Three New Positions: UNH, MRK, CMI

With four positions called away during February, I’ve had some work to do to develop new covered call opportunities.  After adding 10 shares to AFL, which I had wanted to do since I first established that one, I did a screen for candidates.  I’ve settled on three new positions:  UNH, MRK, and CMI. 

These positions are all rated at the four or five star level by S&P, which is a forecast of a given stock’s performance.  Frequent readers will recall that I had lowered this requirement to three stars for most of 2012 – but I took a bath on three of those selections.  I decided I had added some risk to my approach with the compromise and went back to my original standard – although there are still some three star rated positions left in the portfolio, eventually they will be weeded out and I will be left with better quality among the picks. 

A second approach to reducing risk in my trading was a decision to up the amount of cash I'm holding in reserve to just about $10K.  While that is still less than 10% of the portfolio value, is is in the range of 7.5%, significantly more than the 5% I was reserving. I may revisit this as the year progresses, but with the negligible return I get on the cash returns, it seems better to put the capital to work in stock positions.

Here are the details of the three new positions:

UNH

2/21/2013 Bought 200 shares at a total of $11,125.00, basis $55.63

2/21/2013 Sold 2 UNH 57.50 Apr 2013 at a total of $196.49

Net Profit:

1) Options Income:  $196.49
2) Dividend Income: $42.50 (March ex-date)
3) Capital Appreciation if assigned at $57.50:  $357.89

Net Profit if Assigned and dividend collected:  $196.49 + $42.50 + $357.89 = $596.88
Absolute Return on Investment: ($596.88/$11,125.00) = 5.37%
Annualized Return if Assigned (60 days):  5.37%*(365/60) = 32.64%

MRK

2/21/2013 Bought 200 shares at a total of $8,521, basis $42.61

2/21/2013 Sold 2 MRK 44 Apr 2013 at a total of $72.49

Net Profit:

1) Options Income:  $72.49
2) Dividend Income: $86.00 (March ex-date)
3) Capital Appreciation if assigned at $44:  $261.89

Net Profit if Assigned and dividend collected:  $72.49 + $86.00 + $261.89 = $420.38
Absolute Return on Investment: ($420.38/$8,521.00) = 4.93%
Annualized Return if Assigned (60 days):  4.93%*(365/60) = 30.01%

CMI

2/13/2013 Bought 100 shares at a total of $11,956.00, basis $119.56

2/13/2013 Sold 1 CMI 120 Mar 2013 at a total of $255.74

Net Profit:

1) Options Income:  $255.74
2) Dividend Income: $50 (February 20 ex-date)
3) Capital Appreciation if assigned at $120:  $26.89

Net Profit if Assigned and dividend collected:  $255.74 + $50.00 + $26.89 = $332.63
Absolute Return on Investment: ($332.63/$11,956.00) = 2.78%
Annualized Return if Assigned (30 days):  2.78%*(365/30) = 33.85%

Some February Adjustments: DOW and AFL

It was a busy week in the Rescue My IRA account, so I have a couple of blog posts coming up in the next few days.  Today I will write about two adjustments I recently made, to stocks DOW and AFL, and then early next week I will write about some new positions I established with the proceeds from the three call assignments I had during February 2013.

As a practice, I will consider a roll-out on any position where the call I have established reaches a value of 20 cents per share or less.  Lately, I have had occasion, given the market’s action this year, to do roll-ups – closing out a lower strike and selling a higher strike, but in the two cases today the approach was more typical.

Here’s the analysis of the two positions.

DOW

The DOW position consists of 300 shares.  My basis is $31.85 per share, and the stock is trading slightly below there.  I am selling 33 strikes and rolling them monthly; this transaction rolled out March options to April. 

Total option premiums:  $656.18

Total dividend payments (including the forecast March ex-dividend):  $352.00

Total stock gain at $33:  $327.47

Total, absolute gain on the position:  $1,335.65

Total, absolute return percentage ($1,335.65/$9,554.53):  13.98%

Annualized total return percentage (held approx 300 days):  17.01%

AFL

This is a 200 share position I established in January with a 100 share purchase.  I added another 100 share lot last week, averaging my per share basis down while simultaneously rolling the position out a month.  My current share basis is $51.62, and I am selling 55 strikes – the current contract is August 2013.

