Dividend Grab: NVS

I was really happy with the annual dividend from my DIS shares back in December.  Then last week a colleague pointed out that stock NVS was due for an annual dividend payment with an ex-date of February 27.  Having enough funds in my reserve to move quickly on a 100 share position, I pulled the trigger on Friday to be sure I would be a shareholder in time for this dividend of $246 – nearly 4.3%. 

It's a hasty trade and there is a little more risk than I usually have taken on with Rescue My IRA positions.  However, I’ll plan to exit these shares as soon as possible, and at a handsome short-term profit,if possible, owing to the dividend.  I have a standing order in to BTC the option once the stock price is adjusted for the ex-dividend, and I will either adjust into a new contract or sell the shares outright after that.  

Analysis follows: 

NVS

2/25/2012 Bought 100 shares at average share price $57.36 (total $5,736.00)
2./25/2012 Sold 1 NVS Mar 2012 $57.50 at $0.30 (total $21.74)


Net Profit:

1) Options Income:  = $21.74
2) Dividend Income: Ex-date is 2/27, $246.00
3) Capital Appreciation if assigned at $57.50:  -$3.11

Total Net Profit if Assigned and dividend collected:  $21.74 + $246 - $3.11 = $264.63
Absolute Return on Investment: ($264.63/$5,736.00) = 4.61%
Annualized Return if Assigned (30 days):  4.61%*(365/30) = 56.13%
Friday's closing price was just barely out of the money.   

CSX: Train keeps a-rollin'

On 2/27/2012, CSX goes ex-dividend.  As I write this, it looks like I will collect a second dividend payment on this position, which I established with two 200 share purchases in November and January.  The basis of the 400 shares is $8,745, so my average price per share is $21.86.  As the ex-date approaches, I decided to look at another roll-out on the shares, keeping the same strike price that I have been targeting now since November:  $22.50. 

Here are the five(!) covered calls contracts I have sold on CSX:

• 22.50 Nov 2011
• 22.50 Dec 2011
• 22.50 Feb 2012
• 22.50 Mar 2012
• 22.50 Apr 2012

Normally, when I see a position I have held this long, I start to question its performance and whether I should keep it in the Rescue My IRA portfolio.  And so this morning I did the analysis…I actually found something to celebrate here, which is why I posted the Aerosmith song above.  The net income from my call contracts on CSX, including the sales to open and the buys to close, is $540.92 – that is an absolute return rate of 6.2%!

Per the Rescue My IRA trading plan, my goal when establishing positions is to plan for a 24% annualized position.  Here we are five months later with a position that is performing against that goal; however, if I extend the position with another roll-out, it will break through to a lower annualized return.  I have to think about that, but I feel comfortable that the position will return at least 12% annualized, and that is what I am really after.  So I think I can roll with it!

Here’s the rest of the story, based on the current April contract, the forecast dividend, and expected stock gains if the stock is called in April.  As always, these calculations are net of commissions and fees in my Scottrade account.

CSX

Total option premiums:  $540.92

Total dividend payments:  $72.00

Total stock gain at $22.50:  $236.74

Total, absolute gain on the position:  $849.66

Total, absolute return percentage ($849.66/$8745.26):  9.72%

Annualized total return percentage (held 150 days):  23.64%

CSX six month chart - the black line is the $22.50 strike price.

Three New Positions: Return trips with DIS and GE, and ITW

With all the proceeds from last week's assignments I had quite a bit of cash that I wanted to get into new positions.  I decided to look at some new positions but couldn't find anything in the sweet spot, at or below the mid-point of the 52-week range.  So I looked to positions that have ex-dividend dates this month or next - settling on dividend capture opportunities with GE and ITW, and after reading several articles about DIS prospects, I decided to take another position with that stock as well.  


