Thursday, December 22, 2011

Adding to a Good Thing: IP

The approach evolves as we learn - I guess that's part of the human condition.  I have struggled with whether IP should even be in my portfolio - if I draw the hard line of S&P STARS ratings of 4 or above, IP doesn't fit.  On the other hand, quite a few of my colleagues have done well with the shares, and The Motley Fool even had a positive article on it in the last month or so.

So I added another 100 shares last week at $27.97, so I now hold 300 shares with a price basis of $26.21 per share.

Earlier I had completed a roll-out on the original 200 shares, then sold Jan 27s on them for $338.  I sold a Jan 29 on these new shares, netting $55.  So the current position looks like this (assuming the options are assigned):

Total Option Premiums:  $207.19
Dividends: $52.50
Total Stock Gain (Loss):  $419.75
Total Absolute Return:  $679.44
Total Absolute Return Percentage:  13.42%
Annualized Return (held 105 days):  46.64%

Tuesday, December 20, 2011

CMCSA Called Away

For only the second time now, I had one of my covered calls assigned.  This time it was CMCSA, which was one of the 220 share positions I set up in early November.  My basis in the shares was $21.99, and I did two covered call transactions with them at a 22 strike while I held the shares.  I was not emotionally tied to the stock for several reasons, mostly because I consider the business of DIS similar enough that I have had second thoughts about also holding CMCSA.

In looking through the record on this one, I see that I was able to trade in and out during November before selling the December 22.  Here is a summary of results on the trade:

Total Option Premiums:  $173.48
Dividends: $0.00 (next ex-date is 12/31)
Total Stock Gain (Loss):  ($16.98) - this loss is mainly due to the assignment transaction fee of $18
Total Absolute Return:  $156.50
Total Absolute Return Percentage:  3.56%
Annualized Return (held 45 days):  28.86%
After last week's sale of AA, the return of these funds to my investment pool means that I have some cash I need to put into shares.  The next post will review how I've made my decision to invest the excess.

Friday, December 16, 2011

Closing out the Stinking AA Position

Although it is a DJIA stock, there are a lot of reasons not to like AA.  One of them, for me at least, is a political reason - the Secretary of the Treasury during the Bush administration was the former CEO.  Just as the Bush administration left lasting marks on the US economy, I'm sure there's still an O'Neill stink of some kind at AA.

One more piece of advice:  you don't have to wear the funny hat, no matter how nicely they ask.  Bush (more likely Cheney) fired him shortly after this photo was published.

Also, the stock is underperforming, even for a Dogs of the Dow candidate, and it has a miniscule yield.  I've learned my lesson about choosing positions for the Rescue My IRA portfolio just because I wanted to have 90% of the funds invested.  Today I bought back the previous options and sold the shares at a loss.  We'll chalk it up to experience.

Here are the results:

Total Option Premiums:  $127.96
Dividends: $0.00
Total Stock Gain (Loss):  ($609.00)
Total Absolute Return:  ($481.04)
Total Absolute Return Percentage:  -11.7%
Annualized Return (held 75 days):  -57%

This is why I use the portfolio approach.  Sometimes you're just going to have a stinker in there.

Tuesday, December 13, 2011

Adjusting IP: Rolling out and Rolling down

I decided to buy back the 29 Dec 2011 calls I had on my IP position.  I saw the transaction as an opportunity to get back into a credit position on my call premiums, which I was able to do by selling the 27 Jan 2012 - my basis on the shares is $25.32.

I collected $339 for the new call contract.  If called at $37 in January, the total returns onmy 200 share position will be as follows:

Option premiums:  $152.45
Dividends:  $52.50
Stock gain:  $317.45
Total return:  $552.47

The price basis on this position is $5,064, so we have an absolute return of 10.32% and an annualized return of almost 36%.  Will keep you posted.

Adding to Position: DIS

Over the last few weeks, DIS announced an increased annual dividend of $.60 per share, or $60 on lots of 100 shares, which is my usual transaction.  I held 200 shares and have a 36 Jan 2012 written against them.  With the shares trading above $36.00 and Dec expiration date coming up, with the ex-date before that even, I'd become concerned that my shares might be assigned early.

I like the returns this stock is generating for me and would like to hold it for larger capital gains, which I think are possible over the next year.  My share basis is about $34.50 and the 52-week high at the time I bought my first position was $44. I would like to sell at $40 or above.

So I decided to hedge against the early call by buying another 100 shares, which I did Monday, at $36.35.  My average basis is now $35.17.  Against these shares I sold a 37 Jan 2012, netting $84.

I should collect up to $180 in dividends from DIS, and have already collected $322 in option premiums.  If I am called at these strike prices the stock gains are $312, for a total return of $814 on an investment of $10,552, an absolute return rate of 7.7% annualized at 38%.

If I am called early on the shares this week I'll revise the results in a post on Friday.

Friday, December 2, 2011

Trading Plan - Initial

With a little more experience with the covered call strategy, and after completing the November status report, I decided I was finally ready to prepare a trading plan that will guide investing activities in the Rescue My IRA portfolio.

I used a template developed by one of my colleagues in the Covered Call Community - the basic framework is available from the Yahoo Board "Just Covered Calls."  I see it as a living document - I'm sure my approach will evolve and become more thorough with experience.  But here it is in its entirety, first edition.

