Like many of my generational colleagues, the baby boomers, I've found that my best intentions about saving for retirement aren't always meeting the mark. In 2011, I took some old 401(k) accounts and combined them into a self-directed IRA with Scottrade, and established a strategy of using covered calls to stabilize and enhance my returns. Rescue My IRA chronicles the progress of my IRA rescue using this approach.
On Tuesday afternoon the financial
markets were informed of the intent to merge HNZ and KRFT. As it happens, I opened a 100 share position
on KRFT just last week on March 19 – when the merger news broke, those shares
rose more than $20 in one day, and my $62.50 April 2015 was called away.
Although the position plan for KRFT
was designed to be a hat trick, where I would collect a covered call premium,
dividend, and share gain, in the end that stock run up meant my call would be
assigned early, well before the ex-dividend date, so I only received the call premium
and the share gain, for an absolute return of $146 or 2.37%.
If you extrapolate the annualized
return on this 7-day trade, it is 123.60%!
I’m thinking that will be the best trade of the year, but if it isn’t, it's still good for me.
Meanwhile, here is the final
analysis of the KRFT trade, net of commissions and fees:
Bought 100 shares on March 19, 2015,
for a basis of $6,149.99, or $61.50 per share.
The position was called away on a $62.50
strike price, netting $6,232.00, for a total stock gain of $83.01.
Total options income: $62.75
Total dividends collected: $00.00
– the call was exercised before the April ex-dividend date.
Total Net Profit after Unwinding: $145.76
Absolute Return on Investment: ($145.76/$6,149.99) = 2.37%
Annualized Return (7 days): 10.69%*(365/7) = 123.60%
This is the second of two posts about the
CRUS and DOW positions, which were both called away last Saturday on expiration
of their March covered calls. As with
CRUS -the topic of yesterday's post here, the DOW trade proved to be a good one for Rescue My IRA, generating an
absolute return of 3.38% over the 45-day holding period, for an annualized
return of 27.39%. Rescue My IRA sets up
these trades with the goal of generating a 12% annualized return, so between
the 18% for CRUS and 27% for DOW, the account is on a streak!
In any case, let’s move ahead for a
look at the final analysis of the DOW trade, net of commissions and fees:
Bought 200 shares in January 2015,
for a total basis of $9,047.00 and an average share price of $45.24. The position was called away at expiration on
a $45.00 strike price, netting $8.982.00, for a small capital loss of $65.00.
Total options income: $370.48
– there was only one covered call contract written for the duration of this
Total dividends collected: $00.00
– these shares were called away before the ex-dividend date.
Total Net Profit after Unwinding: $305.48
Absolute Return on Investment: ($305.48/$9,047.00) = 3.38%
Annualized Return (45 days): 3.38%*(365/45) = 27.39%
At expiration last Saturday, I had
two positions called away for a profit:
CRUS and DOW. Normally, I would
make a combined post on these transactions, but I am short of time this morning
and will only write about the CRUS trade – I’ll update on DOW tomorrow morning.
CRUS was a little bit of a flyer
when I selected it last year – it has consistently been rated as 3 stars by
S&P, where I typically work with 4 stars stocks, and it pays no dividend,
which is a second key criteria within Rescue My IRA. Other than that, solely by selling covered calls I was able to generate a
very respectable yield of more than 18% for the holding period (absolute
return), and better than 18% annualized, which exceeds my goal of a 12%
annualized return, and then some.
Here is the final analysis of the CRUS
trade, net of commissions and fees:
Bought 400 shares in February 2014,
for a total basis was $8,038.00 with an average share price of $20.10.
The position was called away on a $20
strike price in March 2015, netting $7,982.00, for a total stock gain of -$56.00.
Total options income: $1,576.28
– I sold $20 covered calls on a monthly basis through most of the holding
period, with one transaction at the $18.50 strike.
Total dividends collected: $00.00
– CRUS does not pay dividends.
Total Net Profit after call: $1,520.28
Absolute Return on Investment: ($1,520.28/$8,038.00) = 18.91%
Annualized Return (375 days): 18.91%*(365/375) = 18.41%
the funds from my GM trade in hand after the 400 shares were called away on the
ex-dividend date yesterday, I wanted to get a new trade going right away. I have a list of five potential trades that I’ve
been keeping an eye on since I have so many in-the-money covered calls expiring
this month, but instead of these I went back to AAPL, a stock I’ve done well
AAPL is in the news for another reason these days, beyond its constant
innovation and design: it’s slated to
replace T on the Dow Jones Industrial Average (full disclosure: I also have a
positon in T). While this in and of
itself wouldn’t put it on my list, it is likely that there will be increased
buying and selling during the transition period, as various money managers
adjust their portfolios to include AAPL now that this is happening.
bought 100 shares at around $127.60 and sold a May covered call at the strike
price of $130. This bridges an
ex-dividend date, and also should carry me through the DJIA incorporation phase
– in short, there are a lot of reasons for the shares to be called away, and
for me to take a nice gain on a relatively short-term trade, two months in
duration. If the trade goes as planned, I’ll pick up around 6.41% for the 65
day holding period, which works out to a hypothetical annualized return of 36%!
is the position plans for the new AAPL position, with results reported net of
commissions and fees:
100 shares at average share price $127.58 (total $12,757.99)
Sold 1 $130 May 2015 covered call
1) Options Income: = $546.74
2) Dividend Income (May ex-dividend, if collected): $47.00
3) Capital Appreciation if assigned at $130.00: $224.01
Total Net Profit if assigned on the ex-dividend date: $817.75
Absolute Return on Investment: ($817.75/$12,757.99) = 6.41% Annualized Return if Assigned and Dividend Collected (65
days): 6.41%*(365/65) = 35.99%
Just checked into my Scottrade
account this morning to have a look at the week ahead. My GM position was headed for an ex-dividend
date of 3/9, and was well in-the-money, so I’m faced with the good news – bad news
proposition that a stock I really enjoyed owning has been called away. I’ll get over it though…GM scored a hat trick
for me since I bought it in November, earning returns on covered call premiums,
dividends, and a stock gain.
The absolute return on GM was almost
$1,000 on the $12,400 invested, or 10.69% over the 140 +/- days I held it. Sure there are trades that will do better,
but that’s probably as good as you could ask for in the stock market. I’ve got to get to work to find a position or
two to replace it with; I’ll post that trade as soon as it is set up.
Meanwhile, here is the final
analysis of the GM trade, net of commissions and fees:
Bought 300 shares in November 2014,
and added another 100 share lot in January.
The total basis was $12,397.99 with an average share price of $30.99.
The position was called away on a
$32 strike price, netting $12,782.00, for a total stock gain of $384.01.
Total options income: $520.95
– I stated with the $32 strikes in December and was rolling them out monthly.
Total dividends collected: $90.00
Total Net Profit after Unwinding: $994.96
Absolute Return on Investment: ($994.96/$12,397.99) = 10.69%
Annualized Return (142 days): 10.69%*(365/142) = 27.48%
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.
·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)
·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 %)
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
Happy trading in March – until next month, all the best!
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
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:
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.
(for the term of this trade, strike prices ranges from $130 to $135)
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%