Fastball Financial

With our Apple options trade for July looking a bit more comfortable now, we are adding two additional July expiration positions to produce income for our options portfolio.

Centene

Centene focuses mostly on Medicaid, but also has exposure to speciality services and the individual market (through Celtic).  We highlighted Centene as a runner-up on our 10 Stock Portfolio for 2012.  Centene (CNC) took a beating early in June when it reduced its outlook due to poor results in a couple markets, mostly notably Kentucky and Texas.  However, since then, it climbed back up to $29.70 from a low of $26.90.  During that climb, two big events took place: 1. Centene had a chance to explain itself and investors realized that things weren’t quite as bad as originally thought, and 2. the Supreme Court provided some clarity by ruling on the “Obamacare” legislation.

With all of those events behind it, we are comfortable that Centene will not return to those lows, particularly over the next two and a half weeks.  Therefore, we are selling a put spread that will allow us to profit as long as the stock does not drop below $27.15.

This Put Spread trade has 2 legs:

1. Sell 14 $27.50 July Puts for $0.55
2. Buy 14 $25 July Puts for $0.20

This produces a net $490 and puts $3,010 at risk.  We are setting aside $10,000 in our portfolio for this trade.  So this produces a 4.9% income on our $10,000 we set aside and a 16.3% return on the money we are putting at risk.  In order to get our $490 maximum return, CNC must be above $27.50  at the end of the day on Friday July 20th.  The stock now sits at $29.70. That means we have a 7.4% cushion on the downside.

Research in Motion (RIMM)

For our other July trade, we are going to pick on one of our now favorite stocks to assume that it will continue declining into bankruptcy unless it can find a buyer: Research in Motion (RIMM).  They had yet another horrible earnings report last week that only further supports our negative view.  There really isn’t anything positive to say about the stock other than they may have enough intellectual property for somebody to buy the company.  With that in mind we are selling a call spread against RIMM.

This Call Spread trade has 2 legs:

1. Sell 35 $8 July Calls for $0.15
2. Buy 35 $9 July Calls for $0.05

This produces a net $350 and puts $3,150 at risk.  We are setting aside $10,000 in our portfolio for this trade.  So this produces a 3.5% income on our $10,000 we set aside and a 11.1% return on the money we are putting at risk.  In order to get our $350 maximum return, RIMM must be below $8  at the end of the day on Friday July 20th.  The stock now sits at $7.35. That means we have a 8.1% cushion on the upside.