“Rescue my IRA” Trading Plan

Objective and Background

The objective of this trading plan is to grow the amount I will have available for retirement.  The trading plan only deals with my IRA at Scottrade; I continue to participate in my employer’s 401(K) in addition to these investment activities.

A few years ago, I consolidated my IRAs – four accounts – into one with a large brokerage house.  I counted on the broker there to help me grow my resources, and since he had a good strategy, I felt confident we could reach a simple, not very specific, goal of “having enough.” 

After a few years and bad economic times, it became clear that my broker’s strategy wasn’t going to achieve my goal.  When I consolidated the accounts their nominal value was about $77K.  After a few years, I had seen values as low as $44K.  My conclusion, simply, was that I could do better than this; I then rolled the account, now valued at just more than $51K, over to Scottrade.

I worked with a buy-and-hold strategy in the past, which probably won’t work in today’s markets.  I found additional information about using covered calls to improve investment yields – and this is the strategy I have chosen. 

My big-ass goal for this money is to generate 12% growth per year in the account, while continuing to save between 10 and 15% of my annual income in a company 401(K).  If I am successful, the value of this account could reach nearly $xxx by the time I am aged xx.


As I noted above, I have chosen a covered call strategy as my primary method of achieving this goal.  I will identify, qualify, and buy stock in quality companies that pay a dividend.  I will then seek to trade in covered call contracts written against these shares as a way to build an income stream that supplements the dividends and capital gains that will be earned by the shares. 

The main risks I face with this strategy are simple:

·         Operational risk of making mistakes in stock choices
·         Process risk, consisting of the typical down side arising from holding stocks

Covered calls provide some downside protection in the amount of the premium received for the contract, so the process risk is partially managed.  I describe the stock picking method below; it is meant to manage the operational risk.



  • The Rescue My IRA account is established at Scottrade, Alexandria, VA
  • Account Type: IRA
  • Capital Available: Initial investment was approximately $51K


The focus of this account will be to invest in stocks and option contracts.  From time to time, the account may use alternative instruments, including ETFs, CDs, and mutual funds, but as the account is getting started, these will not be primary.


The overall timeframe of this plan is from November 2011 through December 2023, when I will be aged xx.  For now, let’s consider that a typical retirement age, and therefore a reasonable goal and investment horizon.

Position Sizing

My current plan is to hold no more than 15 positions in this account, with the optimal number being around 12.  After 20% of the value of the account is held in cash reserves, 80% will be invested in stock holdings, which the covered call contracts will be written against.  This means that on average, a holding will represent between 5% and 5.5% of the total account value, if 15 positions are established; or between 6.5% and 7.0% if I am working with 12 positions.

Trade Entry Strategy

Stock picking will be key to success in the Rescue My IRA account.  I will select stocks from US markets that include the following key elements:

·         Nationally known brand and industry leadership
·         Established record of dividend payments ranging from 2-5% annually
·         An S&P STARS rating of 4 or 5 and a Morningstar rating of 4 or 5
·         At the time of purchase, the shares should be trading within the middle 40% of their 52-week range
·         No shares will be purchased that have an anticipated earnings announcement in the next month

From time to time these qualifying details may be revised.

I will make purchases using limit orders that set a price within the middle of the 52-week trading range for each position.  The initial covered call transaction should generate at least $100 in cash flow, and the total trade to establish a position must generate a 12% annualized return on the purchase price of the shares.  The return consists of option premiums, capital gains, and dividends.

Trade Exit Strategy

When the time comes to close a position, I will simply place a limit order for the sale, assuming the stock has not been assigned based on the covered call written against it.  No positions will be closed until all associated options have been closed.

Since I am okay with a buy and hold strategy in this account, and with the covered calls and dividends most positions will continue to generate an income stream even while prices are moving down, I will not exit a position merely because the price is declining.  Exits for beaten-down stocks will be based on their not meeting the trade entry requirements listed above.

On the other hand, if a position is rising, the odds increase that a covered call written against it will be assigned, so that will be one way to close a position with a gain.

I will also evaluate a stock approaching its 52-week high to determine whether to continue holding it or whether to sell and reinvest the proceeds.


Position Management Strategy

The trading cycle for shares in this account will be driven by the options calendar.  Optimally, positions will be evaluated as the options expiration date approaches, and the decision will be based on whether it is feasible and profitable to roll-up, down or out the option contract; to let the contact expire unexercised; or to take profits when the contract is exercised.

Assuming the stock continues to meet the criteria above:

  • If the price is stable, a new contract will be written for the same strike in a future month.
  • If the price is slightly lower, a new contract at the same strike in a future month will be sold.
  • If the price is significantly lower, the new contract may be based on either a lower strike price or a further out month.
  • If the price is slightly higher, the new contract will be at the same or next strike price in a future month.
  • If the price is significantly higher, it may be time to take profits or to continue to roll the contracts.

Tax Strategy

This is an IRA and therefore tax deferred.  A tax strategy is not necessary.

Wednesday, November 30, 2011

November 2011 Recap

As I've mentioned in a couple of past posts, I plan to give a monthy recap of trading history and results in my new Scottrade IRA.  The recap is loosely organized into the following sections:  account status, performance metrics, and a to-do list for the next month.  I expect the format and data reported will evolve over the first few entries until it is standardized - this will facilitate a regular evaluation of the results.

