Monthly Results: May 2013

So I thought I would look for some benchmarks to start out my monthly results post.  From Morningstar, I see that the US Market index return year-to-date is 17.49% as of yesterday, 29 May 2013.  The Rescue My IRA YTD return is 7.80% - that’s below the Morningstar benchmark, which I am only having a look at for comparison purposes.  My goal for the account is a 12% annualized return, and so far so good as far as 2013 goes – looks like we’re on track, if not a little ahead.

I am writing this post tonight from the brick terrace at Hawksbill Cabin, my country house in the Luray, VA area.  I’m taking a week-long vacation out here, away from the hustle and bustle of the Washington, DC area, where my wife and I live full-time.  Hot topic of the week is our prospects for retirement – and so that is the backdrop for my monthly results post.

(By the way, I keep a blog about the weekender lifestyle, called Hawksbill Cabin, which you can find in the blog list on the right.  Or click here: www.hawksbillcabin.blogspot.com).

May was another of those months where we saw the market hit some new highs.  I said goodbye to some long-held positions in CSX and GLW, and I took advantage of the market to roll-up a couple of positions, trading accrued options premiums for stock gains that I hope to recognize in the future.

For that reason, the month won’t show up as one of my best in the history of this account, but when I do finally recognize those gains, I can expect some good months. If I were trying to live on the cash flow from this account, which is how I imagine things will work out when I retire, this is a month where I would have to rely on cash reserves to tide me over.   

I am showing negative results in the options premiums section of the account, but I had a decent dividend month, and there were some nice stock gains to boot.  Between those two revenue streams, the account has a .54% return; I would have added another $1,000 or so in option premiums if it weren’t for the roll-ups.  So my monthly 1% goal was in reach – I’ve just postponed recognizing some revenue until the roll-ups are assigned, for stocks MSFT, CSCO, JPM and SPLS.

So, finally, here is a summary of the Rescue My IRA statistics for May 2013, as of the 5/29/2013 market close:

Account Status:

·         Total Account Value, 5/29/2013 Market Close:  $144,085.05 (vs. April close of $142,267.90)

·         Total Cash Reserve, 5/29/2013 Market Close:  $8,000.25

·         Core Stock Positions (as of 5/29/2013):   AFL (200 shares), CAT (100 shares), CMI (100 shares), COP (200 shares), CSCO (500 shares), DVN (200 shares), GE (500 shares), IP (200 shares), JPM (300 shares), MSFT (400 shares), SPLS (700 shares), TLT (100 shares)

Performance Metrics:
Option Premiums Collected (net, month of May):  -$2,281.18
Capital Gains Collected (net, month of May): $249.47

Dividends Collected (recognized on the ex-date): $480.06
Interest on Cash Reserve (estimated): $0.08
Total, Absolute Return:  -$1,551.57
Absolute Return, Percentage Basis:  -1.17%
Annualized Return, Percentage Basis:  -14.21%

Next Month To-dos:

June is a light month for dividends, with only $248.00 forecast from four positions:  TLT, SPLS, GE, and DVN.  At the time of this writing, GE and SPLS are in the money, and since GE is a June contract, it may well be called away early.  That will reduce my dividend haul by nearly $100, but there is a decent stock gain in the position that will offset. 

There are currently just three June contracts:  DVN, GE, and IP.  Only GE is in the money as we begin the month; I have duplicated the IP position in my conventional (non-IRA) Scottrade account. 

Last month I mentioned that I might “sell in May and go away,” and I was worried about that strategy to some extent.  I think there is more room to run in the market just now, at a minimum until the Fed begins aggressively changing its tune.  So I’m staying 95% in until the summer is over…and I am always looking for good bargains.

Ciao until next month!

Three New Positions: COP, DVN, IP

As soon as I have taken a look at the deltas on my expiring positions in a given month, I begin planning for how to reinvest the proceeds from the ones I am likely to have called away.  I try to maintain a small cash position that is around 5% of the balance of the account, because I figure that I will need to manage about 5 to 10% of the value in cash when I am using the funds during retirement, but everything after that needs to get back to work without any downtime.  My sense of things is that if I don’t manage Rescue My IRA this way, there is a chance that I won’t hit my goal of an annualized return of 12%.

With four positions getting called away in May, I had about $35K to get into new positions, and with the market topping out right now, I also had to evaluate where I think things are headed.  Last month, I believed that the motto should be “Sell in May and Go Away,” but now I’ve come around to the thought that the market has broken into new territory and will stay here through the summer, with a chance of a new run up at some point.

I chose three new positions and set them up with the opportunity for small capital gains.  They also all have ex-dividend dates coming up during the course of the contracts.   

