2012 Retrospective #3: Top Five Trades, part 1

For the final of these year-end retrospective posts, I thought I might take another look at a few trades that went well last year.  I highlighted some very painful experiences in the last few posts, so I figure we might as well close out with a couple of good results.  So here are five trades – let’s call them the Top Five Trades – of 2012, which I will summarize over the course of my next two posts.

Called Away Early and a Roll-out:  ITW

Even though the first couple of weeks of December were soured by the end of the HPQ debacle, there were two other positions that had the potential of being called away on their ex-dividend dates.  In the case of ITW, which started the month in-the-money at a $60 strike price, I listed it as a likely assignment in my monthly forecast.

As it turned out, 100 shares of the 200 share position were called away on the ex-date.  As the share price was adjusted and then dropped after the dividend calculation, I closed out the remaining December option and rolled the remaining 100 shares out to January.  Although the situation means I’m paying for a second sell commission when that time comes, I’ve been able to add to my returns to compensate for that, adding about $50 net on call premiums and $38 in dividends.

As the market rose during the first week of January 2013, I closed the January $60 option and rolled to a February $62.50 – and the stock is still in the money.  The results I’m showing below include the new contract.  Assuming the shares are assigned in February, ITW will be a triple play, netting a total of $1,679.15 in call premiums, dividends, and share gains – and my return meets the goal of earning a 12 percent annualized return on invested capital.

Here is the analysis:

Shares:

March 2012 Bought 200 shares at an average price of $56.37, total position basis $11,274.00

12/14/2012 Sold on assignment 100 shares at $5,982.89, share price $59.83.  I rolled out the remaining shares and have a February $62.50 in place on them. 

Total estimated stock gain:  $941.78

Options:

Total options income:  $475.37

Dividend:

Total dividends collected:  $262.00

Net Profit:
Total Net Profit after Assignment:  $1,679.15
Absolute Return on Investment: ($1,675.15/$11,274.00) = 14.89%
Annualized Return (330 days):  14.89%*(365/390) = 13.94%

Called Early on CAT Jan 2012

During 2012, I held positions in CAT a couple of times.  The trade I made in January 2012 bears mentioning as a Top Five Trade because it was a short turn around trade, designed around an approaching ex-dividend date – that’s not an approach that works every time, but when it does, it’s rewarding and a lot of fun.  This CAT trade is one of two trades of this type I’ll feature here.

I actually bought the CAT shares on December 29, 2011, looking forward to a January 18, 2012 ex-dividend date – a potential holding period of 22 days.  During that period, the stock price ran up over $100 per share, easily blowing past the $92.50 strike I had sold my covered call at, a price where I could record a generous gain since my basis was $89.53.  I didn’t get the dividend of course, so the trade isn’t a triple play, but all in all I’d say things worked out great – and I far exceeded my goal of a 12 percent annualized return.

Here’s an analysis of the results – net of commissions.

12/29/2011 Bought 100 shares at $89.53 (total $8,953)

12/29/2011 Sold to open 1 CAT 92.50 Jan 2012at $1.60 (total $151.74)

1/18/2012 Assigned on 100 shares at $92.50 (net $9,232.82)

Net Profit:

1) Options Income:  $151.74

2) Dividend Income: None, assigned on ex-date
3) Capital Appreciation: $9,232.82-$8,953 = $279.82

Total Net Profit after Assignment:  $279.82 + $151.74 = $431.56
Absolute Return on Investment: ($431.56/$8,953) = 4.71%
Annualized Return (22 days):  4.71%*(365/22) = 78.14%

In the Money Dividend Trade with MAS

The MAS position I held in July 2012 was another trade designed for the short term around an approaching ex-dividend date.  Even though it was in the money on its ex-dividend date, the shares weren’t assigned – that’s point of interest number one.  Point of interest number two was the fact that this small position (200 shares) was established with covered call premiums and dividends I had collected over the course of my June 2012 trades.

If the shares had been called early, I would have held them only a week – and my annualized return would have been among the highest I’ve realized so far in the Rescue My IRA account, even though the cash value of that return is pretty small.  In the end, my absolute return increased with the dividend payment, but the annualized return went down, since I held the shares three times longer than how I had designed the trade.

Here’s the analysis:  

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 $12.00 at $0.70 (total $130.49)

7/3/2012 MAS went ex-dividend, not called away ($15.00)

The shares were assigned on the July expiration.

Net Profit:

1) Options Income:  = $130.49
2) Dividend Income: Ex-date was July 3, dividend was $0.75/share ($15.00 total)
3) Capital Appreciation when assigned at $12.00:  -$65.00

Total Net Profit when assigned and with dividend collected:  $130.49 + $15.00 - $65.00 = $80.49
Absolute Return on Investment: ($80.49/$2,447.00) = 3.29%
Annualized Return when Assigned (20 days):  3.29%*(365/20) = 60.03%