March 2013 Results - a Few Days Early

For much of the month of March the stock markets have been bouncing around at near record levels.  Finally, on the 28^th – the last trading day of the month and quarter, the S&P closed at a new high, above levels that haven’t been seen since 2007.  That’s saying something.

We’ll have to watch and see if this is sustainable; I suppose it would be typical to see some retrenching here and consolidation, after which we’ll see what direction the market will head.  Is the economy at a place where we anticipate continued growth, or have we reached the end of this much too slow expansion?  I’m going to continue trading covered calls with my trading plan in any case – it lessens my downside risk and seems to be meeting my goals for the Rescue My IRA account.

Since the markets are closed for the month now, I will go ahead an report my monthly results a few days earlier than normal.  Like February, March was a steady month, with revenues coming from all three sources:  covered call premiums, dividends, and stock gains. 

My URS covered call position was assigned in two transactions, resulting in a stock gain of $138.64.  Inexplicably, half of the 400 share position was claimed on the stock’s ex-dividend date and the other half a few weeks later, meaning I had to pay two commissions on the transactions.  Of course, the shares were solidly in the money the whole time, which made this outcome even more perplexing – but hey, I’ll take those dividends on the 200 shares that weren’t called away, and they more than make up for the commission on the extra trade! 

In February, Rescue My IRA collected $287 in dividends on five positions.  March was an even better month with six positions going ex-dividend, including the URS shares discussed above.  All totaled, I collected $379.50 in March. 

At the beginning of March, I didn’t expect to do a whole lot of trading in options.  I only ended up making seven trades, which is probably a lighter schedule than normal, but I ended up netting about $1,040 in premiums.  It’s a kind of benchmark for me to hope for the opportunity to collect $1,000 from premiums in any given month, and so March was a success on this account as well. 

So, finally, here are the Rescue My IRA statistics for March 2013, as of the 3/28/2013 market close:

Account Status:

·         Total Account Value, 3/28/2013 Market Close:  $139,988.24 (vs. February close of $137,194.43)

·         Total Cash Reserve, 3/28/2013 Market Close:  $9,910.74

·         Core Stock Positions (as of 3/28/2013):   AFL (200 shares), CAT (100 shares), CMI (100 shares), CSCO (500 shares), CSX (500 shares), DOW (300 shares), GLW (700 shares), ITW (100 shares), JPM (300 shares), MRK (200 shares), MSFT (400 shares), SPLS (700 shares), UNH (200 shares)

Performance Metrics:
Option Premiums Collected (net, month of March):  $1,038.67
Capital Gains Collected (net, month of March): $138.64

Dividends Collected (recognized on the ex-date): $379.50
Interest on Cash Reserve (estimated): $0.08
Total, Absolute Return:  $1,556.89
Absolute Return, Percentage Basis:  1.17%
Annualized Return, Percentage Basis:  14.26%

Next Month To-dos:

April is a light month for dividends, with $212.00 forecast.  The positions going ex-dividend during April are CAT, CSCO, and JPM – all of which have May covered calls written against them, so there probably won’t be early assignments on them.

Of the seven covered call trades I made during March, several of them were roll-outs of April contracts to May.  As a result, I only have three positions with April contracts, all of which are either in the money or very nearly in the money.  The in the money contracts are ITW with an Apr 60 and MRK with an Apr 44.  The almost in the money contract is UNH with an Apr 57.50. 

These positions were all written with healthy stock gains in mind.  If all of them are assigned during the month, the total gains will be about $945, so between the stock gains and dividends I will have nearly met my goal for the account’s monthly return of one percent.   That would be a good thing.

So, until May, those are the results.  Here’s to another green month!

Rolling Out CSCO

As I was reviewing the 13-odd positions in the Rescue My IRA account over the weekend, I found an opportunity to improve my returns on CSCO with a roll-out from the April 21 to May 21 covered call contract.  It is a standard practice for me to take a look at opportunities whenever the premium on one of my contracts approaches about $.20 per share – that’s when I figure I have extracted the lion’s share of value from the time premium.

