New Positions: BA and COP

Since I had a lot of cash on the sidelines, I thought I might wait for the market to pull back before putting it back to work.  After thinking about it for a day or two, it occurred to me that there were some sectors that aren’t booming in this market just yet, so I looked at underperforming Dow stocks for some leads – I chose BA, and after checking out XOM, fell back on COP, which I’ve had a good experience with in the past. 

Having so many positions set up to expire in September kept me busy and interested in posting my trades, so I’m going to try and set the account up so that there are always at least four contracts coming up each month.  That said, both of these new trades are October covered calls.

Here are summaries of the position plans for each of the two new positions, net of commissions and fees.

BA

Transactions

Bought 100 shares at average share price $129.37 (total $12,937.00)
Sold $130 Oct 2014 covered calls

Net Profit:

1) Options Income:  = $157.74
2) Dividend Income (no ex-dividend during contract): $0.00
3) Capital Appreciation if assigned at $130.00:  $45.00

Total Net Profit if assigned:  $202.74
Absolute Return on Investment: ($202.74/$12,937.00) = 1.57%
Annualized Return if Assigned and Dividend Collected (30 days):  1.57%*(365/30) = 19.07%

COP

Transactions

Bought 100 shares at share price $80.51 (total $8,050.99)
Sold $80 Oct 2014 covered call

Net Profit:

1) Options Income:  = $149.74
2) Dividend Income (October ex-dividend): $73.00
3) Capital Appreciation if assigned at $80.00:  -$68.99
Total Net Profit if assigned and dividend collected:  $153.75
Absolute Return on Investment: ($153.75/$8,050.99) = 1.91%
Annualized Return if Assigned and Dividend Collected (30 days):  1.91%*(365/30) = 23.23%

Note:  I sold an ITM call on the COP shares, so it’s possible the shares will be called away on the ex-dividend date in early October.  If that happens, the absolute return will be reduced, but so will the holding period, and results will be as follows:  net gain is $80.75, absolute return is 1.00%, annualized return is 12.20% - so the trade will still meet my goal of a 12% annualized return…just barely.

Unwinding the ETF: SPY

Taking advantage of a couple of up days in the market, I unwound the ETF SPY position a couple of days before the September call expired.  Even though it requires two transactions – you have to buy the covered call to close it, and then sell the shares – I end up saving about $5.00 over the cost of the paperwork transaction when my calls are assigned.  That can boost the return on a transaction in a way I can quantify, while the opportunity cost of having the funds ready to reinvest earlier than they might have been otherwise can’t always be quantified and measured, even though it is a benefit.

The SPY trade was a short-term one that was in play for 49 days, earning an absolute return of 2% - that works out to an annualized return of 15% - exceeding my goals for trades, which is to generate an annualized return of 12%.  The fact that the average annualized return is trending down towards my goal suggests that it’s time to keep some money on the table, waiting for a market pullback or correction – so I’ll spend a few days thinking about this strategy before putting the SPY funds back to work.

Here is the final analysis of the SPY trade, net of commissions and fees:

SPY

Shares:

Bought 100 shares in August 2014 for a total position basis $19,321.00

Sold on unwind 100 shares at $20,135.56. 

Total stock gain:  $814.56

Options:

Total options income:   -$419.53 (By unwinding, I exchanged the option premium for additional stock gains in this trade)

Dividend:

Total dividends collected (not held through an ex-dividend date):  $0.00

Net Profit:
Total Net Profit after Unwinding:  $395.03
Absolute Return on Investment: $395.03/$19,321.00) = 2.04%
Annualized Return (49 days):  2.04%*(365/49) = 15.23%

Called Away Early: PSA

Last week the combination of in-the-money and ex-dividend occurred on my PSA shares, and so the shares were called away.  I’ve held these shares for more than a year, and while the position did not meet my 12% annualized returns goal, it was profitable and it beat a savings account.  The position also earned income all three ways, stock gains, dividends, and covered call premiums. 

Here at Rescue My IRA, we call that a Hat Trick. 

So – winning!

Between unwinding FB and JPM, and this assignment, the account is flush with cash.  Need to put it back to work!

Meanwhile, here is the final analysis of the PSA trade, net of commissions and fees:

PSA

Shares:

Bought 100 shares in July 2013 at an average price of $163.59, total position basis $16,359.00.

