Can short ITM calls work for shorting NAT

V

vanv0029

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?
 
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.
 
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
 
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.
 
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