Called Away Due to Merger: KRFT

On Tuesday afternoon the financial markets were informed of the intent to merge HNZ and KRFT.  As it happens, I opened a 100 share position on KRFT just last week on March 19 – when the merger news broke, those shares rose more than $20 in one day, and my $62.50 April 2015 was called away.

Although the position plan for KRFT was designed to be a hat trick, where I would collect a covered call premium, dividend, and share gain, in the end that stock run up meant my call would be assigned early, well before the ex-dividend date, so I only received the call premium and the share gain, for an absolute return of $146 or 2.37%.  

If you extrapolate the annualized return on this 7-day trade, it is 123.60%!  I’m thinking that will be the best trade of the year, but if it isn’t, it's still good for me. 

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

KRFT

Shares:

Bought 100 shares on March 19, 2015, for a basis of $6,149.99, or $61.50 per share. 

The position was called away on a $62.50 strike price, netting $6,232.00, for a total stock gain of $83.01.

Options:

Total options income:   $62.75

Dividend:

Total dividends collected:  $00.00 – the call was exercised before the April ex-dividend date.

Net Profit:
Total Net Profit after Unwinding:  $145.76
Absolute Return on Investment: ($145.76/$6,149.99) = 2.37%
Annualized Return (7 days):  10.69%*(365/7) = 123.60%

Position Repair: CRUS

After I wrote my to-do list in the November monthly report, I quickly set out to do a position repair on the CRUS holding in the Rescue My IRA account.  As it was, I had adjusted the strike price down from $20 to $18.50, and if I had let the stock get called away I would record a loss on the shares totaling $600.  I decided to roll back up to $20, combined with a roll-out, as a way to mitigate this risk.

The position doesn’t meet all the rules of my trading plan, and as a matter of fact, I set it up as an exception.  For example, I typically look for shares that have a 4-star or better S&P rating, but CRUS was a 3-star stock when I bought it, and I also look for a dividend yield of between 3 and 5% per year, but CRUS doesn’t pay dividends.  Then I rolled down to $18.50 because I wanted to divest the shares after they were no longer rated by S&P. 

I’ve come around to not writing the position off after all – the volatility of this stock means there are plenty of covered call premiums available, enough to meet the yield expectations I have for shares in this account – 12% annualized.  So on Monday I rolled the shares out from December to March, and up from $18.50 to $20.00.

Here’s the current position plan for CRUS, net of fees and commissions.

CRUS

This is a 400-share position established in February 2014 with a basis of $8,038.00, or $20.10 per share.  The current covered call is $20 Mar 2015, I have been selling covered calls with strike prices ranging from $18.50 to $22.00.

Total covered call premiums:  $1,576.28

Total dividend payments (no dividend on CRUS):  $0.00

Total stock loss at $20:  -$56.00

Total, absolute gain on the position:  $1,520.28

Total, absolute return percentage ($1,520.28/$8,038.00):  18.91%

Annualized total return percentage (approx 375 days if held to expiration):  18.41%

Forecasting More Choppy Seas for the S&P 500

When I wrote my monthly summary a couple of weeks ago, we'd already seen a couple of downward trading days - and I summed it up to the effect that October would likely be spent sailing choppy seas.  So far this month, that's exactly how it has turned out.

I have rolled out all of my October positions, so my plan is to wait it out.  Over the last few days, I have considered rolling out some November contracts, but with the market trading in this direction I would either have to go farther out - say to March contracts, or begin rolling down my strike prices.  Instead of attempting to outsmart things with those kinds of reactions, I will simply stay put and deal with my November expirations in November.

Also, starting last February, I had been building a cash reserve that ranged from 25% to 35% of the account - on October 1 it was around 30%.  Now I have begun to think about putting some of that cash into some quality stocks, which appear to be bargains at the moment.

Two choices I have done well with before are QCOM and DIS.  Two 100-share positions in these stocks would put about a third of my reserves back to work with good prospects for meeting my annualized return goals.

On the other hand, the S&P is not yet down 10 percent from its highs.  That's a rule of thumb I've been using as I think about next steps.  So I may wait a few more days before I pull the trigger with a few more buy-writes.