Details:

ITW

2/22/2012 Bought 200 shares at average share price $56.37 (total $11,274.00)

2/22/2012 Sold 2 NOC May 2012 57.50 at $1.26 (total $244.49)

Ex-dividend is 3/28/2012 at $0.36 ($72.00)

Net Profit:

1) Options Income:  = $244.49
2) Dividend Income: Ex-date is 3/28 (0.36 per share), $72.00
3) Capital Appreciation if assigned at $57.50:  $208.89

Total Net Profit if Assigned and dividend collected:  $244.49 + $72 + $208.89 = $525.38
Absolute Return on Investment: ($525.38/$11,274.00) = 4.66%
Annualized Return if Assigned (60 days):  4.66%*(365/60) = 28.35%
Yesterday, the date of purchase, ITW's closing price was out of the money (OTM).

GE (3-12 Position)

2/22/2012 Bought 500 shares at average share price $19.40 (total $9,702.00)

2/22/2012 Sold 5 GE Mar 2012 20  at $0.10 (total $41.74)

Ex-dividend is 2/23/2012 at $0.17 ($85.00)

Net Profit:

1) Options Income:  = $41.74
2) Dividend Income: Ex-date is 2/23 (0.17 per share), $85.00
3) Capital Appreciation if assigned at $20.00:  $280.00

Total Net Profit if Assigned and dividend collected:  $41.74 + $85 + $280.00 = $406.74
Absolute Return on Investment: ($406.74/$9,702.00) = 4.19%
Annualized Return if Assigned (30 days):  4.19%*(365/30) = 51.01%
Yesterday, the date of purchase, GE's closing price was out of the money (OTM).

DIS (3-12 Position)

2/22/2012 Bought 200 shares at average share price $41.64 (total $8,327.00)

2/22/2012 Sold 2 DIS Mar 2012 42  at $0.65 (total $122.49)

Net Profit:

1) Options Income:  = $122.49
2) Dividend Income: None, annual dividend
3) Capital Appreciation if assigned at $42.00:  $55.00

Total Net Profit if Assigned:  $122.49 + $0 + $55.00 = $177.49
Absolute Return on Investment: ($177.49/$8,327.00) = 2.13%
Annualized Return if Assigned (30 days):  2.13%*(365/30) = 25.93%
Yesterday, the date of purchase, DIS's closing price was out of the money (OTM).

February 2012 Expiration Results

Well.  February turned out to be a busy month for having stocks called away in the Rescue My IRA account.  The events of this month do serve to underscore what my friends in this community are saying – the market is overbought, and it is getting more and more difficult to find good values.

I’ve got to get to work on finding some new positions, but in the meantime, here are my results from February options expiration.

DRI – 200 Shares, basis $46.02, 46 Feb 2012 assigned

Option Premiums:  $201.48

Dividends Collected:  $86.00

Stock Gain:  ($21.00)

Total:  $266.48

Absolute return 2.90%

Annualized return (45 days) 23.49%

GE – 400 Shares, basis $16.17, 18 Feb 2012 assigned

Option Premiums:  (27.05)

Dividends Collected:  $68.00

Stock Gain:  $712.00

Total:  $753.05

Absolute return 11.64%

Annualized return (90 days) 47.20%

HAS – 200 Shares, basis $33.71, 35 Feb 2012 assigned

Option Premiums:  $60.49

Dividends Collected:  $60.00

Stock Gain:  239.84

Total:  $360.33

Absolute return 5.34%

Annualized return (30 days) 65.02%

HRS – 200 Shares, basis $39.67, 40 Feb 2012 assigned

Option Premiums:  $150.49

Dividends Collected:  $0.00 (called before ex-date)

Stock Gain:  49.32

Total:  $199.81

Absolute return 2.52%

Annualized return (30 days) 30.64%

IP – 200 Shares, basis $31.47, 32 Feb 2012 assigned

Option Premiums:  $104.49

Dividends Collected:  $52.50

Stock Gain:  $88.32

Total:  $245.31

Absolute return 3.90%

Annualized return (30 days) 47.42%

Another Bite of NOC

Knowing that Friday was options expiration for monthlies, and knowing that I had quite a few positions that would be called away, I figured I needed to get a couple of new positions established.  Even though the market is toppy just now, as long as I can find solid positions that pass my screen I will buy; in some cases, it pays to go to the well a second time, so I decided to add another 100 shares of NOC on Friday afternoon.  I also sold another May 62.50 on the new shares.