When I started the blog, I mentioned my disappointment with the results of having my IRA managed at one of the big broker houses - that I had invested about $77K only to see the value shrink to as low as $44K or so.  By the time I completed the rollover to Scottrade, which took nearly two months to complete, by the way, the amount invested in the IRA was $51,231 (amounts are always rounded on the blog).  My big-ass goal for this money is to generate 12% growth per year in the account.

Account Status:
Total Account Value, 10/31/2011 Statement:  $8,249 (account was opened during October, additional transfers were completed during November, taking the value up to $51K+, and will be reflected in the next recap)
Total Cash Reserve, 10/31/2011 Statement:  $404
Core Stock Positions:  AA (400 shares), CMCSA (200), COP (100), CSX (200), DIS (200), GE (400), GLW (200), IP (200)

Performance Metrics:
Option Premiums Collected (net, from opening through today):  $1,207
Capital Gains Collected (net, from opening through today): $167
Dividends Collected (recognized on the ex-date): $96
Interest on Cash Reserve (estimated total): $8
Total, Absolute Return:  $1,408
Absolute Return, Percentage Basis:  2.88%
Annualized Return, Percentage Basis:  17.55%

Next Month To-dos:
Two current positions will go ex-dividend next month:  DIS and GE; estimated dividends $140
Two covered call contracts expire in December:  CMCSA 22 and IP 29
Additional 401(K) from a past employer to be consolidated into the account
Write a trading plan to document strategies, goals, and processes

Consolidated Lessons Learned:

Basic covered call trading rule: I will concentrate on writing covered calls on the front (next) month; however, I will always seek to gain at least $100 on my trades and an estimated annualized return of at least 12%.

Covered call adjustment guideline:  On all adjustments – roll-ups and roll-outs, or combos – I will seek a net credit in order to maximize profits on this activity.
Potential for early assignment:  So far, I’ve had one position assigned early – COP in October.  This was because the stock was trading near the strike price during expiry week, and an ex-dividend date occurred at the same time and my shares were assigned on the ex-date.  I have no problem with taking the early profit, but on future trades I will consider the potential for early assignment and attempt to take advantage of it where possible.
Taking early profits:  So far, I’ve had limited opportunities to take profits at options expiry, although I expect that will become the routine situation in this account.  However, during sideways and down markets, it looks like there will be a periodic opportunity to close out option positions at a profit, as I was able to do on four holdings during the fourth week of November 2011.  Taking profits when the opportunity presents itself, as in this case, is okay and not a violation of my trading strategy.
Still need a formal trading plan:  I have enough fresh experience now to write a trading plan for the account, and hope to get that done during the month of December.  There are several good models to base this on within the “covered call community” so I will adopt one of these frameworks to use for my account.

Tuesday, November 29, 2011

Completing Adjustments: AA, CSX, DIS, GE

After taking advantage of last week’s market slide to complete a series of buy backs, yesterday the market had a bounce on good news about prospective retail activity during the holiday season this year.  So I went back in to complete adjustments on those old positions, which I will summarize in the post today.
 The four positions, in alphabetical order, are:  AA, CSX, DIS, and GE. Here are the covered call transaction histories for each of these positions.  Note that I am rounding the amounts here, and I am not calculating yields for this post in the interest of brevity.
I have four round lots that I am working with in this position, and this is the first roll-out on AA.
·         STO (4) 11 Dec 2011:  $124.00
·         BTC 11 Dec 2011: ($52.00)
·         STO 11 Jan 2012: $100.00
·         Total AA premiums:  $172.00
I am working with 2 lots in this position, which I have now rolled-out twice. These shares went ex-dividend on 11/28, so a dividend payment of $28.00 or so will soon be making its way to the account!
·         STO (2) 22.50 Nov 2011: $39.00
·         BTC 22.50 Nov 2011: ($16.00)
·         STO 22.50 Dec 2011: $96.00
·         BTC 22.50 Dec 2011: ($46.00)
·         STO 22.50 Feb 2011:  $136.00
·         Total CSX Premiums:  $209.00
I am working with 2 lots on the DIS position, and it is also the second time I have rolled-out the position.  In past years, the stock has gone ex-dividend (an annual payment) in approximately mid-December; based on the payment history for last year the dividend will be about $80.00, assuming I am not assigned early on the Jan 36. Also, this one has that lesson learned story: the first adjustment was completed with a net debit – I don’t allow that to happen any longer.
·         STO (2) 36 Nov 2011:  $81.00
·         BTC 36 Nov 2011:  ($131.00)
·         STO 37 Dec 2011:  $155.00
·         BTC 37 Dec 2011:  ($44.00)
·         STO 36 Jan 2012:  $176.00
·         Total DIS Premiums:  $237.00
I have 4 lots in this position, they were bought in two transactions.  Like DIS, this stock is anticipated to go ex-dividend during December, so there will be a yield of about $60.00 to the position.  This was a roll-out and roll-up since the 17.50 contract is not available anymore.  Because I sold June 2012 contracts, as long as the position is not assigned, I will likely collect dividends in March and June as well.
·         STO (4) 17.50 Jan 2012:  $137.00
·         BTC 17.50 Jan 2012:  ($72.00)
·         STO 18 Jun 2012:  $152.00
·         Total GE Premiums:  $217.00
With these adjustments completed, I only have two positions left for the December expiration:  two IP contracts 29 Dec 2011 and two CMCSA 22 Dec 2011. I will probably let these two ride until expiry. 
Tomorrow I will close the month with a summary of activities and some yield calculations.

