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This Company Could Hold the Key to the Future of Medicine
In last week's Income Trade issue, I mentioned how successful investors generally follow strategies that are suited to their "trading personality." By that, I mean investors believe they have achieved a balance between risk and reward. I know that there are many other ways to look at the question of defining a trading personality. My approach is simple, but I am focusing, as always, on practical solutions instead of esoteric theories. I believe the pace of trading activity and the level of risk accepted are the most important characteristics of an investor's personality. Many investors think of themselves as being aggressive or conservative. The level of trading activity is usually defined by that label -- aggressive investors usually trade frequently, and conservative investors trade less often.
In Today's Issue
ESRX: Set to Benefit in the Health Care Sector This Week's Trade: Sell ESRX Jan 55 Puts ESRX Alternative Trades Income Trader Portfolio & Updates Questions & Answers
Aggressive investors will look at stocks without earnings and dividends, while conservative investors may only consider stocks that have a history of strong earnings and dividend payments. Options might be considered aggressive by some investors, but I believe that options form the core of a conservative strategy. A binary model of investment philosophies has been in place for many years. Now we label the two choices "aggressive" or "conservative." In 1949, the different approaches were called "investment" or "speculation." Benjamin Graham, Warren Buffett's mentor, explained in The Intelligent Investor that "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." Under that definition, I believe Graham would consider the strategy I follow for Income Trader to be an investment operation. For every stock we trade, I complete a detailed analysis that incorporates many of the techniques included in Graham's first book, Security Analysis, which he co-authored with David Dodd and first published in 1934. My focus is on safety of principal, ensuring each stock offers value and an adequate return generated by selling options. This week, I would like to explain how the recommendations in Income Trader can be adapted to accommodate your personality. I realize some readers are more conservative than I am and others are more aggressive. More aggressive traders might be comfortable selling options that have a higher risk of being in the money at expiration. This would allow them to earn higher income on winning trades but could lead to being assigned more shares or incurring losses on some trades and closing them before expiration. More conservative investors might want less risk when selling an option and be willing to accept less income in return. Since the first issue of Income Trader, I have tried to balance these concerns and recommend options that, in Graham's words, "promise safety of principal and an adequate return." I will continue
PBMs prepare lists of drugs they will pay for and offer electronic prescription (e-prescribing) tools to help doctors find the best-priced option for their patients. ESRX also helps reduce costs by filling prescriptions with generic drugs. the exit strategies will be the same for those trades as they will be for my main recommendations. Increasing this to 40% in the short term and 60% in the longer term -. I will fully explain my reasoning behind every alternative pick. ESRX is a pharmacy benefit manager (PBM) with operations in the United States and Canada. One study found that a mail-order pharmacy option offered by Express Scripts saved 16. In recent conference calls with analysts.the company's goal -. you can email me at Editors@ProfitableTradingResearch. those savings amounted to more than $250 million a year.S.9% of prescriptions were filled with generics last quarter. PBMs are able to do this by using their large size to negotiate lower prices from drug manufacturers. Let me know what you think of the new alternative trades section. so does the number of ESRX's potential clients. this will result in recommendations with varying exercise prices. for example. Despite the large savings that are possible. Often. and this change is being made because I think this is what some readers would like to see. Your emails provide valuable feedback. In general. More aggressive investors might be comfortable using an option that expires after an earnings report.4 billion prescriptions. Experience with the Canadian health care system could be beneficial as the U. As always. but 40% of the plan sponsors it works with had generic fill rates that were lower. home delivery represents less than 30% of total claims. but I am saying that experience with different types of systems will be an asset to any company in an environment where the only constant for the next few years is likely to be change. I might even recommend investors look at options in different companies. the company handled more than 1.com. company management said ESRX is working with providers offering . A PBM works with employers. ESRX: Stock Set to Benefit in the Health Care Sector This week's trade is in Express Scripts Holding Company (NASDAQ: ESRX). As access to health insurance increases.could help ESRX increase profits. If there is a significant difference. However. I might recommend selling a put with an exercise price of $50 and note that more conservative investors might want to consider the $40 put while aggressive investors may find the $60 put to be more appealing. I would like to be clear that I am not suggesting the United States will adopt Canada's health care model.to do that. even if the income is slightly lower. but whenever possible.7% when compared to the prices for having the same prescriptions filled at retail pharmacies. unions and government organizations to manage prescription drug benefits for millions of beneficiaries. Conservative investors might be more comfortable with an option that expires in a shorter amount of time. In this study. This could also come in the form of recommendations with different expiration dates. For example.S. As always. They can also offer mail-order pharmacy services that offer convenience to beneficiaries and deliver savings relative to the pricing at retail pharmacies. If I found a department store as a trade. I will continue to adapt to what you tell me as I try to deliver profitable trades to you in the future. Management believes that it can reach an 85% fill rate in the next few years. It is currently the largest PBM in the U. and this could also help ESRX increase profits. health care system changes. On rare occasions. I might recommend a smaller department store for aggressive investors if the two stocks tend to move together. The company noted that 80. PBMs can improve the level of service to beneficiaries while lowering costs. I will do my best to highlight that in the weekly update section. I will also include similar trades that have more or less risk. even though approximately 75% of prescriptions are for maintenance medications. Savings on prescriptions can be substantial for plan providers. In 2012. for example. I will not track alternative trades on a regular basis.