The new position is summarized as follows:

NOC

2/16/2012 Bought 100 shares at average share price $59.62 (total $5,961.75)

2/17/2012Bought 100 shares at average share price of $60.25 (total $6,024.50)
2/16/2012 Sold 1 NOC May 2012 62.50 at $0.94 (total $94.74)

2/17/2012 Sold 1 NOC May 2012 62.50 at $1.07 (total $106.74)

New share basis is for 200 shares is $59.93 per share

Net Profit:

1) Options Income:  = $201.48
2) Dividend Income: Ex-date is 2/23 (0.50 per share), $100.00
3) Capital Appreciation if assigned at $35:  $496.64

Total Net Profit if Assigned and dividend collected:  $201.48 + $100 + $496.64 = $798.12
Absolute Return on Investment: ($798.12/$11,986.25) = 6.66%
Annualized Return if Assigned (90 days):  6.66%*(365/90) = 27.00%
Yesterday, the date of purchase, NOC's closing price was out of the money (OTM).

As always, if the position is not assigned, I will continue to write covered calls against it until I earn the profit above, at a minimum.

New Position: NOC

After my MSFT position was called away, I had seen the cash balance of my account get above 20 percent again.  I would like to run at a 10 percent balance for a while, even though that will be challenging for the next few weeks – I have no less than five positions likely up for assignment today as the February contracts expire!  In any case, after my screening exercise a few weeks ago I had identified NOC as a candidate; yesterday I pulled the trigger with a 100 share position.

Here are the details:

NOC

2/16/2012 Bought 100 shares at average share price $59.62 (total $5,961.75)
2/16/2012 Sold 1 NOC May 2012 62.50 at $0.94 (total $94.74)


Net Profit:

1) Options Income:  = $94.74
2) Dividend Income: Ex-date is 2/23, $50.00
3) Capital Appreciation if assigned at $35:  $271.14

Total Net Profit if Assigned and dividend collected:  $94.74 + $50 + $271.14 = $415.88
Absolute Return on Investment: ($415.88/$5,961.75) = 6.98%
Annualized Return if Assigned (90 days):  6.98%*(365/90) = 28.29%
Yesterday, the date of purchase, NOC's closing price was out of the money (OTM).

Calling Mr. Softie!

This week has been intensive on the dividend front – there were no less than five Rescue My IRA positions that were scheduled to go ex-dividend this week, so I have been monitoring them for early assignment.  Yesterday, February 14, I received news that my 400 share MSFT position had been assigned.  I’ll have to wait and see on the official date of assignment, since technically if I held the shares yesterday it’s my dividend, but I will go ahead with the assumption that the shares were called away with the intent of the dividend following them to a new owner – after all, at $30.25, they were deep in the money from my 27 Feb 2012 covered call.

No hat trick on MSFT, but here is the record on this position, as usual, net of fees and commissions:

MSFT

Shares:

12/30/2012 Bought 400 shares at an average price of $25.99, total position basis $10,395.00

Sold on assignment 400 shares at $10,782.89, average share price $26.96

Total stock gain:  $387.89

Options:

12/30/2011 STO 27 Feb 2012 total $147.99

Total options income:  $147.99

Dividend:

A dividend of $.20 per share was declared, ex-date of 2/14/2012, but the position was assigned before the dividend was collected.

