Rolling Out KO and PFE

I took advantage of the down days last week to complete a couple of roll-outs on KO and PFE.  Rather than a longer post today, I’ll simply put up the analysis of the positions, net of fees and commissions, and assuming I collect dividends between now and the respective expirations. 

KO

400 share position established in two lots; total basis $12,160.00 and average price of $40.36.  Selling $40 strikes and rolling them on a monthly basis, rolled out to April with this trade.

Total covered call premiums:  $713.41

Total dividend payments (including the forecast February ex-dividend):  $336.00

Total stock gain at $40.00:  -$160.07

Total, absolute gain on the position:  $889.34

Total, absolute return percentage ($889.34/$12,160.00):  7.31%

Annualized total return percentage (held approx 210 days):  12.71%

PFE

300 share position, basis $9,256.00, average price per share is $30.85.

Selling $31.00 strikes, mostly working with weeklies to date, rolled out to April with this trade.

Total covered call premiums:  $233.73

Total dividend payments (February ex-date):  $78.00

Total stock gain at $31.00:  $26.89

Total, absolute gain on the position:  $338.62

Total, absolute return percentage ($338.62/$9,256.00):  3.66%

Annualized total return percentage (held 90 days):  14.84%

Adding on to CRUS

Frequent readers will remember that I have made an exception on my usual criterion of only using S&P 4- or 5-star stocks:  I am currently holding FB and CRUS, both 3-star stocks.  My goal with these two positions is to learn about managing volatility and risk.

On CRUS, I originally took a flyer on a 200-share position – low committed capital – and an S&P 3-star stock with no dividend, where I would normally limit my selections to 4- or 5-star stocks that pay from two to five percent annually.  The day before yesterday, after I established the new GLW position, I decided to add 200-shares and sell the January week 4 $20 on them – so I now have a four-lot position with this stock.

Here’s the analysis of the position, net of fees and commissions - if I took the time to break this down into the two 200 share lots, the return would be pretty exceptional due to the duration of the trades; however, to keep this brief I will report performance as an average of the two lots: 

CRUS

The position now consists of 400 shares, with a total basis of $8,038.00, or $20.10 per share. 

I originally sold January 2014 week 3 $20 strikes, but have rolled that out to week 4.  The position is currently in-the-money.

Total covered call premiums:  $441.95

Total dividend payments (no dividend on CRUS):  $0.00

Total stock gain at $20:  -$55.11

Total, absolute gain on the position:  $386.84

Total, absolute return percentage ($386.84/$8,038.00):  4.81%

Annualized total return percentage (held approx 22 days):  79.85%

New Position: GLW

At the moment, I am keeping about a third of my account value in cash, but I still like the portfolio model to reduce the risk of any single position going bust.  That means I really should have between 12 and 16 positions going at any given time, so the average position value needs to be reduced from where it is currently.  This is a process that will probably take a couple of months to implement.

With the funds from INTC, which had been called away last Saturday, sitting idle, I looked for a new position to get those proceeds back to work in the market.  My screen, as usual, was the following:

• S&P 500 Index standing (starts with 500 high-quality companies).
• S&P rated four or five stars (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, with the objective of setting up a multiple lot position.

Sometimes I will take a look at the Bollinger Bands and will consider trading ranges and trends - but I still haven't incorporated this as a regular part of the selection process.  In any case, by this time I am usually down to no more than ten symbols, which I balance against other companies already in the portfolio, screening for earnings announcements coming up (avoiding those), and ex-dividend dates in the upcoming quarter. 

These criteria have led me to GLW.  I’ve held that one before – it was a three-star S&P pick back then, but it has been upgraded.  There is an old post on that previous position here:  http://rescuemyira.blogspot.com/2013/05/im-not-married-to-glw-and-csx.html

I don’t expect to hold a position anywhere near that long these days – but that return met my 12% goal, and it is nothing to complain about.  Here’s the analysis for the new GLW position, net of commissions and fee: 

GLW

Transactions

Bought 300 shares at average share price $18.76 (total $5,629.00)
Sold 3 GLW Feb 2014 $19 for a net of $127.24

Net Profit:

1) Options Income:  = $127.24
2) Dividend Income: Ex-date is February, dividend is $0.10 ($30.00)
3) Capital Appreciation if assigned at $19.00:  $53.89

Total Net Profit if assigned and dividend collected:  $211.13
Absolute Return on Investment: ($211.13/$5,629.00) = 3.75%
Annualized Return if Assigned (32 days):  3.75%*(365/32) = 42.78%

Called Away for the Hat Trick: INTC

Even though there was some downward pressure on the stock, INTC finished in the money by more than a buck on Friday, and my shares were called away at the January expiration.  This is the first time in a while I’ve had shares called – I usually can manage to unwind the position a couple of weeks early, and I get the proceeds moved into a new position ASAP, but that didn’t work out for me with my January $24.00 on INTC this time.

