December 15, 2004
Step One - Find a stock. One of the places to
look for a potential position is a listing of companies that recently split
or announced a stock split. There are many free locations on the
Internet that will provide stock split information. Here is a link to
one for your convenience
.
In looking at this information today, it was noticed that Immucor (BLUD)
completed a 3:2 split yesterday (12/14/04). A partial printout of the
December listing is below. BLUD is the last entry.
Knowing that historically, stocks that split tend to appreciate over
time. There are a number of reasons for this and one is that the stock
would be less expensive to purchase. Just because it split, does not
mean it is a good selection.
Step Two - The next thing to do is to look at a chart of the stock
and see if you 'like the picture'. There are many 'free' charting
services out there, but for clarity, SysCW uses and recommends
TC2000. Here is the picture for this stock:
The four yellow symbols on the chart indicate stock splits! Not
only did this stock split on 12/14/04, but it also split on 7/19/04 and
11/17/03, and on 9/16/02. This stock seems to be a splitting machine!
Now let's take a look at the same time period only with the chart adjusted
for all of the splits. (This is one of the features of TC2000 that
makes it appealing.)
All that needs to be said about the picture is WOW!
Step Three - Another feature of TC2000 is the fact that if a stock
offers options, the word Optionable can be found towards the end of
the fourth text line on the chart. Now we need to know if the options
are reasonable. Let's take a look at the June option chain.
 |
Keep in mind that these figures are after the market has closed.
The green highlighted number in the Strike Price column is the
closing price for BLUD on 12/15/04. Now lets use the $25
strike price and plug the data into the Position Worksheet.
The results are below. Commissions and fees are adjusted to
$25 per transaction. |
Beware that after hours option prices are not necessarily
as accurate as they will be when the market is open. The idea is to
just obtain a 'feel' as to whether the position will work or not. With
this after hours data, the potential return if the $25 option were to be
exercised in June is very good. On the other hand, the downside
protection is below 10%, which is not very good. But, when you
factor in the previous performance, it might be acceptable. This is a
position where you almost have to 'bet' on the stock appreciating if you are
going to write a call against it.
At this point, because of the multiple splits and the
chart, it seems reasonable. Now, what do they do?
Step Four - Again. there are many 'free' locations
to obtain a companies profile. Here is an example:
Immucor, Inc.. The Company's principal
activities are to develop, manufacture and market a complete line of
reagents and automated systems. These systems are used to detect and
identify certain properties of the cell and serum components of human
blood prior to blood transfusion. The products are used by hospitals,
clinical laboratories and blood donor centers. The products are sold in
the United States, Canada, Germany, Portugal, Italy, Spain, France and
Belgium. The automated products of the Company are ABS2000, ROSYS Plato,
DIAS PLUS, GALILEO and Multi reader Plus. The Company also distributes
laboratory equipment, which are designed to automate certain blood
testing procedures and used in conjunction with the Company's Capture
product. The registered trademark of the Company is Immucor.
Step Five - At this point, the investigation
process could continue. In fact you can over investigate. Why?
Because tomorrow some legal issue could crop up and this stock could lose
25% of it's value. Stuff happens. There are no holdings in this
SysCW portfolio that have anything to do with blood testing. A
position with this company would further diversify the portfolio.
TRANSACTIONS WERE ENTERED WITH THE FOLLOWING POSITION BEING ESTABLISHED!
Assuming no further transactions take place, either the
Jun $25 call option will be exercised, or it won't. The figures below
are actual and reflect the net cost and premiums including all fees and
commissions. If this option is exercised the return when annualized
would be over 35%. It is important to realize that when a return is
annualized, the assumption is being made that the transactions could be
repeated over the course of a year. There is no guarantee that this
could happen!
If the option is not exercised, which means the stock is
below $25, the stock would remain in the portfolio along with the $188.50 in
net premiums.