Rolling Can Help You Dodge Assignment

Rolling is a way of trying to put off assignment (or avoid it altogether). It’s a time-grabbing play, essentially, but it’s not one to enter into lightly. Rolling can get you the extra time you need to prove out your opinions, but it can also compound your losses.

You can roll short or a long position, but for the purposes of this discussion we’ll focus on the short side.

Our First Example: Rolling a Covered Call

Let’s imagine you’ve sold a covered call according to the following terms:

Stock XYZ at 87.50
Sold 1 30-day 90 Call at 1.30
XYZ moves against you to 92

In case you’re not familiar: “writing” a covered call involves selling a call for an underlying stock that you already hold. You earn a premium for selling the call, but you also take on an obligation: to sell the underlying stock at the strike price if you’re assigned. Because you already hold the shares, your obligation is “covered” – you can always just hand over these shares, which is much less risky than trying to buy shares in a market where prices are probably rising. (Rising stock prices are probably why the call owner exercised their right to buy anyway.)

When the call is first sold, your potential profit is limited to the strike price minus the current stock price plus the premium received for selling the call. As for your max potential loss, it’s trickier to quantify. You receive a premium for selling the option, but most downside risk comes from owning the stock, which may potentially lose its value. However, selling the option does create an “opportunity risk.” That is, if the stock price skyrockets, the calls might be assigned and you’ll miss out on those gains.

When we put on this trade, the goal was for the stock to reach 90 and be called away, but now our view has changed and we’d like to avoid being assigned. Since the stock is now in-the-money (ITM), at expiration we will most likely be assigned. Let’s assume you see some more upside in the stock going forward. If only you could buy yourself a little more time, maybe you could prove your assumptions correct and eek out a little more profit on the stock.

Rolling is one way to respond to this situation. Specifically, we’re looking at two choices to dodge that potential assignment:

1. You can buy back and close the 90 call you sold, taking a loss on the call, but leaving you long stock with unlimited upside going forward.
2. The other option is to roll the short call roll “up” in strike and “out” in time. To do this we will enter an order to buy to close the short call and the sell to open a new call. The new option will have a higher strike price and go further out in time. Moving up in strike will lower the premium received for a short call, but going out in a time will increase the premium. The net effect, we hope, will be a credit to the account for the entire trade. (Check out the example in bold below.)

Don’t forget to factor commissions into whichever choice of the two you pick. Depending on your online broker, commissions for scenario #1 can be as low as $5.60, for scenario #2 $11.20.

If you buy back the 90 call, that will cost you $2.10 – resulting in a net loss of $0.80 on the trade ($1.30 – $2.10). If you “roll up and out”, you can help offset the cost of buying back the call by choosing a strike price that’s higher (“up”) and further “out” in time.

If you decide to roll, you’d enter the following spread trade with two parts:

Buy to close the front-month 90 call -2.10
Sell to open a 95 call that’s 60 days from expiration +2.30
= 0.20 net credit for the roll

Good News and Bad News

Rolling helped you secure a $0.20 net credit to add to your initial premium received for selling the covered call (1.30). If all goes well, your 95 call will expire worthless in 60 days, and you’ll keep 1.50 in net credit.

That’s the good news, but keep the potential bad news in mind, too. Every time you roll, you may be taking a loss (2.10 – 1.30 = .80 in this example) on the front-month call. You’re also tacking on even more time to your trade, in which your stock turned course and headed lower. If the stock loses more value than the net credit received for the roll, in the big picture you’d be down for the whole trade.

Rolling can be useful, but you should definitely go in with your eyes wide open.

Brian Overby is Sr. Options Analyst at TradeKing, an online options and stock broker. Brian appears frequently on CNBC, FOX Business, Bloomberg, and other financial media and is the author of the award-winning TradeKing Options Playbook. Check out Brian’s Options Guy blog and other actionable market commentary at community.tradeking.com.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options. While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.

Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

Click here to sign up for a free, online presentation by Larry Connors, CEO and founder of TradingMarkets, as he introduces The Machine, the first and only financial software that allows traders and investors to design and build quantified portfolios.

Being a semiconductor stock is like being from the “technology wing of the technology party.” Whether it is in PCs or mobile devices, due to the advent of smart cars and smart appliances or the rise of The Cloud, few things seem to drive the tech sector like the capacity of semiconductor companies to make our machines move faster, work harder and make our lives that much better.