In the case of CSCO, this was happening as the stock was approaching an ex-dividend date, which I forecast as April 3.  So, with the stock hovering just out of the money yesterday and the option premium in the mid-20’s, I decided to complete a roll-out in order to see if I could claim the dividend and still maintain the excellent stock return I stand to earn at this strike price.  The adjustment added a net of about $140 to the total returns I’ve had on this position.

Here’s the analysis of the CSCO position.

CSCO

The CSCO position consists of 500 shares.  My average basis is $19.06 per share, and the stock is currently bumping up against $21, the strike price where I am writing monthly covered calls – I rolled my April contracts out to May with this transaction.

Total option premiums:  $194.10 (this is lower than typical because I rolled-up the position earlier this year and traded premiums for the stock gain)

Total dividend payments (including the forecast April ex-dividend):  $182.00

Total stock gain at $21:  $950.71

Total, absolute gain on the position:  $1,326.81

Total, absolute return percentage ($1,326.81/$9,532.18):  17.47%

Annualized total return percentage (held approx 240 days):  26.57%

New Position: JPM

Frequent readers of Rescue My IRA know that I don’t like to have funds sit idle for very long once positions are assigned and there is a cash balance in the account that is much more than a standard 5% reserve.  Once the remainder of the URS position was called away last week, there was about $15,000 to deal with, so I went to work to develop a new trade.

Once again, I used a stock screen from Scottrade to get a few candidate opportunities out on the table.  I use my trading plan for this purpose:  I like S&P 500 shares because they are readily liquid; I choose only S&P four or five star rated stocks – this reduces my universe for selecting shares to less than 100; I look for dividend yields between 2 and 6 percent annually, paid quarterly – this generally eliminates some utility limited partnerships, REITs, and some financial stocks that have higher yields; and I will look for ex-dividend dates in the upcoming quarter.  From the initial list, I further refine the choice by comparing what’s identified here with what I already have in my portfolio, to make sure that I am not concentrating too much capital in a given industry and to eliminate any holding that are already in the account.

This generally will leave me with two or three choices.  From there I have a simple proforma template that I use to estimate the returns of a given trade – I seek a 12% annualized return based on an initial holding period of three months or so.  This time the screen led me to select JPM for my next investment, and I bought 300 shares at $49.07 – the basis of this new position is $14,722.00.

That is the second largest holding I have placed since I started the Rescue My IRA account.  Interestingly enough, the largest position was URS, the position I am replacing.  That’s just a matter of coincidence, I guess, for now.  The positions will begin to get larger over time as the account continues to grow, and I maintain my diversification goal of 12-16 positions.

Here are the details of the new position:

JPM

Bought 300 shares at a total of $14,722.00, share price basis $49.07

Estimated net profit:

1) Sold to open April 50 2013 covered call (x3):  $187.24
2) Dividend Income: $90.00 (April 3 ex-date, so there is the potential of an early call)
3) Capital Appreciation if assigned at $50.00:  $260.89

Total Net Profit if assigned and dividend collected:  $187.24 + $90.00 + $260.89 = $538.13
Absolute Return on Investment: ($538.13/$14,722.00) = 3.66%
Annualized Return if Assigned (25 days):  3.66%*(365/25) = 53.37%

Called Early for the Hat Trick on URS

Earlier this month I wrote about how 200 shares of my URS position had been called away on the ex-dividend date, March 13: I had held a position of 400 shares, and the stock was in the money by more than $5 – and it had remained there ever since.  For the second time during the course of the Rescue My IRA account I had a partial assignment, but that was rectified on Wednesday this week when the remaining 200 shares were called away.  So today’s post will be the close out entry for the URS position, which I held for about 300 days. 

I had purchased the URS shares as a replacement for my legacy holding, ACM.  I had worked at that company and one of the benefits was the ability to purchase shares within your 401(K) – after I was laid off there in 2011 and rolled the account over to Rescue My IRA, I still held 800 shares, which I wrote covered calls against.  For the record, ACM does not meet my stock purchase criteria and I wouldn’t have bought the shares in the first place if it hadn’t been for the extenuating “legacy” circumstance.  Eventually I decided to exit the position, taking the largest loss I ever have had in this account, around $5,000 – or about 25% of the position value.

