OptionPundit

Category: Magic Formula Investing

  • Do we still have quality left?

    Although markets have been rising relentlessly, I am still looking for more bullish plays. 

    Those who have been reading this blog for a while know that “Magic Formula Investing” has been one of the key screens I have been using for quite sometime. My last find was MRO that delivered great results till last month. Not that this month is bad, but after stock split it doesn’t fit into my criteria for income spreads so I am on lookout for other underlying.

    Those who would like to know more about this, type “Magic Formula Investing” in search box and you will find all the related articles. 

    Here are two screens that I ran after close yesterday. First one is focused for the companies that 1 billion or above in the market cap and other screen looks at the stocks that are 500millions and above. I have screened only for top 25, but you may go to the website and run for 50 or 100 to find more choices. I am attaching screenshots of both. 

     winning-trade_29.jpg    winning-trade_28.jpg

    Have fun analyzing and looking for what suits your investing style. I am personally looking for “Bullish”  picks in different sectors. I think after window dressing is done by today and tomorrow, the money will flow to different sectors.

    Profitable exploring, OptionPundit

  • Magic Formula Investing revisited

    You all know how much I love this little book that I had earlier profiled in Jan’07 and also gave an example on how one can play using this strategy. Since then the market have reached a great high and in fact some of the good companies in the original list have also performed very well. Now since the markets are at new high, I decided to dive into the list once again to find suitable underlyings for a good income trade.

    MFI-1 MFI-2  

    Here is the list, plenty of fishes out there.

    Choose your pick and play well. Make sure it has good liquidity, fundamentals are taken care of by the screen, and has good premiums so as to be a good underlying for options trading. I shall be doing detailed analysis and will share mytake with OPnewsletter susbcribers.

    Profitable trading, OptionPundit

  • The Little Book : FDG Profit 30%

    Good things doesn’t necessarily means it needs to be expensive. Recall I recommended a little book first here that is inexpensive compared to the immense value it delivers. I later shared how that little book can be used for option trading here. I also gave an examle in the same post on Feb 4 highlighting FDG. Let’s revisit the same trade (click here) and see where is it now. The example trade was created for a $270 investment and expected returns were anywhere in between $40-$98. FDG was trading at $22.68, the point of maxium return, app $98. On feb 16th, FDG closed at $23 yielding a profit of roughly $90 for $270 investment. That’s 2 weeks holding period, yielding over 30% return. I don’t think I could ask any more from an income trade with very little risk.

    Here is the chart–> fdg-mfi-feb-2007.png

    Cheers and wish ya’ll profitable trading, OptionPundit 

  • Little Book but Big Gains

    The little book that beats the market.

    I first mentioned about this book in my posting here on Jan 20, 2007. Let me briefly talk about why I think this is a great book and how I would like to use it for option trading. As per the screening on Feb 3, for >100million market cap, Fording Canadian Coal Trust (FDG) is amongst one of the TOP 25 companies. Here are the key points about FDG:

    • Market Cap > $3.3 billion
    • Pre-Tax Earnings Yield : 20%
    • Return on Capital (ROC) > 100%

      I didn’t penetrate into further details on how these numbers are calculated but I am assuming that system works and it’s correct. Though past performance is not indicative of future, just look at the past 5yr chart of the company. fdg-feb-1-2007.png

       

      Let’s dive in how to use it- According to Magic formula investing (The little book that beats the market) I shall assume that over a period of time, the price should go up assuming fundamentals, yields remains same. If I buy either diagonal leaps spread or calendars, I should be able to create something that will give me gains from Theta or delta. So Here I created 3 calendar spreads of $20/$22.5/$25 for $270 investment. fdg-feb-2-2007.png

      And Look at the beauty of this trade, depending upon where FDG is by Feb expiration your returns may vary from $40 to $98 on $270 investment. And mind it, this is only 1 month. You can continue to benefit from this till next year. fdg-feb-2007.png

      Simple concept, difficult to manage. One need to understands Option greeks and adjustments to manage the trade. Those are the key points that one needs to understand thoroughly before enjoying this so that you don’t lose money. However, my point here was to show how this book can be used. One needs to read through it to understand better the foundation of “stock screen” for this strategy.

      Enjoy experimenting,

      Profitable trading,
      OptionPundit

  • Magic Formula Investing

    How to find quality stocks to for creating a profitable stock option trading strategy! Today I would like to introduce you to “The Little Book That Beats the Market. An investment guide for all ages”. It is a recommendation for something that I found brilliant and thought it might be of interest to my readers. I shall share later on how to use it for options trading.

