Selection Criteria, and New Positions (TGT and TRV)

The August contract date has come and gone, but I did not have any open covered calls on Friday, since I had unwound a couple of my August positions or rolled them out until September.  It looks like I was lucky on my timing, since the markets took a scare about upcoming Fed action and had a couple of down days in a row.

Meanwhile, I have two new positions to report today, bought with the proceeds of the unwinding I did earlier in the month:  TGT and TRV.  Before I provide the analysis – my position plan for these two, if you will – let me recap my selection criteria.  I’m hoping that these criteria will serve me well in the consolidating market I expect for the next few weeks!

I choose my stocks based on the following:

• S&P 500 Index standing (starts with 500 high-quality companies).
• S&P rated four or five star stocks (narrows down to about 200 companies).
• I look at annual dividend yield next, seeking from between 2 and 5 percent.  This criterion also provides me with a little up-side opportunity and down-side protection in the shares, and adds a cash flow factor to the account.
• Next, I will try to have a price criterion, depending on the funds available in my account.  If I can set up a multiple lot position, I like that, and I also want to keep the bulk of the positions at less than 10% of the account value – but also to be sure that I have between 12 and 16 positions going at any one time for diversification.
• By this time, I am down to ten or fewer symbols, which I balance against other companies already in the portfolio, and screen for earnings announcements coming up (avoiding those), and ex-dividend dates in the upcoming quarter.  These generally break any ties when choosing positions (for example, if I were considering an investment choice between MRK and PFE).

So that’s how I arrived at TGT and TRV.  Here’s the analysis, or position plan, if you will – all values are net of commissions and fee: 

TGT

Transactions

8/13/2013 Bought 100 shares at average share price $70.80 (total $7,079.99)
8/13/2013 Sold 1 TGT Sep 2013 $72.50 for a net of $61.24 (I usually try for $100 net, but I wanted to stay in the next calendar month)

Net Profit:

1) Options Income:  = $61.24
2) Dividend Income: Ex-date is Aug 19, dividend is $0.43 ($43.00)
3) Capital Appreciation if assigned at $72.50:  $152.90

Total Net Profit if Assigned and dividend collected:  $257.64
Absolute Return on Investment: ($257.64/$7,079.99) = 3.64%
Annualized Return if Assigned (30 days):  3.64%*(365/30) = 44.27%

TRV

Transactions

8/9/2013 Bought 100 shares at average share price $82.11 (total $8,210.99)
8/9/2013 Sold 1 TRV Sep 2013 $82.50 for a net of $135.74

Net Profit:

1) Options Income:  = $135.74
2) Dividend Income: Ex-date is Sep 6, dividend is $0.50 ($50.00)
3) Capital Appreciation if assigned at $82.50:  $21.90

Total Net Profit if Assigned and dividend collected:  $207.64
Absolute Return on Investment: ($207.64/$8,210.99) = 2.53%
Annualized Return if Assigned (35 days):  2.53%*(365/35) = 26.37%