IP: Rolling Out and Up

There was an unusual distribution on my IP shares – they spun off a part of the company and received some cash.  All of that led to an extra dividend in the form of three shares on my 200-share position, and a small amount of cash.  Making it that much more complex was the adjustment to the covered calls I’d written – I had to hold all of those items until expiration.

I resolved to streamline the position by rolling out and rolling up, and put the strategy into action as soon as regular options became available again.  I was able to buy to close the adjusted July $49 option, sell the three shares of the new company, and sell the August $50 option with a net cost of four bucks, improving my total returns to nearly 12% annualized in the process.

Pretty complication transaction all in all, but sometimes that is the way it is.   

Here’s the analysis of the total return on the IP position to date, net of fees and commissions, and assuming I collect dividends through the holding period.

IP

This is a 200-share position established in May 2013, with a basis of $9,592.00, or $47.96 per share.  I have sold strikes ranging from $47 to $50 and rolling them monthly during the holding period.

Total covered call premiums:  $583.38

Total dividend payments (includes the spun-off shares):  $428.08

Total stock gain at $50:  $390.00

Total, absolute gain on the position:  $1,401.46

Total, absolute return percentage ($1,401.46/$9,592.00):  14.61%

Annualized total return percentage (held approx 455 days):  11.72%

Position Repair: CAT

The battery pack on my old Dell laptop died last week, so until I replace it, I’m reconstructing my record spreadsheets and post templates on a borrowed computer. That puts me a little behind the curve on some recent trades, including the one I’ll post about today – a position repair situation on my old CAT shares, and one I’ll post soon about being called away on 200 shares of FB.

As far as the CAT position goes, I established this back in August 2012, making it an exceptionally long-lived trade for Rescue My IRA.  That’s due to the fact that the stock was in decline of most of 2012 – I haven’t checked, but wouldn’t be surprised if it were the dog of the Dow, and not just one of the worst performers of the year. 

Since buying the shares in August 2012, I have sold covered calls at the original $90 strike, have dipped as low as $85, and with the current trade, moved up to a $95 strike.  I count 13 adjustments on the options, and have collected six dividend payouts, with one to go before the current contract expires.  At $95, there will be a share gain, so as things currently stand, if all goes well with this trade, I’ll have a hat trick!

The last adjustment also moved the position into a place where the annualized gain for the period is 10.42%, getting close to my goal of 12%.  The absolute gain is almost 18% - nothing to complain about here, because when I had $85 and $87.50 strikes on CAT the position was going to 5% or 6% annualized.  That’s also why I call this a position repair trade.

Here’s the analysis of the position, net of fees and commissions and assuming I collect the April dividend for CAT.

CAT

This is a 100 share position established at $87.17 per share in August 2012, total basis $8,716.99.

The current covered call is at a $95 strike, but I have sold calls as low as $85 during the holding period.

Total covered call premiums:  $405.86

Total dividend payments (including the forecast April ex-dividend):  $396.00

Total stock gain at $95:  $765.83

Total, absolute gain on the position:  $1,567.69

Total, absolute return percentage ($1,567.69/$8,716.99):  17.98%

Annualized total return percentage (held approx 630 days):  10.42%

Two Roll-outs: CAT and FB

I took advantage of the great trading days we’ve had so far in 2014 to adjust my CAT and FB positions. Both are net gainers, but they are case studies of positions on two different tracks. 

I’ve held CAT since the fall of 2012 – it’s been a long haul – while it is making money, it is not making my target return of 12 percent annualized. This is my second go ‘round with FB; I made a great return the first time, and I recently updated the current trade by adding a second 100 share lot.  On this FB trade, which I’ve held for about 90 days so far, I’ve already met my goal of a 12 percent annualized return.

Here’s the analysis of the two positions.

CAT

The CAT position consists of 100 shares with a basis of $87.17.  I have sold strikes ranging from $85 to $95 over the course of the 15 month holding period; the current option is $90 May 2014.

