Semiconductors and Covered Calls

10/09/2013 10:00 am EST

Focus: STOCKS

Nate Pile

Editor, Nate’s Notes and The Wagmore Advisory Letter

Nate Pile has launched a new advisory service, The Wagmore Report, focused on the conservative use of writing calls against long-term, growth-oriented stock holdings.

Steve Halpern: We're here today with Nate Pile, the longstanding editor of Nate's Notes, and now the editor of the recently launched newsletter, The Wagmore Report. How are you doing Nate?

Nate Pile: Fine thanks.

Steve Halpern: Congratulations on the launch of the new service. Could you tell us a little about the Wagmore Report and why you decided to develop a new advisory service?

Nate Pile: Yes, as you know, I've been publishing Nate's Notes for a little over 18 years now, and it's got a pretty good track record.

And I have a lot of subscribers who have been with me for ten years or more, and, as they've seen their wealth grow and also gotten closer to their own retirement, they've asked me to shift the focus of Nate's Notes to become a little bit more conservative to help them protect their wealth.

So I had to make a decision—do I keep Nate's Notes as is and add a more aggressive service, or go the other direction.

So what I decided to do is keep Nate's Notes as a long-term growth stock investment newsletter, and then add the second service that takes the same approach to stock selection, the same bias towards long-term investing and biotech and high-tech stocks, but to try to smooth out some of the volatility and some of the risk that's often associated with those sectors.

It also writes covered calls against its position, which means we give up some of the upside potential if things move too quickly, but it also helps to bring in some income and minimize our downside risk a little bit.

Steve Halpern: Nate, you've emphasized that this is not an options trading service and when people hear the phrase covered calls, they might be afraid that this is something that's a little too speculative for them. Could you expand on why that's actually a conservative strategy.

Nate Pile: Yes, if you're just buying options, that's a more aggressive way to play, because you're leveraging your money to a pretty high degree.

On the other hand, when you write covered calls, what you're doing is owning the underlying stocks and giving someone else, who wants to be speculative, the chance to buy it from you at an agreed-upon price before a certain date.

In our service, we tend to write out-of-the-money calls, so the stock has to go up for it to get called away from us, and if it doesn't go up too quickly, we keep the premium from writing the contracts, so writing covered calls is actually the most conservative way you can play options or be in the market, and that's your original question. It's not an options trading service.

We really do want to own the stock and write a call against, and, hopefully, hold that call or have someone else hold the call all the way to expiration and have it expire worthless.

There are some services that use the stock position as a way to write a call at, say, $1.50 at nine in the morning and then try to buy it back at $1.35 at 11:00 in the morning.

We're not trying to save pennies here and there. We really are holding stock positions and then using them as collateral to write these contracts and hopefully collect the premium as time goes by.

Steve Halpern: Now, let's walk through this strategy in terms of specific stocks. One area that you consider a favorite right now is the semiconductor sector, which, you know, you could be in the early stages of a new bull market. Could you explain what you like about the sector and then, after that, we can talk about some of the specific stocks?

Nate Pile: As you know, it's one of those sectors that goes in and out of favor, which, that tends to happen with all sectors, but, clearly, semiconductors are part of the future.

They're becoming more and more engrained in our daily lives and the thing about them is that the fundamentals don't always match up with what the stocks are doing, and I feel, at this stage, the stocks have come down quite a bit over the past year or so and they're just starting to turn the corner and head up again.

For better or for worse, a lot of those chip companies supply Apple, and as people started to question Apple, and it fell from $700 to just under $400, a lot of the stocks that fed into their ecosystem came down as well, but it seems to be turning the corner in one of the indices that I track, or watch especially closely, the SOXX Semiconductor Index has also been acting very well since April or May. We got positions in that sector.

One thing I should note about this new service is that, unlike my other newsletter, which was started with two hypothetical portfolios, this one actually has a real-life $15,000 account that I make the same trades in, so we really are limited the same way that a real investor would be, in terms of, it's real money and you need to allocate it wisely.

So when we establish positions now, we've got positions in probably five or six, maybe seven stocks at any given time, and usually only on 100 or 200 shares of each, against which we're going to write the calls.

Steve Halpern: So, for your specific recommendations in the semiconductor sector, you've initially taken positions in TriQuint Semiconductor (TQNT), Cirrus Logic (CRUS), and NVIDIA (NVDA). Could you tell us about those positions and the strategy that you're using with them?

Nate Pile: Yes, so all three of those companies are obviously semiconductor stocks. They've all been around for a while. In fact, TriQuint and Nvidia have both been in the Nate's Notes newsletter for at least eight years, if not longer. They're all doing work that naturally leads into the mobile device sector.

Nvidia used to be a graphic chips company. They still are but they're again making a big push into mobile, whereas TriQuint and Cirrus have always had a pretty strong hand in that sector, so I think we own 100 shares each of Cirrus and Nvdia.

The ticker symbols on those are CRUS and NVPA, and because those both trade in the $15 to $25 range, we have 100 shares each of those and then 200 shares of TriQuint, TQNT, and we own all three.

At this point, we have not written calls against TriQuint and Cirrus, because I am expecting the secretary to continue moving higher and I want to wait to get a higher premium for the calls we write, but because those positions are essentially unhedged in the portfolio.

With Nvidia, rather than write an out-of-the-money call, which is the usual strategy, we actually wrote an in-the-money-call on that one in case the market does take a fairly serious plunge downward.

We collected a much larger premium than we normally would and, obviously, if the stock drops below that lower strike price, it will be a loss on the stock side, but we'll also keep that entire premium and that's really the focus of the newsletter over time is to hold these same stocks that we like, for a three- to five-year timeframe, but collect as much premium as we can along the way.

Steve Halpern: Well, congratulations again on the launch of the new newsletter, The Wagmore Report, and thank you for joining us today.

Nate Pile: Thank you. Always want to talk to your subscribers.

Subscribe to The Wagmore Report here...

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