Monthly Results: April 2013

During April, we’ve continued the recent trend of finding new highs in the markets.  There was a period of more or less sideways trading during the middle of the month – that might have gone either way according to what I’m reading, for either a correction of consolidation in preparation for a new upward trend.  It turned out for the latter.

As I wrote at the end of March, it’s reasonable to question whether this is sustainable; I believe we are in a bull market that will last until the next recession, at least.  However, it is typical to see retrenching and consolidation, and even corrections in the near term.  That’s going to make for a good test of the Rescue My IRA strategy and I’m looking forward to it.

There are still a few trading days left in April, but I’m feeling like I probably have done everything that I am going to do this month, and I will go ahead an report my monthly results a few days early.  Rescue My IRA had good revenue from all three sources:  covered call premiums, dividends, and stock gains – and all proceeds are reinvested, as usual for this account. 

A couple of the trading highlights included my selection of TLT as the first ETF covered call in the account, and the assignment of the second lot of ITW. 

I chose TLT, a US Treasuries Index ETF, as my first ETF position, in part because I felt that it would reduce some risk to what is actually going to be a learning experience for me.  This ETF pays a monthly dividend and does not have a lot of price variation, so my plan is simply to roll-out the current call I have in place until the ETF is called away.  I may also add another 100 shares with any proceeds from the May expiration.

On the ITW trade, having those shares assigned this month closed out a 200 share position I held for just about a year.  It was a hat trick and between the call premiums, dividends, and stock gains, I earned about $1,600 on the original basis of $11,274.00.  With half of the position assigned on the December ex-dividend date, I probably did a little better than the absolute yield of 14.14% I calculated – but that meets my goal and I will leave it at that.

In April, Rescue My IRA collected $212 in dividends on three positions.  This is the slow month in the quarterly cycle, so this is a good amount of yield for the account.

Interestingly, I only made seven options trades in April, counting the three new positions I established.  That is the same number that I had in March…I wonder if that is a trend.  I netted $1,034.93 in premiums, just about the same as in March, so for two months running I have hit my benchmark of $1,000 in monthly premiums. 

Here is a summary of the Rescue My IRA statistics for April 2013, as of the 4/26/2013 market close:

Account Status:

·         Total Account Value, 4/26/2013 Market Close:  $142,267.90 (vs. March close of $139,988.24)

·         Total Cash Reserve, 4/26/2013 Market Close:  $8,086.90

·         Core Stock Positions (as of 4/26/2013):   AFL (200 shares), CAT (100 shares), CMI (100 shares), CSCO (500 shares), CSX (500 shares), DOW (300 shares), F (500 shares), GE (500 shares), GLW (700 shares), JPM (300 shares), MSFT (400 shares), SPLS (700 shares), TLT (100 shares)

Performance Metrics:
Option Premiums Collected (net, month of April):  $1,034.93
Capital Gains Collected (net, month of April): $965.67

Dividends Collected (recognized on the ex-date): $212.00
Interest on Cash Reserve (estimated): $0.08
Total, Absolute Return:  $2,212.68
Absolute Return, Percentage Basis:  1.67%
Annualized Return, Percentage Basis:  20.26%

Next Month To-dos:

May is a generous month for dividends, with $425.00 forecast from seven positions:  F, TLT, AFL, CMI, CSX, GLW, and MSFT.  At the time of this writing, F, CSX and GLW are in the money, and it is very likely I will see an early call on the F position on April 30.  For reporting purposes, I will include that in the May results if it happens; CSX and GLW go ex-dividend after the May contracts, so if they are assigned it will be on expiration date (and my dividend haul will be reduced by $133.00).

May is going to be an exciting month for call expirations – I have seven positions with May contracts:  CMI, CSCO, CSX, DOW, F, GLW, and TLT.  As I mentioned above, CSX, F, and GLW are currently in the money, so are DOW and GE.  For TLT, it is trading within $1.00 of my strike price so I could see that one called away, but CMI is well out of the money just now and I will probably look at a roll-out there.