Total option premiums:  $717.37

Total dividend payments (including the forecast January and April ex-dividends):  $396.00

Total stock gain at $90:  $265.83

Total, absolute gain on the position:  $1,379.20

Total, absolute return percentage ($1,379.20/$8,716.99):  15.82%

Annualized total return percentage (held approx 630 days):  9.17%

FB

This is a 200 share position established over the last two months with two 100 share purchases.  My current per share basis is $54.94, for a total of $10,988.49.  I recently did a roll-up to the $60 strikes while adding 100 shares – post is here:  http://rescuemyira.blogspot.com/2013/12/fb-add-on-and-roll-up.html

Total option premiums:  $274.93

Total dividend payments (no dividends on FB, making it a rule-breaker!):  $0.00

Total stock gain at $60:  $994.40

Total, absolute gain on the position:  $1,269.33

Total, absolute return percentage ($1,269.33/$10,988.49):  11.55%

Annualized total return percentage (held 120 days):  35.14%

FB Add-on and Roll-up

I have taken on positions in FB twice – even though I figure that it doesn’t meet my primary conditions for Rescue My IRA trades, I made my decision to go with it following Warren Buffet’s advice to "go with what you know."  I have been a member of FB since 2009 or so, and have really enjoyed connecting with old friends there. The ads this year have been particularly insidious – some online publications were even warning people that FB ads on a shared computer might spoil surprise gifts, lol – so I expect continued growth from the company, and at this point I can make an exception on the pick.

I wrote about establishing the first FB position here – http://rescuemyira.blogspot.com/2013/11/another-new-position-fb.html.  That trade was an early foray into using weeklies as well. I made an absolute return of 4.59% on that one, for just a three-day holding period…that works out to an annualized return of over 500%. 

If I apportion a share of Rescue My IRA to investments in “hot stocks” like FB, I believe I can control the risk from them in a way that will allow me to take some gains from them.  If I am careful, I may even be able to make a sustained, better than average return with these kinds of shares, as I did with that first FB trade.

With the current position, I’ve just added another 100 share lot and used that purchase as part of a strategy to roll up from a $50 strike to a $60 strike.   If the January 60 is called away, I will have generated an absolute return of over 17 percent in 90 days, exceeding my goal of an annualized return of 12 percent.

Here’s the analysis of the current FB position.

FB

Started with a 100 share lot, and have since added a second 100 shares.  Current basis is $10,988.49, or $54.94 per share.  I have been selling $50 strikes, but recently rolled up to $52.50, and with this trade have rolled up to $60 strikes; the current contract expires January 2014.  

Total option premiums:  -$92.06 (I had to buy to close a contract that was ITM)

Total dividend payments:  $0.00 – FB doesn’t pay dividends

Total stock gain at $60:  $994.40

Total, absolute gain on the position:  $902.34

Total, absolute return percentage ($902.34/$10,988.49):  17.40%

Annualized total return percentage (held approx 90 days):  70.55%

Another New Position: FB

After setting up the new WFC position, I still had some of the proceeds left from unwinding AFL and PFE earlier this week, and I wanted to put a good amount of it back to work in the market.  I usually do a screen for this purpose, and while I was working through the list, I found myself distracted and did some random quotes on shares as they came to mind.  I thought I might check out FB to see where it was trading at; I’ve been amused by the track of that stock since it was first listed and traded so poorly the first few months.

Since S&P has FB as a 3-star stock right now and it doesn’t pay dividends, this company would not normally make it onto a screen for Rescue My IRA.  However, I found that I could make a decent trade with an in the money weekly and I pulled the trigger.  On an annualized basis, this will probably be my best ever trade…but since I broke some of my selection rules, I have to remember the bon mot and not get too carried away –

“Bulls make money, bears make money, pigs get slaughtered…”

Here’s the analysis of the FB position.

FB

Transactions

Bought 100 shares at average share price $48.97 (total $4,896.99)
Sold 1 FB wk 1 Nov 2013 $48.50 for a net of $288.74

Net Profit:

1) Options Income:  = $288.74
2) Dividend Income: FB does not pay a dividend
3) Capital Appreciation if assigned at $48.50:  -$64.10

Total Net Profit if Assigned and dividend collected:  $224.64
Absolute Return on Investment: ($224.64/$4,896.99) = 4.59%
Annualized Return if Assigned (3 days):  4.56%*(365/3) = 558.12%

You read that right – annualized return would be over 500% if I could duplicate the trade over and over.  LOL – if only!

