Opportunity for Adjustments on GE and ACM

I saw an opportunity in the market yesterday on two positions and decided to take aggressive action.  The positions were ACM and GE, and when I established the covered calls on them I had to sell pretty far out in the calendar.  I was able to move both up, and did the trades for an overall gain.

In the case of ACM, the position is pretty much a wash at this point.  It is a legacy in the portfolio from when I used to work there; I have 800 shares and the price basis is about $25/share.  Earlier I STO for 4 22.5 Mar and 4 25 Jun 2012s, which the intention of cashing these out since they don’t fit my trading plan.

With the shares rising of late, I rolled-up the 22.5 Mar to 25 Mar.  For the lower strike contract, I paid $612 to close the position, but got $88 back, plus the additional $1,000 if the contract is exercised.

In the case of GE, I had 4 18 Jun 2012 contracts.  They were in the money, and basically that investment was going to sit for another five months.  My basis in the shares is $16.17, so I decided I could spare a little money to move up to 18 February contracts.

The BTC cost me $628, but I got back $384 on the ITM February contracts.  My net on option premiums is -$27, but I collected dividends of $68 on the shares, and my capital gain if exercised is $712.  So I’m still in a good spot with this one.

Between the anticipated marginal capital gain on ACM, and the BTC/STO round trips, the total gain from this trading activity is $232.  When calculated against my account balance, the percent return is about 0.18%.  It’s moving in the right direction…and there will be some benefit to being able to put the cash back to work in GE’s case.  And I am glad that the ACM position is getting close to a wash.

January Adjustments on GLW, COP, and T

Some folks are describing the current market as “toppy” – meaning we are at a place where trading is looking for support for additional gains, or is hitting resistance that will result in short-term declines.  I’m not seeing anything that concerns me just now, but what I have noticed is that the time value in some of the covered calls is eroding and I decided to roll-out three positions:  GLW, COP, and T.  In T’s case, I have only BTC the old call and have not STO the replacement.

GLW:  I BTC the old position, 14 Feb 2012 for $72.00, after STO in January for $107.99, so I made about $36 on his trade.  That translates to a little more than ½% in returns on the original share prices.  I now have a 14 Mar 2012 on the shares, sold for $67.99, and will look for a dividend announcement soon.

COP:  The position was a 72.50 Jan 2012 that I sold in November for $142.74.  I bought it back before January expiration for $22.25.  Subsequently, I sold the 72.50 Mar 2012 for $54.74.  This is the third series of calls I have written on the position, and I look forward to a dividend announcement next month.

T:  This transaction is not yet completed, but I did BTC the old 31 Feb 2012 position for $34.75.  After STO of $64.24, I netted about $29.49 on these shares.  I am holding off on my next call for now, as the stock price dropped on earnings, which featured an adjustment due to the break-up fee that was paid following the failed T-Mobile merger.  A bright spot was the receipt of $132.00 in dividends that was recently credited to my account after the stock went ex on January 6.

Unless there is some genuine market excitement next week in the two remaining trading days, I suspect I am finished for the month now that these trades are complete.  You never know though, I may get the premium from a new STO on T before the month closes!

Five (!) New Positions: HAS, HRS, IP, SPLS, TGT

Following the January expirations, I had a lot of cash on hand.  Some might make an argument that it would be okay to sit on it, but it is my preference to have it working for me as much of the time as possible.  So I had already begun keeping an eye out for some new positions, and I even decided to go back to the well on IP.

I’ve added five replacement positions this week, mostly with February expirations…I’m going to be busy this month!   Here they are:

SPLS, 500 shares at average price of $15.94 each, total $7,971.42:

·         I sold five 17 Mar 2012 contracts for $136.74.

·         There is no dividend opportunity during this trading period.

·         At $17.00 per share, the net stock gain exceeds $500 on this trade.

·         If assigned, I will realize a net gain of 8.13%, annualized to 49.46%.

