I opened four new positions and rolled one old one today.
music selection: “Bad To The Bone” — George Thorogood
weigh-in: 212.0 +0.8
I was unable to find buyers for three positions I was trying to roll forward. Those are SXCP, SDLP, and PMT. I’ll try again tomorrow with longer expiries to see if I can’t hunt down some liquidity.
The first new position is in AmTrust Financial Services (AFSI). This is a property and casualty insurer I have been watching for some time. The company has grown book value per share by over 1000% in the trailing ten years. They have hit a small snag in the accounting department. They have a side business operating call centers and it has been determined earnings from that segment have been misstated. Shares fell by about 13% on the news making this one attractively priced. It is important to note management reports there are no known accounting problems with the core insurance business. From the press release, “The 10-K delay and restatement largely relate to the timing of recognition of revenue, as previously announced, in the Company’s service and fee business, which we expect will remain profitable in each of the fiscal years 2014, 2015 and 2016. In addition, we believe the corrections will have no material impact on the Company’s ongoing insurance operations, statutory entities or statutory surplus.” The scare has sent the volatility premium soaring so I have written an in the money put to try to capture premium while acquiring attractive priced shares. I sold AFSI170421P00017500 for 1.50 a share. The trade will be in force for 33 days and yields an impressive 94.81% annualized while enjoying 6.38% downside protection.
The second new position is Shopify (SHOP). This is a very strong business with great margins and rapid growth. They are a fierce competitor. Amazon was unable to pry away market share with their online store software offering and have instead teamed up with them and recommend the service to their own customers. I see opportunity for a long series of written puts and covered calls against this ticker. I sold SHOP170421P00065000 for 1.30 a share. The trade will be in force for 33 days and yields 22.12% annualized while enjoying 6.75% downside protection.
Also new to the portfolio is Nvidia (NVDA). This is a chip manufacturer that specializes in small heat efficient chips and parallel processing for machine learning applications. It is well positioned to capture market share in wearable components and self driving car applications. The company has a core business providing chips for gaming applications that is highly profitable and funds vigorous R&D into machine learning. This is another one that I think will throw off years of profitable written put and covered call trades. I sold NVDA170428P00108000 for 3.85 a share. The trade will be in force for 40 days and yields 32.53% annualized while enjoying 4.92% downside protection against a fall in market price.
The final new position to the portfolio is shale oil producer EOG Resources (EOG). I’ve been doing some digging into shale operators and I think this one is best in class. The balance sheet is very strong, they have excellent acreage and are productive drillers. The last part can’t be overstated. They are sometimes getting double the production versus competitors from similar wells. Their estimated all in sustaining cost in the Permian is 12 dollars a barrel. They will remain wildly profitable even with another crash in commodity pricing back down to 24 dollars a barrel. The current market offers excellent chances to hedge future production. I sold EOG170428P00095000 for 2.60 a share. The trade will be in force for 40 days and yields 24.97% annualized while enjoying 3.41% downside protection.
Finally, I have an old position in Genesis Energy (GEL) that I am writing a new covered call on. This is a midstream operator organized as a Master Limited Partnership (MLP). It enjoys tax exempt status so long as it distributes most of its free cash flow to unit holders and thus sports a high yield. We can do better than just the underlying yield though by writing covered calls for additional income. I sold GEL170616C000375000 for 15 cents a share. The trade will be in force for 89 days and yields 1.88% annualized. I remain eligible to collect the underlying distribution yield of 8.7%.
Devour your prey raptors!