Motley Fool CAPS: ENCY

Motley Fool CAPS: ENCY

I have started using the information here to get other insights on stocks I am interested in.  Gives me some hope for my ENCY position.


ENCY Chart for Today

ENCY daily chart

ENCY gets whacked!

One of my holdings, ENCY, got hammered today. It had been cruising along at $5.80 +/- for a week or so, then at 2:00 today they had a conference call and released the information that the FDA was requesting some additional information on their hopefully, maybe, someday, soon to be approved hypertension drug. The stock immediately fell off of a 20%+ cliff, closing the day at $4.49.

Good news: I had sold the Jan5 calls on 11/16 at $1.60 and bought them back today for $0.15, a pretty nice gain.

Bad news (maybe): I bought the shares for $5.92 on 11/16, so I am running about even on the overall covered call trade. However, I still own the stock, so I gain on any increases in the stock price.

I believe that the market over reacted to the news today, and the stock should rise again. I will hold onto the shares for a few days and see what develops. I would like to sell at $5.00 or better to realize my original projected profit.

Investment Philosophy

The Dividend Guy wrote a comment to my post on researching my trades concerning what type of stocks I am looking for.

To paraphrase: He asked if I was looking for stocks as good investments to write calls against, or was I looking for option premium.

I think his strategy of buying stock in companies with increasing dividends, reinvesting those dividends, thus earning more dividends, is an excellent strategy. (I hope I got that correct, Mr. Dividend Guy). If your income stream continues to grow, the ups and downs of the market do not affect the strategy or your mental health.

If you Google covered call strategies, you will find most of them recommend buying stocks you want to own long term, then sell calls against them. I do not follow this advise for a couple of reasons:

  • The types of companies I would like to own stock in do not have much in the way of option premiums. I like steady dividend paying stocks without too much volatility.
  • It would such to have a stock you really like called away because it climbed above the strike price. Or paying good money to buy the option back so you can keep the stock.

My strategy is more of a short term, capture time premium and dividends, while limiting downside risk. I care very little about the underlying stock in my trades, other than the market thinks it is going somewhere in a hurry and is willing to pay a lot for the options on the stock. I try to lock up and overly large time premium or dividend for 30 to 60 days so that my profit is certain through a wide price range of the underlying stock.

Since I have been at this for a very short time, two months now, it will be interesting to see how my strategy works over a longer period of time.

More blood in the biotech street – MarketWatch

More blood in the biotech street – MarketWatch

I wanted to link to this as it concerns one of the stocks that has shown up recently on the high volatility list when I am scanning for possible trades.

Since my trades so far have worked out positively, it is good to be reminded what can happen on the downside.

Reseach & Trades

It would be best to read my previous post before starting this one. This is a follow on to how I made my investments this week.

Since I was unable to ferret out any good trades using my “catch a dividend” strategy, I used some other techniques I have learned or discovered while researching stocks, options, and some of the tools available to me.

Trade King has an option scanner tool from ivolatility that is very useful for finding trading opportunities. I screen for expensive (i.e. high volatility) calls at or preferably in the money. I then research the ones that look promising through Yahoo Finance and Motley Fool caps. I then plug the various stock and option prices into a option calculator spreadsheet that I have downloaded and try to make a decision based on the projected return and what I believe the risk is.

Using the strategy above give a list of high volatility tech and pharma stocks. On Monday I placed a trade for 200 shares of EEE at $8.16 and sold 2 Feb $7.50 calls for $1.80. This gives an expected return of 14.6% for 61 days and downside break-even to about $6.60. In the last two days the share price has fluctuated between $7.80 and $9.50, so it may be wild ride for the next two months.

On Tuesday I purchased 100 shares of GRA for $19.74 and sold a Jan $20 call for $1.30. Static projected return is 5.5% for 31 days, higher if called. Downside is covered to $18.60. I made this trade based on good rating on the Motley Fool Caps and good expected return for a short term trade.

Where to reinvest?

Yesterday I started the day with 75% of my account in cash due to the NFI being called. So I started to research where to trade next.

First, I went through my list of high dividend stocks with dividends being paid in the next 30-60 days. The theory is that I can bump up my return by capturing a dividend as well as option time premium. I found the theory is tough to put into practice. To work I would like the trade to meet the following criteria:

  •  Quarterly dividend of at least 2%. It is surprising how many stocks are paying 8% plus annually. Most are in shipping, natural resources, mortgages and business financing.
  • The price is at a point where there is a call available that is in the money by at least the projected dividend. This is the tough one: If you sell an at-the-money call, the share price will drop when it goes ex-dividend, and you may be stuck with shares at a lower price than you paid. Too far in-the-money and you do not have enough time premium to justify the trade.
  • The time premium must be enough to cover the commission costs plus provide an additional 1% plus of profit. Most of the high dividend stocks do not have enough volatility to generate that much time premium. Also, I am trading only 100 or 200 shares at a time so the commissions are a higher percentage cost than if I could trade 500 or 1000 shares.

After going through the above criteria with about 10 high dividend stocks, I could not find any trades that made sense. My next post will cover the follow on research and the trades I did place.