TGT, 100 shares at $50.50, total $5,049.79:

·         I sold one 52.50 Feb 2012 contracts for $56.74.

·         There is a dividend opportunity of $30 during this trading period.

·         At $52.50 per share, the net stock gain is about $180 on this trade.

·         If assigned and dividend collected, I will realize a net gain of 5.34%, annualized to 65.00%.

HRS, 200 shares at $39.67, total $7,933.50:

·         I sold two 40 Feb 2012 contracts for $150.49.

·         There is no dividend opportunity prior to the option expiration, although the ex-date is later in February.

·         At $40.00 per share, the net stock gain is about $49 on this trade.

·         If assigned (I sold the contract with that goal), I will realize a net gain of 2.52%, annualized to 30.64%.

HAS, 200 shares at $33.71, total $6,742.98:

·         I sold two 35 Feb 2012 contracts for $60.49.

·         There is a dividend opportunity of $60 during this trading period.

·         At $35.00 per share, the net stock gain is about $240 on this trade.

·         If assigned and dividend collected, I will realize a net gain of 5.34%, annualized to 65.00%.

IP, 200 shares at $31.47, total $6,294.50:

·         I sold two 32 Feb 2012 contracts for $104.49.

·         There is a dividend opportunity of $52.50 during this trading period.

·         At $32.00 per share, the net stock gain is about $88 on this trade.

·         If assigned and dividend collected, I will realize a net gain of 3.90%, annualized to 47.42%.

DIS Called Away

My experience with DIS was similar to the one I had with IP, I went back to the well to add to my position on a good trade, but ended up having shares at two strike prices.  I did that to make sure I held shares for the annual dividend ex-date, and I was concerned my lower strike contract would be called away. 

So, just as with the IP shares, I made money all three “Rescue My IRA” ways:  with call premiums, dividends, and share price gains. These shares were called away at options expiry date last week.  Here is the record on this position, as usual, net of fees and commissions:

DIS

Shares:

Bought 300 shares at an average price of $35.17, total position basis $10,551.96

Sold on assignment 300 shares at $10,864.22, average share price $36.21

Total stock gain:  $312.26

Options:

11/8/2011 STO 36 Nov 2011 total $81.00

11/14/2011 BTC 36 Nov 2011 total -131.00

11/14/2011 STO 37 Dec 2011 total $155.00

11/22/2011 BTC 37 Dec 2011 total -$43.50

11/28/2011 (2) STO 36 Jan 2012 total $176.49

12/8/2011 (1) STO 37 Jan 2012 total 83.74

Total options income:  $321.73

Dividend:

Collected $180 on the shares

Net Profit:
1) Stock gains:  $312.26

2) Options income:  $321.73

3) Dividend Income: $180.00

Total Net Profit after Assignment:  $312.26 + $321.73 + $180.00 = $813.99
Absolute Return on Investment: ($813.99/$10,551.96) = 7.71%
Annualized Return (72 days):  7.71%*(365/72) = 39.09%

Early Call on IP

Last Thursday I received a notification that my CAT shares were called away, but 200 shares of my IP position were also called early.  Those shares were among the first I bought when I opened the Rescue My IRA account – I’m fondly remembering that I made that purchase from a hotel room in Vegas. 

As my trading strategy evolved and I began to plan for the additional funds coming in from rolling over the second 401(k), I thought I might add to the IP position and bought 100 more shares in mid December.  I sold a covered call on these shares as I had with the earlier 200, only at a different strike price – they were at 27, and these were at 29. 

Looking at the records on this position, it has everything, including lessons learned for my evolving trading strategy. I see that I made at least two adjustments to the covered calls, collected a dividend, and then had all 300 shares called away at a profit.  I can’t complain, and I will keep IP in mind for another trade down the road. 