Two Adjustments: PSA and TXT

When I wrote my monthly summary for September, I noticed that I had made an error with my management of the PSA position.  I decided that I would try and do something about that to correct what was then a poorly performing position – I had to look into the back months to do a roll-out and roll-up combination – that trade will be the first I summarize here.  With the repair trade the position will earn an estimated return of almost 13%, which is in line with my goals for individual positions in Rescue My IRA.

I also rolled out the new TXT position I’d established last month.  The stock is down a little, very possibly because of the government shutdown, so I decided to do an adjustment from October calls to December calls.  Even by adding 60 days to the holding period, this position will earned an estimated 17% if it is called away in December.

Here’s the analysis of the two positions.

PSA

The position consists of 100 shares at a basis of $163.52 per share.  This trade involved a roll-up from a $160 strike to a $165 strike, while simultaneously rolling out from October 2013 to December 2013.

Total option premiums:  $477.21

Total dividend payments (including the forecast December ex-dividend):  $250.00

Total stock gain at $165:  $130.89

Total, absolute gain on the position:  $858.10

Total, absolute return percentage ($858.10/$16,352.00):  5.25%

Annualized total return percentage (held approx 150 days):  12.77%

TXT

This is a 300 share position with a share basis of $29.30, total cost of 8,791.00.  I am selling $29strikes, and the trade here rolled the contract out from October to December. 

Total option premiums:  $480.71

Total dividend payments (counting ex-dates through the contract term):  $6.00

Total stock loss at $29:  ($108.11)

Total, absolute gain on the position:  $378.61

Total, absolute return percentage ($378.61/$8,791.00):  4.31%

Annualized total return percentage (held 90 days):  17.47%

Rolling out and up ITW

I have one final transaction to post on from my recent trades – this time, a roll-out and roll-up on 100 shares of ITW.  I'm thinking this will be the last transaction of the month - all that is left to do is watch and wait until the February expiration date, or watch for early calls on some of the contracts.

Regular readers may recall that ITW became something of a special situation in the Rescue My IRA portfolio in December, when 100 shares of the original 200 share position were called on the ex-dividend date at a strike price of $60.  The post on that one is here:  

http://rescuemyira.blogspot.com/2012/12/called-away-early-and-roll-out-itw.html

Since the remaining 100 shares were not called in December, I rolled-out to a January option, and now have bumped up to a March $62.50, which I was able to do with a slight gain in premium.  My intention is to let these shares be called away if they are in the money in March. 

Here’s the analysis through the most recent trade:

ITW

The ITW position was established with 200 shares, and is currently 100 shares after a partial early assignment in December.  My basis on the shares is $56.37 per share, and the stock is currently trading near $64.  I have sold covered calls at strikes ranging from $57.50 to $62.50 during the course of this position.   

Total option premiums:  $475.37

Total dividend payments (estimated through the current contract):  $262.00

Total stock gain at $62.50:  $941.78 (includes the gain already recorded on 100 shares)

Total, absolute gain on the position:  $1,679.15

Total, absolute return percentage ($1,679.15/$11,274.00):  14.89%

Annualized total return percentage (held approx 390 days):  13.94%

Something Different with HPQ

Well, normally when I write about an adjustment I’ve made to a position, it’s a roll-out, where I buy-to-close an existing covered call and the sell-to-open a new covered call at the same strike price in a month further out the calendar. Sometimes, I have also done a roll-up, where I sell a new covered call at a higher strike price on an existing position, either in the same month as one I have just closed, or potentially going out a month or two.

Today I am writing about doing the opposite of both on my HPQ position, where I recently sold a covered call at a lower strike price and I sold it in a near-month.  It’s a roll-in and roll-down!

When I’ve had positions take their lumps in the past – as with ACM and ADM – I’ve usually just closed the positions at a loss and reinvested the proceeds.  This time, I think there is still value and opportunity in the underlying HPQ, and I wasn’t ready to write the investment off.