I’m hesitant to say what I will do with those proceeds if everything comes out the way it looks right now.  I have half a mind to add 100 shares to the TLT position – assuming it is not called away, otherwise, I might re-establish it as a 200-share position – and then just sit on cash for the balance of the summer and look for bargains, should we see sideways trading for a consolidation or a correction. 

We’ll just have to see how it plays out.  I am happy with the April results and hope that May is even better.

Ciao for now!

New Position (and First ETF!): TLT

Although I believe we are in the middle of a bullish run that will continue for a while, I can’t help but think we are in for consolidation and possibly a correction during the course of the run.  The cynic in me reminds me that it is occasions like these when the big investors take advantage of the little guys, like me and the Rescue My IRA account. 

I’m pretty happy with most of my positions – as I will post in my monthly update later this week, I have a number of May contracts coming up – but I did find myself a bit heavy on cash last week and decided I would seek out another position.  I’ve been hankering to find an ETF so I could learn a bit more about using them as the basis for covered calls, and I found one that would suit this purpose:  TLT.

Here’s the strategy summary from the Scottrade quote page on TLT:

The investment seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Barclays U.S. 20+ Year Treasury Bond Index (the "underlying index"). The fund generally invests at least 90% of its assets in the bonds of the underlying index and at least 95% of its assets in U.S. government bonds. The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of 20 or more years. As of April 30, 2012, there were 18 issues in the underlying index.

Now, when my May contracts come due, if there are any called away, I may use this ETF to park some of my cash in for the summer, under the “Sell in May and Go Away” rule.  If the shares are not called, I’ll just roll this one monthly, and collect premiums and dividends.

Meanwhile, here’s the analysis of the new position: 

TLT

Transactions

Bought 100 shares at a total of $12,329.00
Sold 1 TLT $124 May 2013 for a net total of $86.00

Net Profit:

1) Options Income:  $86.00
2) Dividend Income (TLT pays monthly dividends): Ex-date is May 1, dividend is $0.25 (estimated): $25.00
3) Capital Appreciation if assigned at $124.00:  $53.89

Total Net Profit if Assigned and dividend collected:  $164.89
Absolute Return on Investment: ($164.89/$12,329.00) = 1.34%
Annualized Return if Assigned (30 days):  1.34%*(365/30) = 16.27%

Two New Positions: F and GE

After the April expirations, I had about $27K ready to reinvest.  I like to get the proceeds of closed out positions reinvested as quickly as possible while maintaining a small cash position, around 5% of the balance of the account.  My sense of things is that if I don’t manage Rescue My IRA this way, with a maximum of my funds working for me all the time, there is a chance that I won’t hit my goal of an annualized return of 12%.

The market continues to scrape along at all time highs right now, adding some risks to making investment decisions in the near-term.  I used my trading plan’s stock selection methodology, and only found two positions to establish with the proceeds:  GE and F.  I’ll carry some extra cash - about $10K - for now, and continue to look for a good stock to put it in.

The F position is similar to the one I wrote about earlier this week, where I established a 500 share position in my conventional trading account.  Like that one, I expect the May 13 covered calls to be assigned on ex-dividend May 1.

Here’s the analysis for the new positions: 

GE

Transactions

Bought 500 shares at average share price $21.62 (total $10,642.00)
Sold 5 GE $22.00 June 2013 for a total of $141.74

Net Profit:

1) Options Income:  = $141.74
2) Dividend Income: Ex-date is June, dividend is $0.19, total of $95.00
3) Capital Appreciation if assigned at $22.00:  $340.89

Total Net Profit if Assigned and dividend collected:  $577.63
Absolute Return on Investment: ($577.63/$10,642.00) = 5.43%
Annualized Return if Assigned (60 days):  5.43%*(365/60) = 33.02%

If the market continues on this run through June, the shares have a good chance of being called away on the ex-dividend date.  In that case, the actual return goes down to 4.54%.

