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%