In our book, Option Wizard® Trading Method, we propose the following: put fundamentals first to give yourself an edge, then follow with technical analysis for timing purposes, then options analysis. This sort of approach can do quite well with a mildly undulating stock such as NBR.
With a book value of $20+, NBR trades in a band from about 13 to 16, plus or minus -- thus giving the investor the "margin of safety" that Graham-Dodd-Buffett wisely appropriated for themselves. With a program of selling puts when the stock declines, even taking delivery, then selling calls as the stock rises, one can do quite well. How "well" is "well?" It's not overly difficult to generate 20% or so per year returns, at this rate. That's 20x what the money markets are paying, without taking an outrageous amount of risk.
Can you lose? Yes, NBR, like every other stock out there can plummet to levels never dreamed possible. Could it increase to book value or beyond? Yes. Appears one big buyer thinks so, and has put his or her money behind the idea, the real show of faith.
A few days ago, CNBC ran this item (source: OptionMonster):
Nabors Industries has been holding long-term lows, and one large buyer is positioning for a gradual rebound.
OptionMonster's trade scanners detected the purchase of 5,000 January 2015 20 calls for $1.70 yesterday. The volume dwarfed the strike's open interest of just 53 contracts at the beginning of the day, so this is clearly a new position.
The calls lock in a $20 entry price in the stock
in the next 25 months. Those options will increase in value if the
shares rise, potentially resulting in significant leverage relative to
the underlying shares.OptionMonster's trade scanners detected the purchase of 5,000 January 2015 20 calls for $1.70 yesterday. The volume dwarfed the strike's open interest of just 53 contracts at the beginning of the day, so this is clearly a new position.
Nabors shares rose 2.9 percent to $14.20 yesterday and has lost 18 percent of its value so far in 2012. The energy driller has managed to stay above its lows from earlier in the year, which could be leading some traders to expect a rally in the belief that it's at support.
Yesterday's call buying dominated option activity the name, which typically sees volume of fewer than 1,200 contracts per session. Calls outnumbered puts by 5 to 1.
—By CNBC Contributor David Russell
That's three years hence for six or so points of move. Meanwhile, a patient and agnostic posture of selling both puts and calls, either sequentially with overbought/oversold readings, or together, and acquiring stock at lower prices, selling (if called), at higher, may prove profitable.
Many options strategists prefer this approach to "delta-neutral" strategies which are ever-so-appealing on paper and ever-so-difficult to realize profits with in the real world.
