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Strategies & Market Trends : Option Strategies

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To: Cliff0rd who wrote (1734)	8/20/2016 1:38:41 PM
From: Jim P.	Read Replies (1) of 2591

Message 30708558 I do not know if it is oversold. It seems oversold when a justice department memo indicates that that 7% of their cash flow is at risk in the next 5 or more years and the stock sells off 50% intra day. Panic or stop loss orders pushed the stock to $13 at the bottom from trading at $27. The yield on the REIT went to close to 17% at the bottom. I personally do not like the business model "private prisons" but that does not mean there is not a price that represents a good investment. cca.com Conference call replay available at link above and in the call the company has already had a larger than 7% change in gross margins from declining business with the prisons that it manages for the justice department. Declining prison population given as the reason. This has been made up for with growth in other areas. The market seems to have priced in a short term risk to the entire business model. The trading account that I sold the options in has a margin feature. Selling the options did not move the needle much on the account. Very small position that allowed me to diversify my short put portfolio and meet my return goal of 2% a month in option premium for the at risk capital. Strike price $15, option after commissions $1.17 . 1.17/15 = 7.8% with a December expiration leaves me with 4 months till expiration. 7.8/4 = 1.95% a month. Most of the time I aim for near month that I can get 2% or much higher on stocks I am willing to buy. I do not think that the company will cut the dividend in the next 4 months so the risk of the yield rising to over 14% on a price of $15 is pretty low in this market. Even then at $15 I am at the money so I will come out ahead or try to roll the option out. The amount of capital at risk in the account is 7% of account value. As far as buying calls. I bought a handful of calls in my Roth IRA at a strike of 20 for one month. Way too expensive $1.79 or 9% for the month. Break even at $21.79 and I am not thrilled with the trade. If the stock moves up I will sell the option for a profit. If the stock is down or near the strike then I will buy the stock and collect the dividend while selling covered calls on the position. This position represents 3/10 of 1% of account value. I would rather sell options than buy them in the IRA especially spendy ones. If I would have had the cash available then I would have bought the stock and sold covered calls for 9% in a month and I would have been much happier with the trade. My view on returns in the general market are pretty pessimistic. I think if market returns are made up of growth of GDP +inflation+dividends and historically have been about 9% total return. With growth of population low, inflation low, dividend yield low, and productivity gains not contributing much to GDP the odds of getting anywhere close to 9% with a diversified portfolio is impossible IMO over the next decade. I am more inclined to give away the limited upside in a diversified portfolio by selling covered calls or selling puts and trying to position myself for close to 2% a month in option premiums with some capital gains and dividends above and beyond the 2% target. I will increase my exposure to CXW this Monday by buying some additional shares in a different IRA. Happy with the risk profile on buying and holding as I expect the 11% yield will eventually attract income investors even with the distasteful business. jim

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