Diversion

Sunday, May 29, 2016

Rescue My IRA: May 2016 Results

Let’s start the May 2016 post with a check of our year-to-date results with where the S&P 500 stands – both as of Friday, May 27:  RMI 2.30%, S&P500 2.70%.  The hypothesis is that Rescue My IRA will earn slightly less than the S&P500, given the inefficiencies I face as a small investor; however, this performance should be offset by a smaller loss in down times.  I’ll continue to track these performance indicators to test the hypothesis, but also to benchmark the account’s performance.

I’m posting the May entry a few days early this week, since I am just getting back from a week of business travel (Phoenix!  “Dry Heat!”) and I’m looking forward to a week of vacation coming up.  Squeezing this write-up in here before what I expect to be a pretty full 4-day week of work before we head up to Maine.

For most of 2016 I have run the account at 15 or 16 positions, but at the close of May there are 14.  Cash reserves are slightly up from the April balance, this component of the account now sits at around 29%, versus 27% at the end of last month.

The big trade of the month was unwinding the FB position I had opened last July with a basis of $98.44 per share.  The first option I sold on these shares was a 95 Aug 2015, well in the money, but a trade that would earn a good short-term return despite the loss on the share price.  Eventually I rolled the shares out and up, settling on a final covered call with the 105 May 2016.

When I unwound the position in early May, the share price was over $117, so the net profit on the trade was nearly $2,000.  That’s an absolute return of 20% on the original investment of $9,844.  Since I do calculate an annualized return for comparison purposes, this one works out to almost 26% on the holding period of 285 days. 

That’s how you want all the trades to work out, but of course they don’t!  I’ll take this one, though, and I’ll look forward to making it work this well again sometime.
 
That’s the update for May. The benchmark results are below, and they are net of commissions and fees, as usual. 

Account Status:
·        Total Account Value, 5/27/2016:  $171,457.29, which is up from the April close of $169,909.66
·        Total Cash Reserve, 5/27/2016:  $49,447.29, or about 29.10%; that’s up slightly from last month.    
·        Core Stock Positions (as of 5/27/2016):  AAPL (100 shares), ABBV (100 shares), CSCO (500 shares), DIS (100 shares), DOW (200 shares), GM (200 shares), HST (300 shares), INTC (200 shares), IP (200 shares), NUE (200 shares), PFG (200 shares) SBUX (200 shares), SPY (100 shares), XRX (500 shares)

Performance Metrics:
·        Option Premiums Collected (net, month of May):  -$462.03 (-0.28 %)
·        Capital Gains Collected (net, month of May):  $1,895.74 (1.13%)
·        Dividends Collected (recognized on the ex-date): $212.00 (0.13%)
·        Estimated Interest on Cash Reserve: $0.20
·        Total, Absolute Return:  $1,645.91 (0.98% absolute return, estimated annualized return 11.78%) 
·        S&P 500 Index 2016 year to date performance as of 5/27/2016: +2.70%
·        Rescue My IRA year to date performance as of 5/27/2016: +2.30%

Next Month To-dos:
June is always a good month for dividends, and there are seven ex-dividend dates declared or expected for the month:  DOW, GM, HST, NUE, PFG, SPY and XRX.  Forecast dividends are $524, but the last three positions have in-the-money covered calls against them, two with June expiries and one with a July expiration, so the potential is for a reduction in dividends to around $300. 

The stocks – PFG, SPY, and XRX – have been taking a little bit of a beating during my holding period and I have rolled them down.  There is the potential of a loss of $1,521 if the shares are called away, so I’ll watch for a chance to make some corrections.  That’s not quite a 1% loss, but it seems like there will be some opportunities to roll the shares up without going too far out into the calendar, and that will be my goal for June, along with finding one more position to invest in, bringing the working total back up to 15.


So that’s my June update.  We’ll be traveling for the first week or so, so I’ll be away from the blog.  Until next month, happy trading!

