Speculative trade idea: HIMX cash secured puts

[SeanM]

My criteria for considering selling naked puts are:

1. A decent cushion between the current stock price and break-even price of the trade (5-10% of the stock price).
2. Premium collected ÷ (100% cash secured amount – premium) yields annualized returns > 50%.
3. No major events (i.e. earnings) expected prior to expiration.
4. Most importantly, only consider companies that I'd be happy owning.

The 4th rule gives me the security of knowing I won't feel forced to liquidate immediately, should the puts be exercised.  Rather, I'm content holding the stock and selling OTM calls against it until the stock is called, or until my investment outlook changes.

 

My trade idea: STO HIMX March 13 put for $0.60

Current stock price: $13.50

 

Himax is a Taiwanese company that manufactures display drivers for LCD screens (best positioned in lower-end smartphones, which is likely the best place to be in the smart phone realm right now) as well as LCOS micro-displays (Google Glass).  I've been very fortunate to have followed this company for the past year, and bought stock shortly after it hit my radar at ~$5.  The stock has been range-bound at $13–$15 for the last few months, and, as the upside for my stock stake has decreased, I'm looking to capitalize on this trading range.  Here's how it fares against my criteria:

 

1. Break-even is $12.40, 8.2% below the current stock price.
2. 0.60 / (13.00 - 0.60) = 4.8% return for a 24 day holding period (74% annualized).  Calculating return based on the margin requirement produces a return of 24%, or 365% annualized.
3. No earnings event, and developments relating to the success or failure of Google Glass are likely a ways down the road.
4. Having owned it for the better part of the past year, HIMX passes this criteria, as well.

So, that's my idea.  While supplying the LCOS displays for Glass has grabbed all the headlines for Himax recently, and created this opportunity by driving option volatility higher, it's only a piece of the Himax story.  In the absence of a sharp market correction in the next 3 weeks, I feel this is a fairly safe trade.

[dbh21]

I love wheel trades. My favorite right now is Lorillard (e-cigs, and has the potential to move into the weed market).

 

I'm definately going to take a deeper look at himx

[Kim]

My criteria for considering selling naked puts are:

1. A decent cushion between the current stock price and break-even price of the trade (5-10% of the stock price).
2. Premium collected ÷ (100% cash secured amount – premium) yields annualized returns > 50%.
3. No major events (i.e. earnings) expected prior to expiration.
4. Most importantly, only consider companies that I'd be happy owning.

The 4th rule gives me the security of knowing I won't feel forced to liquidate immediately, should the puts be exercised.  Rather, I'm content holding the stock and selling OTM calls against it until the stock is called, or until my investment outlook changes.

I think the 4th rule is really the most important one. And it also gives you an idea about position sizing - don't sell more puts than number of shares you would be comfortable to own if assigned. 

 

Personally, I think this is much better way to go long than just buying shares. The return on margin is almost always higher (unless the stock makes a really big move), and if assigned, you own the stock at discount.

[dbh21]

The return on margin is almost always higher (unless the stock makes a really big move), and if assigned, you own the stock at discount.

 

Isn't return on margin for these type of trades kind of creative accounting? Since part of the plan is purchasing the stock, I always consider it return on total potential cost (i.e. cash secured) regardless of margin. The returns are lowish, but these trades can very consistently return 15-20% annually on an account (I tend to trade these conservatively) . My only reservations with these are if you think the market might tank. 

 

While I only look for companies that I would be happy to own, I also look for companies who's P/E is below the market average. Tough work finding these nowadays.

[Kim]

Well, return on margin counts if you are not assigned. But I agree that since you allocate based on number of shares that you want to own, it might be a bit misleading.

[dbh21]

Nice call on HIMX. I just sold my position out for a nickle.

 

Entered an ORCL position today. A little more conservative position.

 

 Now I wait for HIMX and LO to come back down. 

[QZW]

I employ a similar strategy all the time using buy/write feature on the dips. After closing the short on PLUG today, I bought PLUG /sold DITM ($1) calls for a 2 cent/share profit. Not that I'd own PLUG or anything, but there is nothing to lose, and I make 0.1- 0.3% on my account every week, and any drawdowns are rare. I think this is a strategy equivalent to selling naked puts DOTM. My aim is to have the underlying shares called away by the end of the week. Played with LO as well in the past.

 

QZW

Edited March 11, 2014 by QZW

[dbh21]

PLUG is a little too risky for my tastes. I could see it dropping like a rock after earnings. I just sold some AAPL puts minutes ago.

[QZW]

PLUG is a little too risky for my tastes. I could see it dropping like a rock after earnings. I just sold some AAPL puts minutes ago.

Yes, PLUG is risky, but it will be called away in 3 days. AAPL puts eat up daytrade power and give low ROI-unless you sell close to the current price and are agreeable to own the shares long. Not a bad idea to own it below 500 though.

[SeanM]

Nice call on HIMX. I just sold my position out for a nickle.

 

 

Thank you.  Glad it turned out profitable.  We got a great jump in the underlying yesterday thanks to a PT increase.  

 

Interesting that PLUG has come up, as I had attempted to short the stock late last week but couldn't get a borrow.  I ended up shorting FCEL instead, which seemed pretty well correlated, covering the position at the close today.  Unfortunately, today's move down for FCEL wasn't nearly as dramatic as that for PLUG (-17% vs. -42%), and after a day and a half of positive moves, I eked out only a very small gain.  

 

Good luck with your PLUG buy/write, QZW.  I have followed Citron for a while now, and shorted quite a few of the names at the cross-hairs of Mr. Left's write-ups.  His impact should not be underestimated, and I've found that if I can get in within 15 minutes or so of one of his reports hitting the presses, I've made money in each instance.  The stocks almost always stabilize, or even move back up, within a day or 2, so your covered call position will hopefully work out well.

[SeanM]

Credit Suisse initiated coverage on HIMX this morning with an Outperform rating.  I have closed out the put position @ $0.05, and entered the following covered call:

 

BTO:  100 shares HIMX @ $15.50

STO:  1 March 16C @ $0.45

 

7 days to expiration.

Break-even at expiry of $15.05, or 2.9% of current stock price

 

Max gain at $16+ of $95 (6.3%)

Edited March 14, 2014 by SeanM

[dbh21]

Man... HIMX really took a beating recently.

[SeanM]

It's been a bloodbath.  Down another 13% since the post above.  I obviously got hit hard on the covered call strategy, and sincerely hope nobody was along for that ride with me.  Stock is currently at $6.81, so, didn't quite hold that break even level of $15.  

 

Although the initial trade idea worked out well, my tendency to let it ride is evidence as to why "college intern" was as far as I got in my short-lived career as an equity research analyst.  So, if my next speculative trade idea makes it through my internal filter to these forums, all would be wise to meet it with considerable skepticism.  

[K. Miller]

Being able to learn from these less than spectacular trades is what makes a successful trader.  Bad traders will keep doubling down and blow their account.  Good traders take the loss and walk away.  I still have trouble with that sometimes, but it is getting better.

[Kim]

I can tell you that having few trades like this one was one of the main reasons why I completely stopped trading stocks. The "cannot go any lower" mentality can do real damage to your trading account.

[dbh21]

I thought it was a great trade because the duration was so short. I made a few bones on it. I'll buy you a beer if you are ever in San Diego

 

But I didn't have any conviction on the company to place it again. I watched it, but always seemed a little to rich more me, until it plummeted. I quite like these type of trades, but I generally operate on bluechip type companies (My cisco put should open quite nicely tomorrow). I generally like to see ones that appear to be at a discount to the market.