No matter.  I had the shares for 90 days and collected covered call premiums, dividends, and stock gains on this one, making it a hat trick.  And the final returns pegged out at 4.92% absolute, and 19.95% annualized – exceeding my goal of 12%.  I can’t complain.

Here is the record on this position, as usual, net of fees and commissions:

INTC

Shares:

Bought 400 shares at an average price of $23.68, total position basis $9,471.00

Shares called away on assignment at $9,582.89, average share price $23.96.

Total stock gain:  $111.89

Options:

Total options income (I rolled the $24.00 strike out three times):  $263.92

Dividend:

Total dividends collected:  $90.00

Net Profit:
1) Stock gains:  $111.89

2) Options income:  $263.92

3) Dividend Income: $90.00

Total Net Profit after Assignment:  $465.81
Absolute Return on Investment: ($465.81/$9,471.00) = 4.92%
Annualized Return (90 days):  4.92%*(365/90) = 19.95%

Rolling Out ABT and CRUS

We had an erratic trading week with a couple of down days and a couple of up days – that turned out to be a perfect opportunity for me to have a look at rolling out to more Rescue My IRA positions after I had taken care of KO:  ABT and CRUS.

The ABT position was constructed with the goal of capitalizing on a dividend run.  This year I am trying to add a Bollinger band analysis to my stock selection criteria (when I have figured out how I am going to use this routinely, I’ll add a post), and ABT was the first contract that used the new routine.  It appeared that from the basis near $37, a run to $38 was possible, and with the ex-dividend date coming up during the contract period, everything seemed to come together for the trade.

On CRUS, I took a flyer on a 200-share position – low committed capital – and an S&P 3-star stock with no dividend, where I would normally limit my selections to 4- or 5-star stocks that pay from two to five percent annually.  There was enough volatility that I thought I could generate a good return with an in-the-money covered call using the weeklies, and so far I’ve been right. 

Here’s the analysis of the positions, net of fees and commissions and assuming I collect the dividend for ABT.

ABT

The ABT position consists of 300 shares, with a total basis of $11,110.00, or $37.03 per share.  I began by selling a January $38, and just rolled out to February.  If the position works out according to plan, I will have a hat trick of covered call, dividend, and stock gain returns.       

Total covered call premiums:  $264.73

Total dividend payments (including the forecast January ex-dividend):  $66.00

Total stock gain at $38:  $272.89

Total, absolute gain on the position:  $603.82

Total, absolute return percentage ($603.82/$11,110.00):  5.43%

Annualized total return percentage (held approx 50 days):  39.66%

CRUS

As I mentioned, the CRUS trade was meant to be a quick-turn position with a small amount invested.  The position consists of 200 shares, with a total basis of $4,017.00, or $20.09 per share.  I began by selling a January week 3 $20 and just rolled it to week 4.         

Total covered call premiums:  $211.47

Total dividend payments (no dividend on CRUS):  $0.00

Total stock gain at $20:  -$34.11

Total, absolute gain on the position:  $177.36

Total, absolute return percentage ($177.36/$4,017.00):  4.42%

Annualized total return percentage (held 22 days):  73.25%

Rolling Out KO

Last week I rolled out the KO position from January to February, which I have held since the summer of 2013.  I started by selling $41 strikes, but the current covered call contract is $40.  The stock was in the money at this level by the end of the week.

This roll-out brought the KO position in line with the Rescue My IRA goals for annualized returns of 12%; however, to realize this return I will have to hold it until the February contract is called away and collect a dividend.  It’s probably more likely that the position will make a little less than my goal for it, since it may be called at the ex-dividend date – but if that happens, KO will deliver an overall positive return anyway.

Here’s the analysis of the positions, net of fees and commissions and assuming I collect the dividend.

KO

The KO position consists of 400 shares, bought in lots of 300 and 100.  My total basis is $16,142.96, or $40.36 per share.  I began selling $41 strikes, but have been selling at $40 since November and rolling them monthly.     

