Unwinding WIN

Once a position reaches expiration month, if it is in the money, sometimes the option’s delta reaches 1.00.  When that happens, the value of the option changes in step with the value of the underlying stock, and it is a good time to consider unwinding the position.  This process involves buying to close the option and selling the stock at the current price.

In the case of my Scottrade account, I will usually make a little more cash than I would if I waited until expiration.  Part of this extra return is generated because the sell commission on an assigned position is about $18.00, while the commission on the option and stock trade totals about $14.00.  There is sometimes a little extra return in the stock price during the time lag between closing the option and selling the stock also – but I haven’t found that to be predictable yet.

The main opportunity is from being able to generate new covered call premiums and stock gains from a new position opened up two to three weeks earlier than you would have been able to, had you waited.  That’s been the reason I’ve unwound positions over the last two or three months, and it is the case with my WIN position.

I’ll report two “unwind” transactions today – one for the 500 share position I had in Rescue My IRA, and one for the 300 share position I had in my conventional account.  The second position was established a few days after the Rescue My IRA one, and the returns were just a little less – but both positions worked out very well for me.  I might just take another look at WIN next month, as the next ex-dividend date approaches.

Here’s the analysis – net of fees and commissions, of course.

WIN (Rescue My IRA position)

Shares:

Bought 500 shares at an average price of $7.92, total position basis $3,962.00

Sold after unwinding 500 shares at $4,167.92.

Total stock gain:  $205.92

Options:

Total options income:  -$36.51

Dividend:

Total dividends collected:  $125.00

Net Profit:
1) Stock gains:  $205.92

2) Options income:  -$36.51

3) Dividend Income: $125.00

Total Net Profit:  $294.41

Absolute Return on Investment: ($294.41/$3,962.00) = 7.43%
Annualized Return (60 days):  7.43%*(365/60) = 45.20%

WIN (Conventional account position)

Shares:

Bought 300 shares at an average price of $7.97, total position basis $2,392.00

Sold after unwinding 300 shares at $2,497.95.

Total stock gain:  $105.95

Options:

Total options income:  -$64.03

Dividend:

Total dividends collected:  $75.00

Net Profit:
1) Stock gains:  $105.95

2) Options income:  -$64.03

3) Dividend Income: $75.00

Total Net Profit:  $116.92

Absolute Return on Investment: ($116.92/$2,392.00) = 4.89%
Annualized Return (60 days):  4.89%*(365/60) = 29.74%

CSX: Train keeps a-rollin'

On 2/27/2012, CSX goes ex-dividend.  As I write this, it looks like I will collect a second dividend payment on this position, which I established with two 200 share purchases in November and January.  The basis of the 400 shares is $8,745, so my average price per share is $21.86.  As the ex-date approaches, I decided to look at another roll-out on the shares, keeping the same strike price that I have been targeting now since November:  $22.50. 

Here are the five(!) covered calls contracts I have sold on CSX:

• 22.50 Nov 2011
• 22.50 Dec 2011
• 22.50 Feb 2012
• 22.50 Mar 2012
• 22.50 Apr 2012

Normally, when I see a position I have held this long, I start to question its performance and whether I should keep it in the Rescue My IRA portfolio.  And so this morning I did the analysis…I actually found something to celebrate here, which is why I posted the Aerosmith song above.  The net income from my call contracts on CSX, including the sales to open and the buys to close, is $540.92 – that is an absolute return rate of 6.2%!

Per the Rescue My IRA trading plan, my goal when establishing positions is to plan for a 24% annualized position.  Here we are five months later with a position that is performing against that goal; however, if I extend the position with another roll-out, it will break through to a lower annualized return.  I have to think about that, but I feel comfortable that the position will return at least 12% annualized, and that is what I am really after.  So I think I can roll with it!

Here’s the rest of the story, based on the current April contract, the forecast dividend, and expected stock gains if the stock is called in April.  As always, these calculations are net of commissions and fees in my Scottrade account.

CSX

Total option premiums:  $540.92

Total dividend payments:  $72.00

Total stock gain at $22.50:  $236.74

Total, absolute gain on the position:  $849.66

Total, absolute return percentage ($849.66/$8745.26):  9.72%

Annualized total return percentage (held 150 days):  23.64%

CSX six month chart - the black line is the $22.50 strike price.

Transfer and Trades

The majority of my funds from the Ameriprise account has finally made it over to Scottrade, so at last I could begin to implement my plan to "Rescue My IRA" using a covered call strategy for increased yields and capital gains.  Despite my frustrations with how long the transfer took, I actually enjoyed a small benefit from the delay due to rising markets in early October - I calculate the total starting value of the Scottrade account as about $51K, up from a low of around $43K but far below the starting value at Ameriprise of $77K. 

