Options Trading

Fra-gee-lay– Must be from Italy   I’m not abig fan of forwarded emails or “send this to 7 people or else…” messages, but Idid get one recently that made me think a bit. As we approach Thanksgiving andthe full on Christmas (and Hanukkah, …and other holidays) season, I wanted toshare this with you. 

It’s infographic time!  We’ve been hearing about the 1% of peopleand/or corporations not paying their fair share a lot in the news lately. Onething that surprised me as I absorbed the data from this graphic was just whois paying the overwhelming share of taxes in America. Wasn’t it just a fewyears ago we had congress calling for new taxes on “windfall profits” the oilcompanies were making from high gas prices? Did anyone else know the Big 3 OilCompanies in America have 40-45% tax rates? Check out the contrast to GE andAT&T. GE has a tax rate of 7.4%! Is that paying their fair share? Whatabout AT&T? Does anyone know why they get back over a billion dollars intax rebates? 

Whilein Chicago last week, I stopped in to have some fun with the group at tastytrade.For those of you who have not had the pleasure of catching a segment on www.tastytrade.com, theyoffer live online programming about the financial markets. As in ALL financialmarkets, traditional and non-traditional alike. To use their words, “GetTasted,” is alternativefinancial programming where Wall Street squawk meets improv talk.The hosts discuss anything and everything financial from stocks to sports,aiming to deliver a “Daily Show” about the markets.  

null

Mark Wolfinger fields a question about options exercisevs. other ways to exit a trade

Alan Brochstein finds 6 stocksthat might appeal to conservative investors

optionsguy

Alan Brochstein Discusses Investigating Large-Cap Technology Stocks 

AlanBrochstein Screens for Potential Growth Stocks

null

Mark Wolfinger fields a question from an SPX trader in the TradeKing forums

Alan Brochstein suggests investigating large-cap technology stocks down sharply in 2011 Technology stocks, like the rest of the market, are having a lackluster year, essentially unchanged in price in aggregate as measured by the S&P 500 members. Within that group, performance has been quite varied, with 7 of the 75 stocks up more than 20% but 15 of the 75 stocks down by more than 20%. In order to find some potential opportunities among these beaten-up large-cap tech companies, I created a screen to help separate companies with bigger challenges from those that might be able to snap back. Here are the parameters I employed: These two simple requirements - essentially that the company is growing and is expected to continue to grow - knocked out almost half the names, leaving eight to examine more closely. Here they are, sorted by YTD return: [click on the image above to enlarge it] As always, please remember: this screen is just an illustration for identifying stocks to research further. You should do a thorough investigation of any stock before investing.

null

Dan Passarelli considers how an old Chinese saying relates to the current turbulent market

Alan Brochstein screens for stocks with price and earnings momentum

Mark Wolfinger adds his two cents to Brian Overby's counsel in a recent Options Guy post I wanted to chime in a few additional thoughts on Brian Overby's post A Short Put Spread That's Soured On You. What Can You Do? As Brian observes, this is a bad situation for this trader - but hopefully a teachable moment that'll save him future losses like this by replicating the mistake. Below is the original question, so you can get the context. I'd also definitely recommend reading Brian's blog post in response: Hi Brian: I have a trade for which I would like to get your advice. I sold an AA Oct 16-15 put spread for around 55 cents credit. Now AA is trading at 11.21 and that spread ask price is 1.05 with mid around 95 cents. Should I sell one more lot just in case if AA rallies to 12.5 and I can get out of it, or should I roll over to Jan? Waiting for your suggestions...

Dan Passarelli talks moneyness and its usefulness to the options trader Moneyness isn’t a word, is it? It won’t be found on spell-check, but moneyness is a very important term when it comes to options. There are three degrees, if you will, of moneyness for an option: at-the-money (ATM), in-the-money (ITM) and out-of-the-money (OTM). Let’s take a look at each of these terms, using theoretical stock XYZ as an example. Imagine XYZ is trading around the $320 level, so let’s define the moneyness of XYZ options relative to their $320 price.