This is why the group is considered the leader of the overall technology sector. This is why some traders look to such phenomena as divergences between the behavior of semiconductor stocks compared to technology as a whole for potential clues as to whether the larger sector, or even the larger economy, is due for a surprising move.

Here our take on semiconductor stocks is in many ways more pedestrian. Many of these stocks have had great runs. And many traders who have benefitted from those runs appear to be at least starting the process of taking profits. And if that profit-taking continues, many of these semiconductor stocks could be available at their lowest, most oversold levels in weeks if not months.

The semiconductor stock that is most interesting in this regard right now is Novellus Systems (NASDAQ: NVLS). Shares of NVLS rallied to new, 52-week highs late last week, and have pulled back over the past two days as traders have locked in gains and taken profits. Down more than 2% and trading midway between recent, short-term highs and recent, short-term lows, NVLS has a positive edge of more than three-quarters of a percent and neutral ratings of 6 out of 10.

Other semiconductor stocks that have begun to sell off significantly as the week gets underway are Kla-Tencor Corporation (NASDAQ: KLAC), whch pulled back by more than 2% to finish at its lowest level in a week. KLAC has a positive edge of half a percent in the short-term, and has earned a two-point ratings upgrade based on Monday’s selling alone. Additional weakness in the stock could help KLAC earn another two-point upgrade which would put Kla-Tencor in our “consider buying” category in the near-term.

Sellers have already appeared to take control of Triquint Semiconductor (NASDAQ: TQNT). Unlike KLAC and NVLS, shares of TQNT are trading below their 200-day moving average – and have been since the summer of 2011. The stock had rallied into overbought territory on Friday, after climbing for four consecutive sessions. Shares of TQNT sold off by more than 2%, and still have “consider avoiding” ratings of 2 out of 10.

Want more stocks? Read our latest from 7 Stocks You Need to Know: “The Intel Pullback as Pitstop: Three Down, Six Up”

David Penn is Editor in Chief of TradingMarkets.com

Sebastien Bozon | AFP | Getty Images

The Dogs of the Dow – those high-yielding stocks that are supposed to represent the bottom of the blue-chip barrel – have some unlikely company.

General Electric once stood as the bellwether of American industry but now sits among the 10 Dow stocks that produce the highest yield and, theoretically at least, represent the most risk for investors.

GE’s [GE  19.121    0.281  (+1.49%)   ] yield is clocking in at a robust 3.6 percent, more than double the 1.7 percent that Dow stalwart Caterpillar [CAT  107.43    1.14  (+1.07%)   ] produces. (GE is minority owner of CNBC.com-parent NBC Universal.)

Joining GE as newcomers to the 2012 Dog pound is Procter & Gamble, with a 3.2 percent yield.

The two companies replace Chevron [CVX  107.071    0.351  (+0.33%)   ] (3 percent) and McDonald’s [MCD  99.22    0.47  (+0.48%)   ] (2.8 percent), both of which boosted the Dogs to the status as one of the top trades of 2011.

As the Dow 30 gained about 5 percent and the Standard & Poor’s 500 finished flat for the year, the Dogs posted an average total return of 16.7 percent, according to calculations from Bank of America Merrill Lynch.

But the strategy has been a loser so far in 2012.

The Dogs, as tracked through their ETF proxy, the Deutsche Bank ELEMENTS Dogs [DOD  9.77    0.03  (+0.31%)   ] has gained just 1.2 percent even though the Dow had gained 3.7 percent and the S&P 500 4.5 percent heading into Wednesday trading.

That’s been the story of trading this year: What worked in 2011 has faltered in 2012. High-yield boomed last year but has faltered this year; high short interest worked as a contrary indicator then but not so much now, and non-domestic stocks are crushing their U.S.-based counterparts, again reversing a 2011 trend.

Still, the Dog collar hasn’t chased away those who believe the hunt for yield will resume.

“Yield is expected to remain scarce as the 76 million baby boomers head into their retirement years,” said Mary Ann Bartels, technical research analyst at BofA. “The equity market is supplying an abundance of yield and investors can get paid to wait for price appreciation.”