Sunday, May 1, 2016

Rescue My IRA: April 2016 Results

This year is the fifth year of Rescue My IRA, and as I continue to learn about the covered call strategy and refine my approach, I’ve added a statistic to the performance metrics I track – the S&P 500 Index year to date data.  It’s in the monthly “Performance Metrics” section of this write-up, and I’ll track the portfolio year to date performance there along with it.  For the record, the S&P was at +1.05% for the year on April 29, and the account was at +1.37%. 

The account is up for the year, but it is down slightly on a month to month basis from March.  The month ended with a 10-day string of bad earnings news; earlier in the month the results were showing a month to month basis gain.  But such is life in the market for the short-term – long-term we’re up, and hopefully that trend will continue!

As far as specific activities in the Rescue My IRA account, at the start of April there were 15 positions and a cash reserve of 24%.  One position (T) was called away on the ex-dividend date for a small profit, and I unwound a second (BAC) at the end of the month, also for a profit, so we closed the month with 14 positions and a 27% cash reserve. 

I set up the T position in March to be a short-term trade, lasting only 21 days.  Between covered calls premiums and the small stock gain the trade yielded 1.17% over those 21 days, which works out to 20.42% on an annualized basis – I calculate that strictly for comparisons and use it as a tie-breaker when considering multiple trades.

As far as the BAC trade goes, that one also was set up to be a short-term position back in February.  After one month roll-out and collecting the dividend, it began a climb.  I decided to unwind it at the end of April, collecting a 7.94% yield over 60 days, for an annualized gain of 48.30% - that may be the best of the year so far. 

There was another adventure this month – one of my colleagues on the Yahoo Just Covered Calls board suggested a pharmaceutical stock, so I set up an ABBV position.  His recommended stock offered what appeared to be a nice opportunity, but since it was not tracked by S&P it didn’t meet the criteria I use in Rescue My IRA, so I substituted with ABBV (for a sense of what my criteria allow in this industry, I have rotated between ABBV, MRK, and PFE during the last five-years). The position plan for this trade (I have it on the 60 May contract) offers a hat trick, which means it collects covered call premiums, a dividend, and a stock gain, with an absolute yield of 4.9% over 39 days, and an annualized yield of 45.81%. 
  
So that’s the news for April. The benchmark results are below, and they are net of commissions and fees, as usual. 

Account Status:
·        Total Account Value, 4/29/2016:  $169,909.66, which is down from the March close of $170,565.96
·        Total Cash Reserve, 4/29/2016:  $46,522.58, or about 27.38%; that’s up from last month’s balance of $38,275.96. 
·        Core Stock Positions (as of 4/29/2016):  AAPL (100 shares), ABBV (100 shares), CSCO (500 shares), DIS (100 shares), DOW (200 shares), FB (100 shares), GM (200 shares), HST (300 shares), INTC (200 shares), IP (200 shares), NUE (200 shares), SBUX (200 shares), SPY (100 shares), XRX (500 shares)

Performance Metrics:
·        Option Premiums Collected (net, month of April):  -$1,473.041 (-0.88%)
·        Capital Gains Collected (net, month of April):  $1,216.79 (0.73%)
·        Dividends Collected (recognized on the ex-date): $187.00 (0.11%)
·        Estimated Interest on Cash Reserve: $0.20
·        Total, Absolute Return:  -$69.05 (-0.04% absolute return, estimated annualized return -0.49%) 
·        S&P 500 Index 2016 year to date performance as of 4/29/2016: +1.05%
·        Rescue My IRA year to date performance as of 4/29/2016: +1.37%

Next Month To-dos:

The dividends forecast for May includes four positions yielding a total of $212.00:  AAPL, INTC, IP, and AP.  None of them have May covered calls written against them, so it is likely that all of these dividends will be collected.

The May covered call contracts are ABBV, CSCO, and FB.  I’ll look at CSCO for a roll-out and up this month, as the contract price is slightly below the purchase price, but if that doesn’t work out the net gain on these positions is $501.02.  That increases by $214.99 if I am successful rolling out the CSCO.


We’ll see how May goes, but that’s my April update.  Until next month, happy trading!

Saturday, April 2, 2016

Rescue My IRA: March 2016 Results

The S&P 500 index made its way into positive territory during March, and I see that the year-to-date gain was 1.35% on March 31.  That’s after hitting a low of -10.27% in February – where will it go next?  Will there be a pause for consolidation before continuing its climb, or will it head back downward during the balance of the US election year?

