A Capital Idea

It has come to my notice that the best stocks for writing puts on are ones that go up.It seems that this little fact has been overlooked by me over the last 6 years or so. It might seem blindingly obvious but in fact it wasnt.

I have been looking at the optionable stocks on the FTSE and flicking over the graphs. It seems to make sense to choose stocks that have good profits and a decent business model. But how can you tell this from looking at the graph ?

If you look at a 10 year graph of a stock, it will most definitely show fluctuations,but is the trend upwards? I have recently been hammered on all my march expiry puts because the companies I have chosen do not show this trend. Whether you can correlate the two is another matter but why choose anything else that doesnt show this trend ?

You would have thought that a share like Shell, trading at a P/E of around 7, would be a good long-term stock. Well, its not really the case. Sure, it makes money but not the sort of money the market likes. It is virtually totally dependant on the price of oil. At least, thats what the market thinks. So, whilst it may appear a screaming buy (it did on my value calculations) I will lose on it this quarter.

One company I am very fond of is Capita. It has just announced its results and they came in just under analysts forecasts. They were unjustly punished for this so I sold some june puts to take advantage of this downturn. This company has a very sound business model i.e. long term residual contracts and increasing revenues and the share price of the graph is good i.e. it goes up at around a 45 degree angle.

Certainly, it has a bit of debt but it leverages it very well. So I am prepared to put my money where my mouth is and back it.

Let us see if June is kinder to me than March