Still desiring to hold a position in a major construction company, I chose URS, which did meet my selection criteria at the time, and I rolled the ACM proceeds over to a 400 share position.  As the analysis below shows, over the course of the 10 months or so that I held URS, I gained back $1,900 of that loss when the URS shares were called.  

In the end, because I was able to collect a gain on the share price, dividends, and covered call premiums, URS is another hat trick position.  I call that a win for the Rescue My IRA trading plan and a lesson well learned.

Here’s the analysis of the URS position.

URS

Shares:

5/7/2012 Bought 400 shares at $39.55, total position basis $15,827.00 (the largest position to date in this account)

3/2013 Sold on assignment 400 shares at a strike price of $40.00 in two transactions of 200 shares each

Total stock gain:  $138.64

Options:

Total options income (a total of seven contracts):  $1,477.91

Dividend:

Total dividends collected:  $280.00, including dividends on 200 shares from the March 2013 ex-dividend date

Net Profit:
1) Stock gains:  $138.64

2) Options income:  $1,477.91

3) Dividend Income: $280.00

Total Net Profit after Assignment:  $1,896.55
Absolute Return on Investment: ($1,896.55/$15,827.00) = 11.98%
Annualized Return (300 days):  11.98%*(365/300) = 14.58%

Ex-dividend Day After Action (URS, UNH, MRK)

A quick follow-up to my post earlier this week - I noted that I had three positions with ex-dividend dates of 3/13: MRK, UNH, and URS, and was analyzing the prospects of whether I could expect any of the April covered calls I had written on them to be exercised.

I used the delta value for these options as a proxy for the probability of the call being exercised.  In the case of UNH and MRK, a low delta value made it seem unlikely that the shares would be called away, but the 1.00 delta on URS suggested a 100% likelihood that I could expect action on those shares.  I was partially right about this, as it turns out.

First, before I write about URS, let's consider the trading action on MRK over the last few days.  The delta value was low - below .5 - leading up to 3/13, and the position was out of the money.  On 3/12 there was a big move up on the underlying shares and the option moved to an in the money situation - the delta on the option moved to 1.00.  For a moment there was a chance the shares would be called away.

That did not happen in the end - there is still a month of time value left in the April contract and the difference between stock and strike prices was only marginally higher than the dividend amount.  In the end, I'm still holding MRK with a 44 April contract, and I will collect the dividend on the shares.

Moving on to URS - these shares were in the money by more than $5 as of 3/12, and as I noted above and in the previous post, the 40 April call had a delta of 1.00.  If I held those calls, I would have exercised and taken the dividend and the $5.00+ gain on the shares.  So I thought an early call was likely, and as it turned out, two of the four lots I held were called.

I will post either interim or final results on this position the next time I make an adjustment on the covered call, or when the option is assigned.  However, for now, I'm in a pretty good spot with URS:  half of the position has been sold and a small gain on the shares was recorded, and I collected the dividend on the remaining shares, which are still in the money.

Ex-dividend Day and Deltas on MRK, UNH, and URS

I have three positions that will go ex-dividend tomorrow, on March 13:  MRK, UNH, and URS, and each has an April covered call written against it.  I thought I might take a quick look at the deltas on these positions to estimate whether any of them might be called early – a full month early in this case.

The details of the three positions are:

·         MRK, ex-dividend 3/13, April 44 call out of the money

·         UNH, ex-dividend 3/13, April 57.50 call out of the money

·         URS, ex-dividend 3/13, April 40 call in the money

I looked up the Deltas this morning and found that the MRK contract is 48%, the UNH 17%, and the URS is 100%. From this I conclude that the $130 I will collect from MRK and UNH is safe, but the URS dividends, totaling $84, may go to some new owner if the calls are exercised today. 

