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.
Earlier this week, I
had finally achieved what I regard as an optimal balance between investments in
stock positions and cash reserves just now – about 20% of the Rescue My IRA
account was held in cash, and there were 15 stock positions. That arrangement changed yesterday when my
WIN position was called early on the stock’s ex-dividend date.
I added this position
in the spring with the goal of adding a high-dividend stock (at the time, the
calculated dividend yield on WIN was over 12%) that I could sell covered calls
against to add to the returns. I bought
1,000 shares a few days before the March ex-dividend date, but 100 shares were
called away at that time, leaving me with 900 shares. I rolled these out to a $8 May expiration
covered call, and then rolled them up and out to a $9 November contract.
As usually happens, I
traded away the cash I’d earned on covered calls for the promise of downstream
stock gains, but I also figured I would collect at least one more dividend
check before the shares were called. So,
overall, the position would meet my objective of a 12% return.
With the shares all
called away at $9 yesterday, I have the capital back almost 150 days early, and
although I won’t get those fat dividend checks, I did earn a nice return of
nearly 7% on this trade during a 105 day holding period. That works out to better than 24% annualized –
it might just turn out to be one of my best trades so far this year based on
I guess I will get to
work early next week on finding a new position to replace WIN. In the meantime,
here is the final analysis of the WIN trade, net of commissions and fees:
Bought 1,000 shares in
at an average price of $8.12, total position basis $8,117.00
Early calls on 100
shares and then 900 shares, sold for a net of $8,874.00.
income: -$392.01 (When I rolled the stock up from an $8 to $9
covered call, I traded some of the option premium for additional stock gains in
collected: $175.00 – I collected one payment on 9 lots of the stock
Total Net Profit after early call: $539.99
Absolute Return on Investment: ($539.99/$8,117.00) = 6.65%
Annualized Return (105 days): 6.65%*(365/105) = 23.13%
I have had two goals
in the Rescue My IRA account this year – the first has been to maintain more
cash on reserve, with my current goal set at 20% of the account value, and the
second is to further diversify by maintaining between 12 and 15 positions with
an average value of less than $10,000.
With the KO position
unwound, I set out to identify a new position on line with these objectives immediately,
so that I could get the money back to work.
I’ve mentioned the
selection criteria I am using these days in passing in earlier posts: stock choices must be rated 4- or 5-stars by
S&P, they need to pay a dividend of between 3% and 5% annually, and I need
to be able to forecast a 12% annualized return, comprised of option premiums,
dividend payments, and stock gains, with the first transaction.
Actually, I identified
two new positions that met these criteria:
CNP and TGT. After I’d established
the new positions, Rescue My IRA has 15 positions in play, and the cash reserve
is steady at 25%. I’m ready to ride out
the summer, and the account should be able to hold its own for the balance of
Here are summaries of
the position plans for each of the two new positions, net of commissions and
Bought 300 shares at average share
price $24.70 (total $7,411.00)
Sold 3 $25 Aug 2014 covered calls
1) Options Income: = $184.24
2) Dividend Income (August ex-dividend): $71.25
3) Capital Appreciation if assigned at $25.00: $71.00
Total Net Profit if assigned and dividend collected: $326.49
Absolute Return on Investment: ($326.49/$7,411.00) = 4.41%
Annualized Return if Assigned and Dividend Collected (60 days): 4.41%*(365/60)
Bought 100 shares at share price $58.40
Sold $58.50 Aug wk 1 2014 covered call
1) Options Income: = $98.74
2) Dividend Income (August ex-dividend): $52.00
3) Capital Appreciation if assigned at $58.50: -$7.99
Total Net Profit if assigned and dividend collected: $142.75
Absolute Return on Investment: ($142.75/$5,839.99) = 2.44%
Annualized Return if Assigned and Dividend Collected (45 days): 2.44%*(365/45)
S&P had downgraded
KO from a four-star pick to a three-star pick back in February. Since I do try to limit the positions I set
up for Rescue My IRA to four- or five-star S&P choices, this event meant I
would move KO into a category of attentive management going forward: I would
look for opportunities to unwind and exit the position early without taking a
loss, and in the worst case hold it for the long term until the stock finally
Of course, there are exceptions to my rule about choosing four-star S&P stocks. I am holding three positions rated at three-stars in the portfolio right now: AAPL, CRUS, and FB. All offer good returns on their covered call premiums, and I have faith in their ultimate recovery, so I'm in no rush to unwind them.