Here’s the analysis:  

COP

Transactions

5/20/2013 Bought 200 shares at average share price $64.18 (total $12,835.00)
5/20/2013 Sold 2 COP June 2013 $65.00 for a net of $92.49

Net Profit:

1) Options Income:  = $92.49
2) Dividend Income: Ex-date was May 22, dividend is $0.66 ($132.00)
3) Capital Appreciation if assigned at $65.00:  $147.89

Total Net Profit if Assigned and dividend collected:  $372.38
Absolute Return on Investment: ($372.38/$12,835.00) = 2.90%
Annualized Return if Assigned (30 days):  2.90%*(365/30) = 35.30%

DVN

Transactions

5/21/2013 Bought 200 shares at average share price $60.07 (total $12,014.80)
5/21/2013 Sold 2 DVN June 2013 $60.00 for a net of $292.49

Net Profit:

1) Options Income:  = $292.49
2) Dividend Income: Ex-date is June 12, dividend is $0.22 ($44.00)
3) Capital Appreciation if assigned at $60.00:  -$31.91

Total Net Profit if Assigned and dividend collected:  $304.58
Absolute Return on Investment: ($304.58/$12,014.80) = 2.54%
Annualized Return if Assigned (30 days):  2.54%*(365/30) = 30.84%

IP

Transactions

5/21/2013 Bought 200 shares at average share price $47.93 (total $9,585.00)
5/21/2013 Sold 2 IP June 2013 $48.00 for a net of $220.48

Net Profit:

1) Options Income:  = $220.48
2) Dividend Income: Ex-date was May 22, dividend is $0.30 ($60.00)
3) Capital Appreciation if assigned at $48.00:  -$2.11

Total Net Profit if Assigned and dividend collected:  $278.37
Absolute Return on Investment: ($278.37/$9,585.00) = 2.90%
Annualized Return if Assigned (30 days):  2.90%*(365/30) = 35.33%

Rolling Up MSFT and JPM

Continuing on this trend of rolling up some of my positions, I did two more transactions this week, moving my long-in-the-tooth MSFT position from a $32 strike to a $34 strike, and my JPM position from a $50 to $52.50 strike.  As I mentioned when I posted about the CSCO trade last week, generally roll ups mean that you are trading historic revenue from option premiums for share gains, so you have to have a strategy and commit to the trade. 

With the MSFT trade, I also rolled in an October position to July.  The trade was basically break-even on the call premiums and stock gains, but by shortening the holding period by 90 days, I hope to be able to free up that cash to find a more lucrative investment.  If the position is assigned in July, I’ll show an absolute return of 8.12% - that’s the same as it would be if I’d left the original October contract in place; the annualized return, calculated for comparison, improves from 5.93% to 7.23% - well below my goal of 12% annualized.

With the JPM shares the story is much better.  I completed the trade with the opportunity for a net increase in return, around $150 and a 1% increase in absolute return.

I’ll spare the details of the MSFT trade for now, but here’s the analysis of the JPM position.

JPM

The JPM position consists of 300 shares, bought in a single lot.  My basis is $49.07 per share, and I have been selling $50 strikes, rolling them out more or less monthly.  This transaction rolled up the July $50 to a July $52.50 contract.    

Total option premiums:  -$195.31

Total dividend payments (including the forecast July ex-dividend):  $204.00

Total stock gain at $52.50:  $1,010.89

Total, absolute gain on the position:  $1,019.59

Total, absolute return percentage ($1,019.58/$14,722.00):  6.93% (increase from 5.91%)

Annualized total return percentage (held approx 115 days):  21.98% (increase from 18.76%)

May Expiration Results - 4 Calls Assigned

Expiration Friday came and went, and as expected, I had four positions assigned. The four are listed below, including the absolute return percentage and the length of the holding:

• CSX, 20.15%, 510 days
• DOW, 13.75%, 330 days
• F, 2.98%, 30 days
• GLW, 16.96%, 510 days

Since I posted recently about CSX, F, and GLW at the following links, the only result I plan to update today is DOW.

http://rescuemyira.blogspot.com/2013/05/im-not-married-to-glw-and-csx.html

http://rescuemyira.blogspot.com/2013/05/not-called-early-on-f.html

I’m looking at getting about $35K back into the market now.  At the beginning of the month, I thought I might follow that old rule of selling in May and going away – my portfolio has positions that expire in June and July, and then there are two per month in August, September, and October – all set up for that conservative philosophy. 

But I’ve come back around to the thought that the market might have the strength to continue testing new highs, and it may even continue this year’s growth trend throughout the summer.  So I need to find some solid, diverse, new positions to hold me over.  That hard work will begin immediately.

