Spring Flowers at Hawksbill Cabin

Spring Flowers at Hawksbill Cabin
Spring Flowers at Hawksbill Cabin

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:



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:



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. 


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.

Sunday, January 4, 2015

Rescue My IRA - 2014 Annual Results

The year just ended, 2014, is the third full year of my “Rescue My IRA” initiative, which employs a covered call strategy to both help recover from the poor results achieved by professionals from 2005-2007, when I entrusted my IRA to them.  Although the account was active for a few months during 2011, activities during that time were focused on consolidating the old 401(K)’s and writing the trading plan, so I consider January 2012 the official start date for reporting results.  Thus, January to December 2014 is the annual period I’ll be using for this year end post.

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 $154,520.55, and ended the year at $168,107.47, for a net gain of $13,586.92, or 8.50%.  On the face of it, this return is much less than the 2014 gain achieved by the S&P 500 index (reported in various financial media as 14.04%); however, that is probably not an apples-to-apples comparison, as I’ll explain below.

In dollar terms, the account’s statement value has increased from $127,606.44 at the start of 2012, to $168,107.47 at the end of 2014, a gain of nearly $41K.  Besides the S&P 500 results, a second 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%

The average annual return for these three years is 9.64% - that’s not bad, but it is short of the 12% goal I’ve set for Rescue My IRA. However, it is very close to the average S&P compound average growth rate for the 1970-2012 period, as outlined in this Wikipedia article:  10.40%.    

It would be useful to consider some of the differences between my approach and an approach that is based on a straight indexing method, so let’s take a moment to consider the differences in approaches.

  • 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, my sense of market risk for much of 2014 suggested that I keep a larger cash reserve than I had in the past, so I kept the average reserve level at about 30% of the account value throughout the year.  Adjusting the S&P’s 14.04% return by 30% yields a return of around 10%, so my results aren’t that far off.
  • Finally, I don’t use the entire S&P 500 universe of stocks – to limit some of the risk in such a stock market intensive approach I generally focus on the shares that are rated 4- or 5-stars, outsourcing some of my due diligence on stock research in this manner.  With few exceptions, I also look for dividend payers in the range of from 2% to 5% annually, further limiting which shares I will use in Rescue My IRA.  The effect is to limit “home runs” somewhat, but it also reduces the downside risk of a major loser.

All of that said, 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. 

That’s about the extent of the annual wrap-up for 2014, if I were keeping it brief.  However, there are resolutions that are due for 2015, so I’ll take a moment to post them here. 

  • First, I’d like to find a way to put those cash reserves to work for me while they are not invested in stocks.  I looked into bond ladders during 2014, it is possible I could invest 20% of the account value in them and get some interest back that way.  That's a multi-month prospect, so as an alternative I may just find an interest paying ETF for this purpose…it wouldn’t take much to beat what Scottrade (as much as I love them!) pays on the cash balances I’ve kept this year!
  • Second, I’m going to work on retooling the Rescue My IRA trading plan, which I wrote back in 2011.  With three years’ worth of experience with the covered call 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 2014 wrap-up.  It’s onward and upward for Rescue My IRA, and I will continue to use the covered call approach for 2015.       

I hope my readers were successful in 2014 as well – and here’s to happy trading next year! 

Wednesday, December 31, 2014

Rescue My IRA - December 2014 Results

There’s good news breaking out all over about the US economy.  There are those who have begun to worry that the market is overbought and that is the time to start tapering out of stocks.  They may indeed be prescient and able to pick up signals that things are going to come crashing down around us soon, but that is not the way I see it – as a “retail investor,” I don’t see how one can afford not be invested in this marketplace.

I think selling out into this market is what the big fish want us to do.  I started Rescue My IRA out of frustration from the table crumbs that were left to retail investors during the crash of 2007 - I want to use the covered call approach to try and beat those everyday returns.

By the way, today’s post recaps December 2014.  Next week, I’ll put together an annual recap of 2014, plus highlight a few of last year’s trades to accompany the annual recap. 

The potential interest rate shock from prospective Fed action still hangs over us, and on its own, that may well have been something to worry about.  To my mind, those fears are offset by current gas prices – I did a quick calculation that I’m getting about $60 a month back in my pocket, and I know there are people out there that could use the money more than I can.  The impact is showing up in consumer spending, and that’s enough to fire our economy for a bit longer. 

