Spring Flowers at Hawksbill Cabin

Spring Flowers at Hawksbill Cabin
Spring Flowers at Hawksbill Cabin

Sunday, March 1, 2015

Rescue My IRA: February 2015 Results

After trading in a range for the last three months or so, the market appeared to be breaking out towards the end of February.  I’m even seeing trade press that says the NASDAQ is on a run!  As a result the Rescue My IRA value recorded a new high, making a jump of 2 percent during the month. 

Of course, that result reflects unrecorded gains – I continue to track the three income streams from the covered call strategy separately.  Those include:
  • Stock gains or losses – the difference in the buy and sell prices 
  • Dividends – yields on shares held in the account, recognized on the ex-date 
  • Covered call premiums – standard practice is to write a covered call on every 100-share lot in the account, this income is the net of sell to open and buy to close transactions

As reported below, these streams account for about $462 in returns, or about 0.28% in absolute yield for the month, which translates to an annual return of 3.31%.  My goal is to try and generate 1% absolute yield per month, or an annual return of 12%, so February’s results fall short on this calculation. 

I don’t calculate the unrecorded gains and losses, which is why the account value changes independently from these results.  I figure that with a good trading plan, these things take care of themselves over the course of the life of each position, so the best success indicator ultimately is simply the increase in account value.  Even so, monitoring the three component items is a good way to track progress and improve decision making.

Even though I’ve come a long way on these skills, I’ve got a long way to go!

Here is a summary of results for February 2015.  As always, these amounts are net of commissions and fees.

Account Status:
·         Total Account Value, 2/27/2015 Market Close:  $170,606.92 - up from the January 2015 close of $166,116.66)
·         Total Cash Reserve, 2/27/2015 Market Close:  $37,037.92, compared to January end $34,186.66.
·         Core Stock Positions (as of 2/27/2015):  CA (300 shares), COP (100 shares), CRUS (400 shares), DOW (200 shares), EMC (400 shares), FB (100 shares), GE (400 shares), GM (400 shares), HAL (200 shares), JPM (100 shares), NUE (200 shares), PPL (300 shares), QCOM (100 shares), T (400 shares)

Performance Metrics:
·         Option Premiums Collected (net, month of February):  $805.17 (0.48%)
·         Capital Gains Collected (net, month of February):  -$590.45 (-0.35%)
·         Dividends Collected (recognized on the ex-date): $247.00 (0.15 %)
·         Estimated Interest on Cash Reserve: $0.30
·         Total, Absolute Return:  $462.02 (0.28% absolute return, annualized return
3.31%) 

Next Month To-dos:

In March, there are five positions with contracts expiring:  CA, CRUS, DOW, GM and HAL.  At the time of this writing, all five are in the money.  If all are called away, there is the possibility of $715.02 in capital gains, or 0.43 % return. 

March’s dividend forecast is better than January or February – there are seven stocks going ex-dividend during the month. The total estimated yield is $514.25, or 0.31%.  Three of the ITM contracts, DOW, GM, and HAL are among these; if they are called away the dividend haul will be reduced by $240.00, adjusting the total to $430.25, or 0.25% yield. 

Continuing with the sensitivity analysis I have been using to adjust my expectations for the month, I expect $1,145.27 in cash returns from stock gains and dividends, for a yield of 0.68% - in order to meet my goal of 1% return for the month I’ll need to sell covered calls in the amount of about $750.  In the event all of those contracts are exercised, I’ll have plenty of proceeds from sales to develop profitable covered call trades with…so it should be an exciting month. 


Happy trading in March – until next month, all the best!

Thursday, February 12, 2015

Called on the ex-date for a Hat Trick: BA

Yesterday, my BA position went ex-dividend and was called away – the stock has had a good run in the new year so far and has traded in-the-money since January.  The call was not unexpected; in fact, since I scored a hat trick with it – earning income from covered call premiums, a dividend payment, and a stock gain – it is one of this year’s Rescue My IRA success stories.

Next steps for me are to put the proceeds back to work, so I’m getting busy with research now.  In the meantime, here’s the final analysis of the BA trade, net of commissions and fees:

BA

Shares:
Bought 100 shares in September 2014 at an average price of $129.37, total position basis $12,937.00.
Sold on unwind 100 shares at $13,500.00. 
Total stock gain:  $545.70

Options:
Total options income:   $141.21 (for the term of this trade, strike prices ranges from $130 to $135)

Dividend:
Total dividends collected:  $73.00



Net Profit:
Total Net Profit after Unwinding:  $759.91
Absolute Return on Investment: ($759.91/$12.937.00) = 5.87%
Annualized Return (140 days):  5.87%*(365/140) = 15.31%

Sunday, February 1, 2015

Rescue My IRA January 2015 Results

January saw some volatility in the markets, but it seems that a trading band has formed for now. This is a good situation for a covered call trader – my plan is to continue taking call premiums, dividends, and a capital gain here and there in order to meet my Rescue My IRA goal of 1% return per month and 12% annualized.  Compared with this goal, January’s results were okay, but did not perform up to the benchmark – the net of $666.85 in income works out to 0.40% return for the month, or 4.77% annualized. 