Yesterday, the premium
for the 39 Aug 2014 contract I had on KO approached the additional value in the
stock above my strike price, so I decided to unwind the position two months
early. I closed an underperforming
position after 300 days, pulling out a nearly 5% return, which annualized at
slightly more than that. At least I beat
the typical return on a savings account, but this is less than my goal of a 12%
annualized return on investments in Rescue My IRA.
Here are the details
on the KO position, net of fees and commissions.
Bought 400 shares in two
lots, at an average price of $40.36, total position basis $16,142.96
Sold on unwind 400
shares at $16,612.63.
income: -$166.64 (By unwinding, I exchanged the option premium
for additional stock gains in this trade)
collected: $448.00 – if there was a highlight to this trade, it would be
the healthy dividends I received during the holding period.
Total Net Profit after Unwinding: $751.03
Absolute Return on Investment: ($751.03/$16,142.96) = 4.65%
Annualized Return (300 days): 4.65%*(365/300) = 5.66%
I unwound the INTC and SBUX positions this month, I decided to further
diversify the account and continue to average down the individual position
values by staying with 14 positions. These
are risk management strategies – I also decided to maintain my cash reserve at
around 20 percent. So, as the summer
begins, I think Rescue My IRA is in a good place to ride out the potential
doldrums that always seem to be there at this time of year.
Earlier this month I posted about
the first of three new positions:
AAPL. I added positions in KRFT
and T this week, and those are the topics of this post. The market is rolling along at record highs,
and it is a bit of a challenge to find many covered call opportunities that meet
my return objectives of 12 percent annualized – I’m solving this by going out a
few months so that I can maintain my choices among dividend payers and S&P
Here are the details of the two new
positions, net of fees, assuming they are called away in the current contract,
and including dividends collected through the holding period.
100 shares at average share price $59.32 (total $5,932.00)
Sold 1 $60 Sep 2014 for a net of $114.74
I unwound my 27 Aug
covered call for INTC yesterday. The
stock was in the money and there wasn’t much point in letting the investment just
sit there for another two months with little upside. It is the earliest I’ve had the opportunity
to close out an in the money position – now I’ll move on to finding a new stock
to roll the funds into.
Here is the final
analysis of this INTC trade, net of commissions and fees:
Bought 300 shares in April
at an average price of $26.57, total position basis $7,972.00
Sold on unwind 300
shares at $8,992.80.
income: -$685.02 (By unwinding, I exchanged the option premium
for additional stock gains in this trade)
Total Net Profit after Unwinding: $403.28
Absolute Return on Investment: ($402.38/$7,972.00) = 5.06%
Annualized Return (days): 5.06%*(365/73) = 25.29%
those MINI options were first issued, I looked at trying to set up a position
in GOOG or AAPL, but I just found the process too tedious for a 10-share
trade. Now that AAPL has completed a
7-for-1 split, I bought a 100-share lot and sold a covered call. If GOOG ever splits, I may jump in there on
that one too!
first AAPL covered call last week was a two-day trade for a weekly $93.93
strike. That one expired unexercised, so
this week I have rolled out to a traditional July monthly at a $95 strike – I’ll
keep rolling along as the situation permits.
Like FB, AAPL doesn’t fit all of my
trading criteria: I usually trade on S&P 4- or 5-star rated shares in order
to take advantage of their research, but AAPL is a 3-star rated stock, like FB. Unlike FB, AAPL does pay a dividend with the
next ex-date in August, so it has that going for it. AAPL has its lovers and haters, I’m happy to
be on the bandwagon for this fine company for however long that makes sense.
Here are the details on my AAPL
trade, net of fees and commissions.
100 shares at average share price $93.81 (total $9,380.99).
Current covered call is a $95 July 2014; I will roll monthly as long as I hold
1) Options Income: = $143.48
2) Dividend Income: No dividend forecast until August
3) Capital Appreciation if assigned at $95.00: $101.01
Total Net Profit if assigned and dividend collected: $244.49
Absolute Return on Investment: ($244.49/$9,380.99) = 2.61%
Annualized Return if Assigned (32 days): 2.61%*(365/32) = 29.73%
Coming on the heels of
yesterday’s post, about two underperformers in the Rescue My IRA portfolio,
today I am writing about unwinding SBUX with good results after only 38 days.
