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.
Thursday, March 13, 2014
As the month of March
began, I only had two contracts with expirations to look after: ABT and KO.
Yesterday I posted about rolling out KO; late last week I also unwound
ABT. Rescue My IRA has no additional contract
related activities to take care of this month.
To recap my strategy
on unwinding positions, it is a tactic I will look at whenever I have a stock
that is in the money during its contract month, as the delta on that covered
call reaches 1.00. Essentially, there is
no time premium left, and there is a window for closing out the position by
buying to close the call and selling the stock.
The option premium will be just about the same as the value of the stock
over and above the stock price.
There is a slight
variation in the cost of executing these trades – at Scottrade, I pay
commissions and fees on the option transaction and on the stock transaction,
and these costs are in addition to the spread on the buy and sell
transactions. Offsetting the commissions
is the assignment fee that I would incur at expiration – it’s a buck or two
more than the cost of two commissions.
Whenever I execute and unwind trade, I know I am giving up a few
dollars on the transaction, but it is more than made up for if I can get the
proceeds immediately invested in a new position – which I did in this case, and
I will post tomorrow. Until then, here
is the final analysis of the ABT trade, net of commissions and fees:
Bought 400 shares at
an average price of $36.88, total position basis $14,752.99
Sold on unwind 400
shares at $15,888.72.
income: -$491.03 (By unwinding, I exchanged the option premium
for additional stock gains in this trade)
Total Net Profit after Unwinding: $710.70
Absolute Return on Investment: ($710.70/$14,752.99) = 4.82%
Annualized Return (90 days): 4.82%*(365/90) = 19.54%