Total covered call premiums:  $609.43

Total dividend payments (including the forecast February ex-dividend):  $336.00

Total stock gain at $40:  -$160.07

Total, absolute gain on the position:  $785.36

Total, absolute return percentage ($785.36/$16,142.96):  6.46%

Annualized total return percentage (held approx 210 days):  11.23%

Three New Positions: ABT, CRUS, and PFE

Last Friday I added a couple of new positions in CRUS and PFE.  After the JPM early call I had a lot of cash on the sidelines; I’ve decided that I should not have more than 33% of the account value sitting out of the market – that is part of what it is going to take for me to make the returns I expect in the Rescue My IRA account.

These positions will provide examples of new strategies I’m putting to use in the account this year.  For one thing, I have relaxed the criteria of S&P four- or five-star ratings; I will choose from three-star stocks that are part of the S&P 500 but I expect to limit the amount of capital invested in three-star positions to less than 20% of my total holdings.  Also, to increase turnover in the account with the intent to generate additional covered call premiums, I am using weeklies for some trades.

While I am building up experience and confidence with the new strategies, I’m taking smaller positions to get comfortable with the analysis and procedure.  I only put together a 200 share position in CRUS as a result, laying out just over $4,000 for the trade.

I missed posting on ABT, a new position established in late December.  So I will make up for that in today’s post as well.

Here’s the analysis, or position plan for each of the three stocks – all values are net of commissions and fee: 

ABT

Transactions

Bought 300 shares at average share price $37.03 (total $11,110.00)
Sold 3 $38 Jan 2014 for a net of $184.24

Net Profit:

1) Options Income:  = $184.24
2) Dividend Income: Ex-date is January, dividend is $0.22 ($66.00)
3) Capital Appreciation if assigned at $38.00:  $272.89

Total Net Profit if Assigned and dividend collected:  $523.13
Absolute Return on Investment: ($523.13/$11,110.00) = 4.71%
Annualized Return if Assigned (20 days):  4.71%*(365/20) = 85.93%

CRUS

Transactions

Bought 200 shares at average share price $20.09 (total $4,017.00)
Sold 2 $20 Jan wk 3 for a net of $110.48

Net Profit:

1) Options Income:  = $110.48
2) Dividend Income: (rule breaker – no dividend) $0.00
3) Capital Appreciation if assigned at $20:  -$34.11

Total Net Profit if Assigned and dividend collected:  $76.37
Absolute Return on Investment: ($76.37/$4,017.00) = 1.90%
Annualized Return if Assigned (15 days):  1.90%*(365/15) = 46.26%

PFE

Transactions

Bought 300 shares at average share price $30.85 (total $9,256.00)
Sold 3 $31 Feb wk 1 for a net of $133.24

Net Profit:

1) Options Income:  = $133,24
2) Dividend Income (February ex-date): $76.00
3) Capital Appreciation if assigned at $31:  $26.89

Total Net Profit if Assigned and dividend collected:  $238.13
Absolute Return on Investment: ($238.13/$9,256.00) = 2.57%
Annualized Return if Assigned (30 days):  2.57%*(365/30) = 31.30%

Two Roll-outs: CAT and FB

I took advantage of the great trading days we’ve had so far in 2014 to adjust my CAT and FB positions. Both are net gainers, but they are case studies of positions on two different tracks. 

I’ve held CAT since the fall of 2012 – it’s been a long haul – while it is making money, it is not making my target return of 12 percent annualized. This is my second go ‘round with FB; I made a great return the first time, and I recently updated the current trade by adding a second 100 share lot.  On this FB trade, which I’ve held for about 90 days so far, I’ve already met my goal of a 12 percent annualized return.

Here’s the analysis of the two positions.

CAT

The CAT position consists of 100 shares with a basis of $87.17.  I have sold strikes ranging from $85 to $95 over the course of the 15 month holding period; the current option is $90 May 2014.