The rest of the current Dog pack: AT&T [ATT  25.388    0.006  (+0.02%)   ] , DuPont [DD  50.16    0.75  (+1.52%)   ] , Intel [INTC  26.9001    0.0051  (+0.02%)   ] , Johnson & Johnson [JNJ  65.16    0.16  (+0.25%)   ] , Kraft Foods [KFT  38.31    0.01  (+0.03%)   ] , Merck [MRK  38.71    -0.07  (-0.18%)   ] , Pfizer [PFE  21.661    0.001  (+0.01%)   ] and Verizon [VZ  37.5999    -0.1901  (-0.5%)   ] .

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The Kindle Fire sold like hotcakes on Black Friday, but other factors may hold down Amazon.com[AMZN  189.2635    -4.8865  (-2.52%)   ]stock, “Fast Money” experts said Monday.

“At the $199 price point, I think it’s very easy to see this device continuing to sell really well through the rest of the holiday period,” analyst Ken Sena of Eyercore Partners said. “The iPad had such a hold on the tablet market that to see the Kindle Fire actually rival and in some examples surpass the iPad is a bit of a surprise.”

The issue now, he said, was what impact the Kindle Fire will have on the company’s first-quarter guidance.

Last quarter, Amazon.com reported an operating margin below 1 percent.

“Once you do start to see some of that inflection occur, you’ll be layering on very strong revenue growth — 40 percent plus — in addition to margin expansion. I think at that point, the story looks very good,” Sena said. “We just don’t know when that inflection exactly will be.”

Sena said over the past two years, Amazon.com was trading at a 50 percent premium to its 200-day average.

“At this point this year, it’s below,” he said. “While there is excitement over the revenue of what the Kindle Fire could bring, I think there is some concerns over margin weighing down.”

In its favor, Amazon.com delivers customer purchases preloaded on the Kindle, which also provides a platform for future online purchases, Sena said.

“That bodes well for Amazon,” he said.

Looking at options activity for the day, trader Scott Nations said Amazon.com stock price found a floor.

“I think the interesting option play here, though, is in Barnes & Noble [BKS  16.88    -0.30  (-1.75%)   ],” he said.

BKS sells the Nook, yet another rival to the Kindle Fire.

Nations noted that four calls were traded for every put, with call volume at three times the daily average.

“I was really surprised. I didn’t think there was room for a third tablet option,” he said. “The stock is on fire and people want upside.”

Karen Finerman said the issue wasn’t whether the Nook was good.

“The question is: Can they make the transformation? That’s a much, much more difficult thing to do,” she said.

In a related note, host Melissa Lee noted Barclay’s “overweight” rating of Corning[GLW  13.065    -1.715  (-11.6%)   ].

“This is a name I think you can own here,” hedge fund expert Tim Seymour said. “Especially if all the things we’re saying about Apple and these guys are true.”

Joe Terranova called the sustainability of Corning’s strength into question.

“When you look at today’s price action in Best Buy[BBY  27.77    1.28  (+4.83%)   ]it tells you that there potentially is not this overall sustained theme,” he said.

For investors looking for protection from a chaotic market environment, Cramer on Wednesday outlined his top high-yielding stocks.

Windstream[WIN  11.86    0.07  (+0.59%)   ]: This rural telco provider’s stock sports an 8.5 percent dividend yield. While Windstream’s wire-line phone business is in decline, the company has been focusing on areas of growth, such as broadband and business services. Of Cramer’s top high-yielding stocks, he said Windstream’s dividend is the least safe, even though it has enough free cash flow to cover the payout. For investors looking for a safer play, though, he suggests Verizon[VZ  37.39    0.50  (+1.36%)   ].

Solar Capital[SLRC  23.41    1.07  (+4.79%)   ]: This specialty lender’s stock pays a massive 10.7 percent dividend yield. Cramer would typically view a yield that high as a red flag, but this is a special case. As a business development company, Solar Capital lends money to small- and medium-sized companies that are too tiny or risky for most people to invest in. Solar Capital then returns 90 percent of its profits to shareholders by way of a huge dividend, Cramer explained. He likes the stock at current levels.

Energy Transfer Partners[ETP  43.3999    0.5299  (+1.24%)   ]: This pipeline master limited partnership yields 8.3 percent. Cramer thinks of this company as a “steady toll operator for moving oil and gas around.” Thanks to recent oil and gas discoveries, demand for new pipe has skyrocketed, benefitting ETP. Some investors are upset that the company did a massive stock offering that knocked its stock price down, but Cramer sees it as an opportunity to get shares at discount.