Friday, November 25, 2011

Some Buy Backs

Q:  A Greek, and Italian, and a Spaniard go into a bar for a drink.  Who buys?
A:  The German.

Between the European issues referenced in the joke above - I found it in the Washington Post last week, but misplaced the source - and the inability of the "Super Congress" to reach a budget deal in the US, the markets took a major hit last week. 

With my account fully invested in positions, I looked for an opportunity to do something to help continue progress on rescuing my IRA, and what I decided I could do is to take some of the covered calls off of the table as their premiums declined in value quickly.  Targeting my December calls, I found three that I could buy back for a net profit.  I also found one January call to buy back.
  • 2 GE 17.50 Jan 2012, sold for $137 bought for $72; profit $65
  • 4 AA 11 Dec 2011, sold for $124, bought for $52; profit $72
  • 2 DIS 37 Dec 2011, sold for $155, bought for $44; profit $111
  • 2 CSX 22.50 Dec 2011, sold for $96, bought for $45; profit $51
Taken on their own merit, these trades netted a total of $299.  In addition, since three of the stocks will probably go ex-dividend during December (CSX, GE, DIS, although GE and DIS have yet to announce), these holdings are now clear of the risk of early assignment.

While this isn't a core element of the covered call strategy I adopted for my account, these profits will add to my returns, and I can now look for new covered call situations for them.  The pure execution of the strategy would have been to keep the calls until they expire. 

I hope to execute replacement trades in the next week, but will probably wait a few days for the market to stabilize after the series of down days we've been having lately.

If I am able to get these trades done during November, that will be my next post.  Otherwise, I will complete an analysis of the account activities to date and report on returns during the first two months of following this strategy.

Monday, November 21, 2011

November Calls Expiration Results: COP

Last week, I took advantage of the turbulent market to roll-up and out on CSX and CMCSA, stocks that I had sold November calls against.  I sold December calls and closed the November positions. 

After doing this, I was left with only one November contract, COP 72.50 Nov 2011.  I was looking to roll-out to December with the same strike price on this position, but because the market continues to trend down on European news and on the pending failure of the Super Committee to reach a budget deal, I had to move out to Jan 2012 to meet my goals for the transaction.

I was able to sell to open on the COP 72.50 Jan 2012 for a net premium of $142.74.  This brings me back to a net gain on option premiums (COP was one of my learning experiences, I did a previous adjustment for a net debit); I have currently collected a total of $113.97 in premium on the COP shares, which I bought for $6,988. 

The January position also sets me up for the potential of collecting quarterly dividends, estimated at $66.00, with an ex-date of approximately January 13.  My capital gain on the stock if assigned will be approximately $490.00. 

If assigned and I collect the dividend, the absolute return on the shares would be $674.00, or 9.65%.  Annualized, this is just about 48% for an approximately 75 day holding period.

Wednesday, November 16, 2011

Adjusting DIS, Roll-up and Out

A final post on the adjustments I’ve made in the portfolio positions this month, this time a roll-up and out on DIS.  I have always liked this stock since I first started investing in the early ‘80’s, so it was inevitable I would come back to it for the covered call portfolio.  It recently benefited from some good earning news, and since it passed my screen, I decided to make it one of my early holdings. 
I first bought the shares in early November and sold a Nov 2011 covered call against them that same day.  The earnings news combined with the prospect of a juicy annual dividend that is yet to be announced, but that has gone ex-dividend in early December in past years, had me revisiting the strategy almost immediately.  I decided an adjustment was in order.
Here is the analysis of the position and the resulting adjustment.

11/8/2011 Bought 200 shares at $34.55 (total $6,917)
11/8/2011 Sold 2 DIS Nov 2011 36 at $0.45 (total $80.49)
11/14/2011 Bought to close 2 DIS Nov 2011 36 at $0.61 (total $131.50)
11/8/2011 Sold to open 2 DIS Dec 37 at $0.83 (total $156.48)

Net Profit:

1) Options Income:  + $80.49 - $131.50 + $156.48 = $105.47
2) Dividend Income: If held to ex-date, based on last year’s payment, $80.00
3) Capital Appreciation if assigned at $37:  $7,382-$6,917 = $465.00

Total Net Profit if Assigned:  $465.00 + $80.00 + $105.47 = $600.47
Absolute Return on Investment: ($600.47/$6,917) = 8.68%
Annualized Return if Assigned (38 days):  8.68%*(365/38) = 83.37%
Yesterday's closing price was $36.45, so the Dec 37 is currently out of the money (OOM).
Lessons Learned:  On this trade I applied my new rule about adjustments, namely, they must be done for a credit – as shown in net profit calculation 1) above.  The second thing I am working on is how to report pending dividends in the total net profit calculation, especially since this part of the trade is most likely to stimulate an early call. In future posts, I think I may have two total net profit calculations, one for the “if assigned” assumption and one for the “if not assigned” assumption. In the case of DIS, the absolute return would be around 7.5% and the other figures would adjust accordingly if I am assigned before the stock’s ex-dividend date. If I am not assigned and collect the dividend the absolute return drops to 2.68%, and the net profit would be $185.47.