Total option premiums:  $717.37

Total dividend payments (including the forecast January and April ex-dividends):  $396.00

Total stock gain at $90:  $265.83

Total, absolute gain on the position:  $1,379.20

Total, absolute return percentage ($1,379.20/$8,716.99):  15.82%

Annualized total return percentage (held approx 630 days):  9.17%

FB

This is a 200 share position established over the last two months with two 100 share purchases.  My current per share basis is $54.94, for a total of $10,988.49.  I recently did a roll-up to the $60 strikes while adding 100 shares – post is here:  http://rescuemyira.blogspot.com/2013/12/fb-add-on-and-roll-up.html

Total option premiums:  $274.93

Total dividend payments (no dividends on FB, making it a rule-breaker!):  $0.00

Total stock gain at $60:  $994.40

Total, absolute gain on the position:  $1,269.33

Total, absolute return percentage ($1,269.33/$10,988.49):  11.55%

Annualized total return percentage (held 120 days):  35.14%

Called Early on JPM

As I mentioned in the year-end wrap post, I have six trades under my belt already in the Rescue My IRA account.  Today I will post about JPM, which was called away last Thursday on its ex-dividend date. 

I have started using weeklies as part of my strategy to get more turnover in the account.  While I haven’t made any adjustments to my trading plan for this activity yet, I have had a couple of good trades using my usual stock selection criteria and selling near in-the-money (or even ITM) strikes with an ex-date coming up.  That’s what happened here with JPM, which I held for about 20 days.

Here is the record on this position, as usual, net of fees and commissions:

JPM

Shares:

Bought 200 shares at an average price of $56.22, total position basis $11,243.00

Called away 1/2/2014, ex-dividend date, at $56.50, net $11,282.89

Total stock gain:  $39.89

Options:

Total options income:  $132.48

Dividend:

Total dividends collected:  $0.00 (called on ex-date)

Net Profit:
1) Stock gains:  $39.89

2) Options income:  $132.48

3) Dividend Income: $0.00

Total Net Profit after Assignment:  $172.37
Absolute Return on Investment: ($172.37/$11,243.00) = 1.53%
Annualized Return (20 days):  1.53%*(365/20) = 27.98%

Trading Year 2013 - The Wrap

As I prepared to do my look back at calendar year 2013 in the Rescue My IRA account, I had a look at the 12 monthly results posts for the year.  Sure, I wrote them, but what they revealed to me is that after using this covered call system for two years, I’ve probably hit my stride with the approach.  At year end, the account value stood at $154,520.55, up from $132,850.69, yielding an overall return of 16.31%. 

In keeping with how I have reported annual results in the past, this post will provide a very short summary – mainly to ensure that it is not redundant with the monthly results posts.  Since I did not record any “lessons learned” style posts this year, I don’t have a lot of summarizing to do about the results.  Plus, the trading year is already underway and in just two days I already have a backlog of six trades to report!

While there were no lessons learned posts, that is not to say that I did not not make any trading mistakes or learn anything this year.  I simply was more careful about my trades, using solid criteria, including choosing positions that rated an S&P four- or five-star ranking, so I managed to minimize failed positions.  

Another valuable lesson I learned was how to unwind positions once the delta is at 1.00 – while this comes at the price of buying to close an in-the-money covered call, there is usually a stock gain that slightly exceeds that cost, and since the money can be quickly moved on to the next position, there is an opportunity to increase the overall rate of return on the account.

Those two improvements made for a better trading year, but most of the gains this year can be attributed to one thing:  the booming stock market.  The S&P 500 index increased by 29.6% this year, and since the first screen on my picks is to choose stocks from that index, those returns carried me.  At 16.31%, my returns did not beat the market, but they did beat my objective of a 12% annualized return. 

Here’s a quick summary, bullet point style, of Rescue My IRA results for 2013:

• 12/31/2012 Account Value:  $132,850.69
• 12/31/201 Account Value:  $154,520.55
• Net increase in account value:  $21,669.86
• Annual percentage return:  16.31%

For comparison purposes, Rescue My IRA percentage return in 2012 was 4.11%.

I guess I will close with some resolutions for 2014.  I still plan to use covered calls as the heart of my strategy going forward, but I am planning to make some adjustments.  These include moving to an Options First account at Scottrade, which will allow me to use cash secured puts in addition to covered calls, and relaxing my four- and five-star criteria to expand my ability to choose positions.  That should keep the account on its growth curve, which I hope will continue to exceed 12% a year.

I just reread Lehman and McMillan’s Options for Volatile Markets (Amazon link in the right-hand column), and was reminded of some new strategies I could put in play this year.  I have a third of the account, $50,000, sitting in cash right now, waiting for a pull back before buying new shares.  So it’s going to be a fun year working with the account – I have a lot to look forward to!

This will be the single wrap-up post this year.  As I mentioned, I am already behind by six trades!  So it’s time to get back to work!

Happy trading in 2014, readers!