Wash Sale: LXK for DDD

They have that saying about trying to put lipstick on a pig – it really hits home these days, after the market correction we’ve experienced during August and September.  I had resolved that we would stick with the covered call strategy in Rescue My IRA and manage the holdings with roll-outs, roll-ups, and roll-downs – with a deliberate effort to not take losses on the positions until things settled down.

This approach was in synch with the overall market.  At one point during the correction more than 20 of the Dow 30 stocks showed a negative return for the year, which I interpreted to mean that everybody was feeling the pain.  That further reassured me that I should hang tight.

Fast forward a few weeks, and now in mid-October better than half of the correction has been recovered.  The list of Dow 30 stocks down for the year was back in the low teens, where it was before the correction.  I took the recovery as an opportunity to do some weeding Rescue My IRA, focused on my DDD position, established with a 500 share purchase in July 2015.

This position tanked, and while I had managed to offset some of the depreciation with roll-outs and roll-downs (the initial strikes were at $22 and the final ones were at $17), but the stock continued to fall to $13, and it didn’t seem to have good prospects to get back to the strike price over the next 12 months, so I sought out a wash sale opportunity.  I decided to unwind DDD and move the proceeds into a new LXK position.

Before I mention the results of the DDD trade, I want to make a note about the portfolio approach I use in Rescue My IRA.  I try to maintain from 12 to 16 holdings in the account, along with a cash reserve that varies in size.  This diversification allows for risk management – I expect a loss or two every year, balanced by 2 or 3 really good gains, with an overall goal of an average return ranging from 10% to 12% per year.

So the DDD position counts as the big loss of the year – I took a hit of around 30% on the original investment, net of commissions, fees, and covered call premiums.  I immediately rolled those proceeds to LXK, as I mentioned above, with a position that is summarized below – forcasting a 30-day gain of around 5%, which will begin to earn back the DDD loss.

Here is the position plan for LXK, net of fees and commissions; this position was established as a wash sale for the poorly performing DDD contract.

LXK

This is a 200-share position established in October, with a basis of $6,285.00, or $31.43 per share.  The current covered call is $32 Nov 2015; the position is a wash sale on a DDD trade that went south.   

Total covered call premiums:  $240.50

Total dividend payments (no dividends):  $0.00

Total stock gain at $32:  $97.00

Total, absolute gain on the position:  $337.50

Total, absolute return percentage ($337.50/$6,285.00):  5.37%

Annualized total return percentage (approx 40 days if held to expiration):  49.00%