So there remains some risk in the position, that I could have the stock called away at a price that ensures a stock loss, but by setting this trade up to roll on a month-to-month basis, I think I can manage that risk until the stock price recovers…admittedly, that could be a while with this one.  I’ve decided to try and stick it out to see how it goes.

Here’s the analysis of the position.

HPQ

The HPQ position consists of 500 shares.  My basis is $19.23 per share, and the stock is trading way below that.  I had been selling 20 strikes in the back months, when I decided to set lower strike prices in near months and go for yield.  So now I am selling 16 strikes and rolling them monthly. 

Total option premiums:  $538.20

Total dividend payments:  $52.80

Total stock loss at $16:  -$1,634.10

If called, there would be a loss on the whole position.  But as I mentioned, I plan to hold HPQ for the longer term and manage it back to a profitable level. 

Total, absolute return percentage, just counting dividends and option premiums ($591.00/$9,616.99):  6.15%

Annualized total return percentage (held approx 140 days):  16.02%

Closing out COP

Earlier in the month I realized that the 100 share position in COP no longer fit in with my trading plan.  The company has been working on a strategy to spin off a portion of its assets and their action finally came to be with the issuance of 50 shares in PSX.  This was done as a dividend of 50 shares for every 100 share lot in the parent stock.  The problem was that my option contract on COP was now adjusted to be for 100 shares in COP and 50 in PSX. 

PSX is not currently a dividend payer and is unrated by S&P - two strikes against holding it in the Rescue My IRA account.  My normal strategy would have been to immediately divest the shares, but the option contract on COP was now adjusted to be for 100 shares in COP and 50 in PSX.  A second impact was the adjustment of the COP shares to reflect the spin-off. 

I’d held this lot of COP since November, and would have been content to maintain them for a while longer if they still met the requirements of the trading plan.  Instead, I divested the whole package at a slight loss.

Here’s the analysis:

COP

Original November 2011 investment: 100 shares, $6988, average share price $69.88

Option Premiums (total – 8 contracts):  -$62.31

Dividends Collected (includes 50 shares of PSX):  $1,558.96

Stock Loss (sale price of $53.13 per share, adjusted by value of PSX dividend):  -$1,683.80

Total:  -$187.15

Absolute return -2.68%

Annualized return (210 days) -4.65%

Lesson Learned:  I had a good ride with COP, especially considering the early call I had on the previous COP position last October.  I probably could have gotten the position into a break-even status by waiting another month, but I feel like I took the correct action on this position to comply with my trading plan.  There is the problem with the net negative income off of the option premiums – this is the result of chasing the strike price up the ladder – although breakeven on the shares was at 70, I held contracts for 72.50, 75, and 77.50 during the course of this position.  I think I’ve summarized the impact of closing current contracts to chase a higher strike in a past post, and that is where the small loss came from – I’ve already fine-tuned my behavior in this regard to ensure I am always getting a net credit – a positive result – on contract trades.  

Biting the Bullet on Legacy Holding ACM

At last, I decided to end the roller coaster ride I was on with my legacy ACM position.  This is the stock of a company I used to work for, and my view as an employee had been that the company was slow to react to changing market conditions – certainly worse at it than competitors JEC and URS are, and I had also been an employee at JEC before (and done very well with the stock through the employee stock purchase plan, I might add!).

So when earnings came out last week and the stock took a haircut, back to test the lows that we had seen with the shares last year just after I was put on furlough, I decided it really was time to see if there was a better use of the money.  After all, this is a legacy position that was not established under the Rescue My IRA trading plan – it wouldn’t make the cut to begin with as a non-dividend stock, and since it is a company I am not in love with, well, it was time for ACM to hit the road, Jack.

My basis in the shares was around $25, and I don’t see getting back to that this year and maybe not next.  So I cut my losses this week and sold at $18.50.  That capital gain hit is going to set the account back a few months, but I immediately established a position in URS, which I will post about tomorrow, and the recovery has already begun.

Here’s the position analysis:

ACM

Shares:

November 2012:  Transferred 880 shares in from my 401(k) during the rollover.  I sold 80 shares immediately so I would have 8 round lots.  My basis was about $25.00 per share.