The bulk of this underperformance can be attributed to one event – the unwind I did on my WIN position. I wrote a post on that position here; basically, I failed at due diligence and sold the shares for a loss, although that was somewhat offset by call premiums and dividends.  If that loss hadn’t occurred, the results would have been improved by almost $1,400 – easily meeting my goals for this account. 

After my annual results post, which you can find here and follow-up here, there was a good dialog amongst connections on the Yahoo “Just Covered Calls” board and on the Google+ “StockOptions Traders” community about how I calculate my results.  Based on those insights, I’ve settled on this equation to explain how my account value changes every month:

(new value) = (old value) + (dividends) + (call premiums) + (capital gains) + (unrecorded gains/losses)

Essentially, that last variable is a complex one, which I why I haven’t spent a lot of time on working out the math – maybe I should, so that would be a future topic.  It boils down to this:  because valuations for both stocks and options are based on the market at any given time, the change in that last variable is not predictable, and in any given month Rescue My IRA could see an increase or a decrease in the account value, despite how well or poorly I do at the other three variables. I’m comfortable with that – and it leads me to the conclusion that I should focus on the ones I can do something about.

Finally, here is the monthly summary of Rescue My IRA statistics for January 2015, based on the market close on January 30. 


Account Status:
·         Total Account Value, 1/30/2015 Market Close:  $166,116.66 - down from the December 2014 close of $167,659.68)
·         Total Cash Reserve, 1/30/2015 Market Close:  $34,186.66, compared to December end $38,484.88.
·         Core Stock Positions (as of 1/30/2015):  BA (100 shares), CA (300 shares), CNP (400 shares), COP (100 shares), CRUS (400 shares), DOW (200 shares), EMC (400 shares), FB (100 shares), GE (400 shares), GM (400 shares), HAL (200 shares), JPM (100 shares), QCOM (100 shares), T (400 shares)

Performance Metrics:
·         Option Premiums Collected (net, month of January):  $1,050.91 (0.63%)
·         Capital Gains Collected (net, month of January):  -$572.36 (-0.34%)
·         Dividends Collected (recognized on the ex-date): $188.00 (0.88%)
·         Estimated Interest on Cash Reserve: $0.30
·         Total, Absolute Return:  $666.85 (0.40% absolute return, annualized return
4.77%) 

Next Month To-dos:

In February, there are four positions with contracts expiring:  BA, CA, FB, and HAL.  At the time of this writing, only BA is in the money, although the volatility of FB suggests it will be ITM during the month, and thus potentially called away; CA and HAL are likely candidates for roll-outs.  If all are called away, there is the possibility of $1,108.31 in capital gains, or 0.66% return; if only BA and FB are called away, the gains would be $656.30, or 0.39%; and if only BA is called away, the gain is $545.00, for a return of 0.33%.

February’s dividend forecast is better than January’s, where I collected on T only:  BA, CA, CNP, and COP will have ex-dividend dates during the month.  Total estimated yield is $338.00, or 0.20%, but adjusting for the likely assignment of BA the amount adjusts to $247.00, or 0.15%. 

Considering the most likely scenario of BA being called away, the resulting capital gains and dividend payments result in an estimated monthly return of $892.00, or 0.48%.  That has been my typical experience for most of 2014 and continuing until now – about a half of a percent from those sources.  In February, if FB is also called away, the return will be a little higher, totaling $903.30 and 0.54%.  To meet my goal of 1% per month, I’ll need to sell about $700 worth of premiums – and will have a good start from the likely roll-outs on CA and HAL. 


Happy trading in February – until next month, all the best!

Saturday, January 24, 2015

Taking the Hit on WIN

It’s probably been a couple of years since I decided to cut my losses on a covered call position, but I recently did just that on my WIN position.  I did well with two WIN trades in 2014, so I thought I might just return to the well for another go – the stock has typically had a great dividend, and it traded in a narrow range that set up a nice roll-out strategy.  That’s not how it worked out this time, however.

I should have done a better job with due diligence, which would have red flagged the stock for me.  A planned split had been announced for the shares, with many assets being spun out into a real estate investment trust, or REIT.  Holders of WIN shares would receive shares in the new REIT, but a dividend cut was also planned.

All these unknowns made me increasingly uncomfortable with the choice of WIN, so I started making plans to unwind my covered call trade early this month.  I did collect a dividend along the way, so even though I knew I’d take a loss there were some premiums and the dividend to soften the blow.