It still seems a long way out for an early call, but it is reasonable to think that the URS shares could be called away.  I’ll watch carefully and report in my next post.

Rolling out CMI

It does indeed appear that the Rescue My IRA will have a slow trading month during March.  I don’t have any expiring positions to manage – although I have six April contracts, and five positions that will go ex-dividend during March, so there may be some action later.  However, with the market chugging along reaching all-time highs every day this week, the prudent thing is to watch the portfolio and wait. 

Early in the month I did have the opportunity to roll out my CMI position from a March contract to an April contract.  I did not post on that trade yet, so I’ll take a moment to make up for that today.

Here’s the analysis based on the current position: 

CMI

The 100 position consists of 100 shares with a basis of $119.56.  I bought the stock in February, selling a 120 strike and trading with an ex-dividend date bearing down on us.  The position was not called early, so now I have collected the dividend payment, and we’re just out of the money on the April 120. 

Total option premiums:  $400.23

Total dividend payments:  $50.00

Total stock gain at $120:  $26.89

Total, absolute gain on the position:  $477.12

Total, absolute return percentage ($477.12/$11,956.00):  3.99%

Annualized total return percentage (held approx 60 days):  24.28%

February 2013 Monthly Results

Last month I wrote that it seemed the economy has turned the corner; during February, that thought was reinforced, although there were reminders that the recovery is still tenuous and we are likely still several years away from firing on all cylinders.  And the threat of sequestration still hands over our heads, in place now as this post goes up.  I still believe this lopsided approach to Congressional budgeting will impact the economy, but who knows how much. 

For the Rescue My IRA account, February was a steady month where I collected revenues from all three of my typical sources: covered call premiums, dividends, and stock gains.  It was an unusually strong month for stock gains, as a matter of fact, with four covered calls assigned on the HAL, LNC, SWK, and WAG positions and gains totaling almost $1,700 – more than one percent of the account’s total value.

February was a good month for dividends – I collected $287 from this revenue source on five positions.  The WAG call was assigned on the ex-dividend date, so that position was finally closed after nearly a year of holding it – it was a nice hat trick, that one, a good example of what I am trying to do here with every position I establish.

So, finally, here are the Rescue My IRA statistics for February 2013, as of the 2/28/2013 market close:

Account Status:

·         Total Account Value, 2/28/2013 Market Close:  $137,194.43 (vs. January close of $138,735.11)

·         Total Cash Reserve, 2/28/2013 Market Close:  $7,383.93

·         Core Stock Positions (as of 2/28/2013):   AFL (200 shares), CAT (100 shares), CMI (100 shares), CSCO (500 shares), CSX (500 shares), DOW (300 shares), GLW (700 shares), ITW (100 shares), MRK (200 shares), MSFT (300 shares), SPLS (700 shares), UNH (200 shares),URS (400 shares)

Performance Metrics:

• Option Premiums Collected (net, month of February):  $475.88
• Capital Gains Collected (net, month of February): $1,671.35
• Dividends Collected (recognized on the ex-date): $287.00
• Interest on Cash Reserve (total): $0.08
• Total, Absolute Return:  $2,434.31
• Absolute Return, Percentage Basis:  1.83%
• Annualized Return, Percentage Basis:  22.29%

Next Month To-dos:

February will be a pretty good month for dividends; I can forecast about $420 in total payments due to ex-dates coming up for DOW, ITW, MRK, SPLS, UNH, and URS.  All of these shares except SPLS have April contracts on them, and at the time of this writing, two are in the money – so there may be some early assignments out of the lot. 

There is only one March option position, CMI (100 shares at $120).  It is currently out of the money, but has been on a little run for the last week, so we’ll see how it goes.  There isn’t much to report by way of a stock gain at that strike price – less than $30 – but if it is called away I will have a small hat trick there.

Hopefully the market will chug along at these levels and I can just tend to the positions as if they were crops this month.  As March gets started, I can’t forecast much activity otherwise, besides the potential for assignment or rolling the CMI position, and the dividend action.

Until April, that’s the story.