Called away on ex-dividend date, 100 shares at $16,982.00. 

Total stock gain:  $623.00

Options:

Total options income: $174.20

Dividend:

Total dividends collected:  $545.00

Net Profit:
Total Net Profit after assignment:  $1,342.20
Absolute Return on Investment: ($1,342.20/$16,982.00) = 8.20%
Annualized Return (420 days):  14.58%*(365/420) = 7.13%

Unwinding FB and JPM

Last week two positions reached the threshold point where I will consider unwinding them: their in-the-money covered calls have a delta of zero, they expire this month (September 2014), and there are no ex-dividend dates before expiration.  The two stocks were JPM and FB, both were profitable, and both exceeded my goal of better than 12% annualized returns.

My long held PSA position was called away on ex-dividend last week as well – but I’ll save that for tomorrow’s post.  In any case, as a result of these trades the Rescue My IRA account is sitting on a lot of cash, so I need to get to work on finding new trades.

Meanwhile, here’s the final analysis for the two trades, net of commissions and fees:

FB

Shares:
Bought 200 shares in February 2014 at an average price of $70.21, total position basis $14,041.00
Sold on unwind 200 shares at $15,556.67
Total stock gain:  $1,515.67

Options:
Total options income:  $231.81 (By unwinding, I exchanged some of the option premiums for additional stock gains in this trade)

Dividend:
Total dividends collected:  $0.00 – FB doesn’t pay dividends


Net Profit:
Total Net Profit after Unwinding:  $1,747.48
Absolute Return on Investment: ($1,747.48/$14,041.00) = 12.45%
Annualized Return (210 days):  12.45%*(365/210) = 21.63%

JPM

Shares:
Bought 100 shares in April 2014 at an average price of $57.88, total position basis $5,787.99
Sold on unwind 100 shares at $5,990.87
Total stock gain:  $202.88

Options:
Total options income:  $3.98 (By unwinding, I exchanged the some of the option premiums for additional stock gains in this trade)

Dividend:
Total dividends collected:  $40.00


Net Profit:
Total Net Profit after Unwinding:  $246.86
Absolute Return on Investment: ($246.86/$5,990.87) = 4.27%
Annualized Return (87 days):  4.27%*(365/87) = 17.89%

AAPL: Rolling out and up

Last week I adjusted my AAPL position – there was some volatility when one of the competitors announced a new product, so I rolled the position out and up when the shares took a one-day hit.  That is the second roll-up I have done since acquiring these shares in June, I’ve written covered calls on the 100-share position at strikes of $95, $97.50, and now $100.00.

If the shares are called away early on their October ex-dividend date or at November expiration, I will have held them either 150 days or 180 days and generated an absolute return of more than 10% - I can live with that.

Here’s the position plan for AAPL, net of fees and commissions, and assuming I collect dividends through the holding period:

AAPL

This is a 100-share position with a basis of $9,380.99, or $93.81 per share.  The current covered call is $100 Nov 2014 but I started in May 2014 with a $95 strike.

Total covered call premiums:  $269.94

Total dividend payments (assumes I collect November):  $94.00

Total stock gain at $100:  $601.01

Total, absolute gain on the position:  $964.95

Total, absolute return percentage ($964.95/$9,380.99):  10.29%

Annualized total return percentage (approx 180 days if held to expiration):  20.86%

Sensitivity analysis shows that if the shares are called early on the October ex-dividend date, the absolute gain percentage drops to 9.79%, but the annualized gain goes up to 23.81%, due to the shorter holding period.

New Position: EMC

After the August hiatus, I’m going to work on getting back into regular posts here on Rescue My IRA – I opened a new position last week with EMC, so that will be where it all starts.  Also, while I’m still ecstatic with the covered call approach that I have been using for the last three years, I had a look at my trading plan and realized it is time for an update, so I’ll be taking that on over the next few weeks.

When I chose EMC, I used the typical selection criteria for Rescue My IRA stock choices: ideally rated 4- or 5-stars by S&P, dividend payers with a yield of 3% and 5% annually are preferred, 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.  This position falls short on the dividend account but met the other criteria.

September looks to be an active month in the account – I have six in the money covered calls with September expirations, so it will be a challenge to maintain the portfolio with 12 to 15 active trades.  EMC was meant to be a selection that would help me bridge a busy month.