Still there was a net loss on the trade of about $1,000, or -13%.  That’s going to happen in a portfolio from time to time, which doesn’t make it any more fun, but it is the reason I keep between 12 and 15 trades going at any given time, and I’ve already reinvested the proceeds.  For the most part, my trades hit the mark of a 12% return annualized, so this one will be easily made up, probably will be made up for during the month of January, as a matter of fact! 

Here are the final results of this most recent WIN trade, as always, net of commissions and fees:

WIN

Transactions

Bought 800 shares in late November with an average share price of $9.85 (total $7,879.00)
I sold covered calls at a $10 strike price for the duration of this position.

Net Loss:

1) Options Income:  = $109.00
2) Dividend Income (December): $200.0-
3) Capital Loss when unwound at $8.14 per share:  -$1,363.15


Total net loss on the unwound position: -$1,054.14
Absolute Return on Investment: -$1,054.14/$7,879.00) = 13.38%
Annualized Return not calculated due to net loss status of the position.

Thursday, January 22, 2015

New Position: JPM

After the DIS position was called away, I decided to move quickly back into a new position, and chose JPM as the basis for it.  I’ve held JPM and done well with my covered call strategy on the stock, and sure enough that looks to be the case this time as well. I sold April covered calls with a $57.50 strike price, and the timing is such that I have the possibility of a hat trick, with income coming from stock gains, dividends, and covered call premiums.

Here is the position plan for JPM, with results estimated net of commissions and fees:

JPM

Transactions

Bought 200 shares at average share price $56.12 (total $11,223.00)
Sold 2 $57.50 Apr 2015 covered calls

Net Profit:

1) Options Income:  = $358.49
2) Dividend Income (April ex-dividend): $80.00
3) Capital Appreciation if assigned at $57.50:  $259.00


Total Net Profit if assigned on the ex-dividend date:  $697.49
Absolute Return on Investment: ($697.49/$11,223.00) = 6.21%
Annualized Return if Assigned and Dividend Collected (90 days):  6.21%*(365/90) = 25.20%

Tuesday, January 20, 2015

Called Away for the Hat Trick - DIS

In the fall of last year, my thoughts began to turn to that nice annual dividend that DIS pays.  I opened a position in September, but it was very conservative and was quickly called away – the ex-dividend date for this stock is in December.  So I waited a few days until October and opened a new position in DIS, one that was just called away last Friday.

As a matter of fact, that first transaction of the year was a success in another way:  DIS earned me a hat trick, which means I collected covered call premiums, a dividend payment, and there was a capital gain on the sale.  In total, the position earned $381 over the course of 90 days.  That works out to a calculated return of 4.35%, or annualized return of 17.65%.

Here’s the analysis of the DIS position, net of fees and commissions; the position was called away at expiration last week. 

DIS

This was a 100 share position established at $87.59 per share in October 2014, total basis $8,758.99.  During the holding period I sold covered calls at strike prices ranging from $87.50 to $92.50, the final strike price was $90.00.

Total covered call premiums:  $42.72
Total dividend payments (there was a single, annual dividend):  $115.00
Total stock gain at $90:  $223.01
Total, absolute gain on the position:  $380.73
Total, absolute return percentage ($380.73/$8,758.99):  4.35%


Annualized total return percentage (held approx 90 days):  17.65%

Tuesday, January 6, 2015

Follow-up to 2014 Results

There was a great follow-up question yesterday about the Rescue My IRA annual results I posted – a colleague wanted to know a few more details about the returns.  Although I answered the question directly, I’ve decided to post a follow-up here with additional information.

I report the totals for dividends, capital gains, and covered call premiums on a monthly basis in a wrap-up post, but I hadn't totaled them for the year - I haven't come to terms with how to use that as a metric to improve managing the account, since I feel that the statement value is the best gauge of progress. 

At my broker, that accounting goes like this - cash and stock values is positive, and covered call values negative.  I simply use the starting value and the ending value as the way to calculate growth.  If any readers have thoughts on how to reconcile the two, I'd love to hear them.

That said, the following are the total itemized returns in the account: 
  • Dividends:  $3,473
  • Cap Gains: $15,166
  • Premiums $3,200
  • Total:  $21,838

That percentage is 14.13% - but the increase in account value was only 8.5%. I attribute this variance to the fact that since I won’t need the funds from Rescue My IRA for 7 to 10 years, everything is reinvested – and so market ups and downs don’t translate to equivalency of cash flows. 

As a second note, I will often unwind my transactions early when the delta reaches 1.00, which has the effect of offsetting premium revenue for capital gains on the shares. My justification is to take those profits as soon as possible and then get the funds reinvested.


That’s all for today, just a little additional information on how Rescue My IRA operates.