We've got some work to do here.

In an earlier post I mentioned my screen and the stocks that had been identified by it:

AA, COP, CSX, DIS, GE, GLW, MRK, MSFT.  Yesterday I added two more potentials, CMCSA and PKI.  There's pretty good diversity here, especially from within the framework of a portfolio approach and using a trading plan (yet to be completed, but I will share the documentation here when that it done).

Wanting to get the money working for me as soon as possible, I already have established a number of positions:  COP, CSX, DIS, GE, and GLW, plus IP which is a holdover from the early days of the account before I settled on screening criteria (IP doesn't fit, when the options on it expire I will need to evaluate the position).

I will post over the next few days the analysis and expected results for these positions.  However, the account is not fully invested yet, there is approximately $12K remaining - in addition to the cash reserve that I set at 20%.

Qualifying Stocks/Waiting on the Transfer

Scottrade tells me that Ameriprise does all their transfers in a batch, and that is done weekly on Tuesdays.  So hopefully, later today, I will know that the transfer is done; there may be a few days of waiting for the funds to make their way into my Scottrade account.  During all this, I have been keeping busy doing research about what stocks to keep as core holdings to implement the covered call strategy around.

The folks over on Yahoo's "Just Covered Calls" board have been very helpful on this front - it seems that optimally, the investor/trader using this strategy needs to have a routine, and a second pointer was to only pursue stocks you wouldn't mind owning, in case you end up holding when they are not assigned.  I've still got some work to do on developing the routine, but in the meantime, I've developed some ground rules for choosing the initial stocks.

First, I put together a candidate list from some Motley Fool information - they have a lot of material on high-yielding stocks, for example.  Second, I took some cues off of what the other covered call group members are using.  And third, I filled out a list of 30 potentials using a "dogs of the Dow" screen: which of the 30 DJIA stocks are performing worst year to date.

With this list of thirty, I put together a spreadsheet that would further screen them using some basic rules:

• A four or five star rating from both Morningstar and S&P (surprisingly, this eliminated IP, which I currently hold, and disqualified my ACM, the company I currently work for, where I hold shares!);
• There must be a dividend, and I am looking for >1%, but optimally 2%-5%;
• The price at the time of the purchase should be near the midpoint of the 52-week high and low; and
• The companies must be a significant brand name to ensure longevity and company quality.

Now, I may revise these a bit with experience.  For example, the first rule could be subject to revision once I have more practice reading fundamentals for myself.  The third rule could be revised as well, using a "fair value" calculation (one of the Yahoo board posters has a "fair value" calculation that he uses to set a target price of 80% of fair value) - I used the 52-week midpoint as a surrogate for this to ensure that there was price upside and adequate volatility to ensure a good premium on the calls.

This screen gave me a short list of 8 candidates, as follows:

• AA
• COP
• CSX
• DIS
• GE
• GLW
• MRK
• MSFT

Next post I will write about the position rules for my shares.

Finalizing the Transfer from Ameriprise

Yesterday, I received a letter from Ameriprise advising me that they had not been able to send my old account holdings over to Scottrade.  There were six ETFs in the account and the CUSIP numbers required reinvesting profits and dividends - and apparently these CUSIPs aren't acceptable ("holdable") at Scottrade, so they sent the shares back.

I could have had Scottrade sell them anyway, but that would have involved a broker fee of $50 each - $300 total.  That would have taken a little time and worry to make up, so I had them sent back over to Ameriprise and began trying to navigate how to dispose of them.

Finally, I get this letter, dated 10/13/2011, which says to call them and they will take care of it.  It also says that if I didn't do so within 30 days of the date of the letter, they'd reopen the old account with these shares "subject to applicable fees."

I got on the horn with them this morning.  A very pleasant rep named Jeffrey took my order and arranged for the sale, then called me back to confirm. The funds will settle on 10/24 and I can then roll them over to Scottrade.

The good news is the estimated proceeds from these ETFs are $42K or so.  I'm sure there will be fees.  But if the bulk of that is transferred, when combined with what already came over, it means my starting point is $48K - remember from the first post on this blog, my initial goal will be to rebuild the account to $77K as fast as I can. 

Only $29K to go!

Account Status, and Next Trade

I spoke with my Scottrade branch manager today, who called to tell me my COP option was assigned...I told him that I knew already, and that I was working on my next trade.  I'll discuss that in a minute, but first let's go to the status of the account transfer from Ameriprise over to Scottrade.

You'll recall from an earlier post that I had intended to close out my account over at Ameriprise in order to improve the account's practivity and get more control over the investments. There was some issue with the transfer, and several of the previous ETFs could not be held in the Scottrade account, so they had to be transferred back to Ameriprise, where they sit in limbo because my old broker cannot "see" my account on his screen. 