Here is the summary of my EMC position plan, net of commissions and fees:

EMC

Transactions

Bought 300 shares at average share price $29.50 (total $8,851.00)
Sold 3 $30 Oct 2014 covered calls

Net Profit:

1) Options Income:  = $133.24
2) Dividend Income (September ex-dividend): $34.50
3) Capital Appreciation if assigned at $30.00:  $131.00

Total Net Profit if assigned and dividend collected:  $298.74
Absolute Return on Investment: ($298.74/$8,851.00) = 3.38%
Annualized Return if Assigned and Dividend Collected (45 days):  3.38%*(365/45) = 27.38%

If the shares are called away on the ex-dividend date, the absolute return drops to 2.99%, but the annualized return increases to 36.32%!

Rescue My IRA August 2014 Results

After a bit of a hiatus from posting on the blog during August, I’m back.  It’s been quite busy at work during the last month, so I just couldn’t keep up with the pace of posting the results of my trades.  Looking forward to getting back to my normal pace during September…I do have 7 positions set to expire this month, so there is the potential that I will have a lot to post about!

Last month I mentioned reading an article a few months ago about just buying an S&P 500 index fund and sitting on it for years.  That passive approach differs from the active covered call strategy that I use with Rescue My IRA, but I had a sobering revelation as I prepared the data for this month’s report:  on August 29, CNN showed the S&P of returning 8.39%  year-to-date for 2014, while the Rescue My IRA has returned 8.07%.   

I don’t find that small variance discouraging or disappointing – on the contrary, I was pleased to see that Rescue My IRA so closely parallels the return the professionals and computers have been able to generate.  It’s hard work, but I’m still pretty happy with the results.  I’m not quite ready to surrender to the whims of the market, especially since I believe the deck there is stacked against small investors like myself.

Closing out the intro with my prognostication about the market – as September gets underway it does look like there is still room to grow, although navigating the increasing geo-political turmoil adds some risks to the prospect.  Valuations at these levels are making my job of picking covered call trades pretty challenging – hard to find quality picks that can meet my hurdle rate of 12% annualized return.  We’ll see what I can do – I’ll keep working on it.

Here is the monthly summary of Rescue My IRA statistics for August, based the August 29 market close.     

Account Status:

·         Total Account Value, 8/29/2014 Market Close:  $ 166,992.83, up from the July close of $163,409.85)

·         Total Cash Reserve, 8/29/2014 Market Close:  $37,154.83

·         Core Stock Positions (as of 8/29/2014):  AAPL (100 shares), CNP (300 shares), CRUS (400 shares), DIS (100 shares), FB (200 shares), GE (300 shares), IP (200 shares), JPM (100 hares), KRFT (100 shares), PFE (300 shares), PSA (100 shares), SPY (100 shares), T ( 300), TGT (100 shares)

Performance Metrics:

·         Option Premiums Collected (net, month of August):  $332.35 (0.22 %)

·         Capital Gains Collected (net, month of August):  -$638.20 (-0.41%)

·         Dividends Collected (recognized on the ex-date): $240.25 (0.16%)

·         Interest on Cash Reserve: $0.38

·         Total, Absolute Return:  -$65.22 (-0.04% absolute return, annualized return

-0.51%) 

Next Month To-dos:

Looking forward to September, I have an AMAZING seven positions set to expire this month, and at the time of this writing, all seven are in the money!  The positions are AAPL, CRUS, DIS, FB, JPM, PSA, and SPY.  Assuming all are called away, as I expect, the gains will total $2,318.09, or 1.50% of the starting account value this year.  If annualized, that would be an 18% return!

Only three positions are due to go ex-dividend, including PSA and SPY, which are in the money and will likely be called away before I can collect.  The other position is GE, with a December contract.  If I were to collect all the dividends, the cash yield would be $296.00, or 0.19% of the starting account value, but as it stands I will likely only collect the $66.00 from my GE shares.

Even with that kind of low return from dividends, with the forecasted capital gains, it looks like I should easily make my goal of 1% monthly overall return.  I’m already working on it, though!

That’s it for the August Rescue My IRA results post – another okay month, and trading in this account remains very rewarding.  Until next month, happy trading!