Diversion

Saturday, September 3, 2016

Rescue My IRA: August 2016 Covered Call Trading Results

As I have been doing this year, I will start the post with a comparison of Rescue My IRA year-to-date results with the S&P 500 figure, sourced from the Money Magazine web site.  and will continue to do so.  As of August 31, the year-to-date performance of the S&P 500 was 6.34%, and the year-to-date performance of Rescue My IRA was 5.44%, so we are staying close to the benchmark.

The performance gap closed a bit this month, possibly for two reasons:  first, I have started using cash secured puts (CSPs) in the portfolio, and second, I lowered the cash reserve I have been keeping to approximately 10 percent, although at month end I had my BAC shares called away due to an August 31 ex-dividend date so I am sitting at about 17 percent to start the month of September.

All in all, there is not much to report in terms of activity during August, except it was a steady, busy month of trading.  At one point during the month Rescue My IRA had 17 covered call positions in play and two CSPs – that is three trades higher than what I might usually have.  The goal has been to maintain a portfolio of between 12 and 16 positions, but I’ll rationalize this exception by saying it does appear that the trading has set the account up for a good September, which I will describe after the benchmarks:   


Account Status:
·        Total Account Value, 8/31/2016:  $177,642.51, up from the July close of $176,729.72
·        Total Cash Reserve, 8/31/2016:  $30,089.51, or about 17%
·        Core Stock Positions (as of 8/31/2016):  AAPL (100 shares), CSCO (500 shares), DIS (100 shares), DOW (200 shares), FB (100 shares), GM (200 shares), HST (300 shares), MDLZ (200 shares), MET (200 shares), NUE (200 shares), OXY (100 shares), PPL (200 shares), SPY (100 shares), TGT (100 shares), TROW (100 shares), XRX (500 shares)
·        Cash Secured Put (CSP) positions (as of 8/31/2016):  None

Performance Metrics:
·        Option Premiums Collected (net, month of Aug):  -$1,084.83 (-0.65%)
·        Capital Gains Collected (net, month of Aug):  $1,786.40 (1.07 %)
·        Dividends Collected (recognized on the ex-date): $125.00 (0.07%)
·        Estimated Interest on Cash Reserve: $0.24
·        Total, Absolute Return:  $827.61 (0.49% absolute return, estimated annualized return 5.93%) 
·        S&P 500 Index 2016 year to date performance as of 8/31/2016: 6.34%
·        Rescue My IRA year to date performance as of 8/31/2016: 5.44%

Next Month To-dos:

As of this writing, there are six covered call contracts expiring in September:  CSCO, DOW, MDLZ, MET, OXY, and TROW.  If all of them are called away on expiration (they are a mix between the 2 Sep weeklies and the conventional contracts), the account will net stock gains of $602.11, or 0.36% absolute return on the account.  A number of these stocks go ex-dividend during September, so the likelihood of assignment and receiving these gains is high.

September is always a good month for dividends, and 10 of the current positions will go ex-dividend this month.  If I collect the dividends on all of them – DOW, GM, HST, MDLZ, NUE, OXY, PPL, SPY, TROW, and XRX – the haul is $692.75, or 0.41% absolute return.   However, there is significant overlap with the expiring contracts this month, and I am forecasting that the total of dividends will be more like $259.00, due to the likelihood of having many of the stocks called away.

The lower dividend factor will be fine with me if the stock gains are achieved – it’s a total of $851.11, or around 0.51% absolute return.  I’ll need to make up another $850.00 or so to cover my monthly goal of 1.00% absolute return – but, hey, bring it on!


So that’s my update for August.  Until next month, happy trading!

Monday, August 1, 2016

Rescue My IRA: July 2016 Results

For the last couple of months, I have begun the monthly update post with a comparison of year-to-date results from the S&P 500 and Rescue My IRA.  I have been sourcing the S&P 500 figure from the Money Magazine web site and will continue to do so.  For July, the year-to-date performance of the S&P 500 was 6.34%, and the year-to-date performance of Rescue My IRA was 5.44%.

I’ve noted before that I expect Rescue My IRA to earn a little less on an annual basis than the S&P 500 return in positive years, or lose a little less than the index in negative years.  This is the result of my status as a small time investor, unable to monitor the market on a constant basis (and to act immediately because my IRA is in a retail account), because I pay fees on each trade, and because I make mistakes.  I believe my mistakes are typically because I don’t follow the stock selection criteria I established in my trading plan – I try to have the discipline to avoid this problem, but I’m not always successful.