Over the past 12 months. The company reported that it had a customer retention rate of about 95% for 2013.2 13.8% Sector Relative Strength: Price to 200-day MA: Dividend Information Dividends Per Share (est): Payout Ratio: Dividend Yield: No.3B $1.9 N/A N/A N/A N/A N/A N/A Health Care Plans 64 107% Based on projected EPS of $4. By selling a put on the stock.5B $2." Relationships for ESRX tend to be long-lasting.65 $29. and growth should be expected to slow with size.insurance through the new exchanges. Although this is down from the 25% average annual EPS growth of the past five years. revenue has topped $100 billion. analysts expect earnings per share (EPS) growth of about 15. Yrs Increased Div: Ex-Dividend Date: Valuation 0.5% Discount On Wednesday.8B $14. in 2008. Express Scripts Holding Company. Five years ago. This week.2 billion over that time. I recommend selling the ESRX Jan 2014 55 Puts for $0. representing more than 90% of the newly available lives. Selling a put obligates $50 (each contract controls 100 shares). we may get the opportunity to buy it at an even bigger discount.6% 214.7B $6. receive instant income upfront (known .2% a year. ESRX is a very large company.5% and Get the Chance to Buy ESRX at a 17. assuming you us to purchase that stock from the enter the trade near the middle of the range. 17 (the last day these options can When we accept that obligation. Shares Outstanding: $1.3% 15.10 Market Cap: Debt: Debt to Equity: Income Statement Revenue (ttm): Owner's Earnings: Diluted Earnings Per Share (ttm): Quarterly Revenue Growth (yoy): Quarterly Earnings Growth (yoy): Earnings Growth (5-yr): Balance Sheet Cash: Cash Per Share: Book Value (per share): No. In the next five years.to sell a stock at a specified price before a Selling these puts will generate immediate income of about specified date. Note: As I explained in my put selling report. for less than that on Jan.2M Price to Sales: Price to Book: P/E (forward): PEG (5-yr): $106. The company noted. ESRX closed at $66.60.94 in 2014.3B 59. Yrs Paid Div: No.4 0.19 -4. a put option is simply the right -.31 814. $66.but not the obligation -. Net income has grown from $776 million to $2.10. "We have managed care clients located in 41 of the 50 states. we be traded). I believe that ESRX is worth $75 a share and is undervalued at its current price.5 2.40 $0. Generate 4. This put will put buyer if it falls below a specified obligate you to buy ESRX at $55 a share if the stock trades price (the option's "strike price").2% $53. annual revenue was only $22 billion. Analysts expect all of these changes to allow the company to grow its earnings faster than average for a large company.