Total option premiums:  $246.46

Total dividend payments (counting ex-dates through the contract term):  $175.00

Total stock gain at $55:  658.89

Total, absolute gain on the position:  $1,080.35

Total, absolute return percentage ($1,080.35/$10,324.00):  10.46%

Annualized total return percentage (held 210 days):  18.19%

Called Away on HAL, LNC, and SWK

When I checked on the deltas for my February expiring contracts last week, it looked likely that my positions in SWK, LNC, and HAL would be called away, while the CSCO position was less likely.  As the month played out, that is more or less what happened – I took advantage of a down market Thursday and closed the CSCO Feb 21, rolling out to an Apr 21, at a profit of just over $200.  Meanwhile the other positions were called away.

All three of the assigned positions ended up as hat tricks – meaning I collected call premiums, dividends, and stock gains from them.  On HAL, I didn’t quite earn the annualized return of 12% that I have set as a goal, but I did much better than that on the LNC position after only holding it for about 60 days, and then SWK also delivered.  Now I will begin the process of investing the proceeds from these three – about $27K in capital ready to go back to market.

In the case of HAL, the stock continues to have a 3-star rating from S&P – I have decided to upgrade my portfolio to include only 4- and 5-star stocks.  During February I culled two of those positions between HAL and WAG, there aren’t many left but I will continue to work on this going forward.

Here’s the analysis of the three positions:

HAL

Position basis:  300 Shares, basis $10,299.90, or $34.33 per share; Feb 35 assigned.

Option Premiums:  $643.08

Dividends Collected:  $81.00

Stock Gain:  $182.92

Total:  $907.00

Absolute return 8.81%

Annualized return (300 days) 10.71%

LNC

Position basis:  400 Shares, basis $10,346.80, or $25.87per share; Feb 26 assigned.

Option Premiums:  $398.93

Dividends Collected:  $48.00

Stock Gain:  $36.09

Total:  $483.02

Absolute return 6.23%

Annualized return (60 days) 37.90%

SWK

Position basis:  100 Shares, basis $7,291.50, $or $72.92 per share; Feb 75 assigned.

Option Premiums:  $679.20

Dividends Collected:  $139.00

Stock Gain:  $191.32

Total:  $1,009.52

Absolute return 13.85%

Annualized return (300 days) 16.84%

WAG: Taking Some Money Off the Table

Last year during the intensive travel schedule I had, I distinctly remember the day in Dallas when I established the 300 share position on WAG.  It seemed a lucrative opportunity, and now, just a bit longer than a year since then, it turns out it was.  While the stock price had its ups and downs, from managing this position in particular I learned quite a bit about this covered call adventure I’ve embarked upon.

The shares were called away yesterday on the ex-dividend date; I earned a 15.65% absolute yield on the stock.  In my final transaction, I bought to close a July 40 call and sold to open a February 38; doing this on the ex-dividend date ensured that the transaction would happen.  Also, that puts WAG into the hat trick category, having secured income on all three accounts – call premiums, dividends, and stock gains.

That exceeds my goal of earning a 12% return on these investments, so I’m satisfied with the results.  Also, since the shares are one of the S&P 3 star stocks I still have in the portfolio, I needed to divest them to better align my program with my trading plan.

A last note – WAG is one of a few positions that I rolled up to chase a higher strike price.  As I’ve come to understand this process, this is where one trades option premiums for stock gains.  It worked in this case, but I need more data to evaluate the strategy.  I have a couple more of those positions, and should be able to draw some conclusions soon.