Here is the record on this position, as usual, net of fees and commissions:

IP

Shares:

10/13/2011 Bought 200 shares at $25.32 (total $5,064.48)

12/19/2011 Bought additional 100 shares at $27.97 (total $2,797.77)

Total position cost $7,862.25, average share basis $26.21

1/17/2012 Sold on assignment 200 shares at $27.00 (net $5,382.89)

1/20/2012 Sold on assignment 100 shares at $29.00 (net $2,882.89)

Total position sold at $8,265.78, average share price $27.55

Total stock gain:  $419.75

Options:

10/13/2011 STO 26 Oct 2011 total $196.48

11/8/2011 BTC 26 Oct 2011 total -$543.50

11/8/2011 STO 29 Dec 2011 total $190.48

12/12/2011 BTC 29 Dec 2011 total -$29.50

12/12/2011 (2) STO 27 Jan 2012 total $338.49

12/19/2011 (1) STO 29 Jan 2012 total -$54.74

Total options income:  $207.19

Dividend:

Collected $52.50 on the first 200 shares

Net Profit:
1) Stock gains:  $419.75

2) Options income:  $207.19

3) Dividend Income: $52.50

Total Net Profit after Assignment:  $419.75 + $207.19 + $52.50 = $679.44
Absolute Return on Investment: ($679.44/$8,265.78) = 8.22%
Annualized Return (97 days):  8.22%*(365/97) = 30.93%

Lessons Learned:

There were a couple of lessons learned in this trade.  Most importantly, this is the one where I made a goal of not taking a loss on options adjustments, as I did with the 26 Oct 2011 contract.  The second one was that it is okay to go back to the well on a good stock for another trade, as I did when I found that I had enough cash to put back into shares and decided the best option was to go with one I already had. 

Early Assignment on CAT

Yesterday I received an email early in the morning about the early assignment of my CAT option.  The note also informed me that part of my IP position was assigned early, but I will hold off on posting about that one since I am holding part of the position with another January call. 

The early assignment on CAT (92.50 Jan 2012) was not entirely unexpected.  When I made the initial trade back on 12/29/2011 I knew the ex-dividend date was 1/18/2012, so I chose a strike price that would allow decent appreciation during that 22 day period if the shares were assigned. 

Since I bought them, the CAT shares have gone on a tear and blew past $100 per share, closing yesterday at $104.26. I gave up on some of that upside with my trade, but I can’t complain about the small bite I took and the return generated over the 22 days I held this position!

That’s the case:  my basis in the shares was $89.53, and I sold them at $92.33.  As I’ve posted recently, I have two or three other positions I expect to be assigned on this month, so I will make new investment decisions next week.  Meanwhile, here is an analysis of the CAT position (all net of commissions and fees):

CAT

12/29/2011 Bought 100 shares at $89.53 (total $8,953)

12/29/2011 Sold to open 1 CAT 92.50 Jan 2012at $1.60 (total $151.74)

1/18/2012 Assigned on 100 shares at $92.50 (net $9,232.82)

Net Profit:

1) Options Income:  $151.74

2) Dividend Income: None, assigned on ex-date
3) Capital Appreciation: $9,232.82-$8,953 = $279.82

Total Net Profit after Assignment:  $279.82 + $151.74 = $431.56
Absolute Return on Investment: ($431.56/$8,953) = 4.71%
Annualized Return (22 days):  4.71%*(365/22) = 78.14%

COP: BTC

Last Friday, after watching the stock price of COP begin to decline for a week or so - in anticipation of a dividend declaration that will likely sport an increase, mind you - I decided I would do a buy-to-close BTC on my 72.50 Jan 2012 for the stock.  My out of pocket was $22.50.

COP usually declares a dividend in February and what I am seeing around the investing community is that this year's February dividend will include an increase.  There's also a bit of news about strategic developments within the company as they prepare to spin off some assets. 

Including the estimated dividend of $66 and the call premiums to date of $114, my returns on these shares is  about 8% annualized (I've held the shares since October).  I think I will continue to hold, but wait until the dividend declaration and earnings have been reported.

