Portfolio Update (11-July-2017)

July 11, 2017

We present our ideas here at TheOptionsEdge.Com and in the spirit of full transparency, we track the performance of these ideas in the TOE Trade-Ideas portfolio. In 2016 and 2017 we wrote for Action Alerts Options over at TheStreet.Com. We identify this portfolio as the AAO Trade-Ideas.  The following table summarizes the performance of all our ideas since we started publishing in 2016. We have broken up the analysis into three sub-components. (1) Trades that are still open, (2) Trades that were closed so far in 2017, and (3) those trades that were closed in 2016.

Computing returns for options trades in a manner that is comparable to a stock portfolio are somewhat challenging. Some people like to compare gains and losses to the price of the underlying security. By this method, the average annualized return enjoyed was 5.6%. It is worth noting that this method has far less risk as the underlying stock, as the options strategies we use generally have limited risk compared to a stock holding. An alternative method is to compare the gains and losses on the options trades to the Capital at Risk. This method is closer to the risk of holding stocks but it tends to be more volatile. By this measure, the tactical portfolio generated an annualized return of 22.1%.

For more on how we calculate returns, click here.

Every investor goes through some ups and downs. Since we started publishing our ideas, our method of finding investment opportunities where value, momentum, and sentiment align has served us well align has served us well. Lately, however, the market has tested our method and resolve as we are now struggling after generating steady performance over time. It is times like these that a little post mortem is appropriate to examine our results. We have a total of 165 trade ideas on the books overall, and 53 one the books for our followers hear at TOE. Of those, 6 have really given us some heartburn.

The first is Gilead Sciences (GILD). We think this is a great company whose stock is very cheap. The market price of their stock has fallen about 10% since we initiated a buy-write on the stock. The company trades at a single digit PE on both a trailing and forward-looking basis. Investors have turned their back on the stock as revenues are expected to fall until it gets its next drug approved. (It has 6 in Phase III trials.) We think the stock is worth twice its current price, so we are sticking with the position.

We think investors should have some exposure to the precious metals market and we think platinum is the cheapest metal in the complex. PPLT the Platinum ETF has fallen just over 6% since we expressed the idea. Platinum is currently trading at a discount to gold, whereas it usually trades at a premium. We think this is the metal to hold for our precious metals allocation.

Westrock (WRK) is trading in its own world. It is a very good company, but paper and the corrugated box business is a very competitive and slow-growing business. With the stock trading at 60 times earnings, we think the share price is way over valued. We recommended a short call spread risk reversal (a synthetic, low-cost put option) in April 2017 as was were looking for a sharp fall. Instead, we got run over. This investment reminds us that price can do whatever it wants and that using options to take a bearish position is safer than short selling the stock itself.

We sold a put spread to get long Tyson Foods (TSN). Food stocks are usually stable that trade at a market multiple. So when it looked like TSN was finding a bottom and the valuation was a very reasonable, we thought we found a winner. Unfortunately, the share price fell 10%. The stock now trades at a PE of about 12. Like GILD and BBBY, we think it is worth twice the market price, so we are sticking with it. The question is how should we structure the trade as this one matures. Stay tuned.

We sold a cash covered put to get long Bed, Bath & Beyond (BBBY). Unfortunately, bad sentiment became worse and the share price fell 28%. The stock now trades at a PE of about 7. Like GILD, we think BBBY is worth twice the market price, so we are sticking with it.

Wayfair (W) is another stock trading in its own world. The company has never made a profit and we cannot see a way to profitability. Buying furniture online does not seem like the best way to sell this product, but other investors clearly disagree with us. Shortly after selling a call spread on the stock, the share price rallied about 70%. Since call spreads have a built in stop loss, our risk was limited going in, but that does not make the sting any less painful.

The remaining 19 trade ideas are performing within expectation and we expect them to eventually work out fine.

You probably want to know more about the individual trades we made, particularly if you are evaluating our service for the first time. The following links will take you to tables that summarize the ideas we have discussed. Those tables will have the date of trade initiation, prices at which the trade was recommended and the closing prices. This leads us to the profit on a trade by trade basis. The performance of the closed trades is available for everyone to evaluate. The summary of open trades is strictly reserved for our subscribers.

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