    As published on the website: Two years in MBA school won’t teach you how to double the market’s return. Two hours with The Little Book That Beats the Market will. Let Joel Greenblatt, Founder and Managing Partner at Gotham Capital (with average annualized returns of 40% for over 20 years) show you how “beating the market” can be made simple and easy. The Little Book does more than simply set out the basic principles for successful stock market investing, it provides a “magic formula” that is easy to use and makes buying good companies at bargain prices automatic.
    Though the formula has been extensively tested and is a clear breakthrough in the academic and professional world, the common sense method is convincingly explained using 6th grade math skills, plain language and humor. Readers will learn how to use this low risk method to beat the market and professional managers by a wide margin. Along the way, readers will also learn: how to view the stock market; why success eludes almost all individual and professional investors; and why the formula will continue to work even after everyone “knows” it.

    The Little Book That Beats the Market This is not a get-rich-quick book. He explains what really matters and what’s behind successful investing and it’s so simple that you may not believe it. Magic formula investing is an essential tool in OptionPundit’s Toolbox Please note, it’s a free tool and you can browse their website and get stock list everyday after registering. You don’t have to pay to those “magic investment letters” to get this list.

    So how do we use it for options trading? My interpretation is that the screened stocks will go up over the long term so we need to use strategies that are bullish over long term. So put it simply, a strategy that has positive delta, positive theta so we gain from upwards movement in stock and time decay due to long term holding. For instance, long leaps and short current month (same strike) as theta for current month will be higher than leap month so you get positive theta (i.e. Calendar spreads or diagonal spreads). Let me know via comments if you would like to discuss more on how to play this.

    Top 25 companies with a minimum market cap. of $1 billion (as of Jan 20,2007)(Companies are listed in alphabetical order)
    Name Ticker Market Cap
    ($ Millions)    		 Pre Tax
    Earnings Yield    		 Pre Tax
    Return on Capital    		 Price
    From    		 Most Recent
    Quarter Data
    Barr Pharmaceuticals Inc BRL 5,875.09 10% > 100% 01/19 09/30
    Biovail Corp BVF 3,357.05 15% > 100% 01/19 09/30
    CGI Group Inc. GIB 2,325.17 10% > 100% 01/19 09/30
    Career Education Corp CECO 2,405.30 13% 50 – 75% 01/19 09/30
    Deluxe Corp DLX 1,441.08 9% > 100% 01/19 09/30
    Fording Canadian Coal Trust FDG 3,166.38 21% > 100% 01/19 09/30
    Freeport-McMoran Copper & Gold Inc. FCX 10,628.15 23% 75 – 100% 01/19 12/31
    Frontier Oil Corp. FTO 3,001.80 21% > 100% 01/19 09/30
    Getty Images Inc GYI 2,412.70 10% > 100% 01/19 09/30
    Herbalife Ltd HLF 2,334.36 10% > 100% 01/19 09/30
    Holly Corp HOC 2,839.11 14% 75 – 100% 01/19 09/30
    K-Swiss Inc KSWS 1,065.38 13% > 100% 01/19 09/30
    King Pharmaceuticals Inc. KG 4,254.50 16% > 100% 01/19 09/30
    Labor Ready Inc. LRW 1,003.98 12% 75 – 100% 01/19 09/30
    Motorola Inc. MOT 46,585.23 12% > 100% 01/19 12/31
    Nucor Corp NUE 17,278.01 16% 50 – 75% 01/19 09/30
    Pacer International Inc PACR 1,079.85 10% > 100% 01/19 09/30
    Palm Inc PALM 1,394.34 13% > 100% 01/19 11/30
    Patterson-UTI Energy Inc PTEN 3,775.40 26% 50 – 75% 01/19 09/30
    Quest Diagnostics Inc DGX 9,996.69 10% > 100% 01/19 09/30
    Southern Copper Corp PCU 16,454.42 16% 50 – 75% 01/19 09/30
    Teck Cominco Ltd TCK 14,897.51 21% 50 – 75% 01/19 09/30
    Verigy Ltd VRGY 1,051.63 15% > 100% 01/19 10/31
    ViroPharma Inc VPHM 1,045.02 12% > 100% 01/19 09/30
    Western Refining Inc WNR 1,724.95 19% 75 – 100% 01/19 09/30

    Note: See The Little Book That Beats the Market for full instructions. In general, purchase 5 to 7 top ranked stocks every 2 months or 7 to 9 top ranked stocks every 3 months. After 9 or 10 months, this should result in a portfolio of 20 to 30 stocks. Sell each stock after holding for one year (for taxable accounts refer to Step-by-step section of the book) and replace with a new pick. Remember, maintaining a diversified portfolio over a long period of time is an integral part of the Magic Formula strategy.