Why 401(k)s Aren't Working

This one is pretty insightful, and offers yet another reason to take charge of managing your own retirement funds.


http://redtape.msnbc.msn.com/_news/2012/06/29/12465334-your-family-is-probably-losing-155k-from-401k-plan-and-why-new-rules-wont-help?lite

New Position: MAS

The proceeds from covered calls and dividends this month and last have been enough to provide the opportunity to add to one position – CSX, as I posted on previously – and to establish a new position in MAS, which I’ll post about here.

Since the amount invested in this 200 share position is relatively small, I decided to try something a couple of the other folks in the covered call community have told me about.  I sold in the money calls, which is even more significant because the stock has an ex-dividend date coming up before the contract expires.  The option is likely to be called early, and in this case it means I may be in and out of the position in a week 

We’ll see how that works out.  In the meantime, here’s the analysis: 

MAS

Transactions

6/26/2012 Bought 200 shares at average share price $12.24 (total $2,447.00)
6/26/2012 Sold 2 MAS JUL 2012 $13.00 at $0.70 (total $130.49)

Net Profit:

1) Options Income:  = $130.49
2) Dividend Income: Ex-date is July 3, dividend is $0.75 ($15.00)
3) Capital Appreciation if assigned at $12.00:  -$65.00

Total Net Profit if Assigned and dividend collected:  $130.49 + $0 - $65.00 = $65.49
Absolute Return on Investment: ($65.49/$2,447.00) = 2.68%
Annualized Return if Assigned (7 days):  2.68%*(365/7) = 139.55%

On the day of purchase, MAS was in the money.   

Three June Highlights: ADM, ITW, and SPLS

It felt like it has been a long time since I sold any shares in the Rescue My IRA account, so I went through my records and found that I did sell shares in May – two special situations, with COP and ACM.  Before that, there were two sales in April – NVS, also a special situation, and T.  That last one, T, was the last time I recorded a stock gain in the account; I guess that is why I’m feeling it’s been a long time.

I won’t rehash the NVS, COP and ACM situations in the post today.  I thought I might take a look at what I have been doing in the meantime to meet my revenue goal in the account: earning 1 percent return or more per month.  

As I mentioned in the last post, I’ve been doing this through dividends and covered call premiums – in trading action this week, I passed $2,000 in call premiums, as a matter of fact.

There are three positions I’ll highlight to show how the premiums have added up to this level of return:  ADM, ITW, and SPLS.  On each of them, I’ve completed two adjustments during June:

• ADM – rolled out June contracts to July, then July contracts to August, netting $292.99 for the month;
• ITW – rolled out June contracts to July, then July contracts to August, netting $181.96 for the month; and
• SPLS – rolled back and down a September position to July, and then rolled out to August, netting $226.96 for the month.

While none of these are bad results, the action is quite a bit different than what I expected I would be doing in the account.  But we are in the summer doldrums, and this week was marked by the second largest down day in the markets for the year so far. 

I’m comforting myself with the thought that by buying shares with the cash I am generating at this point, and keeping most of my lots at a strike with a gain built in, time will take care of me.  There’s likely to be a rally soon, with it being an election year and summer coming along.  Things will get back to normal then.

June 2012 Results Preview

I had an interesting dialog with another member of the covered call community this month and it caused me to take a look at my trading plan a moment, to see how my approach may have evolved from when I first wrote that last fall when I began the Rescue My IRA account.

As I have grown comfortable with the to's and fro's of the market, I've had to come to terms with a few things.  For one, I don't treat my covered call contracts simply as an additional dividend yield on the shares they are based on.

They are separate securities, and as such, there is an opportunity to make a profit with them.  At the end of the day, that is more or less a yield on the stock, but I am finding that I trade them fairly actively once I see the delta moving downward.  I will consider buying the calls to close them out anytime the premium gets to .20, and I will look to roll-out or even roll-down the strike to get a new position that will net at least $100 in premium.

