Monday, August 1, 2016

Rescue My IRA: July 2016 Results

For the last couple of months, I have begun the monthly update post with a comparison of year-to-date results from the S&P 500 and Rescue My IRA.  I have been sourcing the S&P 500 figure from the Money Magazine web site and will continue to do so.  For July, the year-to-date performance of the S&P 500 was 6.34%, and the year-to-date performance of Rescue My IRA was 5.44%.

I’ve noted before that I expect Rescue My IRA to earn a little less on an annual basis than the S&P 500 return in positive years, or lose a little less than the index in negative years.  This is the result of my status as a small time investor, unable to monitor the market on a constant basis (and to act immediately because my IRA is in a retail account), because I pay fees on each trade, and because I make mistakes.  I believe my mistakes are typically because I don’t follow the stock selection criteria I established in my trading plan – I try to have the discipline to avoid this problem, but I’m not always successful.

Since June, I have been working on learning how to incorporate cash secured puts (CSPs) in my portfolio, a trading approach now allowed by Scottrade in IRAs.  A number of colleagues on the Yahoo “Just Covered Calls” board have used it. 

One of the advantages of CSPs is that the cash stays in the account unless the stock is put to you by the option holder.  I see some advantages in that it should be easier to enter and exit positions with the cash balance there – avoiding larger losses on the stock itself, that the cash will earn (miniscule) interest during the option’s term, and that as long as the stocks you are working with otherwise meet your selection criteria, there is the potential of buying them at a discount to the market price when you first make the trade.

As I wrote last month, for the most part, I’m using the same criteria for CSPs as I do for covered calls – the stock should be a component of the S&P 500 index, the stock rated as 4- or 5-stars by S&P, and it should offer a dividend yield ranging between 3-6%.  For CSP candidates, I added a criterion, setting a goal for the stock to be within 25% of its 52-week low to be considered, suggesting that there is more upside than downside in a given trade. 

My first two trades were in the energy sector, where there are many stocks that meet all of these criteria.  It’s a beaten-down sector though, and I don’t want to end up holding these stocks, so eventually I closed out the three trades that I had made there with a slight gain overall.  Now, one of the CSPs I have now is with CMI, which has been a favorite of mine for covered calls – I hope to settle in to a strategy that will find me investing in familiar names like this.

For now, the market has shaken off Brexit and the other bad news from June, so the account value of Rescue My IRA stands at an all-time high.  I used the paper gains as an opportunity to do some roll-ups and position maintenance that was overdue from the long months of sideways trading.  That’s why the current results are more or less breakeven this month, even though the account value is up nearly $6K from last month.
That’s a summary of my July results.  The benchmarks are below, net of commissions and fees, as usual:   

Account Status:
·        Total Account Value, 7/29/2016:  $176,729.72, up from the June close of $170,976.96, and a new high for the first time since mid-2015
·        Total Cash Reserve, 7/29/2016:  $54,071.72, or about 32%, note that this includes reserved balances for CSPs
·        Core Stock Positions (as of 7/29/2016):  AAPL (100 shares), ABBV (100 shares), CSCO (500 shares), DIS (100 shares), DOW (200 shares), FB (100 shares), GM (200 shares), HST (300 shares), NUE (200 shares), PFG (200 shares) SBUX (200 shares), SPY (100 shares), XRX (500 shares)
·        Cash Secured Put (CSP) positions (as of 7/29/2016):  CMI 110 Aug 2016, SKX 23 Aug 2016

Performance Metrics:
·        Option Premiums Collected (net, month of July):  -$633.02 (-0.38%)
·        Capital Gains Collected (net, month of July):  $529.03 (0.32%)
·        Dividends Collected (recognized on the ex-date): $258.00 (0.15%)
·        Estimated Interest on Cash Reserve: $0.20
·        Total, Absolute Return:  $155.01 (1.06% absolute return, estimated annualized return 12.72%) 
·        S&P 500 Index 2016 year to date performance as of 7/29/2016: +6.34%
·        Rescue My IRA year to date performance as of 7/29/2016: +5.44%

Next Month To-dos:

There are three contracts expiring in August:  ABBV, FB, and PFG, with the potential of netting stock gains of $932.02, or 0.56% absolute return on the account.  I’ll have gains on ABBV and FB, but since I sold an at-the-money call on PFG, I will show a $1.00 loss on the stock value for this position, compared to an overall return netting dividends and option premiums in excess of 5% over the course of the 100-day holding period. 

Also, I’m doing the analysis to determine whether a roll-out and -up of FB would be profitable at this time – the current option has a $120 strike price and I have no doubt the stock will go higher.  If I can construct a good trade with a back month horizon (November-December) that allows me to meet or exceed a 12% annual return, I will probably execute it.       

August will provide a light dividend haul, which I’m estimating as $125.00, or 0.07% absolute return.  Three positions go ex-dividend this month:  AAPL, INTC, and SBUX.  All of my contracts are safe from assignment, so I will most likely collect all dividends.

So that’s my July update.  August looks steady – I hope so.  In any case, until next month, happy trading!