As we mentioned in our last monthly report we had taken a trade position in FTR. We normally do not disclose specific trade info due to our decision to keep proprietary trading knowledge and approaches to ourselves and only said we had placed this trade on in separate account due the size and volatility of the trade. Since this trade was specifically mentioned we have decided to fully disclose this trade for those who might have interest and want to profit themselves from such trades. The trade was a put option position of 100 contracts, or 10000 shares, at $4 expiring in August 2012. The sale price was 55 cents. Basically a $40k trade with full loss potential for a up front cash flow of $5500. The trade is now 23 days old and could be sold today for a $3500 profit or 1383% annualized profit on equity. Options are not money manipulation, but people and investors assessing risk forward and offering stock value insurance for those desiring to purchase such insurance.
Thursday after the market closed FTR reported earnings for the quarter. The earnings report was moved up two weeks due to the huge short position in the stock which had pushed the stock down below $4 at one point earlier this month. The company thought that the early release was necessary to relieve pressure on the security and wanted to get full info out into the public. Our interest was based on the our continued research and considerations in the security and we leveraged that by a longer term horizon of 6 months.
The earnings report was good and the recent integration of the Verizon assets was ahead of schedule. Cash flow was strong and frankly this report beat expectations and made most traders and investors feel positive going forward. We expect there was some insider info here since the stock moved sharply higher the day prior to the earnings report which signaled that short sellers were getting out prior to the earnings report. That is always a risk you take and must consider in trading.
The stock was trading somewhat lower in after hours market trading due to what is considered the one negative reported. That negative was a cut of the dividend to 10 cents per quarter from 18.75 cents per quarter. However long term investors saw this cut as positive since the company will still pay almost a 10% dividend and the $348 million in freed up cash flow will help with the debt load.
Here was our thinking on the trade prior to execution. If FTR cut it's dividend to 12 cents or 10 cents that would be a long term positive so the $4 put option should be a sound trade. As a legacy telecom there was no way the dividend would be cut completely. Our thought is that $4 was a floor and our highest profit would be $5500 upon expiration in August. Our worst case scenario would be the stock trading down to $3.45 per share where we would basically be net zero in the stock and we saw that as a complete disaster in the earnings report that likely would not happen so we would have profit almost assured. Even if we were put in the stock with it below $4 we would be still be positive in the capital and have a nice 10% dividend going forward. Simply put we saw an almost 90% chance of not losing anything. Therefore we made the trade. Currently we see almost a guaranteed full $5500 profit and an option that will expire in August unassigned. We could buy back the position now for a $3500 profit since the options are now selling at 20 cents and deploy assets elsewhere, but we are of the belief that the entire $5500 profit is assured due to the good report and are willing to wait on the expiration date for the full net.
We would consider stepping up our position in FTR if there is renewed appearance of scared money noted in high option premiums. Some key stats from the earnings report. One, the payout is now around 40% of free cash flow which is very low for legacy telecom. Two, and this is the big one, over 60% of revenue is coming from business and broadband which means this company is not getting the bulk of it's money from wireline. Three, the company by cutting their dividend has essentially doubled down on paying off the debt load. We might double down on our position in this stock provided weakness in share price.
Our thoughts to be completely open with this one trade was to show how one does extensive research and due diligence to make a excellent profit on a position.
We currently own a option position in FTR.
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