Here’s the analysis:

WAG

Shares:

February – March 2012:  Bought 300 shares at an average price of $33.74, total position basis $10,121.80

2/13/2013 Sold on assignment 300 shares at $11,382.82, average share price $37.94

Total stock gain:  $1,261.02

Options:

Total options premiums:  $45.62 (as I mentioned above, I chased the stock gain here, exchanging options premiums for a good return on the stock price)

Dividend:

During the year plus I held the position, I collected a total of $277.50 in dividends

Net Profit:
1) Stock gains:  $1,261.02

2) Options income:  $45.62

3) Dividend Income: $277.50

Total Net Profit after Assignment:  $1,261.02 + $45.62 + $277.50 = $1,584.14
Absolute Return on Investment: ($1,584.14/$10,121.80) = 15.65%
Annualized Return: not calculated, the average holding period for the two lots was almost exactly one year, so we’ll call it 15.65%

The Deltas on My February Contracts

I’ve written about it before – delta – the option Greek that provides insight on the potential change in the option price based on volatility of the underlying stock.  More sophisticated traders than I am use it as part of their trade calculations, especially those who work on the put side of the charts.  It enters the calculations a little less often on the call side, which is most of the trades I do.

The actually meaning of the statistic is that in the case of delta valued at 1.00, a $1 move in the stock price will result in a $1.00 move in the price of the option.  These high values are most often seen when an option is in the money – the stock price is trading above the option strike price.   By the way, for puts, the delta moves inversely to the stock price (i.e., when the stock price goes up, the value of the put decreases).

As my experience in trading options grows, I may come to terms with delta and the other Greeks beyond my very rudimentary understanding of them so far.   One insight I have found with delta is it is useful to predict the likelihood of a stock being called away at expiration day (or at ex-dividend date, if that occurs within the month of expiration).  The higher the delta is, as it approaches or equals 1.00, the more likely the stock is to be called.

Since this month is where all of my money is on the table in Rescue My IRA, I don’t have a lot to write about on the blog and I thought I might put a post up about the four February contracts I have in play just now:

• CSCO 21 Feb 2013, yesterday close $21.19, delta .54
• HAL 35 Feb 2013, yesterday close $40.31, delta .89
• LNC 26 Feb 2013, yesterday close $29.50, delta 1.00
• SWK 75 Feb 2013, yesterday close $77.31, delta .85

Each of these positions are in the money, some deeper than others.  The high delta values on the HAL, LNC, and SWK options suggest that they are very likely to be called next week on expiration day, while it more of a 50-50 proposition for the CSCO shares. 

One of the takeaways from this review – something I’ll need to look in further sometime – is why the delta for HAL is not 1.00 at this point, given that the shares are in the money for the 35 strike by more than $5.00.  Compare that with LNC in the examples above, the shares are only $3.50 in the money.  To dig into this question, I will probably need to take a look at the stock beta for some insight.

In closing, this analysis shows that it is very likely my calls will be assigned for HAL, LNC, and SWK, and less likely for CSCO.  The result of these trades will be stocks gains totaling $1,460.04 – February will be a very nice month, indeed.

Mini-Options Set to Begin Trading

Mike Scanlin, CEO at Born to Sell (see link below), sent me a note calling attention to the fact that CBOE is going to begin allowing the sale of “mini-options” in March.  There is plenty of background on the internets as to how they came up with this strategy, but essentially, it targets high-priced stocks (over $150/share) and will allow trading on odd lots of 10 shares.

Mike’s post highlights the fact that there 22 S&P 500 stocks trading at prices of over $150 per share – AAPL, AMZN, AZO, BIIB, BLK, CF, CMG, CRM, FLS, GOOG, GWW, IBM, ISRG, MA, NFLX, PCLN, PCP, PSA, RL, SHW, SPG, and V.  However, it looks like only five of them will have mini options contracts available when this trading starts on March 18:  AAPL, AMZN, GLD, GOOG, and SPG. 

Because my trading plan limits me to choosing stocks rated as 4 or 5 stars by S&P, of these five, I could add AAPL or SPG to my portfolio – and I will look into it!  From that broader list, if the contracts were available, I could also choose BLK, FLS, GWW, IBM, PCP, and PSA.  So there is some promise here for the Rescue My IRA portfolio!

My next step will be to check in with Scottrade to make sure that mini-options will be offered in my accounts there. 

