Daily Archives: March 25, 2019

Options

Using Options to Trade the Spike in Advanced Micro Devices

There are generally two reasons why a stock a sudden, big move. Either the overall market is having a big up or down day (the systemic effect). Or, the company itself has some specific news item causing a large move (the idiosyncratic effect). Most stock specific news is related to earnings or product announcements, although sometimes it can be something entirely random.

Sticking with the more standard explanations, we tend to see gap moves in stocks after a surprising earnings announcement or an unexpected product announcement. Earnings surprises are generally straightforward but product surprises are a different matter. What kind of product announcement can cause a stock to gap (usually higher)?

In most cases, a surprise product announcement is one that comes entirely out of left field. We’re not talking about the next edition of an iPhone, but instead the unveiling of an entirely new product line.

For a perfect example, look what just happened with Advanced Micro Devices (NASDAQ: AMD).

AMD is one of the biggest graphic card companies in the world (GPUs). The company’s Radeon line of graphics cards are particular prevalent in the gaming universe. The video game industry is huge and continues to grow as e-sports becomes a more mainstream phenomenon.

So, when Alphabet (NASDAQ: GOOGL) announced a new video game streaming platform called Stadia, it was huge news. What was even bigger news for AMD is that Google announced it would be using their GPUs to render the graphics for its new gaming system.

The response by investors was overwhelming positive for AMD – and why it shouldn’t it be? There’s a massive amount of potential with this service and it will clearly boost sales and profits for the company. In fact, the stock jumped 12% on the day of the announcement.

What’s more, bullish options action in AMD substantially increased. The 30-day average for bullish trades on AMD was at 60% of activity. But, the day of the announcement, bullish activity jumped to 76% of all options activity.

One strike and expiration which saw a lot of action in particular was the 27.5 strike expiring on April 5th. With the stock price around $25.50 about 2,000 of these calls were bought for about 40 cents. That’s a breakeven price of $27.90 for roughly a two-week trade.

The stock closed at $26 the day of the spike, so the trader clearly thinks the stock will keep running. The buyer is spending about $80,000 on this bullish trade, but could generate $200,000 per $1 above the breakeven price.

If you want to make a short-term bet on AMD continuing its climb, buying those short-term calls is a reasonable trade. However, you can also buy yourself more time without spending too much more in premium.

The April 18th 27 calls cost about $1 with the stock at $26. So, for a full month before expiration (and with the stock 50 cents higher and the strike 50 cents lower) you can spend $1 instead of $0.40. The breakeven point is still right around $28, but you have 2 additional weeks (and about 4 total weeks) for the trade to work.

That’s a reasonable tradeoff in my opinion and will give you a better chance to succeed if the stock keeps climbing. Given the massively bullish news, it certainly wouldn’t shock me if the stock takes a shot at $30 or above in the near future.

Dividends

Three High-Yield Stocks For You to Safely Ride Out for the Coming Recession

The next U.S. economic recession is coming. Guaranteed!

It is likely that you are reading many predictions concerning the next recession. Last year the pundits were predicting one for 2019. Now I am seeing more predictions for a recession in 2020 or 2021. These predictions are mostly about marketing, because the people making the guesses on the next recession are betting on a sure thing. The economy does cycle, so at some point in the future we will go through a period of negative economic growth.

Predicting the timing of the next recession is a harder task.

At the current time I would say any prediction that ends up correct was more of a lucky guess than from astute analysis. The economy continues to chug along at a moderate 2% to 3% annual GDP growth rate. The economic indicators that traditionally are leading clues for the next economic slow down are giving mixed signals, with a slight bias towards continued growth. Yet it is good to have a plan and some investments in your portfolio that are recession resistant. There is always the possibility of an unforeseen economic event that pushes the economy into negative growth.

Recession resistant income stocks are those that meet two criteria:

First, they have businesses that will continue to generate revenue and free cash flow even in a negative growth economy.

Second, we want to own shares of companies with above average free cash flow coverage of the current dividend rate. Excess cash flow gives a company’s board of directors’ confidence to not cut dividend rates when the economy is under pressure.

Understand that in a recession driven bear market all stock prices will fall.

As high yield stock investors we want to ride through the bear market and subsequent stock recovery with our dividend earnings intact. This allows us to buy more shares when prices are down and boost portfolio income coming out the other side. Remember for the same reasons a recession is inevitable, so is the following recovery. The economy goes through cycles.

Here are three stocks that should be able to sustain and possibly grow their dividends through the next economic recession.

Kinder Morgan Inc. (NYSE: KMI) is a large-cap owner and operator of energy infrastructure assets.

The company owns an interest in or operates approximately 84,000 miles of pipelines and 157 terminals. The pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and more. The terminals store and handle petroleum products, chemicals and other products.

Management guidance has 2019 distributable cash flow $5 billion, providing 2.2 times coverage of this year’s dividend payments. That is much better than the typical 1.3 to 1.5 times coverage prevalent in the energy infrastructure space.

Kinder Morgan plans to increase the dividend by 25% this year and next year.

The shares yield 4.0%.

National Retail Properties, Inc. (NYSE: NNN) is a triple-net lease REIT that 3,000 single tenant retail properties in 48 states.

The properties are leased and operated by businesses that won’t go out of business in an economic recession. Think of your local convenience stores, auto parts shops and movie theaters.

For 2018, the company’s dividend payout ratio was 77% of adjusted funds from operations (AFFO). This is very solid dividend coverage for a net lease REIT.

This company has increased its dividend for 29 consecutive years, which means the dividend has grown through the last several economic recessions. That’s a record a Board of Directors will not want to stop.

NNN shares yield 3.8%.

Tanger Factor Outlet Centers (NYSE: SKT) owns and operates 44 outlet center type shopping malls.

Tanger was an originator of this type of mall and is the only pure play outlet center REIT. This type of mall will outperform other retail sectors when the economy is going through a slowdown. People always will shop. They are more likely to shop at an outlet mall if they believe times are tough.

Tanger operates very conservatively, with a low debt ratio and dividend well covered by cash flow. The SKT dividend has been increased every year since the company’s 1993 IPO.

The stock currently yields 7.1%.