Frustrating. No likey. Part of why I moved the account.

Moving on to the next transaction.  I know I have a lot to learn about the covered call process, but I decided to set up a November trade.  I created a screen on Scottrade to get a few candidate stocks - looking for S&P Stars ratings of 4 or 5, and dividend yields in excess of 3%.  This is what I am working with now, I will probably improve this with payout ratios as I learn more.

Another example of what I want to beccome proficient on is the time value of the premiums.  That will come.

For the next trade I decided on IP - International Paper, which was trading around $25.30 per share today.  The stock pays a dividend of $26.25, goes ex- in November during options expiry week.  I bought 200.  Then I sold 2 contracts of the November 26, picking up $196 or so.

If I am assigned on this trade, I will net around $297 for the sale and the options contracts, that's around 5.8% for about a month on this trade. 

If I am not assigned, I will receive about $52.50 in dividends and look at whether I want to take profits or do another covered call.  I'll keep you posted.

COP Assigned - First Trade Complete

Logging into my Scottrade account today, I see that my COP option has been assigned well before the ex-dividend date for the shares.  The market has been rising lately, and it took these shares with it, obviously.

So here's a quick recap on how that covered call trade worked out for me:

Cost (net) of 100 shares of COP:  $6,315.91
Oct 65 call on COP premium (net): $87.74
Price (net) on assigned shares: $6,482.87

So I netted $254.70 off of the first trade with this strategy, which is close to the top of the range I had estimated, which was between $140-260.  That's 4% on the trade.  My money was locked in the stock for about 10 days.

The only downside, I didn't hold the stock through the ex-dividend date, so there's no residual revenue to be made off of this one.  But I didn't expect that to be the case; it's why I didn't include it in the estimate.

Looking for the next one.  Baby steps.  Comments welcome.

Money's in Transit, but First Transaction Anyhow

My transfer from the old Ameritrade account has hit a speed bump.  Some of their ETFs are not holdable in the new Scottrade account, so they were sent back and I have to do something to get the CUSIPs changed.  Honestly, I just want out of them at this point.

Meanwhile, three of the ETF holdings did transfer, and I disposed of them quickly this morning (lucky me, they were up $40 from yesterday.  I followed the sales with a simple covered call trade as follows:

Buy 100 sh. Conoco Phillips (COP) @ $63
Sell COP Oct 65 Covered Call at .95

There is a dividend date of record between now and the October expiry, the quarterly amount is .66...my goal was to be able to get this cash too, but it looks like the option expiry is before the dividend ex- date.

If my option is assigned, I will have a capital gain of about $200, an option premium of $95; and costs of around $32.  If it's not assigned, I'll collect the dividend of $66, in addition to the option premium, and costs are only $15; I'll revisit the stock strategy afterwards. 

As it stands today, the transaction will net between $140 and $260 - between three and five percent on the value of this IRA. This is an estimate and wouldn't be bad for the month of October, with the downside being I am locked in the position for a couple of weeks.

Baby steps, though.

Have I got this right?  Covered call strategists are welcome to comment.

And so it begins: Rescue My IRA

The year of my birth means that the demographers will group me in with the baby boomers.  I’m really at the tail end of that group, but my arguments fall on deaf ears.

Now that I have passed fifty also, all the talk about retirement – friends of mine who’ve earned pensions from federal, state or local organizations, especially – is starting to make me concerned.  We hear that social security won’t be there, and the date I’m eligible has already been extended once in my lifetime.

I began saving for retirement a long time ago, taking advantage of 401(k) accounts at employers, and when it has been offered, their matching funds.  But those balances have never seemed enough either, especially in light of what’s happening in the markets these days.

A few years ago, I thought it would be a good idea to consolidate some of the old 401(k) accounts from past employers into a single IRA.  The investment advisor I did this with soon left the firm he was part of, but we had managed to get my assets into one account.

I sought recommendations for another broker to work with, and made a change to a new guy who was working with ETFs and had a strategy.  The amount I sent his way was $77,000 or so. 

Since then, the market has tanked and our economy has had a tough go of it.  I even avoided opening the monthly statements I’d get from my broker, although I did open them a couple of times a year. The news wasn’t good.

Finally, last month I opened my statement.  I found that the balance had climbed back from it’s all time low, which was last year, when it hit $44,000.  I decided it was time to take some action, and roll this – now $47,000 – over into an IRA with Scottrade.

This blog will capture my efforts to “Rescue My IRA,” as the title says. 

By the way, I won’t be providing specifics on dollar amounts from now on. I’ve just offered those to emphasize the sense of urgency I’m feeling, as the need to prepare for retirement begins to occupy more and more of my thinking.