Since June, I have been working on learning how to incorporate cash secured puts (CSPs) in my portfolio, a trading approach now allowed by Scottrade in IRAs.  A number of colleagues on the Yahoo “Just Covered Calls” board have used it. 

One of the advantages of CSPs is that the cash stays in the account unless the stock is put to you by the option holder.  I see some advantages in that it should be easier to enter and exit positions with the cash balance there – avoiding larger losses on the stock itself, that the cash will earn (miniscule) interest during the option’s term, and that as long as the stocks you are working with otherwise meet your selection criteria, there is the potential of buying them at a discount to the market price when you first make the trade.

As I wrote last month, for the most part, I’m using the same criteria for CSPs as I do for covered calls – the stock should be a component of the S&P 500 index, the stock rated as 4- or 5-stars by S&P, and it should offer a dividend yield ranging between 3-6%.  For CSP candidates, I added a criterion, setting a goal for the stock to be within 25% of its 52-week low to be considered, suggesting that there is more upside than downside in a given trade. 

My first two trades were in the energy sector, where there are many stocks that meet all of these criteria.  It’s a beaten-down sector though, and I don’t want to end up holding these stocks, so eventually I closed out the three trades that I had made there with a slight gain overall.  Now, one of the CSPs I have now is with CMI, which has been a favorite of mine for covered calls – I hope to settle in to a strategy that will find me investing in familiar names like this.

For now, the market has shaken off Brexit and the other bad news from June, so the account value of Rescue My IRA stands at an all-time high.  I used the paper gains as an opportunity to do some roll-ups and position maintenance that was overdue from the long months of sideways trading.  That’s why the current results are more or less breakeven this month, even though the account value is up nearly $6K from last month.
 
That’s a summary of my July results.  The benchmarks are below, net of commissions and fees, as usual:   

Account Status:
·        Total Account Value, 7/29/2016:  $176,729.72, up from the June close of $170,976.96, and a new high for the first time since mid-2015
·        Total Cash Reserve, 7/29/2016:  $54,071.72, or about 32%, note that this includes reserved balances for CSPs
·        Core Stock Positions (as of 7/29/2016):  AAPL (100 shares), ABBV (100 shares), CSCO (500 shares), DIS (100 shares), DOW (200 shares), FB (100 shares), GM (200 shares), HST (300 shares), NUE (200 shares), PFG (200 shares) SBUX (200 shares), SPY (100 shares), XRX (500 shares)
·        Cash Secured Put (CSP) positions (as of 7/29/2016):  CMI 110 Aug 2016, SKX 23 Aug 2016

Performance Metrics:
·        Option Premiums Collected (net, month of July):  -$633.02 (-0.38%)
·        Capital Gains Collected (net, month of July):  $529.03 (0.32%)
·        Dividends Collected (recognized on the ex-date): $258.00 (0.15%)
·        Estimated Interest on Cash Reserve: $0.20
·        Total, Absolute Return:  $155.01 (1.06% absolute return, estimated annualized return 12.72%) 
·        S&P 500 Index 2016 year to date performance as of 7/29/2016: +6.34%
·        Rescue My IRA year to date performance as of 7/29/2016: +5.44%

Next Month To-dos:

There are three contracts expiring in August:  ABBV, FB, and PFG, with the potential of netting stock gains of $932.02, or 0.56% absolute return on the account.  I’ll have gains on ABBV and FB, but since I sold an at-the-money call on PFG, I will show a $1.00 loss on the stock value for this position, compared to an overall return netting dividends and option premiums in excess of 5% over the course of the 100-day holding period. 

Also, I’m doing the analysis to determine whether a roll-out and -up of FB would be profitable at this time – the current option has a $120 strike price and I have no doubt the stock will go higher.  If I can construct a good trade with a back month horizon (November-December) that allows me to meet or exceed a 12% annual return, I will probably execute it.       

August will provide a light dividend haul, which I’m estimating as $125.00, or 0.07% absolute return.  Three positions go ex-dividend this month:  AAPL, INTC, and SBUX.  All of my contracts are safe from assignment, so I will most likely collect all dividends.