Book Review: Options for Volatile Markets

Jeff Partlow, blogger and mentor in the covered call community, was among the first to bring the book linked over in the right column, to my attention.  I promptly went out and bought it, drawing from the insights offered to develop my strategy for the Rescue My IRA account.  Jeff (whose blog may be found at http://coveredcallsadvisor.blogspot.com/) recently posted a review of the book on Amazon.com, which I thought I might repost here for convenience.  He is also the moderator of the members only JustCoveredCalls discussion board over on Yahoo (link to the sign-in page, from which you can join the board:  https://login.yahoo.com/config/login_verify2?.intl=us&.src=ygrp&.done=http%3a//finance.groups.yahoo.com%2Fgroup%2Fjustcoveredcalls%2Fjoin).

Here is Jeff's review of the book, in full text:

PRAISE: First and foremost, I confidently assert that this book is the single best resource now available that is focused primarily on the subject of covered calls investing. To those who have read the 1st Edition of this book (titled "New Insights on Covered Call Writing"), this 2nd Edition is a substantial improvement. It is written with great clarity throughout and is worthwhile reading for anyone (from novice to expert) interested in covered calls and other closely-related hedging strategies.

Some of the best features are:

1. Excellent definitions and explanations of options terminology; and especially insightful discussions of important topics such as time value decay, skews, implied volatility, and historic volatility.
2. A very good explanation of why a fear common to many newbie covered calls investors, namely early exercise, is largely unwarranted.
3. Thorough discussions related to position management (the authors call this "follow-up actions"), including various types of "rolling".
4. The section on "Basic Tax Rules for Options" is the best concise description I've seen anywhere on this topic.
5. Why it is critically important that investors develop knowledge of how "risk" and "volatility" should inform our investment decision-making process. Consideration of specific "traps" to be avoided is another especially strong feature of this book.
6. For investors interested in modifications to the basic covered calls strategy, hedging with protective puts, collars, and option spreads are also presented. Thankfully, the authors present these alternatives in a well-balanced manner, taking time to present both the pros and cons of each strategy.

CONCERNS:

1. I share the concern of some other reviewers that the revised title of this 2nd Edition is overly generic and therefore somewhat misleading. A more appropriate title would be something like "Covered Calls and Related Hedging Strategies".
2. Figure 6.4 is a very nice, visual way to portray the "Behavioral Impact of Covered Call Writing". But the stock price ranges are incorrect: "Good decision offset..." should be <$47, etc., etc.
3. Weekly options now exist for over 100 equities/ETFs and they continue to grow in both availability and popularity. Including commentary on the possible role of weeklies in the several instances when expiration timeframes are addressed throughout the book would definitely enhance the readers' overall understanding.

MAJOR FLAW: On pages 162-164, the authors present results from their own study of four strategies during 2007-2010. The results are summarized in Table 8.3. Unfortunately, there are errors in the "Total Period" column which will cause naïve readers to falsely conclude that the collar strategy provides substantially better returns than the other three strategies.

Two of these errors are:

• The actual overall performance of SPY over these 4 years was -3.8%, not -17.3%.
• The +15.2% return claimed for the collar strategy defies basic, common sense when compared with the returns presented for its related component parts, that is a covered calls return of +3.1% in combination with a put hedge return of -5.2%. We can also conclude that the +15.2% is also clearly inaccurate from a different viewpoint, since a time-weighted average of the flat period (+5.8%), down period(+0.4%), and up period (+16.7%) is much closer to +8.4% -- but definitely not +15.2%.

This major flaw should be corrected prior to the next printing of this book. Further, to improve the validity of the results, the current 4-year backtest should be extended to a more rigorous minimum of 20 years.

###

January Expirations - and Deltas

January 20 is options expiry this month, so I wanted to take a look at the January contracts to see which ones I can expect will be called.  On another note, a recent discussion over on the Yahoo board touched on one of the “Greeks,” namely delta, defining it as the probability that an option will be assigned.  The Greeks are statistical calculations, often provided by the market, that can be used to assist in developing trade strategies.    