To be honest, I’m not so worried.  I chose the covered call strategy used in Rescue my IRA to insulate me somewhat from market volatility, and so far that has worked: at the end of February the account’s year-to-date performance was -2.51% versus the index at -5.09%; on March 31 I calculated a year-to-date return of 1.76% compared to the 1.35% achieved by the broader market. 

I guess I’m emphasizing benchmarks this year because the account is approaching its fifth year of operation, and I truly want to understand how the strategy is performing.  The mechanics of the methodology are documented in my trading plan – I focus on S&P 500 stocks that are rated 4-star or better (although I have sometimes made speculative choices at the 3-star level), I look for an annual dividend yield of between 3 and 5 percent, I keep between 12 and 15 positions open at any one time, and I vary the amount of cash reserve I keep at any given time to match my assessment of market conditions. 

As far as specific activities in the Rescue My IRA account during March, there were 14 positions and a cash reserve of 25% at the start of the month.  Two positions were unwound this month, and I moved the target reserves to 20%, allowing me to set up 3 new positions for a total of 15 by the end of the month. 

My strategy of getting the reserves up to 30 percent until the election is still in place, and I should be able to have another look at that during April, since there are three in-the-money contracts coming up (FB, BAC, and T), and one of them has an ex-dividend date coming up in the first week of the month. 

Because I unwound CMI and QCOM during March, taking gains on both trades, my covered call revenue was negative this month.  It was a great month for dividends, but March, June, September, and December always are; and so it goes. 

Here is a summary of benchmark results for March 2016 –the amounts are net of commissions and fees. 

Account Status:
·        Total Account Value, 3/31/2016:  $170,565.96, which is up from the February 2016 close of $169,800.00
·        Total Cash Reserve, 3/31/2016:  $38,275.96, or about 23.93%; that’s down from last month’s balance of $42,225.96. 
·        Core Stock Positions (as of 3/31/2016):  AAPL (100 shares), BAC (500 shares), CSCO (500 shares), DIS (100 shares), DOW (200 shares), FB (100 shares), GM (200 shares), HST (300 shares), INTC (200 shares), IP (200 shares), NUE (200 shares), SBUX (200 shares), SPY (100 shares), T (200 shares), XRX (500 shares)

Performance Metrics:
·        Option Premiums Collected (net, month of March):  -$695.01 (-0.41%)
·        Capital Gains Collected (net, month of March):  $1,352.67 (0.81%)
·        Dividends Collected (recognized on the ex-date): $471.75 (0.28%)
·        Interest on Cash Reserve (estimated): $0.20
·        Total, Absolute Return:  $1,129.61 (0.67% absolute return, estimated annualized return 7.99%) 

Next Month To-dos:

There are two positions with dividends during April:  CSCO and T.  At the time of this writing, T is in the money with an April covered call, and is likely to be called away early.   If both dividends are collected, the account will receive $222.00, or 0.13 % return on the 2016 beginning balance, but the amount reduces by $92.00 to $130.00 if T is called away.  The dividend on T is offset by a gain of $149.00 if the stock is called.   

Three positions have April covered call contracts that will yield capital gains if the shares are called away:  T, discussed above, and BAC and FB.  All three are in the money, and combined they will yield $937.00 if the shares are called – about 0.56% return on the 2016 beginning balance.

Between dividends and capital gains, the plan accounts for about 0.64% total gain on the 2016 starting balance so far.  Covered calls will need to make up the remaining 0.36% if I’m going to achieve the 1% goal that I set for Rescue My IRA – this will have to be made up with roll-outs or with new positions after expirations this month. 

Over all, it was good to see the account climb above the 2016 start this month, and even better to see it begin to reach for some of the high points Rescue My IRA achieved in 2015.  Is there more ground to gain ahead?  It’s an election year, and it’s atypical for the market to keep climbing in that environment – but we’ll see.


That’s it for the March update.  Until the April post, happy trading!