Tuesday, November 15, 2011

Adjusting IP: Rolling Up and Out

Early in the development of this covered call approach, I chose IP as one of my stocks.  As I’ve done additional research to map out my process and stock selection scheme, this stock is one that doesn’t meet all the criteria.  But I like it, and a lot of the colleagues I have been following trade IP options; and I have to admit it has been a stock that has given me a lot of experience already in the short time I have been working with this strategy.
Coincidentally, I noticed yesterday on one of the blogs I follow that a colleague has worked on a similar trade with this stock – an adjustment to the strike price of the call and to the contract month.  There is a link to his post at the end of this one.
With IP approaching ex-dividend date (yesterday), I began to think of whether I might make an adjustment to my holding of 200 shares and the covered call I had sold on them.  I had two Nov 2011 26 contracts, and soon after I bought the shares the contracts had gone in the money (ITM).  So I have been keeping an eye on the position for a while, in light of the pending dividend ($28.75 per lot) – remembering that my COP was called away last month on the ex-date.
Here is the analysis of the position and the resulting adjustment.

10/13/2011 Bought 200 shares at $25.29 (total $5,064.48)
10/13/2011 Sold 2 IP Nov 2011 26 at $1.03 (total $196.48)
11/8/2011 Bought to close 2 IP Nov 2011 26 at $2.67 (total $543.50)
11/8/2011 Sold to open 2 IP Dec 29 at $1.00 (total $190.48)

Net Profit:

1) Options Income:  + $196.48 - $543.50 + $190.48 = -$156.54
2) Dividend Income: Held to ex-date, $57.50
3) Capital Appreciation if assigned at $29.00:  $5,782-$5,065 = $717.00
Total Net Profit:  $717 + $57.50 - $156.54 = $617.96
Absolute Return on Investment: ($617.96/$5,065) = 12.20%
Annualized Return if Assigned (14 days):  12.20%*(365/64) = 69.58%
Yesterday's closing price was $28.15, so the Dec 29 is currently out of the money (OOM).
Lessons Learned: There are a couple of takeaways from this trade. The first is a reinforcement of working on the assumption that I will seek to create credit transactions on contract adjustments, rather than debits, as I did in this case.  Second is to keep an eye on ex-dates, although I learned that one last month with COP. Third, and still unresolved – this seems to be a good trade, even though the shares don’t meet my criteria for having them in the portfolio; so I may need to have a way to resolve exceptions in the future…especially when there is the opportunity to participate in a “hot stock.”
My friend’s post – and note he has a lot more experience with covered calls than I do – is here: http://coveredcallsadvisor.blogspot.com/2011/11/roll-up-and-out-international-paper-co.html

Monday, November 14, 2011

Adjusting COP: Roll-up

As I mentioned in the previous posts, I made adjustments to several of the positions where November Covered Calls have been written.  I will summarize each of the transactions in separate posts.  Today, the underlying is COP.

As a note, COP was my first covered call transaction in the new Scottrade account.  I bought the shares at $63.09 and sold an Oct 65 which was assigned on the dividend ex-date.  That transaction whetted my appetite for this strategy.

Because I want to have a diversity of opportunity across industry sectors in this account, I returned to COP for a new transaction this month.  Analysis below is net of commissions.


11/4/2011 Bought 100 shares at $69.81 (total $6,988)
11/4/2011 Sold 1 COP Nov 2011 70 at $1.48 (total $139.74)
11/8/2011 Bought to close 1 COP Nov 70 at $2.26 (total $234.25)
11/8/2011 Sold to open 1 COP Nov 72.50 at $.74 (total $65.74)

Net Profit:

1) Options Income:  + $139.74 - $234.25 + $65.74 = -$28.77
2) Dividend Income: None, ex-date was in October
3) Capital Appreciation if assigned at 72.50:  $7,232-$6,988 = $244

Total Net Profit:  $244 - $28.77 = $215.23
Absolute Return on Investment: ($215.23/$6,988) = 3.08%
Annualized Return if Assigned (14 days):  3.08%*(365/14) = 80.3%
Today's closing price was $71.70

Lesson Learned:  I was not happy to complete the roll-up for a debit, which reduced my options income on this trade (at this point, anyway) to a negative amount.  I will institute a new rule about adjustments going forward - roll-ups and roll-outs will not be written for net losses; I will seek to complete adjustment transactions for a net credit. 

Nov 2011 Covered Call Positions

I have two CC positions that will be held through the week.  At present, I have no plans to complete an adjustment on them, as there is no ex-dividend date on either before options expire this Friday, but I may reconsider in the case of CSX.  The positions are: 
  • 2 CMCSA Nov 22.00
  • 2 CSX Nov 22.50
What follows is a transaction history on each position, net of commissions.


11/9/2011 Purchased 200 shares at $21.89 (total $4,392)
11/9/2011 Sold 2 Nov 2011 22 at $0.43 total ($76.49)

Net Profit:

1) Options Income: $76.49
2) Dividend Income: $0.00 (ex-date is 12/30/2011)
3) Capital Appreciation (if assigned at $22): $11.00

Total Net Profit:  $86.49
Absolute Return on investment (purchase price) $86.49/$4,392 = 2.0%
Annualized Return if assigned (stock held ten days):  2.0 * (365/10) = 73.48%
As of the time of this post, the stock closed at $22.21, above the strike price of the option.

Lesson learned:  One of my colleagues has a rule that he will not execute a trade that does not generate at least $100 in net profit and an annualized return of 20%.  This trade met one requirement but did not meet the other, but I proceed because of the very short term.  Due to the impact of transaction costs, I think that having a dollar value threshhold is a good idea, so I am adopting the $100 rule; however, I am willing to accept an annualized return of at least 12% for my trades.  I will apply this rule for all future trades after November 2011.