In their book Options for Volatile Markets (see the Amazon link over there to the right), Lehman and McMillan define delta as “the amount an option is expected to move for a one dollar move in the stock.”  Thus, as the value of delta approaches 1.00 – meaning a one dollar move in the stock will produce an equal move in the option price – you have a pretty good idea that your in-the-money option is going to be exercised.

My strategy is not yet so sophisticated as to use delta, or any of the Greeks, for that matter, in trades…maybe someday it will be.  Getting back to my post today, I will use it in the analysis that I present here. 

Here’s a table of the six positions up for January expiration:

There are a couple of things to note about this analysis.  First, my goal in the Rescue My IRA account is to earn 1 percent per month (in January, the goal is approximately $1,300) – the total here exceeds my goal, and is in addition to dividends and option premiums I’ll receive, so January’s looking like a good month. Second, each of the deltas are fairly high, approaching 1.00, or 100%.  Thus, it’s highly likely these contracts will be assigned and I will earn these amounts – which, by the way, are estimated net of commissions.

Another point I would make today is the likelihood of the CAT contract being assigned early.  Not only does the recent close far exceed the strike price on my contract, this stock goes ex-dividend on January 18.

And the last one, an issue I have mentioned before, is that the recent close price on these positions is higher than my strike price, meaning there is an opportunity cost I've given up by using the covered call strategy.  I've come to terms with that - what I'm finding is that there is an intangible benefit to having a strategy and feeling like your contracts provide some assurance you'll meet your financial goals.  And, as I noted above, I have certainly been able to do that for this month.

Finally, looks like I will have a substantial cash position to work with during the week after expiration.  With the recent market gains, I’ll need to get to work on finding some prudent new investments.     

Adjusting DRI: Roll-out

When I bought the DRI shares, one of my goals was to scoop them up before the ex-dividend date of 1-6, last Friday.  Over the few days I'd held them, they went into the money and I was worried that I might see them called away early, leaving me with the profit from the call premium but nothing else. 

Using my trading plan, this is okay, since I enter trades with two objectives:  1) to earn at least $100 on the trade, and 2) to earn a calculated annual return of 12% or more.  Here is the position summary from the entry trade (which assumed collection of the dividend of $86):

Total Net Profit if Assigned and dividend collected:  $114.49 + $86 + ($21.00) = $179.49

Absolute Return on Investment: ($179.49/$9,203.00) = 1.95%

Annualized Return if Assigned (21 days):  1.95*(365/21) = 31.51%

On Thursday, the day before the stock went ex-dividend, the price dipped below the $46 strike price.  I decided to take a look at whether an adjustment, rolling out from a January to February call, might be prudent.  On Friday, the January calls were moving pretty slow so I put a limit buy to close (BTC), and was able to pick up 2 contracts for $59.50 net, leaving me with a $55.01 profit on the first covered call trade with this stock. 

I then sold to open (STO) 2 February 46s for $146.49, and since I was now sure the shares were not going to be called away early, I recorded the dividend amount of $86 on my account history spreadsheet.  Here is the analysis of the position now that the roll-out is in place:

DRI

1/3/2012 Bought 200 shares at average share price $46.02 (total $9,203.00)

Net Profit Calculation:

·         Options Income:  = $201.48

·         Dividend Income: $86.00

·         Capital Appreciation if assigned at $46:  ($21.00)

Total Net Profit if Assigned and dividend collected:  $201.48 + $86 + ($21.00) = $266.48

Return on Investment Calculation:

Absolute Return on Investment: ($266.48/$9,203.00) = 2.90%

Annualized Return if Assigned (45 days):  2.90*(365/45) = 23.49%

Friday's close on DRI left the Feb 46 out of the money (OTM).