Monday, March 21, 2016

New Positions: HST and T

After unwinding the CMI and QCOM positions, I quickly rolled most of the proceeds into two new positions with HST and T.  Both are ex-dividend plays – their ex-dividend date is between when I set the trades up and the covered call expiration date, with the theory being that the stocks could be called away early. 

In the case of an early call, it will mean that I lose the dividend, but since I can get the money working again pretty quickly, the gain from the new position offsets the lost dividend.

Here are the position plans for HST and T, net of commissions and fees. 

HST

Transactions

Bought 300 shares at average share price $16.81 (total $5,044.00)
Sold 3 $17 APR covered calls. 

Net Profit:

1) Options Income:  = $113.00
2) Dividend Income (ex-date is 3/29): $60.00
3) Capital Appreciation if assigned at $17.00:  $38.00

Total Net Profit if assigned on the contract expiration date:  $211.00
Absolute Return on Investment: ($211.00/$5,044.00) = 4.18%
Annualized Return if Assigned and Dividend Collected (30 days): 4.18%*(365/30) = 50.90%

If called away on the ex-dividend date, the absolute return drops by $60.00, but it is still 2.99% for a 15-day holding period.

T

Transactions

Bought 200 shares at average share price $38.31 (total $7,661.00)
Sold 2 $38.50 APR 8 covered calls. 

Net Profit:

1) Options Income:  = $69.00
2) Dividend Income (ex-date is April 6): $96.00
3) Capital Appreciation if assigned at $38.50:  $21.00

Total Net Profit if assigned on the contract expiration date:  $186.00
Absolute Return on Investment: ($186.00/$7,661.00.00) = 2.43%
Annualized Return if Assigned and Dividend Collected (21 days): 2.43%*(365/21) = 42.20%


If called away on the ex-dividend date, the absolute return drops by $96.00, but it is still 1.17% for the 21-day holding period.

Sunday, March 20, 2016

Unwinding CMI and QCOM

Looks like the last time I put up a post mid-month was back in October.  There is finally some good news in 2016, though, with the market officially making up the ground it had lost this year.  And for Rescue My IRA, that also means I had some contracts that were ready to be called away at a profit!

But I did not wait until expiration on these shares (CMI and QCOM) – instead I unwound the trades a few days early.  I reinvested the proceeds into HST and T last week, and will post about the new positions tomorrow. 

My philosophy regarding unwinding trades before expiration is somewhat nuanced – if I can accelerate a planned gain by a week or so, I will, as long as I can immediately find a next position for those proceeds to go towards.  The opportunity to do this at a minimum cost usually doesn’t happen until the final week before expiration, and I am typically able to exit with a cost of about $10 from the net gain.  That is worth it as long as the quick turnaround is executed, creating a trade with a 2% gross return.

Meanwhile, here is the final analysis of the CMI and QCOM trades, net of commissions and fees:

CMI

Shares:
Bought 100 shares in November 2015.  The total basis was $9,357.00, for an average share price of $93.57.
The covered call strike price ranged from $93.50 to $95.00 during the holding period, but I sold the shares for $10,244.77, netting $102.48 per share and a total gain of $1,065.77.

Options:
Total options income:   -$488.25; as I mentioned I rolled the strike price up during the course of the holding, but I traded the premiums for the stock gain when I unwound the position.

Dividend:
Total dividends collected:  $97.50.

Net Profit:
Total Net Profit after Unwinding:  $675.02
Absolute Return on Investment: $675.02/$9,357.00) = 7.21%
Annualized Return (105 days):  7.21%*(365/105) = 25.08%

QCOM

Shares:
Bought 100 shares in December 2015.  The total basis was $4,935.99, for an average share price of $49.36.
I sold the shares for $5,222.89, netting $52,23 per share and a total gain of $286.90.

Options:
Total options income:   -$20.25; this was an unusually stable position, so I never rolled out the March contract after setting it up in December.

Dividend:
Total dividends collected:  $48.00.