American Electric Power[AEP  38.83    0.40  (+1.04%)   ]: This utility company is committed to paying out higher dividends, Cramer said, and the stock already has a 4.9 percent dividend yield. American Electric Power is one of the U.S.’s top generators of electricity and has the country’s largest transmission system. Cramer prefers this utility to others, though, because he thinks its utility portfolio is among the strongest in the country and it provides power to the “Heartland” where manufacturing is “very strong.”

Sanofi[SNY  33.49    0.63  (+1.92%)   ]: This drug company pays a 5.4 percent dividend yield. Cramer likes Sanofi because it’s a defensive play that doesn’t need a growing economy for business to be good. In addition, it has the lowest exposure to Medicare of any big pharma company. So any potential cuts U.S. lawmakers make to the program are less of a concern. Meanwhile, the company is moving into faster growing areas, such as vaccines, diabetes, generics and more.

Read on for Cramer’s Top Dividend Stocks 2011

 

 

When this story was published, Cramer’s charitable trust owned Sanofi.

Trader Jon Najarian has spotted unusual activity in a major specialty retailer.

He tells us his proprietary OptionMonster heat seeker has identified an unusually high number of November 15 calls that recently traded in American Eagle[AEO  13.383    0.383  (+2.95%)   ].

”It’s not my number 1 pick in the space but there’s not doubt big investors have their eye on this stock, It’s a lot of upside buying.”

It suggests at least some institutional investors expect the stock to make a sharp move higher.

Elsewhere in the space trader Zach Karabell is watching VF Corp [VFC  136.93    4.24  (+3.2%)   ], Bed Bath & Beyond[BBBY  62.3802    0.5702  (+0.92%)   ], Nike[NKE  94.98    0.63  (+0.67%)   ]Limited [LTD  43.90    1.19  (+2.79%)   ]and Ralph Lauren[RL  157.85    7.11  (+4.72%)   ]which all hit record highs.

”High end retail is keyed into the discretionary spend. If people have money they continue to spend it.”

JJ Kinahan agrees. “For the high end this could be a much better holiday than many investors expect.”

The United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecasts.

The trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit, the bank said in a research note published on Friday.

A second downgrade — either from Moody’s[MCO  32.00    0.62  (+1.98%)   ]or Fitch — would follow Standard & Poor’s downgrade in August on concerns about the government’s budget deficit and rising debt burden.

A second loss of the country’s top credit rating would be an additional blow to the sluggish U.S. economy, Merrill said.

“The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan” to cut the deficit, Merrill’s North American economist, Ethan Harris, wrote in the report.

“Hence, we expect at least one credit downgrade in late November or early December when the super committee crashes,” he added.

The bipartisan congressional committee formed to address the deficit — known as the “super committee” — needs to break an impasse between Republicans and Democrats in order to reach a deal to reduce the U.S. deficit by at least $1.2 trillion by November 23.

If a majority of the 12-member committee fails to agree on a plan, $1.2 trillion in automatic spending cuts will be triggered, beginning in 2013.

Those automatic cuts, mostly in discretionary spending, would weigh further on a fragile U.S. economy, Merrill said.

In the same report, the bank reduced its 2012 and 2013 growth forecasts for the United States to 1.8 percent and 1.4 percent, respectively.

If there were a downgrade, it was not clear which ratings agency would move first.

Moody’s Investors Service, which has a negative outlook on the United States’s Aaa rating, said it is looking at several other factors, including the results of presidential elections and the expiration of the Bush-era tax cuts late in 2012, to decide on the rating.

“It’s not that we’re waiting just for this committee to decide on the rating,” Steven Hess, Moody’s lead analyst for the United States, told Reuters in an interview last week.

Failure by the committee to come up with an agreement, he said, “would be negative information but it is not decisive in our view about the rating.” To be sure, Hess did not rule out the possibility of an early move on U.S. ratings if the country’s economy slips into recession.

So far, however, the economic performance “is certainly not super positive but not a disaster either,” he said.

Fitch Ratings, on the other hand, still has a stable outlook on its AAA rating on the United States, meaning it is more likely to revise that outlook to negative before actually downgrading the rating.

In its latest report on the United States, Fitch says a “negative rating action,” which could be only an outlook revision, could result from a weaker-than-expected economic recovery or by failure by the bipartisan committee to reach agreement on at least $1.2 billion in deficit-reduction measures.

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