Following this approach, June looks to end up as a good month.  I posted recently about the dividends I stand to collect - $424, equal to just about 3.5% per year.  But I've also been busy on the covered calls side of the account, where I have netted premiums of almost $1,800 for the month.  That's an absolute yield of 1.4%, and 16.5% annually.

On the other hand, this meant I had traded myself out of all of my June contracts, so when expiration day came around today I didn't have anything to keep an eye on.  Instead, I got to thinking about the fact that I currently have contracts expiring in July, August, September, and even October, as follows:

At today's close, only three of the positions ended in the money.  So, maybe the extra time I have here is a good thing, since the market could make a swing back into the black for me.  But for planning purposes, it does give me pause - with so few August and September contracts on the books, how will I maintain my goal of making 1% per month in this account?

Maybe what will happen is I'll roll-out some of those July positions into August and September, so the transaction volume is there.  But even better would be a swing back to the upside, where I start getting the opportunity to pull out some stock gains.

Then again, those months are good quarterly dividend months, and I've been averaging about $400 monthly on those cycles.  So, really, I only need enough transactions to make $800 or so.  We'll have to see when the time comes.

June 2012 Dividends Forecast

I haven't been the most consistent about putting a post up on the topic of dividends.  However, since last month and this month have included ex-dividend dates on every position in the Rescue My IRA portfolio, it is hard to escape the fact that this is a very important component of the strategy in this account.

The table shows the seven current positions in the account that will go ex-dividend and the date that will happen, along with the total dividend expected based on the number of shares.  At the time of this posting, URS has not gone ex-div officially; however, it did close below my covered call strike price today and is no danger of being called away before the ex-date, so I will receive the dividend when it is paid.

For the purpose of calculating returns, I count the dividends in the month they go ex-dividend as long as the shares are not called away from me.  That's a transaction I don't mind, since it usually means that I can record a share gain earlier than expected.  Unfortunately, in the market these days, that isn't likely to happen over the next couple of months.

I do expect things to improve over the course of the next quarter - in August and September when the ex-dividend dates roll around again.

Until then, I'll have to be satisfied with the $424.00 I expect to collect from dividends this month - that is a total return of 0.33% on the account. I've already had a lot of covered call premiums too - but that post will wait until the end of the month.

Adding Shares and Rolling Out CSX

I’ve written a few posts about my CSX position.  I opened the position in November at the very start of the Rescue My IRA account.  That original position was 200 shares, and I subsequently added 200 shares in a second transaction.  Just last week I added 100 more after finding that all the adjustments this month and last had generated enough cash for it.

I’ve sold covered calls on the shares since I’ve held them.  Up until now I’ve only missed one month, as a matter of fact – January, although since my current positions are Aug 22.50, I will miss July as well. That August strike price is the one I have been writing the whole time, since my share basis is $21.72.

Here’s the analysis:

CSX

Transactions

Total covered call premiums prior to current contract:  $647.91
Additional premiums, Aug 22.50 contract:  $355.47

Total covered call premiums:  $1,003.38

Dividends (as of May 2012 ex-dividend date):$120.00

Capital gains if assigned at $22.50: $370.99

Total Net Profit if Assigned in August at $22.50:  $1,003.38 + $120 + $370.99 = $1,494.37
Absolute Return on Investment: ($1,494.37/$10,861.01) = 17.09%
Annualized Return if Assigned (270 days):  17.09%*(365/270) = 23.10%

These shares continue to deliver the kind of yield I am looking for – even without the capital gain at 22.50, my return is in excess of 12% for the 270 day holding period.  My goal is 12% a year, so with CSX, I am slightly ahead of schedule.  As of Friday, the stock was out of the money for these August calls.

More Adjustments: ITW, NOC, and SPLS

Today’s post concludes the one I started yesterday concerning some recent roll-out positions.  I covered the GE, HAL, and WAG shares yesterday so today will be about ITW, NOC and SPLS. 