5/8/2012 Sold 800 shares at $14,784.66, average share price $18.49

Total stock LOSS:  -$5,233.34

Options:

Over the course of this holding, I have had covered calls with March, June and September expirations at strike prices between 22.50 and 25.00; total options income:  $204.91

Dividend:

ACM is not a dividend payer.  It is a legacy holding that was not selected based on the trading plan, and has always been a candidate for divestment because of this.

Net Profit:
1) Stock loss:  -$5,233.34

2) Options income:  $201.91

3) Dividend Income: $0

Total Net loss upon divestment:  -$5,233.34 + $201.91 + $0.00 = -$5,028.43
Estimated Absolute Return on Investment: -25.14%
Annualized Return:  Not calculated

All I can say here is good riddance.  I have my work cut out for me to recover this loss over the course of the rest of the year.

And we'll call it a lesson learned - the trading plan for this account is working; the investments I make here need to follow that trading plan!

It's Finally over: NVS Called Away

As expected, my NVS shares were called away at expiration last week.  This is a position I have regretted since I got into it (check out previous posts by searching the blog on NVS) – I finally have gotten rid of it. 

The stock has a juicy annual dividend that first attracted me to it, and I bought a round lot before the ex-date.  I sold a covered call against it, but I forgot some of the basics of my trading plan in doing so.  When the stock dropped on the ex-date, which was close to the expiry date of my first position, I found it hard to establish a profitable next position and got in a rush, setting my next contract up for a loss.

Then the dividend payment came in, and it turns out this stock is subject to a foreign tax - so another nickel and dime taken away.  In the end, I only lost $9.73 on the position, and that turns into about 1% on an annual basis.  It’s a loss, but not so bad, and I really learned a lot from this one.  Here’s the history:

NVS – 100 Shares, basis $57.26, 55 Apr 2012 assigned

Option Premiums (total):  $84.23

Dividends Collected (net of foreign tax):  $159.13

Stock Loss:  -253.11

Total:  -$9.73

Absolute return -0.17%

Annualized return (60 days) -1.03%

I’m glad this is finally over with!

Be Not Hasty - NVS Dividend Grab

Last week I wrote about a trade I did quickly to be a shareholder of NVS in time for it's annual dividend payment of $2.46.  That's a nice chunk of change and I thought it would be worthwhile to go for it, so I made a trade.  I moved so quickly, in fact, I forgot to factor in the price drop that comes on the morning of the ex-dividend date.


I started the Rescue My IRA account with the goal of being more aggressive about investing than I have in the past, but every position has to make a profit - some less, some more, some minuscule and some generous - but profitable, nonetheless, and so far that is working. On the upside, NVS is a pretty strong stock that meets my investment criteria, so holding it for a longer than average term doesn't bother me, and I will make some money on it, so we're good.


Still, when the ex-dividend price drop hit, the stock went down from my basis of $57.36 to $55.  So I am looking at biding time in this position.  I have done a roll-out of my original 57.50 Mar and rolled down also, to a 55 Apr.  That will extend my holding period to about 60 days, and bring my annualized return down some, below where I would like to see it, but I'll continue to monitor and see what else I might do to improve my profits.  


Here's the analysis:

NVS

Transactions

2/25/2012 Bought 100 shares at average share price $57.36 (total $5,736.00)
2/25/2012 Sold 1 NVS Mar 2012 $57.50 at $0.30 (total $21.74)

2/28/2012 BTC 1 NVS Mar 2012 $57.50 at $0.05 (total - $13.74)

3/2/2012 STO 1 NVS Apr 2012 $55.00 at $0.84 (total $75.74)

Net Profit:

1) Options Income:  = $84.23
2) Dividend Income: Ex-date was 2/27, $246.00
3) Capital Appreciation if assigned at $57.50:  -$253.11

Total Net Profit if Assigned and dividend collected:  $84.23 + $246 - $253.11 = $77.12
Absolute Return on Investment: ($77.12/$5,736.00) = 1.34%
Annualized Return if Assigned (60 days):  1.13%*(365/60) = 8.18%
Friday's closing price was out of the money for the 55 strike in the current option.