The Blue Collar Investor WeBlog

Greetings to all,

I find that whenever I sit down to write my next journal article, there is some overiding issue that has captured your attention. I thank you for your feedback as it allows me to make these writings as pertinant and helpful as possible

Many of you  astutely purchased SID (me too) and noticed that it had a 3-for-1 stock split on 2/11/08. As a result, you now own three times as many shares at one third the previous market value. Although a stock split does not change the market capitalization (# of shares times the price) of an equity, it is often perceived as a positive for a company that has been appreciating in value as in this case. For more information on stock splits, see chapter 17 of my book, Cashing in on Covered Calls and pages 144-146 of the Companion Workbook.

Let’s take a look and see how this stock split of SID effected our option contracts. Please note that the changes that occur to our contracts can occur in different formats. I will show you how to access the information later in this article. Here is how our contracts were adjusted:

1- Each contract deliveres 300 ADSs (American Depository Shares since it is a foreign company), not 100.

2- The SID option symbol changes to SIU.

3- Premium and Strike Price amounts for the SIU series will continue to be calculated on the basis of a multiplier of 100, which means that 1 point of premium or strike price = $100. Of course this $100 change is now for 300, not 100 shares.

4-  For an example of such a change, I will use the February 90 call:

     SID BR becomes SIU BR; if you had bought back the option this past Friday as part of an Expiration Friday exit strategy, the ticker symbol you would have used is SIU BR, not the original SID BR.

5- You will notice a new series of options were created that begin with SID and reflect the new post-split price of SID. Until all the old SIU options expire, the option chain for this security will show a mix of old SIU options and new SID options. I know that this is a bit complicated, even for the more experienced options traders. But like anything else, the more you see it and understand it, the less threatening these changes will become.

Now I am aware of the fact that despite the above brilliant explanation, many will still find the handling of a stock split a bit challenging. It did for me for many years. So I give you the following way of looking up the information for the specific security in question:

1- Go to www.cboe.com

2-Click on Trading Tools and then Contract Adjustments

3- Type in ticker symbol of the stock in question

4- Click on article pertaining to your stock

This will allow you to access information regarding a full explanation as to how the contract adjustments are made and a chart of the existing and adjusted options series.

5- If you are still in need of additional information, call the Chicago Board of Options Exchange @ 1-877-THE-CBOE. Press #5 for the operator and let them know your question and you will be referrred to the appropriate party. The information and call is free.

PRXL- Another Stock Split Example:

Let’s evaluate PRXL, a stock I have been selling options on. It was recently announced the the company’s Board of Directors and shareholders approved a 2-for-1 stock split that becomes effective on March 3, 2008. That is this current contract period. Those of us that own the stock will subsequently own twice as many shares at one half the original cost basis. You will have sold twice as many contracts at one half the strike price. Use the above website to interpret the specific contract adjustments made in this case. As I stress in my seminars and books, do not buy a stock simply because it announces a split. Sometimes that split is approved simply to draw attention to the company in hopes of boosting its share price. That is not the case with PRXL. Let’s look at its financial report card:

1-Overall Diagnosis: A+

2-Stock Fundamental: A+

3- Stock Technical: A-

4- Stock Attractiveness: A+

5- Group Technical: A

6- Scouter rating: 8

7- Technical Analysis: Mixed with the most important Moving Average positive.

The stock is currently trading @ $55.81 and because of the proximity of the $55 call and the mixed technical picture, I would lean towards that $55 strike. The ROO on this option is $3.20 - .81 = $239 per contract on a bought down cost basis of $5500. This represents a 1- month return of 4.3% or 52% annualized with 1.5% downside protection. After March 3rd, we will make our contract adjustments. Not a bad deal!

Some Bright Spots in our Economy!

I recently heard some encouraging news relating to our volatile economy:

1- Retail sales increased by .3% in January. Analysts had predicted a .3% decline.

2- The U.S. trade deficit narrowed by 7%. Year to date the deficit has decreased by 6%.

3- President Bush signed the economic stimulus package. Many single filers will receive $600 and married couples up to $1200. The IRS will start mailing rebate checks in May.

4- Federal reserve Chairman Bernanke stated that the Fed is open to further reductions in the federal funds rate “as needed to support growth”. He also mentioned that he expects a “somewhat stronger pace of growth starting later this year”. Since September, the Fed has cut the federal funds rate by 2.25 percentage points.

Notes:

1- In my last article, I mentioned that I was keeping an eye on stocks related to the Coal industry. I highlighted WLT which was supposed to have its Earnings Report come out in the first week of February. That date was changed to February 19th. With a great ER the stock’s fundamental rating could increase to meet our system criteria. With the tremendous amount of institutional money moving into this industry, I believe that it is worth keeping an eye out for great performing stocks in the Coal Industry.

2- After 4 years the DOW 30 is changing. CVX and BAC are being added while HON and MO are being removed. These changes are made to better reflect which industries have the most impact over our economy and stock market. BAC is the nation’s biggest bank by deposits and CVX was added due to the fact that oil and gas have a growing significance to the global economy. On the other hand, MO was eliminated because it has become a smaller company due to its spinoffs(Kraft Food for one); HON because it is the smallest company in the DOW 30 by revenue and profit. I view these changes a  non-event if you own any of these equities. 

Finally, I encourage you to let us know of any great performing stocks you have found that many of us may have missed We are here to assist each other, that’s what Blue Collar Investors do. Just click on the word Comment and share with us any constructive ideas you may have.

I can also be reached directly by email @: alan@thebluecollarinvestor.com

Wishing you the best in investing

Alan