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Let's face it, all those things you heard about efficient markets over the years were hogwash. In the short term, markets are not efficient and as we have learned on too many occasions, not even rational. If everything was always priced just right you would not have winners and losers and everyone would live happily ever after. For some things the short term might be as long as five to ten years.Three years ago I lost out on the purchase of a property close to my office when someone decided it was worth 40% more than I did. At the time I told the broker the buyer was nuts and would lose money, if not more. I remember the broker telling me that the property was worth what someone is willing to pay. That is not true, but far be it from me too convince a broker that just made a terrific deal for his client that people often pay more than something is worth. To make a long story short, the property is now in default and I am trying to buy the note from the bank that made a bad loan accepting a silly valuation.
Back to the stock market: one thing we know for sure is that there are no sure things. However, because there are stocks that are mis-priced for various reasons on occasion you might come close. If you are able to trade options here is an example.
United Parcel Service (NYSE: UPS ) January 2011 puts with a $40 strike price are offering $3.08 a share. If you "sell to open" an option, creating a naked put, your break even point will be $36.92. For some perspective, that is $1.07 off it's 52 week low of $37.99 (it's lowest ever) in the worst economy of our life times. Let me state it another way. The market is willing to pay you over $3 per share today, to promise to buy the stock below below its all-time low. I repeat there are no sure things but this seems like it might be close.
My colleague Joseph Lazaro thinks there is value in UPS today and posted UPS has lagged, but stick with it with the stock hovering around $54 per share. I tend to agree with him. If there is value at today's price then how can you go wrong with this option trade? I don't believe you can -- so i did it.
I have written many favorable articles about United Parcel and I think it is one of the best managed and safest stocks you can own. In addition, when UPS tells us their units shipped are on the rise, then you will have a better indication of improvement in the economy.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of UPS and options.
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Reader Comments (Page 1 of 1)
8-11-2009 @ 4:31PM
Mike said...
Love the strategy, but according to Morningstar's option page, with the 2011 UPS puts you're selling, you're only getting around 5% Why not look at something like the PG Oct 50s@1.25, you're getting around 14% annualized premium and worst case you get to buy PG at an adjusted 48.75? Then in Oct when (if) the expire worthless, you can go out another 2-3 months. My fear with the LEAPS is that most of the decay happens in the last 2-3 months and when you sell the LEAPS you wait a long time for the time decay to take hold. Good luck/good trading!
8-11-2009 @ 5:45PM
Sheldon L said...
Mike,
Your assessment makes perfect sense accept that your strike price is already close to being in the money, whereas the UPS has close to no probability of being put to me.
A more fair comparison would be the Jan 2011 UPS 55's paying about $9 per share. That too is a bargain and UPS has a good chance of being higher than that when the time comes and the premium is closer to your liking.
Seems like you do know what you're doing and this has been a spectacular year to be doing it.
8-11-2009 @ 6:24PM
Unknown said...
UPS specifically drew my interest because it is almost impossible to compete with them. It is the classic Coke/Pepsi market between them and FedEx. DHL tried to compete and ended up completely pulling out of the US. What chance would someone else have to take on UPS/FedEx? I'm waiting patiently for a pullback to enter into the common, but will keep an eye out for good put writing chances. If you do it right, you end up loving even the worst case scenario-- getting put a stock you wanted any way!
8-11-2009 @ 10:37PM
william lindblad said...
The puts and calls end of the market is out of my league, but the concept of figuring out what is going to be of value is not. UPS has been around for a real long time and it's major competitor is FedEx. However, we still have the guys who deliver "snail mail" to consider and they like the package business also. This is a strange area as you have two privates and one pseudo private. You always have to consider how much of the action the later is going to get, and also, the fact that all of us are shareholders in an entity that does not trade.
All of the recent push on "flat rate" boxes tell you something?