Tuesday, June 24, 2014

Unwinding KO

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 came back. 

It’s a similar strategy to the one I followed for CAT, a position I ultimately held for almost two years before exiting.  Here’s the post from April when I finally closed that position:  http://rescuemyira.blogspot.com/2014/04/unwinding-cat-after-600-days-held.html

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. 
Total stock gain:  $469.67

Total options income:   -$166.64 (By unwinding, I exchanged the option premium for additional stock gains in this trade)

Total dividends collected:  $448.00 – if there was a highlight to this trade, it would be the healthy dividends I received during the holding period.

Net Profit:
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%

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