11/7/2011 Purchased 200 shares at $21.71 (total $4,349)
11/7/2011 Sold 2 Nov 2011 22.50 at $0.24 total ($38.48)

Net Profit:

1) Options Income: $38.48
2) Dividend Income: $0.00 (ex-date is 11/28/2011)
3) Capital Appreciation (if assigned at $22.50): $169.00

Total Net Profit:  $207.48
Absolute Return on investment (purchase price) $207.48/$4,349= 4.78%
Annualized Return if assigned (stock held 12 days):  4.78% * (365/12) = 145.47%
As of the time of this post, the stock closed at $22.31, below the strike price of this option.

Initial Positions Established

Okay, since the transfer from Ameriprise has finally taken place, I moved ahead with the covered call strategy, establishing a total of eight positions, including the GLW and IP that were already in place. I established a 20% cash reserve and invested the remaining funds in shares, as follows:

AA - 400 shares at $10.24
CMCSA - 200 shares at $21.89
COP - 100 shares at $69.81
CSX - 200 shares at $21.71
DIS - 200 shares at $34.55
GE - 200 shares at $16.28, additional 200 shares at 15.99
GLW - 200 shares at $13.60 (actually purschased last month)
IP - 200 shares at $25.29

My goal was to invest no more than 10% in each company, but because I needed to work in round lots, the allocations work out to be more around 12% on average.

In any case, I have sold covered calls on all of these positions - I'll list the initial options below, and then in a future post will discuss those I have adjusted or closed.

AA - 4 Dec 11s netting $124
CMCSA - 2 Nov 22s netting $75
*COP - 1 Nov 70 netting $140
CSX - 2 Nov 22.50s netting $39
*DIS - 2 Nov 36s netting $80
GE - 4 Jan 17.50s netting $137
GLW - 2 Jan 15s netting $110
*IP - 2 Nov 26s netting $196

These positions have subsequently been adjusted.  I will post a follow-up on these transactions.

It is options expiration week, so I have CSX and CMCSA shares sitting under calls, we'll see what happens Friday.

Wednesday, November 9, 2011

Transfer and Trades

The majority of my funds from the Ameriprise account has finally made it over to Scottrade, so at last I could begin to implement my plan to "Rescue My IRA" using a covered call strategy for increased yields and capital gains.  Despite my frustrations with how long the transfer took, I actually enjoyed a small benefit from the delay due to rising markets in early October - I calculate the total starting value of the Scottrade account as about $51K, up from a low of around $43K but far below the starting value at Ameriprise of $77K. 

We've got some work to do here.

In an earlier post I mentioned my screen and the stocks that had been identified by it:

AA, COP, CSX, DIS, GE, GLW, MRK, MSFT.  Yesterday I added two more potentials, CMCSA and PKI.  There's pretty good diversity here, especially from within the framework of a portfolio approach and using a trading plan (yet to be completed, but I will share the documentation here when that it done).

Wanting to get the money working for me as soon as possible, I already have established a number of positions:  COP, CSX, DIS, GE, and GLW, plus IP which is a holdover from the early days of the account before I settled on screening criteria (IP doesn't fit, when the options on it expire I will need to evaluate the position).

I will post over the next few days the analysis and expected results for these positions.  However, the account is not fully invested yet, there is approximately $12K remaining - in addition to the cash reserve that I set at 20%.

Tuesday, November 1, 2011

Qualifying Stocks/Waiting on the Transfer

Scottrade tells me that Ameriprise does all their transfers in a batch, and that is done weekly on Tuesdays.  So hopefully, later today, I will know that the transfer is done; there may be a few days of waiting for the funds to make their way into my Scottrade account.  During all this, I have been keeping busy doing research about what stocks to keep as core holdings to implement the covered call strategy around.

The folks over on Yahoo's "Just Covered Calls" board have been very helpful on this front - it seems that optimally, the investor/trader using this strategy needs to have a routine, and a second pointer was to only pursue stocks you wouldn't mind owning, in case you end up holding when they are not assigned.  I've still got some work to do on developing the routine, but in the meantime, I've developed some ground rules for choosing the initial stocks.

First, I put together a candidate list from some Motley Fool information - they have a lot of material on high-yielding stocks, for example.  Second, I took some cues off of what the other covered call group members are using.  And third, I filled out a list of 30 potentials using a "dogs of the Dow" screen: which of the 30 DJIA stocks are performing worst year to date.

With this list of thirty, I put together a spreadsheet that would further screen them using some basic rules:

  • A four or five star rating from both Morningstar and S&P (surprisingly, this eliminated IP, which I currently hold, and disqualified my ACM, the company I currently work for, where I hold shares!);
  • There must be a dividend, and I am looking for >1%, but optimally 2%-5%;
  • The price at the time of the purchase should be near the midpoint of the 52-week high and low; and
  • The companies must be a significant brand name to ensure longevity and company quality.
Now, I may revise these a bit with experience.  For example, the first rule could be subject to revision once I have more practice reading fundamentals for myself.  The third rule could be revised as well, using a "fair value" calculation (one of the Yahoo board posters has a "fair value" calculation that he uses to set a target price of 80% of fair value) - I used the 52-week midpoint as a surrogate for this to ensure that there was price upside and adequate volatility to ensure a good premium on the calls.