As I mentioned yesterday, the proceeds from these six roll-outs were enough to add another lot to my CSX position.  I will add a post on that one next week.  

And of course, there are still three weeks left to June – I’m sure I’ll have a few more trades to report by the end of the month.

Here’s the analysis of the three positions.

ITW

The ITW position consists of 200 shares.  My basis is around $56 per share, and the stock is trading near there.  I am selling 57.50 strikes and rolling them monthly. 

Total option premiums:  $554.45

Total dividend payments (including the forecast June ex-dividend):  $144.00

Total stock gain at $57.50:  $208.89

Total, absolute gain on the position:  $907.34

Total, absolute return percentage ($907.34/$11,274.00):  8.05%

Annualized total return percentage (held approx 150 days):  19.58%

NOC

This 200 share position has held its own in the current market.  I was satisfied with the results of my initial analysis, but had a few reservations about making a choice in the defense sector.  Live and learn.

Total option premiums:  $589.79

Total dividend payments (counting May ex-date):  $210.00

Total stock gain at $60.00:  -$3.36

Total, absolute gain on the position:  $796.35

Total, absolute return percentage ($796.35/$11,986.25):  6.64%

Annualized total return percentage (held 120 days):  20.21%

SPLS

I have a 500 share position in SPLS.  It has a four-star rating with S&P, so I thought it was a good opportunity back in February or so when I bought it, and I don’t mind owning it now.  It’s just that I can’t profitably write 17 strikes anymore.  So I’ve decided to compromise that objective and write in-the-money calls against the position while the stock is moving down.  This most recent trade is a 13 July; there is an ex-dividend date coming up in June, so there is a chance of an early call also.

I’ll take a loss if that happens.  But it will also give me $6,500 in cash to go bargain shopping with…

Total option premiums:  $425.11

Total dividend payments (counting June ex-date):  $105.00

Total stock loss at $13.00:  -$1,488.60

Total, absolute gain on the position:  -$958.49

Total, absolute return percentage -$958.49/$7,971.42):  Negative

Annualized total return percentage (held 240 days):  Negative

Three Adjustments: Rolling out GE, HAL, and WAG

With the market continuing its downward trend, I decided I would proceed with the strategy of taking profits on call premiums via the roll-out activities I had begun last week.  I have completed six roll-out transactions since then, generating enough cash flow to add another 100 shares of CSX.  Today, I’ll summarize three of the new roll-outs, I’ll follow-up with another post to show the analysis of the other three very soon – also, I will make a note of the revised CSX position at that time.

With the completion of these roll-outs, I have no June contracts left in the portfolio.  There are six positions set to expire in July, two Augusts, three Septembers, and two Octobers.  For the most part, I have sought to maintain the original strike prices, although I have made exceptions by selling at a lower strike on the GLW, as noted last week, and on SPLS, which I will write about next time.

Here’s the analysis of the three positions.

GE

This is the second time I’ve held a position in GE; this time I have 500 shares, and I’ve been selling calls with a strike price of 20 against them. The current contract has a July expiration.

Total option premiums:  $212.21

Total dividend payments (including the May ex-dividend):  $170.00

Total stock gain at $20.00:  $280.00

Total, absolute gain on the position:  $662.21

Total, absolute return percentage ($662.21/$9,702.00):  6.83%

Annualized total return percentage (held approx 120 days):  20.76%

HAL

This 300 share position has really gotten beaten down in the current market.  My basis is north of $34 and the shares are trading at $28, this meant I’ve gone out to a 35 Oct 2012 contract for a decent call premium.  The upside there is I will likely collect another dividend – it goes ex-dividend in June and likely again in September. 

Even though this one may just miss my 12% annual return target, I’ll sit tight on this long expiration date and see what happens by October.