F

Bought 500 shares at average share price $12.94, total $6,472.00
Sold 5 F $13.00 May 2013 for a total of $131.74

Net Profit:

1) Options Income:  = $131.74
2) Dividend Income: Ex-date is 5/1, $50.00
3) Capital Appreciation if assigned at $13:  $10.89

Total Net Profit if Assigned and dividend collected:  $192.63
Absolute Return on Investment: ($192.63/$6,472.00) = 2.98%
Annualized Return if Assigned (30 days):  2.98*(365/30) = 36.21%

If the shares are assigned, I will miss out on the dividend, dropping my absolute return by $50.  The absolute return on a percentage basis would be 2.20% - when annualized, that 10 day holding period works out to a return of 80.44%!

Meanwhile, In My Conventional Account

While this blog is primarily meant to cover my trades in the Rescue My IRA account at Scottrade, I have begun to use the covered call approach on a small conventional account that I have with the brokerage.  I generally use the same investing approach, trading plan – and even stock selection screeners for that purpose.

I recently closed a trade on MSFT in that account, and just established another on F – details of the trades are below.  I need to get with my tax guy now, to make sure that I have all the records I’ll need to do my schedule D.

I structured the F trade around an ex-dividend date of May 1, selling what was a near the money covered call, which has subsequently gone in the money.  However, F has earnings today – so there could be a change in strategy soon enough.

Details below:

MSFT

Position basis:  200 Shares, basis $5,583.00, or $27.92 per share; Apr 28 assigned.

Option Premiums:  $181.48

Dividends Collected:  $46.00

Stock Gain:  -$0.11 (a loss of eleven cents!)

Total:  $227.37

Absolute return 4.07%

Annualized return (90 days) 16.52

F

Position basis:  500 Shares, basis $6,472.00, or $12.94 per share; May 13 calls sold

Option Premiums:  $141.74

Dividends Collected:  $0.00 (ex-date May 1, stock is in the money and I expect early assignment – otherwise I will collect $50.000)

Stock Gain:  $10.89

Total:  $152.63

Absolute return 2.36% (if the stock is not assigned May 1, this estimated return goes up to >3%)

Annualized return (20 days) 43.04%

ITW: Closed out at Last

The ITW position is unusual because of how it ended up rolling out.  I established it as a 200 share purchase in March 2012 – I think I might have made that first trade from a hotel room in Fort Worth, in fact.  The share basis was $56.37, so I started out with $57.50 strikes.

Eventually I made the move to $60 strikes, and during December, half of the shares were called away on the ex-dividend date.  I’ve held the remaining shares since then, and they were finally called away from me on the April expiration last Friday.

I held these long enough to collect a full year’s worth of dividends, a good amount of call premiums, and a handsome gain on the shares – a hat trick.  But calculating an annualized return is quirky because of the way the shares were called.  I calculate the return against the total original basis – on ITW it works out to an annualized 13.24%, which is slightly above my goal of 12%. 

If I were to adjust that for the assignment and reduced basis for the last five months I held the shares, I’d probably come out with 14 or 15%.  That’s not bad, so I’m happy in any case.

Here’s the analysis of the ITW position:

ITW

osition basis:  200 Shares, basis $11,274.00, or $56.37 per share; Apr 60 assigned.

Option Premiums:  $606.86

Dividends Collected:  $296.00

Stock Gain:  $691.72

Total:  $1,594.58

Absolute return 14.14%

Annualized return (390 days) 13.24%

Hat Tricks on MRK and UNH

This was a volatile week in the markets, understandable when you consider the bombing attacks in Boston on the negative side and improving hiring news on the positive side.  At one point, it looked as if some of my April contracts, which were well in the money at the beginning of the week, might end up not getting called away.  As it turned out, all three of the contracts in the Rescue My IRA account were assigned, and the one contract in my conventional account was also – today I will write about two of the contracts and my next post will cover the other two.

All of the assigned positions ended up as hat tricks – meaning I collected call premiums, dividends, and stock gains from them.  My goal is to earn a return of about 12% per year in the account, but the two positions I’ll cover in this post are noteworthy because I only held them for 60 days – and the estimated annualized return on them was 30% or better!  Now I will begin the process of investing the proceeds from these contracts, about $30K in the Rescue My IRA account.