Add-on to Position: CSX

In light of the additional deposit in the Rescue My IRA account, I'm shooting for holding 12 to 15 positionsat any given time.  At the current time, that means the average value of the holdings should be about $8,000.  Along with all the new positions I established I looked at the holdings to see if there might be some to add on to - CSX seemed like one with potential so I added 200 more shares.  I also sold to open two more of the 22.50 Feb 2012 calls on the new shares.

Here's the analysis of the position:

CSX

Original 200 shares:  $4,348.82
Second 200 shares:  $4,396.44
Total basis:  $8,745.26
Average share price:  $21.86

Prior Call Premiums:  $73.97
1st lot 22.50 Feb 2012:  $126.49
2nd lot 22.50 Feb 2012:  $136.48
Total Call Premiums:  $336.94

Dividends Received:  $24.00

Estimated Total Returns if Assigned:
Total Call Premiums:  $336.94
Dividends:  $24.00
Estimated Capital Gains at $22.50 per share:  $236.74

Total Absolute Return:  $597.68
Total Return, Percentage:  13.74%
Estimated Annualized Total Return (held 120 days):  41.80%
Most recent closing price per share:  $22.76, so these calls are in the money (ITM).

Two More New Positions: T and DRI

As I mentioned in yesterday’s posts about new positions, it is a key goal of the Rescue My IRA approach to earn income in three ways from each position:  trough call premiums, capital appreciation, and dividends.  While I did my due diligence for the positions I would establish following my 401(k) rollover, I found opportunities with T and DRI where the ex-date was 1-6-2012, so I decided to quickly pull the trigger on these.  Analysis follows.

T

1/3/2012 Bought 300 shares at average share price $30.41 (total $9,123.85)
1/3/2012 Sold 3 T Feb 2012 31 at $0.25 (total $64.24)


Net Profit:

1) Options Income:  = $64.24
2) Dividend Income: Ex-date is 1/6, $132.00
3) Capital Appreciation if assigned at $31:  $158.15

Total Net Profit if Assigned and dividend collected:  $64.24 + $132 + $158.15 = $354.39
Absolute Return on Investment: ($354.39/$9,123.85) = 3.88%
Annualized Return if Assigned (45 days):  3.88%*(365/45) = 31.51%
Yesterday's closing price was $29.96, so the Feb 27 is currently out of the money (OTM).

DRI

1/3/2012 Bought 200 shares at average share price $46.02 (total $9,203.00)
1/3/2012 Sold 2 DRI Jan 2012 46 at $0.62 (total $114.49)


Net Profit:

1) Options Income:  = $114.49
2) Dividend Income: Ex-date is 1/6, $86.00
3) Capital Appreciation if assigned at $46:  ($21.00)

Total Net Profit if Assigned and dividend collected:  $114.49 + $86 + ($21.00) = $179.49
Absolute Return on Investment: ($179.49/$9,203.00) = 1.95%
Annualized Return if Assigned (21 days):  1.95*(365/21) = 31.51%
Yesterday's closing price was $45.01, so the Jan 46 is currently out of the money (OTM).

When I made the decision to go with the DRI purchase, the shares were trading right at $46, so I was working on the margin.  In the past when I have made similar trades, even though I recognize I small capital gain, I’ll accept that if the upside from the option premium and dividend meets my goals of more than $100 gain on the transaction and an annualized return of greater than 12%.

As with T, this stock goes ex-dividend today, the date of this post.  There has been a risk this week of the DRI shares moving high enough over the strike price to be assigned early.  However, as of yesterday’s close, it is much less likely that DRI will be assigned today.

New Position: MSFT

Here is an analysis of the second position I established with my rollover 401(k) funds:  MSFT.  Remember, the goal of the Rescue My IRA approach is to earn income in three ways from each position, whenever possible…through call premiums, capital appreciation, and dividends.