Total option premiums:  $393.13

Total dividend payments (counting June ex-date):  $18.00

Total stock gain at $35.00:  $182.92

Total, absolute gain on the position:  $594.05

Total, absolute return percentage ($594.05/$10,299.90):  5.77%

Annualized total return percentage (held 200 days):  10.53%

WAG

This is another 300 share position where I’ve gone out to a 35 Oct 2012 contract, although the stock is not quite as beaten down as HAL.  As with those shares, if I hold WAG that long I will collect another dividend – these shares passed an ex-dividend date in May and will have another in August.  WAG is currently forecast to meet my 12% objective. 

Total option premiums:  $531.21

Total dividend payments (counting May ex-date):  $90.00

Total stock gain at $35.00:  $361.02

Total, absolute gain on the position:  $982.23

Total, absolute return percentage ($982.23/$10,121.80):  9.70%

Annualized total return percentage (held 240 days):  14.76%

June Adjustments: ADM and GLW

On June 1, last Friday, I started out the month with two adjustments, rolling out positions on ADM and GLW.  Although current market positions are requiring me to go out into the back months on some of these transactions, I have been able to find new positions that hold my strike prices steady – important, because total returns in Rescue My IRA come from three sources:  stock gains, dividends, and option premiums.

Here’s the analysis.

ADM

I’ve held contracts at a strike of 32 on this 300-share position, doing the BTC for June and STO for July just this last Friday.

Total option premiums:  $345.74

Total dividend payments (May ex-dividend):  $52.50

Total stock gain at $32.00:  $335.94

Total, absolute gain on the position:  $734.18

Total, absolute return percentage ($734.18/$9,246.88):  7.94%

Annualized total return percentage (held approx 90 days):  32.20%

GLW

Friday’s transaction established the sixth contract I have written on this 700-share position.  Currently at a strike price of 13, I have written contracts at 14 in the past.

Total option premiums:  $1,068.16

Total dividend payments:  $97.50

Total stock gain at $13.00:  -$159.88

Total, absolute gain on the position:  $1,005.78

Total, absolute return percentage ($1,005.78/$9,241.88):  10.55%

Annualized total return percentage (held 240 days):  14.71%

If this position is assigned in August, the 14.71% exceeds my goal of achieving a 12% return annually on these investments.  If that contract is not called away, then I stand to collect another dividend payment of $57.50 total, and a premium payment.  In that event, it appears likely that GLW will continue meet my objectives.

May 2012 Results - Hot Wash

(This month's recap is a "hot wash" - not all of the usual data is available so I'm rushing to print with what I have.)

Well, to begin with, I never thought direct management of the Rescue My IRA was going to be easy.  May was a tough month for the account when you measure it strictly on market valuations - "paper" gains and losses. Somewhere along the way I came across an old market bon mot: “Sell in May and go away;” at times, that seemed like it could have been good advice, as the market was in a steady decline for the entire month.

There was a complex bunch of account activities this month.  I decided to clear out the ACM shares, a legacy holding, and the transaction had its pros and cons – a capital loss as I sold below the share basis, but bringing the account fully into compliance with my trading plan on the positive side.  Also, my COP shares spun out a part of the business; that meant a portion of that holding wasn’t in compliance with the trading plan and I had to reconcile it – in the end, I have a small loss overall on that position. 

Meanwhile, May is a month where many holdings passed ex-dividend dates, and I rolled-out a number of the positions, sometimes into August or September, so my income from option premiums remained high and met my goals.  The fact that I now have some September contracts in the portfolio means that for some of my positions I really did sell in May and go away!

On a month-to-month basis the combination of the three return producing activities – share price gains, dividends, and option premiums – shows a net negative return for May.  It’s not as bad as it could have been, and I feel better about the account overall since it’s now wholly in line with the trading plan and diversification is improved. 

I have a feeling, however, that the summer months are going to test my commitment to this strategy.