This screen gave me a short list of 8 candidates, as follows:
  • AA
  • COP
  • CSX
  • DIS
  • GE
  • GLW
  • MRK
  • MSFT
Next post I will write about the position rules for my shares.

Tuesday, October 25, 2011

A Third Trade: GLW and JAN 2012 15

A quick post on the third trade I have going on, involving 200 shares of GLW and the January 2015 15 call.

But first, a few notes about this blog:

  • I am still in a steep part of the learning curve, and my research is just beginning to touch on the nature of the risks that the covered call strategy involves. So over the next month or so, I'll probably write up some "Covered Calls 101" posts.
  • As a result of the research, I am finding that I have a generally bullish outlook on the markets.  My trades generally have been designed under the assumption that my contracts will be assigned with a capital gain.  As I learn more about the risks, I may revise how these are reported.
  • Some of the other covered call blogs post much less often than I have or probably will.  RescueMyIRA will fall into its own rhythm, no doubt, but since the options calendar has an inherent cycle, I expect my posts to loosely follow that...there'll be strategy posts, trade results, and monthly results that work around significant dates on the trading calendar.
  • Lastly, one of the bloggers has a trading philosophy and plan - I think that is a good idea, and I plan to develop one.  He has made 12 adjustments to that plan over the 5+ years he's been doing this...I would expect my experience to be similar.
Now for the GLW trade.

I bought 200 shares at $13.60 last week, then sold 2 JAN 2012 15 contracts at .60 each.  There's a dividend with a November ex-date of .075 per share. The calculation of anticipated return is:

Share price (200 shares plus commission):  $2,727
JAN 2012 15 calls (2) premium (net of commission and assignment fee):  $92.50
Dividend (if collected): $15.00
Capital Gain (if assigned):  $273

If I am assigned, the proceeds will range from $300 to $400, a return on the share price of 13.4% or better, mainly dependant on whether I collect the dividend.

If the calls are not assigned, the proceeds are around $125.50 (includes option premium net of commission and dividends), that is a yield of about 4.6% on the share price.  At January expiry I will revisit this scenario to determine next steps.

Onward and upward.

Monday, October 24, 2011

New contract: IP Nov 26 CC

While I am doing some overhead activities on the new plan for rescuing my IRA (I hope to develop a strategy, business plan, and metrics) ...I did go ahead and set up a new trade (I noticed that I posted on this trade earlier, but I've corrected some figures in today's post)...I may even be assigned on it shortly, as this morning the stock is trading above the strike price today...

The company is International Paper, symbol IP.

I bought 200 shares a couple of weeks ago after the COP trade was completed. The share price was $25.29, and my commission was $7.  A dividend of about .26 is planned with an ex-date of Nov 17, during expiration week for November option contracts.  I sold two November 26 covered calls.

My calculations on anticipated return, assuming this stock continues on it's upward trend and I am assigned, is as follows: 

Share price (for 200 shares, including commission):  $5,042.10
Nov 26 call premium (2 contracts, net of commission and assignment fee):  $179.00
Dividend, if collected:  $52.50
Capital Gain, if assigned:  $157.90

If I am assigned on the covered call, my proceeds will range from about $310 to $370, depending on whether I collect the dividend, giving me a return of between 6 and 8% on invested capital for the five weeks on this contract.

If I am not assigned, the proceeds are about $250 (includes the dividend and option premium, net of fees), for a return of 4.59% for the five weeks of this contract term.

One of my colleagues from the Yahoo Covered Calls community has given me an insight on his experience with shares in IP - his strategy is to sell cash secured puts, and he's doing pretty well with them.  That's a strategy I need to look into further, and will, once I've settled on my goals and strategy for the Scottrade account.

Friday, October 21, 2011

Finalizing the Transfer from Ameriprise

Yesterday, I received a letter from Ameriprise advising me that they had not been able to send my old account holdings over to Scottrade.  There were six ETFs in the account and the CUSIP numbers required reinvesting profits and dividends - and apparently these CUSIPs aren't acceptable ("holdable") at Scottrade, so they sent the shares back.

I could have had Scottrade sell them anyway, but that would have involved a broker fee of $50 each - $300 total.  That would have taken a little time and worry to make up, so I had them sent back over to Ameriprise and began trying to navigate how to dispose of them.

Finally, I get this letter, dated 10/13/2011, which says to call them and they will take care of it.  It also says that if I didn't do so within 30 days of the date of the letter, they'd reopen the old account with these shares "subject to applicable fees."

I got on the horn with them this morning.  A very pleasant rep named Jeffrey took my order and arranged for the sale, then called me back to confirm. The funds will settle on 10/24 and I can then roll them over to Scottrade.

The good news is the estimated proceeds from these ETFs are $42K or so.  I'm sure there will be fees.  But if the bulk of that is transferred, when combined with what already came over, it means my starting point is $48K - remember from the first post on this blog, my initial goal will be to rebuild the account to $77K as fast as I can. 

Only $29K to go!

Wednesday, October 19, 2011

Revisiting COP

The stock of my first trade with this account, COP, closed at $69.56 today, a week after I exited when my call option was assigned.  This is one of those situations I will need to get used to with the covered call strategy...if I had stayed long in the shares, I would be up around $500 and looking to collect the dividend on my shares.

As it is I am out of the stock, having taken a nice profit, and not subject to the volatility that might ensue from such a quick run up...

I think the point has to be that the previous transaction was a trade, making money the old fashioned way, buying low and selling higher.  At least, that is what I am going to tell myself with this new approach.