MSFT

12/30/2011 Bought 400 shares at average share price $25.99 (total $10,395.00)
12/30/2011 Sold 4 MSFT Feb 2012 27 at $0.40 (total $147.99)


Net Profit:

1) Options Income:  = $147.99
2) Dividend Income: Ex-date is 2/14, $80.00
3) Capital Appreciation if assigned at $27:  $387.00

Total Net Profit if Assigned and dividend collected:  $147.99 + $80 + $387.00 = $614.99
Absolute Return on Investment: ($614.99/$10,395.00) = 5.92%
Annualized Return if Assigned (45 days):  5.92*(365/45) = 47.99%
Yesterday's closing price was $27.30, so the Feb 27 is currently in the money (ITM).

New Position: CAT

With the arrival of the funds from my old 401(k), I established several new positions in an effort to get the money working for me right away.  Here is an analysis of the first position – stock symbol CAT.

CAT

12/29/2011 Bought 100 shares at average share price $89.53 (total $8,953.00)
12/29/2011 Sold 1 CAT Jan 2012 92.50 at $1.60 (total $151.74)


Net Profit:

1) Options Income:  = $151.74
2) Dividend Income: Ex-date is 1/18, but it looks like the position will be assigned early, $46.00
3) Capital Appreciation if assigned at $92.20:  $279.00

Total Net Profit if Assigned and dividend collected:  $151.74 + $46 + $279.00 = $476.74
Absolute Return on Investment: ($476.74/$8,953.00) = 5.32%
Annualized Return if Assigned (21 days):  5.32*(365/21) = 92.55%
Yesterday's closing price was $94.17, so the Jan 92.50 is currently in the money (ITM).

I have several more new position posts to put up in the next few days.

New Year, New Positions, and a Special Situation

With the rollover of my old 401(k) complete, there is that exciting time of establishing new positions! 

Tomorrow I will begin to post on four of the positions:  CAT (100 shares), T (300 shares), MSFT (400 Shares), and DRI (200 shares).

There is one complicated position...in the old 401(k), I had 880 shares of the company stock (symbol ACM), since they were offered at a 10% discount.  I took advantage of this, intending to manage the position as 20% of my account value - it didn't quite work out that way and the position was a little overweight at the time of my layoff.

That would have been easy enough to manage, except that the stock dropped 25% within the week of my layoff, and I was stuck in a place where I couldn't do anything about it.  So although I could liquidate the mutual funds, I decided to roll these shares and write covered calls against them.

I sold the 80 shares at a loss, but for accounting purposes, I valued the shares at $25 each.  The remaining position is still overweight in the Rescue My IRA portfolio, so I split the contracts between a Mar 22.5 and a Jun 25, laddering up to recover most of the investment.  Even so, if I am called on both contracts, I will take a capital loss that totals about $1,000 on these shares - I'll have some work to do to make up for this, but the position has risk that I need to manage down, so the calls should help mitigate the potential for a larger loss. 

Here's the position analysis:

ACM

12/27/2011 Transferred in 800 shares @$25.00 = $20,000
12/27/2011 STO 4x 22.5 MAR 2012 = $167.99

12/27/2011 STO 4x 25 Jun 2012 = $155.99

Net Profit Calculations:

1) Options Income:  $167.99+$155.99=$323.98
2) Dividend Income: None, ACM is a non-dividend stock
3) Capital Appreciation if assigned:  $18,982-$20,000 = ($1,018.00)

Total Net Profit:  ($694.02)

Absolute Return on Investment: (3.47%)
Annualized Return if Assigned: Not calculated.

Calendar 2011 Recap

After three short months of working on the “Rescue My IRA” strategy, I have decent enough results to report.  This post is a summary of the account’s performance so far, basically adding up everything that has happened in 2011.  I don’t want this annual post to be overly redundant to the monthly reports, and since this first one is for just three months, I’m afraid I don’t have a lot of material.  So next year’s annual report will probably have a bit more meat to it.