In the meantime, here is the analysis of the DOW position, the only one of the four assigned stocks I haven’t posted on recently.

DOW

300 shares, basis $9,554.53, per share average $31.85, assigned at $32.00

Option Premiums:  $934.67

Dividends Collected:  $352.00

Stock Gain:  $27.57

Total:  $1,314.14

Absolute return 13.75%

Annualized return (330 days) 15.21%

Rolling Up CSCO

Earlier this month I rolled out the CSCO position, where I had a $21 strike price. It had a bump up almost $2 per share on Thursday, so I started toying with the idea of a roll up.  It continued to climb on Friday, so I rolled up to a $24 strike with a July expiry.

This is an aggressive trade for me – generally roll ups mean that you are trading historic revenue from option premiums for share gains.  You have to be committed to the trade, in other words.  So I slept on this one, and then I ran the numbers and found that I could increase my annualized return from 24 percent to 28 percent – that was good enough for me.

I don't have a rule in my trading plan to guide me on these roll ups.  I have found pulling the trigger on them a little difficult in the past, but I have done okay on these trades for the most part.  So I think I will make a little decision rule I can follow for future opportunities.

Here’s the analysis of the CSCO position’s current situation.

CSCO

The CSCO position consists of 500 shares, bought in a few lots.  My basis is $19.06 per share, and the stock is trading at $24.  I was selling $21 strikes and rolling them out monthly; this transaction rolled up the July $21 to a July $24 contract.    

Total option premiums:  -$928.93

Total dividend payments (including the forecast July ex-dividend):  $252.00

Total stock gain at $24:  $2,450.71

Total, absolute gain on the position:  $1,773.78

Total, absolute return percentage ($1,773.78/$9,532.18):  23.36% (increase from 19.62%)

Annualized total return percentage (held approx 300 days):  28.42% (increase from 23.88%)

I'm Not Married to GLW and CSX

It’s looking very likely that my two longest held positions, GLW and CSX, will be called away this Friday when the May call contracts expire.  Some marriages don't last as long as these holdings have lasted - I bought the shares starting in November 2011.  As expiration day approaches and assignment seems assured, I thought I might republish my last post on them today, originally dated December 26, 2012 (with some slight edits).

The GLW and CSX Positions – 2012 Performance

As I begin to assess how I’ve done as a covered call investor with the Rescue My IRA approach this year, I thought I might start with a pause and reflect on my two long-standing positions:  the 700-share GLW position, and the 500-share CSX positions.  They currently have May 2013 covered calls written on them, and I have held the shares pretty much since the beginning of the account.

As I reported last month, when I adjusted them with the May roll-out, I have earned a 12% annualized return on them – easily verifiable, since I’ve held them for more than a year.  Now, I’d rather that the positions on these shares were a bit closer in, but given the markets ups and downs, sometimes I take what I can get.

We’ll start first with a look at the basis for the shares.

GLW – 700 shares, purchased in several lots at a total cost of $9,241.88, or $13.20 per share

CSX – 500 shares, also purchased in a couple of lots, at a total cost of 10,861.01, or $21.72 per share

Over the course of holding these shares, I have written more than 10 contracts on each of them, as summarized in the table below:

Calculated on their respective bases, the premiums I’ve generated on these shares work out to 15.7% on GLW and 13.6% on CSX.  These holdings have met my goals of a 12% annualized return on the basis of the covered call premiums alone; however, they’ve also returned dividends along the way, since one of my screening criteria is a requirement for a dividend payment.

My goal on dividends is to find shares that pay between 2 and 5% on an annual basis.  For GLW, assuming I hold the shares through the current May contract, I will have received a total of $276.00 in dividends, adding another 3% to the return, for a total of 18.7%.  On CSX, the dividend amounts are $338.00, or 3.1%, making a total of 16.7% on these shares.

The final component of returns in the Rescue My IRA account is capital gains on the shares.  On the GLW side of the ledger, here is where we have a little bit of a problem – at the current strike price of $13 per share I will take a capital loss on the position of about $160.  That will reduce my absolute return to 16.96% - it still averages out to 12.14% annualized for the position over the course of holding it approximately 510 days.

As for CSX, this stock has been a steady performer in this department – I’ve been writing covered calls at a $22.50 strike price since I first bought the shares, a price that will yield a capital gain of just about $371 on the position.  That works out to an absolute return of 20.15%, which annualizes to 14.42% over the 510-day holding period, slightly better than my goal of 12% annualized.

One of the advantages of using a portfolio model, as I do here with the Rescue My IRA account, is that you’ll have a few positions that exceed your goals, some that fall short, and some that perform right on target.  The GLW and CSX positions are examples of positions that have worked out as planned.