Here is a link to Mike’s Born to Sell blog post on the topic:  https://www.borntosell.com/covered-call-blog/mini-options

January 2013 Results

As I write my monthly report for January 2013, it appears to me that we are finally turning the corner in the economy.  There has been steady – albeit slow – improvement over the last three or four years, but it appears that the market has finally embraced the turnaround, and that has meant good news for investors.  There is a bit of a dark cloud due to the potential for sequestration and how that lopsided approach to Congressional budgeting may impact the economy, but it would be nice to see a run for the next six months to a year, wouldn’t it?

 

January was yet another month I learned something about using the covered call approach that I have adopted for the Rescue My IRA account. Because of the rally that took place early, I was able to roll-out quite a few of my positions, and in some cases, I also rolled them up to higher strike prices.  Since there was an impact to my cash flow, I evaluated each of these trades to consider whether the cost for the “buy to close” transaction was less than the total of the “sell to open” premium and the opportunity for a stock gain I was adding. 

If I were to sum it up, using that formula, my costs were approximately $800, while the net of the stock gains is around $4,500.  I don’t like the short term negative cash flow that resulted very much, but if everything comes out as planned, these will be nice gains.  Since there is no guarantee of that, I’m just going to have to watch the action and manage my trading while the scenarios play out. 

I completed these trades at the risk of chasing the stock price up – and that gives some perspective, since I’ve chased stock prices down before.  If a trade felt stretched in this regard, I didn’t sell the call, and there is only about $500 in the potential gains that I would categorize as a chase.  In another case, when I first acquired shares, the breakeven was at the new strike price – was it a chase to sell calls at a lower strike at the interim? 

I’ll consider the experience a lesson for managing the account – there are always improvements that can be made and some of them will make their way into my trading plan.  Fortunately, in any case, my account value continues to rise despite the mistakes and hard knocks of all of this. 

All in all, January was a light month for dividends – the ones I recognized are a few that got away from me in December, shares where the companies declared out of cycle due to tax implications.  That accounts for $156.00 of the cash flow this month.

The January rally has been good for the Rescue My IRA account – the account value grew to $138,735 this month, an increase of nearly $6,000 over the December 31, 2012 statement value.  For now, these are paper gains until the shares are called, but I have to say that I feel like we’re finally moving in the right direction.

Finally, here are the statistics for January 2013, as of the market close on 1/31/2013:

Account Status:

·         Total Account Value, 1/31/2013 Market Close:  $138,735.11 (vs. December close of $132,850.69)

·         Total Cash Reserve, 1/31/2013 Market Close:  $6,641.11

·         Core Stock Positions (as of 1/31/2013):   AFL (100 shares), CAT (100 shares), CSCO (500 shares), CSX (500 shares), DOW (300 shares), GLW (700 shares), HAL (300 shares), ITW (100 shares), LNC(400 shares), MSFT (300 shares), SWK (100 shares), SPLS (700 shares), URS (400 shares), WAG (300 shares)

Performance Metrics:
Option Premiums Collected (net, month of October):  -$805.66
Capital Gains Collected (net, month of October): $0.00

Dividends Collected (recognized on the ex-date): $156.00
Interest on Cash Reserve (total): $0.08
Total, Absolute Return:  -$649.58
Absolute Return, Percentage Basis:  Negative
Annualized Return, Percentage Basis:  Negative

Next Month To-dos:

February will be a pretty good month for dividends; I can forecast about $320 in total payments due to ex-dates coming up for AFL, CSX, GLW, MSFT, and WAG. 

There are four positions with options coming up in February:  CSCO (500 shares at $21), HAL (300 shares at $35), LNC (400 shares at $26), and SWK (100 shares at $75).  At the time of this writing, only the CSCO position is out of the money, and just barely, so – so February has the potential for being a good month for stock gains.  If all, or most, of the calls are assigned, there will also be a lot of new positions to write about – and income from new call premiums.

We’ll see how it goes.  If I figure out how to think about roll-ups and roll-downs more coherently, I’ll post that here.

Until then, bueno suerte, amigos!