Some Adjustments for a Sideways Market: MSFT, HPQ, SWK

So far this month, the market has been fairly tepid.  At least one of the big market events has happened now that President Obama was re-elected, but the bigger potential impact looms with the “fiscal cliff” hanging out there unresolved. 

So while the economy does seem to be finding its footing ever so slowly, this dark cloud looms on the horizon, so we’re trading more or less sideways.  A quick resolution of this turmoil is in order and I hope our politicians are up to it.

Meanwhile, I’ve been taking advantage of the action to roll-out a few positions.  I’ll post a few of them today and then get the rest of them posted in a few days.

Here are the first three: 

MSFT

Rolled out and up the Jan 32.50 to Feb 33

Total Option Premiums:  $419.68

Total Dividends (including forecast ex-dividend dates through contract): $180.00

Total Stock Gain (if assigned): $129.46

Total Absolute Gain on Position: $729.14

Absolute Return on Position: 7.48%

Annualized Return on Position (held 270 days): 10.11%

The MSFT position is marginally underperforming at present.  However, I can accept this transaction if it was to come to pass – it’s very close to my objective of 12% annual on invested capital.

HPQ

Rolled down the 17 Jan to 16 Jan

Total Option Premiums:  $605.18

Total Dividends (including forecast ex-dividend dates through contract): $105.60

Total Stock Gain (if assigned): $0

Total Absolute Gain on Position: $710.78

Absolute Return on Position: 7.39%

Annualized Return on Position (held 140 days): 19.27%

Note: if this position were assigned at 16, I will take a loss on the position.  However, I monitor these positions closely on a daily basis.  If HPQ begins a recovery I will take quick action to roll the stock up to protect myself from a capital loss.

SWK

Rolled out and down the 75 Nov to 72.50 Dec

Total Option Premiums:  $580.22

Total Dividends (including forecast ex-dividend dates through contract): $82.00

Total Stock Gain (if assigned): $-58.68

Total Absolute Gain on Position: $603.54

Absolute Return on Position: 8.28%

Annualized Return on Position (held 240 days): 12.59%

October 2012 Results

As I expected it to be, October was a challenging month during the account.  The market has been bouncing along at high values, but we have all of these reasons to doubt that the current levels are sustainable.  I found it difficult to complete new profitable trades, although I was able to collect some dividends and did generate some cash from buying and selling covered calls.  But there were no call assignments and no capital gains – all in all, it was just a breakeven month. 

Here are the statistics for October 2012:

Account Status:

·         Total Account Value, 11/1/2012 Statement:  $127,568.73, a value that is close to the January 1 value of $127,606.44.

·         Total Cash Reserve, 11/1/2012 Statement:  $6,605.73 (Fascinating!  Exactly $3.00 more than last month!)

·         Core Stock Positions (as of 11/1/2012):   CAT (100 shares), CSCO (400 shares), CSX (500 shares), DOW (300 shares), F (400 shares), GLW (700 shares), HAL (300 shares), HPQ (400 shares), ITW (200 shares), MSFT (300 shares), SWK (100 shares), SPLS (700 shares), URS (400 shares), WAG (300 shares)

Performance Metrics:
Option Premiums Collected (net, month of October):  -$90.84
Capital Gains Collected (net, month of October): $0.00

Dividends Collected (recognized on the ex-date): $128.00
Interest on Cash Reserve (total): $0.08
Total, Absolute Return:  $37.24
Absolute Return, Percentage Basis:  0.03%
Annualized Return, Percentage Basis:  0.36%

Next Month To-dos:

As a dividend month, November will similar to August, which was a good month.  Five positions will go ex-dividend this month:  CSX, GLW, HAL, MSFT and WAG.  I will collect $311.50 from dividends, meaning I need to make up $900 or so to make my 1% return goal.

As of this writing there is only one position with a November contract – 400 shares of F at a 10 strike, a position that is in the money.  It won’t earn a gain if the stock is called away, I designed the trade to make money basically at the purchase price based on the option premium and dividend that I have already collected.  So it looks like I’ve got my work cut out for me on the covered call buying and selling side.

I’ve taken advantage of down market days over the last two weeks and closed some of the options – so at some point during the month I hope to be able to sell new contracts and thus will begin to generate some income. Plus, assuming the F shares are called away, I’ll have about $4,000 to make a new position with…

I’ll keep you posted. 

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%

Some Adjustments: SWK, CAT, and CSX

I was behind on my posts during October, so I am going to try and do better this month.  I have three adjustments to report today – when added to the URS roll-up and out I already posted, there are four transactions already this month. 

I have two more in mind that I may complete today, as a matter of fact. But here’s a summary of the week’s activity to date:

SWK

Rolled up and out the 72.5 Oct to 75 Nov

Total Option Premiums:  $485.73

Total Dividends:  $82.00

Total Stock Gain (if assigned): $191.32

Total Absolute Gain on Position: $759.05

Absolute Return on Position: 10.41%

Annualized Return on Position (held 210 days): 18.09%

CAT

Rolled out the 90 Nov to 90 Jan

Total Option Premiums:  $517.23

Total Dividends (including forecast ex-dividend dates through contract): $104.00

Total Stock Gain (if assigned): $265.83

Total Absolute Gain on Position: $887.06

Absolute Return on Position: 10.18%

Annualized Return on Position (held 160 days): 23.21%

CSX

Rolled out 22.5 Nov to 22.5 Feb

Total Option Premiums:  $1,396.35

Total Dividends (including forecast ex-dividend dates through contract): $268.00

Total Stock Gain (if assigned): $370.99

Total Absolute Gain on Position: $2,035.34

Absolute Return on Position: 18.74%

Annualized Return on Position not calculated, I have held the position for longer than one year.

