my originally written $25 put, I wasn’t assigned shares.  That's because the fashion retailer announced a $1.20 special dividend -- the strike price was actually reduced to $23.80 meaning the put expired worthless.  I can’t complain too much as I was able to earn 6.5% worth of options income in just over two months.

Other than the special dividend, there wasn’t a lot to like from Guess’ third quarter earnings report.  There were a lot of moving parts but the bottom line had revenue down 2%.  Looking ahead the company sees earnings of $2.05 to $2.15 for the year.  That’s down from the more than $3 a share the company earned last year. 

The big problem at Guess is margins and until the company can return to mid-teens margins the company’s stock isn’t likely to do more than bounce around.  That makes it a great stock to generate options income.  I continue to view writing at-the-money puts as a solid income trade.

Options can make you richer, not broker
Also joining the special dividend crowd was Interactive Brokers (NASDAQ: IBKR), a company on which I wrote December $13 puts.  Also like Guess I was completely unaffected by IB’s $1.00 special dividend as shares ended up closer to $14 a share at expiration.  I was still able to generate income on the name, netting just over 2.5% for the portfolio.

IB offers investors a much more sophisticated trading platform when compared to discount broker peers like E*TRADE Financial (NASDAQ: ETFC). This sophistication can be overwhelming enough to dissuade the average investor to switch. However, the company’s robust product offerings and dirt cheap commissions are a cut above the rest. 

Meanwhile, outside the company’s bread-and-butter broker business, it operates a very important market making business that offers plenty of upside.  While that business might concern investors who got burned by E*TRADE’s foray into mortgages a few years back, it’s an important complementary business.  Despite the upside from market making, I think the best way to make money on this broker is through options.

Hedging pays even if you lose
My more complex UnitedHealth (NYSE: UNH) hedging trade ended up not being necessary.  The thesis behind the trade was that if Mitt Romney won the election it could send health insurers like UNH down due to the renewed uncertainty.  With the president being reelected, it all but guarantees that his landmark health care bill remains the law of the land. 

Even though the trade lost, I was still paid a net 1.5% to put this hedge in place.  Not only that but I am free to reinvest the capital that was used to hold the hedge open.  At this point my portfolio has no exposure to health care other than my position in hospital REIT Medical Properties Trust (NYSE: MPW)

While MPT offers a great dividend paid for by health care companies, I’m seeking more direct exposure to the industry.  While I’d like to find a company that offers a better dividend than the 1.5% that UntiedHealth offers, the company has grown it triple digits over the past five years.  Shares also appear cheap at just 10 times earnings.  My plan is to at least watch the company through the fiscal cliff fears and see if volatility picks up enough to bring another options trade my way. 

Bottom Line
With all six trades this month expiring for income I’ve reduced my allocated capital to just 58% of my starting cash.  It’s a good time to have all that available firepower -- if Washington botches the fiscal cliff we could have one nasty sell off.  As with most sell offs, traders tend to go a bit overboard meaning there could be some very interesting bargains. 

 


latimerburned owns shares of Medical Properties Trust and Guess? and has a diagonal call on UnitedHealth Group. The Motley Fool owns shares of Guess?. Motley Fool newsletter services recommend 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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