null

Alan Brochstein takes another look at medical-device companies It has been almost two years since I first shared my bullish view on the medical device industry on the TradeKing All-Star blog. Since then, the group's performance has generally improved, in some cases significantly. Despite the recovery in prices, with several moving to all-time-highs recently, I still find these stocks to be very attractive value plays, especially for conservative investors. Before reviewing some of the companies that comprise the industry, I wanted to update my bullish thesis. This industry tends to have high margins, reflecting limited competition, strong and productive R&D, good balance sheets and very favorable demographics (aging population). One of the more interesting characteristics is the high international exposure, and many of these companies are growing their emerging market sales quite substantially. I believe recent economic trends have distracted investors who have focused too much on short-term results rather than longer-term opportunities. Here is a table with data on all the medical equipment stocks with market capitalization in excess of $5 billion: [click on the image above to enlarge it]   Please remember that none of these stocks should be considered as recommendations to buy or sell. You should always do your own investigation of the merits of any investment. I sorted the list by P/E, with the companies with the lowest P/E ratios at the top of the list. Before commenting briefly on each of the companies, I want to point out that the group as a whole is outperforming the market so far in 2011, with a median return of 9% and a range of -9% to 41%. The median P/E ratio is at a slight premium to the S&P 500 at 14.9X, but these stocks have traded at much higher ratios historically. I have included the 5-year average to demonstrate this point. I also included dividend information as well for investors who are interested in income. Medtronic (MDT) looks quite inexpensive to me, but there has been some uncertainty due to the sudden departure of the CEO and the hiring of an outsider to replace him. Much of its historical growth has come from acquisitions. I continue to prefer its rival, St Jude (STJ). Covidien (COV) was spun out of Tyco a few years ago and looks to be on track now, recently printing an all-time high. The company is highly diversified. I follow Zimmer (ZMH) somewhat closely. It has suffered from changes in marketing practices that have impacted the hip and knee implant manufacturers. Despite the market's recovery, the stock retains one of the lower valuations in the industry. Johnson & Johnson (JNJ) has certainly suffered from a series of recalls in its consumer products franchise as well as patent expirations in its pharmaceutical division. Medical devices, its largest segment, has faced industry challenges but seems to be performing relatively well. The stock recently moved to a two-year high and is within 10% of its all-time high set in 2008. St Jude (STJ) remains one of my favorites in the group despite increasing from $33 when I profiled it in the original blog post. The company, with primarily a cardiac/cardiovascular focus, has exceptional management and a robust pipeline of new products. It has pulled back somewhat sharply after posting an all-time high in April. Baxter (BAX), whose products are focused on blood treatments and monitoring, had a couple of major setbacks last year, but that looks to be behind them now. Becton Dickinson (BDX), which is focused on hospital infection prevention and diabetes care, has performed well and is sitting just beneath its all-time high. I used to follow Hologic (HOLX) more closely and should probably take a closer look. They are focused on various aspects of women’s health, including breast and gynecological diagnostics.  I recently added Carefusion (CFN) to my watchlist. It was spun out of Cardinal Health (CAH) and hired a fantastic CEO, in my view, recently. The company is focused on intravenous infusion, medication dispensing, respiratory care and infection prevention. Stryker (SYK) competes with ZMH and also sells equipment to hospitals. The company is well-managed in my view. I have downgraded my near-term view of C.R. Bard (BCR) due to the strong performance after they issued debt to repurchase a significant amount of stock, driving the price to an all-time high and the valuation a bit above peers. Longer-term, I do like their diversification. Boston Scientific (BSX) might well be the most troubled company in the industry (in my opinion, at least). Its P/E is high because its earnings have fallen rather than because it is viewed as a strong growth company like the three that follow. Their CEO departed suddenly recently. I don’t mean to sound negative about the name, though, but I want to make sure that I convey that this is a “turnaround” story, at least a potentially positive one. BSX has divested some businesses and has focused more on cardiac/cardiovascular. Varian Medical (VAR) looks expensive to me, but that is usually the case for this great company that treats cancer with radiation. Investors like their steady growth and active share repurchase program. Intuitive Surgical (ISRG) remains one of my favorite stocks in this industry due to its monopoly status as the only provider of robotically-assisted surgery. I described ISRG in great detail last December, using it as an example of what I called a “Good Company for 2011”. Despite the stock's 41% rise this year and a move to an all-time high close earlier this month, the stock looks attractive to me. The most expensive stock on the list is Edwards LifeSciences (EW), but this company could have a key advantage in its new transcatheter valve, which has been approved in Europe and is likely to be approved in the U.S. within the next year. This new technology dramatically increases the number of patients who will be able to have their heart repaired. While the company has a first-mover advantage, there will almost certainly be others following, including STJ. So, hopefully my brief comments on these large-cap medical device companies gives you a starting point for investigating this group further. I continue to believe that the industry is one of the more interesting components of healthcare. Investors who were disappointed by the slowdown as the economy contracted may return to this group as fundamentals improve over the next few years.

Mark Wolfinger helps a spread trader think through a mid-trade decision