2012 Retrospective #1: Some Lessons Learned

As we begin a series of three or four retrospective posts about last year’s trading, I thought I might take a moment to make a note about some recognition for the blog.  As I posted back in August, there was a post on Commodity Traders HQ about the blog, ranking it in the "Top 100" of options trading blogs.  And more recently, the folks at Safe Options, a blog I follow over in the right hand column, recommended Rescue My IRA as a good resource for people interested in trading options.  Here are links to those two sources:

http://commodityhq.com/2012/top-100-options-trading-blogs/

http://www.safe-options-trading-income.com/OptionsTradingBlogs.html

For the balance of this particular retrospective post, I want to take a look back at the “lessons learned” entries that are sometimes included in the monthly recap posts.  In the earliest two or three, I had simply documented some trading practices – especially in cases where I was trading to make a position adjustment.  After the first few of these, I came to the conclusion that these trades should be conducted at a premium whenever possible.

There's also one about the importance of considering portfolio concentration, or the weighting of any particular position - but I have another post in mind for that story, which dealt with ACM shares.  There are two other trades that I will highlight in this post – the “dividend grab” I did for my NVS position and the poorly timed trade on COP, just before the PSX spin-off. 

These are taken from the original posts but edited for brevity here.

NVS Dividend Grab:  I moved hastily to capitalize on the 4% annual dividend for this stock.  In hindsight, it wasn’t a good idea to rush to pull the trigger.  I failed to include the ex-dividend price adjustment for the shares, which was substantial at 4%, and the error meant that the return calculation was wrong and actually below what I’ve set as the goal for Rescue My IRA trades. 

The position was called a month or two after the ex-dividend date.  I’d managed to sell two covered calls on the shares while I held them, and was back to breakeven on the position by the time I had them called away.

Then the dividend was paid – there was one more oversight in the trade.  NVS is a foreign stock, and there was a withholding for home country income taxes taken out of the dividend before it was credited to my account.  This reduced the annual dividend from about 4% to around 2.5% - the dollar value of the taxes was $87.

After all was said and done, I lost about $60 on the trade – about 1% of the investment. 

My lesson learned?  I adopted a new motto for Rescue My IRA after that:  Be not hasty.  It’s pretty much like anything else – if it sounds like there is an easy gain to be had, make sure that you’ve considered everything in the mix before you pull the trigger. It might still work out, but be prepared that it might not.

Watch and understand the news:  The second position worth noting as a “learning experience” was what happened to COP.  This is a stock I’ve held before in another account and had done well with - over the last ten years it paid a steady dividend and had reliable earnings that have meant share price gains. 

However, the company undertook some strategic “financial engineering” with some of assets in 2012, 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 in my return calculations – 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 a quick Monte Carlo analysis with the COP position, net of PSX, decided to close it out and put the proceeds to work with another stock.  The transaction resulted in a loss of about $187 on this position, which had a basis of $6,988 – overall, a 2.7% loss on the position.

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 and defers recognizing them for the mistakes that they are...it’s something I will keep an eye out for in future positions.

I have a couple more posts to follow on the topic of 2012 Retrospective.  Next up is the story of three stocks - ACM, ADM, and HPQ - trades that I took some big hits on this year.