Can short ITM calls work for shorting NAT

Discussion in 'Stocks' started by vanv0029, Aug 8, 2009.

  1. NAT (Nordic American Tankers) reduced it dividend
    to 0.50 per quarter on a 30 USD stock. It did only
    lose 6 cents versus consensus 9 cents, but it
    is a stock mostly held for dividends by small
    investors. The crude tanker market is in the dumps
    and all the NAT ships are on spot charters. A very
    good short, yes? Also, it seems to me that this
    type of short is the type that provides economic
    benefit versus say pipe shorting by hedge funds.

    It was down 90 cents on 08/07 after cutting the
    dividend so I tried to short at IB. But when I entered
    the order, IB message was wait while we try to locate
    the shares.

    Therefore I tried shorting a few August 25 calls. I
    think there is a good chance it will be below 25 on
    Aug. 21, but I do not understand from IB if I can let
    the options be exercised and then buy back the shares.

    Record date for the dividend is Aug. 21 so no matter
    what, if NAT is above 25 on expiration, the options
    will be exercised. I think bid/ask spread
    is starting to widen. Is there something I am missing
    assuming my prediction that NAT will be near 25
    in 2 weeks is correct?
     
  2. AAA30

    AAA30

    The reduction in the dividend is a bad thing yes but these companies(shippers) generally payout a percentage(a high percentage) of net income as a dividend. NAT is a little different beast then the others in this sector as it has no debt. So if you plan on its price falling it would be from a combination of both lower shipping rates and lower asset pricing for Suez/double haul tankers. IMO other tanker company's would be a better option for options as you have the extra protection if you are wrong because inflation will hurt them more on their debt(yields) and increase the cost of operations and likelihood of a home run due to a bankruptcy. If you want to play in the shippers you can get allot of good info from their investor relations websites many give independent analysis on a regular basis.

    I followed this sector a while ago but never ran across NAT(I do not know why not as it is a 1 billion dollar commpany but I focused on TK and FRO) it is an interesting company and with no debt it allows you to use it as a proxy for the spot market for Suez tankers. Many of which have been turned into storage facilities for arbs.

    hope I made some sense as it late here and i have had a few already I will re read this tomorrow and add any comments if I think my comments are messed up.
     
  3. NoDoji

    NoDoji

    According to the news, NAT beat earnings estimates:

    (6:24 AM ET) LONDON (MarketWatch) -- Nordic American Tanker Shippingsaid it swung to a second-quarter loss of $137,000, as net voyage revenue dropped to $29.7 million from $63.2 million. It earned $35.5 million in the year-earlier period. It said earnings per share from continuing operations were 9 cents a share. Analysts polled by FactSet had expected earnings of 5 cents a share. The company will pay a dividend of 50 cents per share on or about Sept. 4, 2009, to shareholders of record as of Aug. 21, 2009, down from 88 cents in the first quarter.

    Also, there seems to be no reason technically why NAT should drop below $25. The only time it's done that was during the market panic last fall and at March lows. It's been trading in a range and even if it breaks down, it will likely work its way slowly through previous support levels of $29, $28, $27 and so on.

    So, if NAT isn't below $25 on exp the options will be exercised before the market closes because of the dividend. If IB at that time has shares available, you'll be short the stock and will have to cover before market close to avoid paying the .50 cent dividend. This could be a problem for you if NAT trades above the low of its current range.

    On the plus side, Cramer's been pumping NAT for quite some time now, and is still bullish as recently as yesterday. :D
     
  4. Thanks for the comments. I just looked at my IB
    account and it shows that my current position is
    20% short stock and 80% short options. So I think
    some options were exercised on Friday. For some
    reason IB does not let me log in to statements
    during non market hours so I do not know exactly.

    It does not make sense to exercise this far before
    xdiv date right? It may just be an IB mistake.

    I think there is a problem with NAT's no debt
    approach because they keep diluting the number of
    shares. In a rising tanker prices and day rate
    market that makes sense, but I think the dividend
    per share is coming down since all the NAT ships
    are not chartered but get spot rates. Spot rates
    are arguably below cost (the FRO earning report
    will say for sure). Also, Suezmaxes are not good
    for storage because the arbitrage has some extra
    fixed costs so the larger VLCCs are much better.

    I plan to sell the options (or any short shares) before
    xdiv date, but I think there is a chance the stock will
    fall more than just the 0.50 dividend amount.

    If there is no credit crunch using debt for long term
    producing assets like tankers is good since it
    allows higher gearing and better internal rate of
    return.