Sunday, December 16, 2012

New Position: LNC

In general, I like to get the proceeds of closed out positions reinvested as quickly as possible – and that’s especially the case on the ones I’ve taken hits on, like I did recently with HPQ.  Still, I had been sitting on a little bit of extra cash over and above the 5% reserve balance I usually reserve in the Rescue My IRA account.  I decided I needed to get to work on getting the money back to work as soon as possible.

The one lesson learned I have decided to take away from HPQ is to not compromise on my selection criteria regarding the stock quality.  Here I take advantage of the research that S&P does to qualify a short list of NYSE and NASDAQ shares, by selecting from the list of four- and five-star stocks (HPQ was a three-star, and I have a few other positions that were, which I will begin weeding out). 

One of the reasons I had compromised this rule was I was finding that there didn’t seem to be as many opportunities for covered call positions as I would have liked – I had further qualified my selection criteria by eliminating financials and banks in the aftermath of the financial crisis that the country went through in 2009.  As I began doing screens for a new position, I decided that this was a rule I could relax now, as the economy continues to improve.  

My screen turned up four interesting positions this time, but three of them were in industries I already have acceptable concentrations in, or they were direct competitors to companies I’m already holding – such as DE, while I am holding a CAT position.  LNC was the only company identified that didn’t fall into that category, and since I had a newly opened mind about financial shares, I pulled the trigger.

Here’s the position starting analysis: 



12/13/2012 Bought 300 shares at average share price $25.84 (total $7,753.00)
12/13/2012 Sold 3 LNC Jan 2013 $26.00 for a total of $202.22

Net Profit:

1) Options Income:  = $202.22
2) Dividend Income: Ex-date is January 8, dividend is $0.12 ($36.00)
3) Capital Appreciation if assigned at $26:  $29.89

Total Net Profit if Assigned and dividend collected:  $268.11
Absolute Return on Investment: ($268.11/$7,753.00) = 3.46%
Annualized Return if Assigned (30 days):  3.46%*(365/30) = 42.07%

If the shares are called away on the ex-dividend date, the actual return goes down to 2.99%, but the annualized return is still 36.42%.  We’ll see how it goes.    

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