Net Profit:
Total Net Profit after Unwinding:  $314.65
Absolute Return on Investment: $314.65/$9,357.00) = 6.37%
Annualized Return (75 days):  6.37%*(365/75) = 31.02%

Friday, March 4, 2016

Rescue My IRA: February 2016 Results

So far during 2016, the market is down, with the S&P 500 index hitting a low of -10.27% on February 11, after a few days of trading between -8.00 and -10.00% that week.  There was also a week in January where the index hit similar levels. 

On February 29, the index had improved to 5.09% - that’s when I benchmarked the performance of Rescue My IRA for the month.  The account sat at -2.51% at that time, so we are still tracking better performance than the overall market.

I started with the benchmarks this month because my colleague Jeff pointed out an error in my last monthly post.  I was writing during the week where the S&P 500 was hitting those lows, and must have picked up a year-to-date metric rather than the final January number, which was -4.96% to compare with the Rescue My IRA result of -4.6% for January.   That’s slightly better than the market, but not as good as I wrote the first time! 

In any case, I appreciated the note - Jeff runs the “Just Covered Calls” board on Yahoo and I’ve learned a lot about the covered calls approach I use for Rescue My IRA from him and the other members there.

During February, the account continued along with 14 positions and a cash reserve that sits at around 25%.  I might have liked for that to have been higher heading into this correction, but time ran out, so we’re sitting tight.  As far as strategy goes for the way forward, I am going to strive to maintain this number of positions, but I will average the position value down during the year and continue to build my cash reserves to 30%.

Although trading activities consisted mainly of rolling out (and in some cases, rolling up!) covered call contracts, I did make one wash sale trade this month, unwinding my JPM position and moving the proceeds over to BAC.  I took a net loss of about $230 on the JPM for an absolute return of -3.47%, but the April contract on BAC should make up for it with an absolute gain of $398 and an absolute return of more than 6%.

Despite the loss on JPM, the account generated $1,116.17 in cash returns during February, counting dividends, covered call premiums, and the loss.  This equates to a return for the month of 0.67%, or a calculated annualized return of 7.99%.  It’s below my goal of 12% annualized, but given market conditions, I can live with it.

Here is a summary of benchmark results for February 2016 – as always, these amounts are net of commissions and fees. 

Account Status:
·        Total Account Value, 2/29/2016:  $163,406.96, which is up from the January 2016 close of $159,952.67
·        Total Cash Reserve, 2/29/2016:  $42,225.96, or about 26%; that’s up from last month’s balance of $40,750.30. 
·        Core Stock Positions (as of 2/29/2016):  AAPL (100 shares), BAC (500 shares), CMI (100 shares), CSCO (500 shares), DIS (100 shares), DOW (200 shares), FB (100 shares), GM (200 shares), IP (200 shares), NUE (200 shares), QCOM (100 shares), SBUX (200 shares), SPY (100 shares), XRX (500 shares)

Performance Metrics:
·        Option Premiums Collected (net, month of February):  $1,748.45 (1.04%)
·        Capital Gains Collected (net, month of February):  -$938.11 (-0.56%)
·        Dividends Collected (recognized on the ex-date): $305.50 (0.18%)
·        Interest on Cash Reserve: $0.33
·        Total, Absolute Return:  $1,116.17 (0.67% absolute return, estimated annualized return 7.99%) 

Next Month To-dos:

There are six positions with dividends during March:  BAC, DOW, GM, NUE, SPY, and XRX.  If all are collected, the account will receive $427.75, or 0.26 % return on the 2016 beginning balance.  So far this month, BAC is ex-dividend, and the remaining five are out of the money, so it’s not likely any will be called away on their ex-dividend dates  

Two positions have March covered call contracts that will yield capital gains if the shares are called away:  CMI and QCOM.  Both are in the money, and combined they will yield $171.01 if the shares are called – about 0.10% return on the 2016 beginning balance.

Between dividends and capital gains, the March plan accounts for about 0.36% total gain on the 2016 starting balance so far.  Covered calls will need to make up the remaining 0.64% if I’m going to achieve the 1% goal that I set for Rescue My IRA. 

I think that’s a stretch, but I’m glad to see the market coming back a little.  As I write this on Friday, March 4, the account’s balance is in striking distance of its starting point for 2016, so that’s a good thing. 


That’s it for the February update.  Until the March post, happy trading!

