Like many of my generational colleagues, the baby boomers, I've found that my best intentions about saving for retirement aren't always meeting the mark. In 2011, I took some old 401(k) accounts and combined them into a self-directed IRA with Scottrade, and established a strategy of using covered calls to stabilize and enhance my returns. Rescue My IRA chronicles the progress of my IRA rescue using this approach.
Even with the holiday shortened trading week,
there has been a lot of activity in the Rescue My IRA account so far. In fact, yesterday alone, I did four
roll-outs, netting about $400 in cash from the premiums. Because of the holiday and how busy I’ve been
so far, I’ll just list those four symbols today so I can get on with the topic
of this post, the recent unwinding of my TXT position: PSA, INTC, F and FB.
The trading week started out tentatively, but
we’ve ended up setting new highs for three consecutive days. The articles I am reading are evenly split
between their anticipation of a traditionally great month during December and a
looming correction in the range of 10-20%.
Since I can be as wrong as any of the experts, I am going to hold
off on new positions during the month
and let the contracts I have in place take care of themselves – there are still
four December positions, even with the four roll-outs listed above.
One action I did take was to unwind my TXT
position – there was an odd situation with the covered call premium once the
delta reached 1.00, and I decided to close it out to get some cash off the
table. I did this even though TXT will
go ex-dividend early next month. The
dividend is only $2.00; I decided that getting the cash in was more prudent
than waiting to see what the market is going to do this month.
This was the second time I’ve taken a bite of
TXT, it’s an S&P 5 star stock. I
held the previous position for 50 days; it also exceeded my goal of a 12% annualized
return – that time it achieved a 24.83% annualized. Even so, comparing the actual returns between
the two positions, this one did a little better – 3.89% vs. 3.40%.
So here is the record on the TXT position, net
of fees and commissions – it was an excellent performer, once again:
This was a 300 share
position an average price of $29.30, total position basis $8,791.00
Sold on unwind at $9,742.83
income: -$610.03 (due to unwind transaction)
Net Profit: Total Net Profit after
Absolute Return on Investment: ($341.80/$8,791.00) = 3.89%
Annualized Return (75 days): 3.89%*(365/75) = 18.92%
After I post today
about two roll-outs – CAT and FB – I’ll be caught up on the month’s
trading. We’re headed into the holiday
weekend and I’ll be drafting my monthly results to go up over the weekend. Of course the trading week will still have
some opportunities and I will seek them out, posting if there are any more
In the meantime, here’s
the analysis of the CAT and FB positions.
This is a 100 share
position established in August 2012; basis is $8,716.99 or $87.17 per share.
This transaction rolled out to a $85.00 Feb 2014 covered call. I've held the position for more than a year - it's very much a dog of the DOW and just sort of limps along, albeit with an overall positive return on the position.
Total dividend payments
(including dividends through the current contract): $336.00
return percentage (held approx 540 days):
Since I had a good
experience with a short-term trade on FB last month, I decided to try again…even
though I knew lightning probably wouldn’t strike twice. This is a 100 share position with a basis of
$5,186.99 or $51.87 per share.
Total option premiums: $213.21
payments (no dividend on this stock – a rule breaker!): $0.00
We’re in the middle of
a great month here in November 2013 – plenty of new highs getting strung along
so far this week. That’s put most of my
positions, which are all S&P 500 stocks, in the money, or close to it. I used the trading action of the last two
weeks to do some adjustments on the shares that hadn’t made it to that
status: F and IP.
For F, the position is
right at the target of 12% annualized return, the goal for Rescue My IRA
positions, while IP is performing slightly better than that. Here’s the analysis of the two positions.
F is a 500 share
position started in August, bought in two lots, with a basis of $8,616.00 and
average share price of $17.23. I have
been selling covered calls at $17.00, $17.50, and $18.00 on the position.
Once again, I found that I had enough
cash on the sidelines to set up another buy-write covered call position. I used the same criteria for this I have in
S&P 500 Index standing (starts with
500 high-quality companies).
S&P rated four or five stocks
(narrows down to about 200 companies).
Annual dividend of 2 to 5 percent
Ability to develop a position that
yields $100 or more in call premium
By this time, I am down to four or
five symbols that I can balance against other companies already in the portfolio. I then screen for earnings announcements
coming up (avoiding those), and ex-dividend dates in the upcoming quarter. That’s how I ended up at MRK for the new
position last week.
