Investment / Trade Overlay $GLW – Gorilla Habitat

by Enis December 9, 2013 12:23 pm • Commentary

Corning has rallied almost 5% since our addition of the stock to the Investment Portfolio about a month ago, while the S&P 500 is up about 2.5% in that period.  No major news has moved the stock in that period.  Our entry was predicated on the important technical setup of a large volume breakout above $16, followed by low volume selling to near that prior resistance.

We still like the long-term investment idea, and the fundamental reasoning that got us into the position remains unchanged.  As we first laid out when we unveiled our investment portfolio, one of our main goals is to use options to take advantage of additional yield / protection based on important technical levels.  In GLW’s case, that means looking at the options setup at the moment as an opportunity to add some extra juice for an already profitable position.  

Given the approaching holiday season, we like the idea of selling optionality, particularly in a value name like GLW where we see limited downside and no negative catalysts, but no news announcements scheduled in the interim.  Moreover, the technical situation is conducive, with obvious support and resistance that are unlikely to be breached in the quiet period over the next few weeks:

[caption id="attachment_33493" align="alignnone" width="600"]GLW daily, Courtesy of Bloomberg GLW daily, Courtesy of Bloomberg[/caption]

$18 is strong resistance after the reversal in late October after the breakout above the $16 level.  Meanwhile, $16 is strong support given that it is near the high from May, and the stock broke out above that level after 2 years of price action below it.

With those levels in mind, and the holiday season backdrop, here is our structure for adding incremental yield against our long GLW stock position:

Trade: Overlay Against 100 shares of Long GLW ($17.08) Sell Jan 16 / 18  Strangle at $0.40

— Sell to Open 1 Jan 16 Put at $0.20

— Sell to Open 1 Jan 18 Call at $0.20

Trade Rationale:  The total premium is almost 2.5% of the current spot price, a decent return over the next 5 weeks if the stock remains between 16 and 18, which we view as quite likely.  In addition, as an investment position, this is a situation where we are willing to take the downside risk of adding to the position below 15.60 (our break-even on the downside) if the stock gets down there by January expiry.  On the upside, we get called away at $18, for a break-even sale price of $18.40, or more than 10% above our purchase price on November 6th.

Because the sale of the Put requires margin on the position this overlay is not for everyone. The better trade for those with margin would be selling an 18 call on a rally closer to 18 in the stock and getting similar premium for that sale.