Not to mention that it will foster a more consistent analytical approach.  I simply don’t have much data, and the basis of this account has changed quite a bit over the first three months as several accounts were combined to form it.  So I suppose we should call these results “illustrative” – although there are real, actual, cold hard cash results included.
Performance Metrics:
Total Option Premiums Collected (net, 2011):  $2,013
Capital Gains Collected (net, month of December): ($459)
Dividends Collected (recognized on the ex-date): $344
Interest on Cash Reserve (estimated total): $.70
Total, Absolute Return:  $1,898
Absolute Return, Percentage Basis:  3.71%
Annualized Return, Percentage Basis:  15.03%
As I mentioned in yesterday’s “monthly recap” post, I rolled a sizeable 401(k) into the Rescue My IRA portfolio during the month of December.  I established a couple of new positions with those funds (and maintained a “legacy” position of 800 shares with ACM), so calculating anything in much more detail doesn’t seem to accomplish much.

The takeaway, though, is easy enough to discern.  I set out to achieve a 1% return monthly, and an annualized return of 12%.  So far, so good on these, I met that objective.

I am looking forward to making some progress on my goals in 2012.  Here’s to you, hoping you accomplish your financial goals as well, dear reader!

December 2011 Recap

Here’s a recap of the action for December.  I will follow-up this week with a summary for 2011, adding together my returns for the three months the account was active:  October, November, and December.  As with last month, the recap is loosely organized into the following sections:  account status, performance metrics, and a to-do list for the next month. 

The returns for this month (and when I post for 2011) are based on the initial valuation of the account:  approximately $51K plus.  To keep an element of anonymity to the blog, I generally post in rounded numbers – and honestly, it is too much work to calculate any kind of average daily balance and other approaches to valuation that would be technically correct!  But one thing is consistent; it is my big-ass goal for this money is to generate 12% growth per year in the account.

One additional significant event to mention in the introduction: I rolled the IRA from my previous employer AECOM into this account.  That added about $75K to the balance (I will be more specific about this next month).  I’ve already established a few positions with these funds.  That income is included in the December returns…it will inflate my return percentage for the month a bit, but that will all average out over the longer term.  One thing that needs to be mentioned is that I had a position in AECOM shares (symbol ACM); I plan to write calls on this until I am able to get back to a break-even price above $25 per share.
Account Status:
Total Account Value, 11/30/2011 Statement:  $51,785.53
Total Cash Reserve, 11/30/2011 Statement:  $11,315.78
Core Stock Positions (as of 12/31/2011):  ACM (800 shares), CAT (100 shares), COP (100 shares), CSX (200 shares), DIS (300 shares), GE (400 shares), GLW (400 shares), IP (300 shares), MSFT (400 shares)
Performance Metrics:
Option Premiums Collected (net, month of December):  $806
Capital Gains Collected (net, month of December): ($626)
Dividends Collected (recognized on the ex-date): $248
Interest on Cash Reserve (estimated total): $.70
Total, Absolute Return:  $429
Absolute Return, Percentage Basis:  .84%
Annualized Return, Percentage Basis:  10.18%
Next Month To-dos:
None of the current positions will go ex-dividend next month

The following covered call contracts expire in January: 

CAT 92.50

COP 72.50

DIS 36 (x2)

DIS 37 (x1)

IP 27 (x2)

IP 29 (x1)

Several of these are in-the-money, so I should have some capital gains to report next month.

Consolidated Lessons Learned:
Formal trading plan:  Earlier during the month of December, I finished and published my first trading plan for the account.  I am finding that I am having to make some exceptions on the stock picking requirements, mainly in terms of the rigor I had applied for S&P 4 STARS and above shares.  At present, a few of the positions, including ACM, IP and CAT do not pass that hurdle.  I will revisit it in a few months as these situations evolve.

Taking a loss on a bad position:  This month I closed my AA position at a loss.  It was a pretty big loss, actually, and lowered my results below my goal of 1% total return on the account.  However, I believe that stock is going to be stuck in the doldrums for some time, and I am glad to have the opportunity to invest those funds elsewhere. While taking a loss this month reduced my return below the goal of 1%, on average, even with this loss, the account is exceeding 1% returns per month – more on this in the next post.