Earlier this year I was carrying a cash reserve of as much as 30 percent of the Rescue My IRA account value.  Because of my confidence in the economy, I started to lower that ratio to around 20 percent as of this month.  That will remain the plan until I see some confirmation of the potential for a downturn – possibly a down quarter of GDP growth, or similar – then I’ll start harvesting cash out of assigned positions until I rebuild the cash reserve to 30 percent. 
On the whole, December 2014 was a good month for Rescue My IRA.  The account met my goal of returning 1% in cash, between dividends, covered call premiums, and stock gains – I use a 12% annual return as a benchmark, in addition to periodically comparing my results against the S&P.  Plus, despite the terrific hiccup in the market mid-month, the account value reached a new high during Christmas week, cresting over $169K for a few days, before settling at $167,659.68 to end the year.

I’m staying with the covered calls approach – there’s nothing to convince me otherwise, at this point.  Meanwhile, here is the monthly summary of Rescue My IRA statistics for December, based on the market close on December 31. 

Account Status:
·         Total Account Value, 12/31/2014 Market Close:  $ 167,659.68, that’s down a little from the November close of 168,107.47)
·         Total Cash Reserve, 12/31/2014 Market Close:  $38,484.88.
·         Core Stock Positions (as of 12/31/2014):  BA (100 shares), CNP (400 shares), COP (100 shares), CRUS (400 shares), DIS (100 shares), EMC (400 shares), FB (100 shares), GE (400 shares), GM (400 shares), HAL (200 shares), PFE (300 shares), QCOM (100 shares), T (400 shares), WIN (600 shares)

Performance Metrics:
·         Option Premiums Collected (net, month of December):  $1,336.06 (0.86%)
·         Capital Gains Collected (net, month of December):  -$260.92 (-0.17%)
·         Dividends Collected (recognized on the ex-date): $575.00 (0.37%)
·         Interest on Cash Reserve: $0.30
·         Total, Absolute Return:  $1,650.44 (1.07% absolute return, annualized return

Next Month To-dos:

There are three positions with January covered call contracts:  DIS, EMC, and FB. If these positions are called away at expiration, I’ll earn stock gains totaling $570.32, or about 0.34% on the account value (for 2014, I am measuring this return against the 12/31/2013 account value, when I write results in January the basis will be the 12/31/2014 value). 

January’s dividend forecast is slim:  only two stocks have ex-dividend dates coming up:  COP and T.  Neither of these have January calls written against them, so I am very likely to collect dividends in the amount of $261.00, or 0.16% of the account value. 

It was typical during 2014 that I could forecast about a half of a percent return on the account between share gains and dividends, and that is once again the case for January 2015.  In fact, the forecast return is exactly 0.50%; as usual, I’ll plan to make up the balance in covered call premiums.

As I mentioned at the start of the post – I’m staying the course with the covered call strategy – Rescue My IRA just started the fourth year using this approach.  During that time, the account value has grown from around $127K to where it is now.  I could choose a less risky or easier way to invest, but that would likely mean lower returns; and besides, I’m enjoying this approach. 

Until next month, here’s to happy trading in January for my readers – and for the rest of 2015!

Sunday, December 21, 2014

Adding on and Rolling Out GM and T

During the rock-and-roll week we just had, I took advantage of the down days to do some add-ons and roll-outs on GM and T.  While the shares were low, I added 100 shares to each of these positions while also rolling them out a month or two.

Here are the current position plans for GM and T after the roll-outs, net of fees and commissions, and assuming I collect dividends through the holding period:


With all the company has been through in the last few years, GM is currently rated five stars by S&P.  I established a 300-share position in November 2014, and added 100 shares this week to make a 300-share position out of it.  The basis is now $12,397.99, or $30.99 per share.  The current covered call is $32 Mar 2015; I started with a $32 strike and have been rolling the contract out every other month or so.   

Total covered call premiums:  $520.95
Total dividend payments (includes March ex-date):  $210.00
Total stock gain at $32:  $384.01
Total, absolute gain on the position:  $1,114.96
Total, absolute return percentage ($1,114.96/$12,397.99):  11.98%

Annualized total return percentage (approx 142 days if held to expiration):  30.97%


As with GM, this position was established with a 300-share lot back in August, and I added 100 shares last week.  Now it is a 400-share position with a basis of $13,621.96, or $34.05 per share.  I have been selling covered calls at the $35 strike, rolling them just about monthly since I started.

Total covered call premiums:  $308.44
Total dividend payments (includes January ex-date):  $336.00
Total stock gain at $35:  $360.04
Total, absolute gain on the position:  $1,004.48
Total, absolute return percentage ($1,004.48/$13,621.96):  7.37%

Annualized total return percentage (held approx 200 days):  13.46%