Here’s the analysis of the two hat tricks:

UNH

Position basis:  200 Shares, basis $11,125.00, or $55.63 per share; Apr 57.5 assigned.

Option Premiums:  $196.49

Dividends Collected:  $42.50

Stock Gain:  $357.89

Total:  $596.88

Absolute return 5.37%

Annualized return (60 days) 32.64%

MRK

Position basis:  200 Shares, basis $8,521.00, or $42.61 per share; Apr 44 assigned.

Option Premiums:  $72.49

Dividends Collected:  $86.00

Stock Gain:  $261.89

Total:  $420.38

Absolute return 4.93%

Annualized return (60 days) 30.01%

April Contract Deltas: ITW, MRK, and UNH

Three of the Rescue My IRA covered call contracts have April expirations.  With the market chugging along at record highs this week, all of them are now in the money, so I wanted to take a minute to look at their deltas and see if I could estimate the likelihood of these shares being called away.  

Here are the three positions: 

·          ITW, April 60 contract, yesterday’s close at $62.58, 1.00
·          MRK, April 44 contract, yesterday’s close at $46.84, delta .93
·          UNH, Apr 57.50, yesterday’s close at $62.41, delta 1.00

I like to use the delta as a probability metric as expiration day approaches.  In this case, with all three stocks up more than $2.00 from my strike prices, MRK is still deemed volatile enough that the delta is not 100%.  At 93% there is still a high probability that the stock will be assigned next Friday. Assuming that the contracts will be exercised, all three positions are hat tricks, meaning I’ve collected covered call premiums, dividends, and prospectively a stock gain.  In fact, I stand to record gains of $966 on these shares if there are assigned, making this an exceptional month on that account.  

If the market holds a few more weeks, May will be as good or better – I have six positions with May expirations right now. So we’ll revisit these shares next week after expiration day.  

Until then, happy trading!

Two Adjustments: CAT and SPLS

I rolled out and down the CAT and SPLS positions last week.  This provided about $271 in net covered call premiums, offset by some reductions in stock gains downstream if these positions are called away. 

For CAT, I rolled the 95 May to a 92.5 June – this is still above my basis, so this is still a “hat trick” position.  For SPLS, a position that is getting rather long in the tooth for the Rescue My IRA account, I am close to pulling to plug since it is not meeting my goals.  I rolled the June 15 down to an April 13, and I am honestly indifferent about having those shares called.

Here’s the analysis of the two positions.

CAT

The CAT position consists of 100 shares at a basis of $87.17.  I make money at a 90, 92.50 or 95 strike, and I have held contracts at those prices with these shares since starting the position in August 2012.  If these shares are called away in June, the position will have exceeded my 12% annual return goal on both an absolute and annualized basis.

Total option premiums:  $613.69

Total dividend payments (including the forecast April ex-dividend):  $156.00

Total stock gain at $92.50:  $515.83

Total, absolute gain on the position:  $1,285.52

Total, absolute return percentage ($1,285.52/$8,716.99):  14.75%

Annualized total return percentage (held approx 300 days):  17.94%

SPLS

This is a 700 share position I established in February 2012.  I have used past cash flow to buy a few more shares to average the price basis down; I’m now at $10,288.42 invested with an average price per share of $14.70.  In the interest of not pouring any more good money into the bad, I’m not investing any additional funds here and I am seeking to close out the position soon.

In the recent transaction I rolled my June 15 contracts in and down to April 13.  This is also one of the positions where I chased additional stock gains, trading some option premiums in the meantime…I’d have to say there is a lesson learned on that account, it’s very unlikely that I will take that strategy again. 

At least the position is getting close to breakeven…one more dividend cycle and a couple of covered call premiums would see to that, but I may not have the patience.

Total option premiums:  $458.74

Total dividend payments (counting ex-dates through the contract term):  $336.00

Total stock gain at $13:  -$1205.60

Total, absolute gain on the position:  -$410.86

Total, absolute return percentage:  Negative

Annualized total return percentage (held 365+ days):  Negative