Monday, February 15, 2016

Rescue My IRA: 2015 Annual Results

The Rescue My IRA year-end post for 2015 is long overdue – here we are in February already!  But we have a snow day and I just got my recordkeeping for January and February caught up, and I’m motivated, so I think I might go ahead to put together a wrap up post.  This is the fourth full year of running the account using a covered call strategy; this report covers the January through December 2015.

Rescue My IRA followed a winding road in 2015, ending the year
almost exactly where it started!

 Bottom Line Up Front – or “BLUF,” as we like to say at my office: Rescue My IRA started the year with a statement balance of $167,659.68, and ended the year at 167,609.77.  While that is technically a loss of -$49.91 on the year, it’s basically breakeven since the percentage is -0.0003%! 

Meanwhile, my benchmarks of the DJIA returned -2.20% on the year, and the S&P 500 returned -0.70%, so I suppose that you can say we outperformed them.  But you can also say that nobody is happy about it.    

Long-term Performance – in dollar terms, the account’s statement value has increased from $127,606.44 at the start of 2012, to $167,609.77 at the end of 2014, a gain of nearly $41K.  Besides the DJIA and S&P 500 results, a third benchmark I use is a goal of a 12% annualized return. Here’s a summary of the results, by year:

2012: 4.11%
2013: 16.31%
2014: 8.50%
2015:  0.00%

The average annual return for these four years is 7.23% - that’s not bad, but it is short of the 12% goal I’ve set for Rescue My IRA – and it basically matches the long-term average return on the S&P 500.  Looking at it another way, the calculator at http://www.moneychimp.com/features/market_cagr.htm suggests I could have done more like 15% or so from 2012-2015.   

Analysis – as we did last year, here’s an assessment of why Rescue My IRA falls short of the benchmarks on annual basis:

First, I am a “small time, retail investor” – as such, my fees are fairly high, and I don’t spend all of my time managing the Rescue My IRA account at Scottrade, although I do find time to check in on it every day. 

Second, while I started the year with the goal of getting most of my cash reserve in the market, and was able to get down to 5% cash, by mid-year I had reassessed and set a goal of getting the reserve up to 30% by October – eventually getting to the 25% level.  Hindsight doesn’t lend itself to determining whether staying fully invested would have improved performance – or worsened it! 

Finally, I only invest in S&P 500 stocks as part of my risk management approach, focusing on shares that are rated 4- or 5-stars, and further limit my selections to dividend payers in the range of from 2% to 5% annually.  This approach may limit how many home runs I get, but it does reduce my risks as well.

All of that said, the conclusion I’ve come to is that I don’t have anything to complain about with these results.  I have a good feeling about what I’m accomplishing by being in control of the investment choices and approach in Rescue My IRA – and that is one of my primary goals for this account. 

Resolutions for 2016 – it’s now traditional to end the annual results post with some resolutions. 

By the way, I did not accomplish either of my resolutions last year, which were to find alternatives for putting my cash reserves to work, and to work on revising the Rescue My IRA trading plan.  I suppose I can account for this by saying I was keeping busy – I taught a graduate level class at Catholic University in the spring, and I started a farm, called “Hawksbill Hop Yards,” on the side…but this year will be just as busy, since I’m teaching again, continue to run the farm, and will open a brewery this fall – so I guess I won’t hold out much hope for achieving anything I write this time either!     

I still would like to find a way to put the cash reserves to work while they are not invested in stocks.  Going forward, I’ll probably settle on 20% as the target reserve amount, so maybe keeping half of that in CDs or bonds will work.  The remaining half would be for liquidity purposes.
   
Retooling the trading plan seems like a low hanging fruit goal, so I’ll try and take this on, especially if I come up with a way to achieve resolution number 1.  As I wrote last year, now that I have a few years of experience with this approach, there are probably some insights I can apply to improve my results by a few percentage points (but there won’t be major changes). 

That’s it for the tardy 2015 wrap-up.  It’s onward and upward for Rescue My IRA, and I will continue to use the covered call approach for 2016.       


I hope my readers were more successful with their accounts in 2015 than I was – and here’s to happy trading next year!