Net Profit:
1) Stock gains:  $387.89

2) Options income:  $147.99

3) Dividend Income: $0

Total Net Profit after Assignment:  $387.89 + $147.99 + $0 = $535.88
Absolute Return on Investment: ($535.88/$10,395.00) = 5.16%
Annualized Return (45 days):  5.16%*(365/45) = 41.81%

February Deltas and Exes

The date for options expiry this month is February 17.  While I was traveling last week, I talked myself into expecting a fairly complex trading week ahead for the Rescue My IRA portfolio since I had a few positions going ex-dividend this month, including a couple before Friday’s expirations.  While preparing this monthly assignment forecast post, I’ve found the situation not quite as complex as I thought, but I will make a note of the dividend situations in addition to the typical discussion of Deltas.

 

As I mentioned last month, in the book Options for Volatile Markets (linked over there to the right), Lehman and McMillan define delta as “the amount an option is expected to move for a one dollar move in the stock.”  Thus, as the value of delta approaches 1.00 – meaning a one dollar move in the stock will produce an equal move in the option price – you have a pretty good idea that your in-the-money option is going to be exercised.

 

Stocks going ex-dividend play into the probabilities for early assignment also.  You can imagine someone holding an option on a stock that is near-the-money or in-the-money taking a look at a scheduled dividend payout and doing some analysis to determine whether he or she is interested in collecting that dividend.  This becomes a straightforward calculation:  does the amount of the dividend exceed the remaining time value of the option?  In my portfolio, this month there is one definite early call waiting on my MSFT position, which goes ex-dividend on Tuesday, and I expect the stock to be called away Monday. 

Here is a table of the positions with a February option:

Estimated February 2012 Assignment Calculations

Recall that my goal in the Rescue My IRA account is to earn 1 percent per month, based on the December 31, 2011 value of the account.  That’s about $1,300 per month.  The results in the table – both the nominal results and the probability adjusted ones (here I have simply multiplied the option Delta value by the calculated stock gain) – show that I will meet my goals this month, before counting dividends and option premiums. 

Five of the positions are likely to be assigned based on their Deltas of 80%+:  DRI, GE, HAS, HRS, and MSFT. 

Two of the positions, IP and TGT, have already passed their ex-dividend date as of Fridays closing.  This is reflected in their Deltas of 50% - that will be corrected after trading in the options begins again Monday, and should be significantly higher than 50% given current prices. They are trading pretty close to the strike price, so if we have a good week it's likely they will be called away as well.

   

As before, it looks like I will have a substantial cash position to work with during the week after expiration.  I’ve been working on a new screen and have some candidate positions already identified.  But given progress here, it may be time to subscribe to a service that can do this for me…

Tongues will WAG: New Position

I saw a few articles that mentioned WAG as a recommend.  I added it to some stock research I was doing for the Rescue My IRA account, and as it turned out, it passed the screen (I’ll put a post up soon about that). 

After deciding that I could let my cash reserves run at 10 percent, down from 20, I had the capital available for a new position and added WAG (I guess I need a new post on the revisions to the trading plan also).  That made an otherwise dull trip to Dallas (dull because of the dearth of on-the-road recreation, the work down there was engaging!) just a little more interesting. 

I pulled the trigger on WAG because of the looming ex-date on February 15.  I would like another hat trick!  Here are the details:

WAG

2/7/2012 Bought 200 shares at average share price $33.58 (total $6,716.20)
2/7/2012 Sold 2 WAG Apr 2012 35 at $0.96 (total $182.49)


Net Profit:

1) Options Income:  = $182.49
2) Dividend Income: Ex-date is 2/15, $45.00
3) Capital Appreciation if assigned at $35:  $266.62

Total Net Profit if Assigned and dividend collected:  $182.49 + $45 + $266.62 = $494.11
Absolute Return on Investment: ($494.11/$6,716.20) = 7.36%
Annualized Return if Assigned (60 days):  7.36%*(365/60) = 44.76%
Yesterday's closing price was $34.54, so the Apr 35 is currently (just barely) out of the money (OTM).

January 2012 Results

Here’s a recap of trading results for January 2012.  As with previous months, the monthly recap is loosely organized into the following sections:  account status, performance metrics, and a to-do list for the next month.  