I drink a lot of
coffee, and I’m at SBUX every work day, plus that is the brand we drink at
home. So I figured, Warren Buffet says buy what you know – and when the stock
received a 4-star rating from S&P, it made it to my list of
I set the position up
in May with a June contract, collected a dividend, and unwound it last
Thursday, a week before the contract expired.
Here is the final
analysis of the SBUX trade, net of commissions and fees:
Bought 100 shares in May
2014 at an average price of $70.68, total position basis $7,068.00
Sold on unwind 100
shares at $7,462.84
income: -$140.51 (By unwinding, I exchanged the option premium
for additional stock gains in this trade)
Total Net Profit after Unwinding: $282.33
Absolute Return on Investment: ($282.33/$7,462.00) = 3.99%
Annualized Return (38 days): 3.99%*(365/38) = 38.37%
Seems like I haven’t
posted a few of my past trades, but then again, I didn’t trade for a couple of
weeks while I was away on vacation. By
the way, thanks for 150 views of my monthly results for May! Today, I’ll put up
the results of two roll-outs: GE and
Here’s the analysis of
the two positions, net of fees and commissions, and assuming I collect dividends
through the holding periods.
This is a 300-share
position with a basis of $7,901.99, or $26.34 per share. I started out by selling covered call $26
strikes, but rolled up to $27 and continue selling them. The current contract
expires in September 2014. Even though I am forecasting a hat trick, with
positive income from all three sources, this position is underperforming my
goal of 12% annualized for total return.
return percentage (held approx 180 days): 10.54%
This is a 300-share
position with a basis of $9,256.00, or $30.85 per share. This is a stock where I have gotten caught in
a downgrade. In the past I might have
sold to exit immediately, but I decided to stay in and minimize stock losses –
I’ll continue to manage it closely. The
current forecast is for a close to overall breakeven result with the $29 Aug
Mary and I were away
on vacation for the last week of May, and it had turned out to be a fairly slow
month for trading in Rescue My IRA in any case, so I’m posting for the first
time in a few weeks.
The statement value of
the account has reached an all-time high (so far!) of more than $161K, but on “cash
flow” terms, May was a net negative, although not by much. I rolled out and up several positions,
trading cash on buy-to-close premiums for longer term stock gains. Also, no positions were called away during
May, so there were no gains to offset the cost of the options premiums I closed.
With the vacation and
other distractions, I consider May 2014 a holding pattern month. June is looking better already, just three
days in. Here is a summary of my Rescue
My IRA statistics for May 2014, based on the May 29, 2014 close.
·Total Account Value, 5/29/2014
Market Close: $161,404.45 (vs. March close of $160,205.03)
·Core Stock Positions
(as of 5/29/2014): CRUS (400 shares), F
(500 shares), FB (200 shares), GE (300 shares), INTC (300 shares), IP (200
shares), JPM (100 shares), KO (400 shares), MAT (200 shares), PFE (300 shares),
PSA (100 shares), SBUX (100 shares), WIN (900 shares)
Collected (net, month of May): -$741.14 (-0.41 %)
Collected (net, month of May): $0.00 (0.00 %)
(recognized on the ex-date): $319.50 (0.21 %)
·Interest on Cash
Total, Absolute Return: -$421.34 (-0.27% absolute return, annualized
return not calculated)
Next Month To-dos:
Looking forward to June, four positions are due to go ex-dividend, yielding an
estimated $553.00, or 0.36% for the month.
Three of the four are in the money – KO, PSA, and WIN – while one is not
– GE. However, all of the in the money
positions are in back months – August through November – so the likelihood of
having these positions called away is low.
There is only one June
contract on the books: the 100-share SBUX position. The option is a $72.50 covered call and the
shares are in the money. If it is called
away, I will record a sock gain of $182.00, adding to the month’s proceeds.
During the spring I
took steps to further diversify this portfolio, moving from 10 positions to
13. I am considering the addition of one
more position, totaling 14, and if I take this step, I will probably ratchet down
the cash reserve portion of the account to 20% of the statement value. That will give me about $7K to play with on
Well, that’s it for
May, not the most exciting month for Rescue My IRA. So, until next month, happy trading!