Thursday, October 13, 2011

Account Status, and Next Trade

I spoke with my Scottrade branch manager today, who called to tell me my COP option was assigned...I told him that I knew already, and that I was working on my next trade.  I'll discuss that in a minute, but first let's go to the status of the account transfer from Ameriprise over to Scottrade.

You'll recall from an earlier post that I had intended to close out my account over at Ameriprise in order to improve the account's practivity and get more control over the investments. There was some issue with the transfer, and several of the previous ETFs could not be held in the Scottrade account, so they had to be transferred back to Ameriprise, where they sit in limbo because my old broker cannot "see" my account on his screen. 

Frustrating. No likey. Part of why I moved the account.

Moving on to the next transaction.  I know I have a lot to learn about the covered call process, but I decided to set up a November trade.  I created a screen on Scottrade to get a few candidate stocks - looking for S&P Stars ratings of 4 or 5, and dividend yields in excess of 3%.  This is what I am working with now, I will probably improve this with payout ratios as I learn more.

Another example of what I want to beccome proficient on is the time value of the premiums.  That will come.

For the next trade I decided on IP - International Paper, which was trading around $25.30 per share today.  The stock pays a dividend of $26.25, goes ex- in November during options expiry week.  I bought 200.  Then I sold 2 contracts of the November 26, picking up $196 or so.

If I am assigned on this trade, I will net around $297 for the sale and the options contracts, that's around 5.8% for about a month on this trade. 

If I am not assigned, I will receive about $52.50 in dividends and look at whether I want to take profits or do another covered call.  I'll keep you posted.

COP Assigned - First Trade Complete

Logging into my Scottrade account today, I see that my COP option has been assigned well before the ex-dividend date for the shares.  The market has been rising lately, and it took these shares with it, obviously.

So here's a quick recap on how that covered call trade worked out for me:

Cost (net) of 100 shares of COP:  $6,315.91
Oct 65 call on COP premium (net): $87.74
Price (net) on assigned shares: $6,482.87

So I netted $254.70 off of the first trade with this strategy, which is close to the top of the range I had estimated, which was between $140-260.  That's 4% on the trade.  My money was locked in the stock for about 10 days.

The only downside, I didn't hold the stock through the ex-dividend date, so there's no residual revenue to be made off of this one.  But I didn't expect that to be the case; it's why I didn't include it in the estimate.

Looking for the next one.  Baby steps.  Comments welcome.

Wednesday, October 5, 2011

Money's in Transit, but First Transaction Anyhow

My transfer from the old Ameritrade account has hit a speed bump.  Some of their ETFs are not holdable in the new Scottrade account, so they were sent back and I have to do something to get the CUSIPs changed.  Honestly, I just want out of them at this point.

Meanwhile, three of the ETF holdings did transfer, and I disposed of them quickly this morning (lucky me, they were up $40 from yesterday.  I followed the sales with a simple covered call trade as follows:

Buy 100 sh. Conoco Phillips (COP) @ $63
Sell COP Oct 65 Covered Call at .95

There is a dividend date of record between now and the October expiry, the quarterly amount is .66...my goal was to be able to get this cash too, but it looks like the option expiry is before the dividend ex- date.

If my option is assigned, I will have a capital gain of about $200, an option premium of $95; and costs of around $32.  If it's not assigned, I'll collect the dividend of $66, in addition to the option premium, and costs are only $15; I'll revisit the stock strategy afterwards. 

As it stands today, the transaction will net between $140 and $260 - between three and five percent on the value of this IRA. This is an estimate and wouldn't be bad for the month of October, with the downside being I am locked in the position for a couple of weeks.

Baby steps, though.

Have I got this right?  Covered call strategists are welcome to comment.

Tuesday, October 4, 2011

And so it begins: Rescue My IRA

The year of my birth means that the demographers will group me in with the baby boomers.  I’m really at the tail end of that group, but my arguments fall on deaf ears.
Now that I have passed fifty also, all the talk about retirement – friends of mine who’ve earned pensions from federal, state or local organizations, especially – is starting to make me concerned.  We hear that social security won’t be there, and the date I’m eligible has already been extended once in my lifetime.
I began saving for retirement a long time ago, taking advantage of 401(k) accounts at employers, and when it has been offered, their matching funds.  But those balances have never seemed enough either, especially in light of what’s happening in the markets these days.
A few years ago, I thought it would be a good idea to consolidate some of the old 401(k) accounts from past employers into a single IRA.  The investment advisor I did this with soon left the firm he was part of, but we had managed to get my assets into one account.
I sought recommendations for another broker to work with, and made a change to a new guy who was working with ETFs and had a strategy.  The amount I sent his way was $77,000 or so. 
Since then, the market has tanked and our economy has had a tough go of it.  I even avoided opening the monthly statements I’d get from my broker, although I did open them a couple of times a year. The news wasn’t good.
Finally, last month I opened my statement.  I found that the balance had climbed back from it’s all time low, which was last year, when it hit $44,000.  I decided it was time to take some action, and roll this – now $47,000 – over into an IRA with Scottrade.
This blog will capture my efforts to “Rescue My IRA,” as the title says. 
By the way, I won’t be providing specifics on dollar amounts from now on. I’ve just offered those to emphasize the sense of urgency I’m feeling, as the need to prepare for retirement begins to occupy more and more of my thinking.