40 . and we'd be able to sell covered calls on the position to generate additional income. For information on how to execute trades. don't chase the trade.50) -17. Recommended Trade: Sell ESRX Jan 55 Puts for $0. If you're not comfortable owning more than 100 shares of ESRX. in 128 days. each option contract you sell represents a potential obligation to purchase 100 shares of ESRX.50 (the $55 strike minus the $0. Below are this week's alternative trade ideas. we'd earn a 12.$0.100 $50 4. don't sell more than one put. 17. buy the stock at any time between To initiate this trade. Worst case. or 4. if ESRX falls below $55.50 ($55 .10 $55 $50 ($0. but with a different strike price and/or expiration date.60.100 (20% of $5.50 Margin Requirement: Premium: Return on Margin: Days in Trade: $1.e.8% return on our capital in 12 months. so you'll get plenty of opportunities to generate income selling puts and covered calls. I don't recommend using a stop-loss on this trade. As always. you'll keep the $50 per contract. I'll provide alternative trade ideas when the opportunity presents itself. I recommend readers use limit orders to execute trades. read Profitable Trading's Brokerage Guide. . If we can repeat a similar trade every 128 days.100. In this case. ESRX Alternative Trades: As I mentioned above.50 premium. This ESRX trade would require a margin deposit of $1. a 17. we'd own shares for about 11 times estimated 2015 earnings. Here's how the trade looks if we are put shares: ESRX Jan 55 Puts for $0. You can be asked to Buying 100 shares of ESRX at $55 each would cost $5. 17. like and the expiration of the option a down payment on a house. i. I will be monitoring it closely and will send an immediate update if anything changes. These trades will usually involve the same stock I profile in the issue.50 per share) $54.5% discount to recent prices.50 Recent Price: Strike Price: Premium: Cost Basis: Discount (to recent prices): $66. we'd likely be "put" the stock.5% If ESRX trades for less than $55 on Jan. Income Trader is a weekly publication. which you keep).5% 128 Assuming ESRX trades for $55 or more on Jan.as a "premium"). At $54.500.50. we keep the premium and make a profit of $50 on $1. the buyer of the put requires us to purchase the stock.500). Here's how the trade looks if the option expires worthless: ESRX Jan 55 Puts for $0. but you'll have to buy ESRX at $55 per share.5%. you'll own ESRX at a cost basis of $54." It usually runs about 20% of the amount it would cost you to buy the shares.$0. If prices move and you can't get the premium you want. your broker will likely require you to the moment you collect the premium deposit a percentage of that obligation in your account. Remember. requirement. This is called a "margin contract..
Trade is open.50 put.8% above the $65 strike price. which should expire just before earnings are announced at the end of October. and GMCR is trading 25.00 $0.08 $1. Aggressive ESRX Trade Option ESRX Oct 62.38 Est. Return on Margin Margin Deposit $1.50 strike price.100 3.100 5.75 $1.50 strike price.00 $0.55 $0.10 $1. The advantage relative to the recommended trade is that the shorter time to expiration increases the annualized rate of return. CARBO Ceramics (NYSE: CRR) continued climbing higher and gained more than 4% last week. This trade meets my minimum income requirement and is very low risk.3% Annualized Return on Margin 9. Western Digital Corporation (NASDAQ: WDC) also delivered a market-beating gain of almost 5% last week.9% above the $55 strike price.050 Return on Margin 3. Trade is open.0% above the $60 strike price.80 $0.1% Sell QCOR Sept 55 Puts 08/15/13 $0.300 4.08 Est. Conservative ESRX Trade Option ESRX Jan 52. Margin $1. The put option fell significantly to reflect that gain. and FFIV is trading 31. and WDC is trading 19. But the amount of income is relatively small. and HD is trading 11.7% above the $55 strike price.45 $1.350 2. Trade is open.38.40 $1.50 Puts Premium $0. .35 Est.50 puts for about $0.50 Puts Premium $0.50 Puts 09/05/13 $0.75 $0.7% Sell WDC Oct 55 Puts 07/26/13 $1.40 $1.3% above the $55 strike price.5% CME Group (NASDAQ: CME) should expire worthless next week.5% Sell FFIV Oct 70 Puts 08/01/13 $0.9% above the $67. Sell CME Sept 65 Puts 07/11/13 $0.350 1. and CME is trading 11.50 Puts 08/28/13 $1. Trade is open. and SODA is trading 18.2% Sell GMCR Oct 67.9% Sell HD Oct 67.200 6.400 2.5% Income Trader Puts Portfolio & Updates Trade Date Sold Price Recent Price $0.0% Annualized Return on Margin 30.90 $0.65 Sell CRR Sept 60 Puts 07/24/13 $0. Margin $1. Trade is open.2% above the $67. This trade is right at the limit of what I consider to be an acceptable level of risk. This option should expire worthless next week.250 Return on Margin 3.30 $0. and QCOR is trading 16. Trade is open. and CRR is trading 50.4% Notes Trade is open.5% above the $70 strike price. Trade is open.More aggrieve investors can consider selling the Oct 62.0% More conservative investors might want to consider selling the Jan 52.21 $1.100 11.5% Sell SODA Sept 55 Puts 08/08/13 $1.
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