 Here are the statistics for May 2012:

Account Status:
Total Account Value, 5/31/2012 Statement:  Not Available at the time of this post…but down for the month!
Total Cash Reserve, 6/1/2012 Statement:  $8,251.07
Core Stock Positions (as of 4/30/2012):   ADM (300 shares), CSX (400 shares), DOW (200 shares), GE (500 shares), GLW (700 shares), HAL (300 shares), ITW (200 shares), MSFT (300 shares), NOC (200 shares), SWK (100 shares), SPLS (500 shares), URS (400 shares), WAG (300 shares)

Performance Metrics:
Option Premiums Collected (net, month of May):  $2,092.84
Capital Gains Collected (net, month of April): -$6,917.14

Dividends Collected (recognized on the ex-date): $1,891.46
Interest on Cash Reserve (estimated total): $0.06
Total, Absolute Return:  -$2,932.78
Absolute Return, Percentage Basis:  -2.30%
Annualized Return, Percentage Basis:  -27.96%

Next Month To-dos:
During June, seven positions have forecast ex-dividend dates.  I haven’t done much in terms of figuring which might be close to a share price that would result in an early call, but I don’t think many of them are at risk for that. The total take from dividends will be about $420, or 0.33%, an amount that translates to nearly four percent annually!  That's a second month of good dividend income.  Here’s the ex-date forecast:

·         HAL on 6/4

·         SWK on 6/4

·         URS on 6/13

·         SPLS on 6/21

·         GE on 6/23

·         DOW on 6/27

·         ITW on 6/27

As far as covered call contracts forecast to expire in June go, there are currently only two positions.  These are substantially off of their strike price and neither has a dividend ex-date before the options expire, so I’m likely to either do an adjustment by rolling-out or simply let the current contracts expire.  Here’s the list of June contracts:     

·         NOC 60 (x2)

·         ITW 57.50 (x2)

Consolidated Lessons Learned:

Concentration of capital:  I had held 800 shares of ACM in this account since the inception of Rescue My IRA.  That represented the highest concentration of value in the account, and I had always been concerned about the need to reduce the holding to something closer to the average position, especially since ACM is not a dividend stock and doesn’t meet my trading rules.

I had observed what happens to this company when it reports a bad quarter once before.  Last August the shares tumbled from $28 to around $21 on poor earnings news, but that was before I started the account and my calculated basis was around $25, so I continued to hold. I sold covered calls at a 25 strike on the position after I transferred it into Rescue My IRA.

Although the share price had gotten back to around $24, this month the company took another significant hit in share price after announcing a bad quarter, so I decided to face the music and divest.  The size of the position means I took a hefty loss on the position to do so, but was relieved to quickly have the capital back at work in a stock that met the requirements I’ve set for the account.

Still, you’re not supposed to buy high and sell low (thanks Dennis!) – so I’ll be working hard to make sure this doesn’t happen again!

Watch and understand the news:  The second position worth noting as a “learning experience” was what happened to COP.  I’ve had a good experience with this stock over the last ten years since it pays a steady dividend and reliable earnings that have meant share price gains. 

The company undertook some strategic “financial engineering” with some of its assets this year, and I didn’t fully understand the impact that would have in the price of the shares.  I received shares from the spinoff of these assets – I recognized this as a dividend payment – and the price of the original COP holding was adjusted downward.  The option I had on the position was adjusted to be for original COP and the spinoff PSX, which would not pay dividends in the future.

So I closed out the option, and after doing some Monte Carlo with the COP position, net of PSX, decided to close it and put it somewhere else.  The transaction resulted in a loss of about $187 on this position, which had a basis of $6,988.  That works out to a 2.7% loss on this position, which I’ve held since November 2011, but because it improves the quality of the portfolio overall, I can take it in stride.

The lesson learned is to watch the news diligently on Rescue My IRA positions, and consider carefully the impact these types of events can have on the shares.  I’ve never been a big fan of financial engineering by any firms, as I feel that this kind of activity masks management failures.  So it’s something I will keep an eye out for in future positions.