FINDING THE RIGHT STOCKS CONTINUED

FINDING THE RIGHT STOCKS CONTINUED

There are a number of things I look for in finding the right stock. Determining stock purchase is an area you may have to experiment with to determine what works for you. I almost never purchase a stock with intentions to hold it long term. If I look for channeling stocks, then 12:00pm is long term. If I plan to write a covered call, then about 30 to 40 days is my long term goal.

Here are some stocks I either own or probably will own at some future date. Some are discounted at this time due to conditions in the market. Each of these stocks pay a dividend. That is one of the first things I look for, in fact I have a portfolio watch with the heading, “Stocks that Pay Dividends.” After finding stocks that pay a dividend I look at their options charts and decide if they are paying good premiums compared to the purchase price of the stock. If you think you may hold the stock for long term, you need to look at their earnings per share and other analysis or performance markers.

I like (MMP,) “MAGELLAN MIDSTREAM PRTNRS.” I bought this stock primarily to capture the dividend. I bought MMP at $41.99 per share online at Zecco so I only paid $4.50 commission. The stock last traded today (December 12, 2007) at $43.70. Unfortunately, it has not run up enough to get a good premium from an “Option,” since the next “Strike” price is $45.00. I have a choice, I can hold for a while and hope it runs up close to $45.00, or I can sell at a profit.

I know Microsoft is a worn out horse so to speak, but at this time because of the price, I like them. The last trade today for MSFT was $34.47, the last $35 strike was 0.30; however, if you roll out to January the price is 0.91. I don’t like to go out into the next month, but the difference is probably worth looking at. It could possibly be better to wait a few days for the market to move a little.

I have owned AT & T several times. While other stocks sold off yesterday and today, AT & T (T) held up nicely. The price may even be to high. I should have bought the stock yesterday when it was almost $2 cheaper. The last trade today was $41.77, and the last option trade today for the $42.50 strike was 0.35.

When you study hese examples, you may notice something you need to look for. Watch for the stock to be discounted. As an example, (T) closed yesterday at $39.48. If you had purchased at that price, you could have sold the $40 strike today for $1.93; and hopefully, you would be called out on Friday, December 21, 2007 at the $40.00 price. Then you will making a profit on the sale of the stock as well as almost $2.00 per share for the option premium.

General Motors (GM) is another discounted stock today. The last close today was $27.36. GM 52 week low was $24.50 so they are just a little over their 1 year low. The $27.50 strike for the Call Option is 0.78. but I believe you could hold out for a few days and maybe get a good premium.

Another thing you need to keep in mind is the amount of commission you must pay. There is a commission when you buy and when you sell. For the Option trade there is an additional charge and it is based on the “contract.” A contract is usually but not always 100 shares. Zecco charges 0.50 per contract, Etrade charges 0.75, and Scottrade charges $1.25.

When considering weather you can make money on a stock and writing a covered call, you must take into account all of these charges. If you only buy 100 shares and pay $9.95 for the purchase, then another $9.95 plus 0.75 for the contract, you have $20.65 in charges added to the price of the stock. Let us look at (FRE) FEDERAL HOME LN MTG CORP COM. Their last trade today was $30.42. If you purchase 100 shares, it will look like this. 100 X $30.42 = $3042. After adding $9.95 for the purchase you have invested a total of $3051.95. For an example, let us sell 1 contract at the strike price of $35. If we write the December option, the price is only 0.20. We have to pay $9.95 for the commission plus 0.75 for the contract. The option this far has cost us $10.70. In order to write the $35 strike we will have a total investment of $20.65, but only be paid $20.00 for the option. We lose 0.65. If you go out to the January option, the price for the last sale was $1.00. Using the same figures, we have now earned $100 less the charges of $20.65, so our profit is $79.35. The advantage of the covered call is, we still own the stock. If the value goes up over $35 we will then sell our stock for $35.00. This will cost us another $9.95 in commissions, but we have made a profit of $438.10. If the price does not go up over the $35 strike, we keep the stock and write another “Covered Call.”

FRE CHART
Etrade Chart© Figure 1[1]

From the looks of the 3 month chart you can immediately see it is considerably discounted, so it appears poised to go up in value.






[1] Etrade.com