Here’s to more positions that perform as reliably as GLW and CSX have for me over the 18 months or so I have held them.

Here's a link to the December post:

 http://rescuemyira.blogspot.com/2012/12/the-glw-and-csx-positions-2012.html

May Contract Deltas: CSX, DOW, F, GLW

Looking at the four May covered call positions that I currently have in the Rescue My IRA account, all four of them seem highly likely to be called away next Friday when the May options expire.  They are far enough in the money, in fact, that they would likely withstand some turbulence. 

Here are the four positions: 

• CSX, May $22.50 contract, Friday’s close at $25.43, delta 1.00
• DOW, May $33 contract, Friday’s close at $34.46, delta 1.00
• F, May $13 contract, Friday’s close at $14.11, delta 1.00
• GLW, May $13 contract, Friday’s close at $15.10, delta 1.00

As I’ve mentioned in past posts, I like to use the delta as a probability metric as expiration day approaches.  In this case, all four of the stocks are significantly up from my strike prices, so I expect most of these shares to be assigned next Friday.

If that happens, I’ll be selling off two of my longest held positions in CSX and GLW – I’ve had each of these for more than a year and a half.  They’ve been solid performers.  Even though I will take a small loss on the share price for GLW, both positions have met my goal of a 12% annualized return.  My absolute return for CSX is 20%, and for GLW, it is 17%.

Even with the small loss on GLW, I stand to recognize $249 in share gains if the stocks are called away, and I will have somewhere around $35K in proceeds to reinvest.  That’s going to be a little bit of a challenge, I think – my sense of things is that the old bon mot, “Sell in May and go away,” should be the rule of thumb for small-time investors like myself this year.   

I’ll revisit these shares next week after expiration day.  Until then, happy trading!

Roll Outs: CSCO and TLT

At the start of the month, I had six positions with May contracts, and with the market bumping along at all time highs, it seemed possible that all six covered calls might be assigned on expiration day.  As it turns out, my CSCO and TLT positions gradually looked less likely based on their deltas, which I use as a surrogate for covered call probability of assignment, so I rolled them out.

Here’s the analysis of the two positions:

CSCO

The CSCO position consists of 500 shares.  My basis is $19.06 per share, and the stock is trading between $20 and $21.  After rolling up in January and February, I have been selling $21.00 strikes and rolling them monthly; this transaction rolled out May options to July. 

Total option premiums:  $287.59

Total dividend payments (including the forecast July ex-dividend):  $252.00

Total stock gain at $21:  $950.71

Total, absolute gain on the position:  $1,490.30

Total, absolute return percentage ($1,490.30/$9,532.18):  19.62%

Annualized total return percentage (held approx 300 days):  23.88%

TLT

As I mentioned when I first established this 100 share position, TLT is my first ETF in the Rescue My Account.  My basis is $12,329.00 and I am selling $124 strikes.  This transaction rolled out the May contract to June. 

It is a US Treasuries fund and appears to be negatively coordinated to the stock market as a whole.  At the moment it is doing a little below my goal of 12% annualized return, but between a monthly dividend payment and rolling out monthly contracts until it is assigned, I think that performance will track my goals pretty closely.

Total option premiums:  $128.49

Total dividend payments (monthly dividends!):  $51.00

Total stock gain at $124.00:  53.89

Total, absolute gain on the position:  $233.38

Total, absolute return percentage ($233.38/$12,329.00):  1.89%

Annualized total return percentage (held 60 days):  11.52%

Not Called Early on F

Despite being in the money by nearly 75 cents, neither of my two 500 share positions in F was called away when they went ex-dividend on May 1 – I established mirrored positions in the Rescue My IRA account and a conventional investment account I have at Scottrade.  At some point, I will be comfortable predicting whether a given position will be called, but so far it is just a random thing to me.  The shares continue to trade above my $13 strike, so they are looking good for assignment on May 18.

This means I will collect the 10 cents per share quarterly dividend, so the return calculations below are revised to reflect that improvement in the positions.  I was satisfied with the predicted results as it was - this extra $50 on each of the two positions is icing on the cake.

F- Rescue My IRA Position

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 was 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%

F- Conventional Position

Bought 500 shares at average share price $12.94, total $6,472.00
Sold 5 F $13.00 May 2013 for a total of $141.74 ($10 more than I recd in Rescue My IRA)

Net Profit:

1) Options Income:  = $141.74
2) Dividend Income: Ex-date was 5/1, $50.00
3) Capital Appreciation if assigned at $13:  $10.89

Total Net Profit if Assigned and dividend collected:  $202.63
Absolute Return on Investment: ($202.63/$6,472.00) = 3.13%
Annualized Return if Assigned (30 days):  3.13*(365/30) = 38.09%