MBUU 2017-10-23
I was called out of my position of SQ when the options expired and I was looking for a new stock to roll into. I came across Malibu Boats Inc MBUU in Investor’s Business Daily Vol 34 NO 29 Week of October 23, 2017 – Your Week in Review.
I keep a short list of stocks that I am watching, but many are reporting earnings within the next standard option cycle due on November 17th. So I had crossed many off of my list.
I purchased the stock today 31.77 and plan on selling the $35 call for .65. I am legging into a buy/write. The volume is low currently and the delta is at .28. So I’m correct and the stock increases then I will be able to sell the call for more, but even now it’s still a good 2% gain.
Buy 100 shares MBUU $31.77
Current price
Sell to Open 1 Contract of MBUU NOV 17 2017 35.00 C at Limit Price of $0.65. Duration of this order is Good until Cancelled.
A recommendation from Allen Ellman and most of the the books on covered call writing is: Do not sell a call during earnings reporting period. This is due to volatility. So, I then checked EarningsWhisper: MBUU for the next earnings release. That is for Nov 1 so the Oct 20, 2017 call option is available.
Remember to do your own due diligence. This example is used to illustrate a trade.
The upside is $35.00 a share. This will generate a $3.23 in capital gains or 10%
35.00 – 31.77 = 3.23 / 31.77 = 10%
Selling the call gives me $65.00
$0.65 x 100 shares = $65.00
This is another 2.0% in yield
So the total return on the upside is $3.88 a share or 12%.
My downside limit is 7%, but the extra $0.65 gives a higher probability for a successful trade. My cost basis for the stock is now $31.12 and a 7% loss is at $28.94
31.77 – .65 = 31.12 * .93 = $28.94
If this stock drops down to $29 a share I’m really wrong on the setup and will sell to preserve capital
Checking the Fundamentals for a profitable company:
Gross Margin (TTM) 26.62%
Operating Margin (TTM) 13.99%
Pretax Margin (TTM) 17.26%
Net Profit Margin (TTM) 11.02%
This company has good margins and Net Profit Margin tells you that out of every dollar of sale 11.02 hits the bottom line.
P/E excluding extraordinary items (TTM) 20.2
P/Sales (TTM) 2.3 You’re buying the company 230% of current revenue and anything under 2 is considered cheap.
They have some cash on hand:
Current Ratio (MRQ) 1.8
Debt: 1.1 They have 110% and are heavily leveraged
Debt/Equity (MRQ) 1.1
I like companies without a lot of debt, because that commits revenue. So, if it needs quick cash it will be able to meet short term needs it will be able borrow for the money.
Return on Equity (TTM) 87.91%
EPS (TTM over TTM) 1.51
Book Value per share 2.74 This should be bottom line in pricing for liquidation
Let’s look how this is currently trading. Cover call strategy requires a positive overall trend. Starting with a longer view point helps give some perspective on the current trading cycle.
The charts are from bigcharts.com:
This is the current 5 yr chart
Next a current 1yr weekly chart.
3 Month Chart.
Bryan
2017-11-14 Update
I was wrong and was stopped out of my position.
I had written down the next earnings date as Dec 7, 2018 and planned on selling the November 17th call. The earnings announcement was on November 7 and they disappointed. This caused the stock to fall past the stop point.
The days before were not acting right and was close to selling the position at a slight loss instead of the greater loss