When presented as an ROI percentage, the returns for this month (and for the remainder of 2012) are based on the statement valuation of the account at the end of December 2011, which was around $127K.  To keep an element of anonymity to the blog, I generally post balances in rounded numbers – and honestly, it is too much work to calculate any kind of average daily balance and other approaches to valuation, even thought those would be technically correct!  


One thing is consistent; it is my big-ass goal for this money is to generate 12% growth per year in the account that is about $15K per year in monetary terms.

Most of my colleagues in the covered call community are discussing the difficulties with finding good trades in this market, which is being called “toppy.”  We could see an upturn as the economy is apparently improving, but we could also see some stabilizing here, and even short-term declines as the market continues to prepare for the next stage of growth.  The good news is that the covered call strategy is as good as any other approach to investing, given these conditions.

And January turned out to be a good month for the Rescue My IRA account.  Here are the results:

Account Status:
Total Account Value, 1/31/2012 Statement:  $130.168.92
Total Cash Reserve, 11/30/2011 Statement:  $22,635.20
Core Stock Positions (as of 1/31/2012):  ACM (800 shares), COP (100 shares), CSX (200 shares), DRI (200 shares), GE (400 shares), GLW (400 shares), HAS (200 shares), HRS (200 shares), IP (200 shares), MSFT (400 shares),  SPLS (500 shares), TGT (100 shares), T (300 shares)

Performance Metrics:
Option Premiums Collected (net, month of January):  $426
Capital Gains Collected (net, month of December): $1,011
Dividends Collected (recognized on the ex-date): $278
Interest on Cash Reserve (estimated total): NM
Total, Absolute Return:  $1,715
Absolute Return, Percentage Basis:  1.34%
Annualized Return, Percentage Basis:  5.45%

Next Month To-dos:
Five of the current positions go ex-dividend during the month of February, and several of them are likely to be called early on the ex-date:

·          COP, IP, TGT on 2/13

·          MSFT on 2/14

·          CSX, GLW on 2/28

The following covered call contracts expire in February: 

·          CSX 22.5 (x2)

·          DRI 46 (x2)

·          GE 18 (x2)

·          HAS 35 (x2)

·          HRS 40 (x2)

·          IP 32 (x2)

·          MSFT 27 (x4)

A couple of these positions are in the money, and I even added a couple of them as very NTM positions, so I expect to have some capital gains to report next month.  As I did last month, as options expiration approaches I will take a look at Deltas and see what is likely to be called away.

I started developing a new watch list, using the “dividend kings” analysis that many of my colleagues prefer.  I whittled this stock universe down to about 200 stocks and I am completing the research here so I can use a simple Excel sort to preliminarily pick stocks.  I’m probably halfway through the research, but so far, seven stocks are candidates to replace expiring positions, even in this toppy market:  BBY, CPB, K, NOC, SON, UTX, and WAG.  You may refer to my trading plan to see the screening conditions if you are interested.

Consolidated Lessons Learned:
Adjustment to GE:  I took the step of moving up the GE June position to February.  There was a tradeoff, since the option I bought back was ITM and the new on was ITM, but overall, I will still see a gain that totals $750 on this trade, nearly 12%, and annualized to about 47%.  This kind of trade is an exception to my usual approach, but I figured that the position was dead money for three months if I let it ride (although I would probably pick up at least one more dividend payout).  The trade is profitable overall, but I did give up around $200 in call premiums. 

Adjustment to ACM:  I rolled up ACM from a 22.5 to a 25 contract on the same day as I did the GE trade.  That gave me contracts that will be worth an additional $1,000 in stock gains if I am successful with this trade.  As with GE, the tradeoff was to lose my option premiums in exchange for the stock gain, but with ACM, which doesn’t match my investment criteria in Rescue My IRA (no dividends and unrated by one of the two systems I use), I rationalized the trade.  At the moment, this stock is climbing towards the March contract strike, so we’ll see where we end up.