So that’s my July update.  August looks steady – I hope so.  In any case, until next month, happy trading!

Monday, July 4, 2016

Rescue My IRA - June 2016 Results

A few more posts and it will be a habit, but the first item of business for the monthly post is to compare the year-to-date performance of Rescue My IRA (RMI) with the S&P 500, both as of June 30, 2016:  RMI 2.01%, S&P500 2.46%.  I’ve mentioned before that I expect the account to earn a little less on an annual basis than the S&P 500 return, in positive years, but I also expect to lose a little less than the index in negative years.

Everything was going fine this month until the Brits had their votes about leaving the European Union.  The markets tanked for a few days and then started a comeback, and that is where the month ended. 

On news like this I have taken to buying my covered calls back and then re-establishing them a few days later at the same price; if the expiration is soon, I’ll do a roll-out at the same time.  This activity helped with the covered call premium returns during June, which happened to be the first month in a few where we showed positive earnings in all three sources of income (covered call premiums, dividends, and stock gains).

The breakthrough this month was my first cash secured put (CSP) trade, since Scottrade has recently changed its policy and now allows them in IRAs.  On the Yahoo “Just Covered Calls” board, I’ve learned that this kind of trade is essentially the same as covered calls, with the exception that instead of holding the stock, you keep cash in the account in case the stock is put to you. 

For now, I’m using the same criteria for CSPs as I do for covered calls – component of the S&P 500 index, stock rated as 4- or 5-stars by S&P, and dividend yield ranging between 3-6%.  For CSP candidates, I added a criterion, so the stock needs to be within 25% of its 52-week low to be considered. 

For better or worse, I’m doing this in the energy sector.  The first trade, which I completed during June, was MOS, where I made a profit on a short-term trade.  I followed that up with a trade on VLO; that one is profitable as well, but the Brexit market impacts had me worried about assignment – although that didn’t end up happening.

The game plan for CSPs is to sell this or next month’s put and either have the option expire worthless or to have the stock sold/put to you at a lower price than it was on the day of your trade. If the outcome is expiration, the trade is complete, but if you are assigned the stock purchase you begin selling covered calls until the shares are called away.  I’m going to keep one or two of these contracts going in the near-term so I can practice the methodology.    
  
So that’s the update for June.  July is harvest month for the hop farm, so I may not be as active a trader this month as I have been.  In any case, my benchmark results for June are below, and they are net of commissions and fees, as usual. 

Account Status:
·        Total Account Value, 6/30/2016:  $170,976.96, which is down from the May close of $171,457.29
·        Total Cash Reserve, 6/30/2016:  $47,048.88, or about 28%, down slightly on the amount and percentage from last month.    
·        Core Stock Positions (as of 6/30/2016):  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), NUE (200 shares), PFG (200 shares) SBUX (200 shares), SPY (100 shares), XRX (500 shares)
·        Cash Secured Put positions (as of 6/30/2016):  VLO Sep 52.50

Performance Metrics:
·        Option Premiums Collected (net, month of June):  $263.96 (0.16 %)
·        Capital Gains Collected (net, month of June):  $991.80 (0.59%)
·        Dividends Collected (recognized on the ex-date): $524.75 (0.31%)
·        Estimated Interest on Cash Reserve: $0.20
·        Total, Absolute Return:  $1,780.81 (1.06% absolute return, estimated annualized return 12.72%) 
·        S&P 500 Index 2016 year to date performance as of 6/30/2016: +2.46%
·        Rescue My IRA year to date performance as of 6/30/2016: +2.01%

Next Month To-dos:

Because of the Brexit market action, all of my July contracts have been rolled out, so there are no transactions on the horizon.  I’m sure that just like every other month there will still be a spate of roll-outs, roll-ups, and maybe even an unwind – so not to worry, Scottrade, you’ll still earn some commissions! 

After June’s dividend haul, it’s not likely that July could ever keep up, but there are two positions with ex-dates this month:  ABBV and CSCO.  Together they will pay $187.00 or about 0.11% absolute return – so I’ve got my work cut out for me to make my goal of 1% return. 


So that’s my July update.  The summer doldrums are upon us and I don’t expect to see my action in the market during July.  But anyway, until next month, happy trading!

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!