Back on the 13th October, I bought Transocean (RIG) Call Options expiring in January 2013 at $6.75 per contract. Having watched the stock appreciate on the back of the rising price of oil, the subsequent move in the option price accelerated at a faster pace due to the added leverage facility options provide. Although, I could (and should) have taken profits a few days ago when my return could have exceeded 50%, I unfortunately delayed the decision unnecessarily and deservedly paid for my inaction. Instead, I sold my position yesterday with the option trading at $8.70 for a registered gain of 29% in just over 3 months. Whilst this is certainly nothing to be scoffed at, I am still kicking myself and wracking my brain for why exactly I didn’t act sooner when I had done the hard work of identifying the exit point. Such mistakes are all simply part of the learning curb involved with Investing, an education that never truly ends, which in my opinion adds to the mystique and my personal fascination with the markets. To put the profits into context, if I held Transocean to expiry in 2013, it would need to trade at just over $116 to recognize a 29% gain. Whilst that cannot be ruled out, it seems like a difficult hurdle and lies outside the base fair value I had previously assigned.
Elsewhere, Raytheon continues it’s recent move and having broken through the $50 barrier, offers us some added Margin of Safety in our investment. To recap, if the stock trades above $45 on the third Friday of January 2012, a 61% gain will be recognized. With the stock trading at $51.82 as of yesterdays close, that means we now have a 15% cushion for the stock to fall and still walk away with impressive profits. Furthermore, with our breakeven at $43.10, the stock could fall as much as 20% without us losing any of our investment. However, this week could see some further action in the stock price one way or another as Raytheon announces it’s quarterly results on Thursday 27th, along with rival Lockheed Martin. Fellow competitors Boeing and General Dynamics report a day earlier on the 26th. Matt Jarzemsky summarizes what to expect from Raytheon on the Dow Jones Newswire:
“Wall Street Expectations: Analysts were expecting a profit of $1.16 a share and$7.06 billion in revenue. The prior year, the company reported earnings of $ 1.30 a share and revenue of $6.67 billion.
Key Issues: The Surface Launched Advanced Medium Range Air-to-Air Missile it was developing for the army was among the procurement cuts in the new budget plan. Raytheon’s agreement last year to buy Applied Signal Technology Inc. ( APSG) for$490 million underscored defense contractors’ push into cyber security, a segment seen as relatively immune to budget cuts.”
Apart from that, the rest of the portfolio continues to hold up well. The Exelon call option moved into the money recently and at one stage was showing gains of as much as 19%. Whilst that has been trimmed to 4% as of yesterdays close, Exelon continues to look cheap by my valuations and with an attractive dividend coupled with an overbought market, investors will be more inclined to favor larger, dividend yielding stocks until such time as the performance disparity between large and small cap stocks narrows. This thesis can similarly be applied to our Health Care holding, Novartis. Trading at $57.50, I still need Novartis to advance a further 4% by the 3rd week in April to recognize a gain of 60%. My breakeven on the investment remains at $56.25, providing a small margin of safety. Like Exelon though, the stock does not look fundamentally expensive and with such strong history of cash flow and an appealing dividend, investors should take note.
As for the markets themselves, I admit to being rather cautious right now of the recent moves. Both the Nasdaq and S&P500 both look heavily overbought, both on the weekly and daily indicators I monitor. Interestingly, the Dow Jones looks less overbought than the other two indices, which further leads me to believe the large cap blue chips could be in line for a period of out-performance, relative to their smaller counterparts. Since December, I have been trimming the portfolio, selling positions in both Spectra Energy and Carters for tidy profits and now doing the same with Transocean. Whilst I don’t think the market is set to collapse or anything like that, as a largely contrarian investor, I do believe we are long overdue a correction. The technical indicators I follow care suggesting that time is now upon us. It is down to this reason I have held off entering into any Put Spreads so far in January. With the market in such overbought territory, the only smart investments right now (if any) are undervalued, dividend yielding stocks in my view. With that not being available to me in the options segment of my portfolio, I am content to wait before further deploying my cash at a more opportune time.