Here’s the analysis, or position plan,
if you will – all values are net of commissions and fee:
Bought 200 shares at
average share price $47.87 (total $9,573.00)
Sold 2 MRK Dec 2013 $48 for a net of $116.48
1) Options Income: = $116.48
2) Dividend Income: Ex-date is in December, dividend is $0.48 ($48.00)
3) Capital Appreciation if assigned at $48.00: $9.89
Total Net Profit if Assigned and dividend collected: $222.37
Absolute Return on Investment: ($222.37/$9,573.00) = 2.32%
Annualized Return if Assigned (30 days): 2.32%*(365/30) = 28.26%
After setting up the new WFC position,
I still had some of the proceeds left from unwinding AFL and PFE earlier this
week, and I wanted to put a good amount of it back to work in the market. I usually do a screen for this purpose, and
while I was working through the list, I found myself distracted and did some
random quotes on shares as they came to mind.
I thought I might check out FB to see where it was trading at; I’ve been
amused by the track of that stock since it was first listed and traded so
poorly the first few months.
Since S&P has FB as a 3-star stock
right now and it doesn’t pay dividends, this company would not normally make it
onto a screen for Rescue My IRA.
However, I found that I could make a decent trade with an in the money
weekly and I pulled the trigger. On an
annualized basis, this will probably be my best ever trade…but since I broke
some of my selection rules, I have to remember the bon mot and not get too
carried away –
“Bulls make money, bears make money,
pigs get slaughtered…”
Here’s the analysis of the FB position.
Bought 100 shares at
average share price $48.97 (total $4,896.99)
Sold 1 FB wk 1 Nov 2013 $48.50 for a net of $288.74
1) Options Income: = $288.74
2) Dividend Income: FB does not pay a dividend
3) Capital Appreciation if assigned at $48.50: -$64.10
Total Net Profit if Assigned and dividend collected: $224.64
Absolute Return on Investment: ($224.64/$4,896.99) = 4.59%
Annualized Return if Assigned (3 days): 4.56%*(365/3) = 558.12%
You read that right –
annualized return would be over 500% if I could duplicate the trade over and
over. LOL – if only!
After unwinding AFL and PFE, I wanted
to get a good share of the proceeds back into the market. With the market hitting new highs a few days
during the week, I was worried about buying at a top; one of my criteria is to
look for an annual dividend yield percentage of from 2 to 5% - for the most
part, this has served as protection from the risk of buying at a price that is
After an initial screen, I had four or
five good choices. I realized that the
sector not currently included in my portfolio was a financial – so I chose WFC
for the new position. The covered call is out of the money at the moment, so I
expect to have a chance of collecting the dividend here.
Here’s the analysis.
Bought 300 shares at
average share price $42.78 (total $12,835.00)
Sold 3 WFC Nov 2013 $43.00 for a net of $130.24
1) Options Income: = $130.24
2) Dividend Income: Ex-date is before November expiration, dividend is $30.00 ($90.00)
3) Capital Appreciation if assigned at $43.00: $47.89
Total Net Profit if Assigned and dividend collected: $268.13
Absolute Return on Investment: ($268.13/$12,835.00) = 2.09%
Annualized Return if Assigned (30 days): 2.09%*(365/30) = 25.42%
Once the delta on one of my covered calls
reaches 1.0, there is a good chance that unwinding it will allow me to capture
most of the profit budgeted for that position and free up the capital to use in
a new one. The only thing to come to
terms with is the tradeoff between the covered call premiums that have been
collected and the additional stock price gains – they offset each other. So this week AFL and PFE reached this
situation, and I took action to close them out.
I’ve already gotten part of the capital back
into the market – a new position with WFC, and then a rule breaker with FB –
but those will be topics of new posts in the next few days.
Meanwhile, the positions earned a 19.24% and 17.86% annualized return, respectively - well above my goal of a 12% annualized return.
Here is the record on the AFL and
PFE positions, net of fees and commissions:
200 shares at an
average price of $51.62, total position basis $10,324.00
Sold on unwind 200
shares at $13,288.76, average share price $66.44
Total options income
(net, includes the unwinding costs): -$1,615.95
Net Profit: Total Net Profit after
Absolute Return on Investment: ($1,523.81/$10,324.00) = 14.76%
Annualized Return (280 days): 14,76%*(365/280) = 19.24%
Bought 400 shares, position
basis $11,031.00, average price $27.56
Sold on unwind 400
shares at $12,272.78
Total options income
(includes unwinding costs): -$636.04
Net Profit: Total Net Profit after
Absolute Return on Investment: ($701.74/$11,031.00) = 6.36%
Annualized Return (130 days): 6.36%*(365/130) = 17.86%