New Position: F

As I’ve written before, I work hard to ensure that the proceeds of closed out positions reinvested as quickly as possible.  I try to maintain a small cash position that is around 5% of the balance of the account, but everything after that needs to get back to work without any downtime.  Between the option proceeds and dividends I collect in a given month I sometimes find I have enough money to establish a small position designed for a short-term trade, as I have done with MAS a couple of times this year. 

I found myself with about $4K available at the end of September and went through a couple of days’ work to find a trade I liked, finally settling on a 400 share position on F, which also goes ex-dividend on November 1.  I set up an in-the-money November call on this with an eye on that ex-date, I’ll take the early call or ride it out to options expiration and make a good return either way. 

Here’s the analysis: 

F

Transactions

9/27/2012 Bought 400 shares at average share price $10.06 (total $4,022.50)
9/27/2012 Sold 4 F Oct 2012 $10.00 for $147.99)

Net Profit:

1) Options Income:  = $147.99
2) Dividend Income: Ex-date is November 1, dividend is $0.05 ($20.00)
3) Capital Appreciation if assigned at $10.00:  -$39.61

Total Net Profit if Assigned and dividend collected:  $128.38
Absolute Return on Investment: ($128.38/$4,022.50) = 3.19%
Annualized Return if Assigned (45 days):  3.19%*(365/45) = 25.89%

If the shares are called away on the ex-dividend date, the actual return goes down to 2.69%, but the annualized return is 21.89%, exceeding my goal of a 12% annualized return.  We’ll see how it goes.    

Rolling out a URS Lot

When I wrote my monthly post yesterday, I realized that the URS position was up for some management.  A few months back I was concerned about the concentration of investment funds in this stock – I bought 400 shares, representing a slightly larger percentage of the portfolio than any other position.  Somewhere along the way I got the idea that I should pare it down by one lot, so I sold a 35 call and three 40 calls.

At a 35 strike, I would take a loss on that one lot, and it was enough that it would offset the potential gains on all three of the 40 lots.  That is the problem I set out to fix yesterday by rolling out and up the one lot, so that now all four of the URS lots are covered with Jan 40 calls.

This action sets the position up to meet my goal of 12% annualized, where previously I would have been short on this.  As the time value in the January call continues to erode, I may look at the April calls, which would extend my holding period to 330 days and give me one more shot at a quarterly dividend.  I will keep an eye out for an opportunity to do this – if the April trade generates $300 or so, it will meet my annualized goal for this position.

Here’s the analysis on the URS position:

URS

The URS position consists of 400 shares.  My basis is around $39.57 per share, and with the exception of the ill-advised 35 strike calls above, I have been selling 40 strikes and periodically rolling them out. 

Total option premiums:  $1,361.92

Total dividend payments (through the Jan options):  $180.00

Total stock gain at $40:  $155.82

Total, absolute gain on the position:  $1,697.74

Total, absolute return percentage ($1,697.74/$15,827):  10.73%

Annualized total return percentage (held approx 240 days):  16.31%

October 2012 Results

September was the kind of month I’d like to see happen more often – the returns and gains in the Rescue My IRA were sourced on a balanced basis from stock gains, dividends, and call premiums.  It was probably my best month from that perspective, but it will be hard to repeat that performance during October.

Here are the statistics for September 2012:

Account Status:
Total Account Value, 10/1/2012 Statement:  $130,272.73, so once again the account is above the January 1 value of $127,606.44.

Total Cash Reserve, 8/31/2012 Statement:  $6,602.73
Core Stock Positions (as of 8/1/2012):   CAT (100 shares), CSCO (400 shares), CSX (500 shares), DOW (200 shares), F (400 shares), GLW (700 shares), HAL (300 shares), HPQ (400 shares), ITW (200 shares), MSFT (300 shares), SWK (100 shares), SPLS (500 shares), URS (400 shares), WAG (300 shares)

Performance Metrics:
Option Premiums Collected (net, month of September):  $840.42
Capital Gains Collected (net, month of September): $383.89

Dividends Collected (recognized on the ex-date): $408.80
Interest on Cash Reserve (total): $0.08
Total, Absolute Return:  $1,633.19
Absolute Return, Percentage Basis:  1.28%
Annualized Return, Percentage Basis:  15.57%

Next Month To-dos:

As a dividend month, October should be similar to July, since quarterly dividends are on a three month cycle.  And that means that the month will be slow for income from this source – I only collected one dividend that month, on MAS, a position that I don’t have any more.  There are two coming up this month:  CSCO on October 2 (today), and CAT- undeclared so far but due in mid-October.  Those will generate $100 or so in revenues, so if I am going to meet my goal of one percent returns this month, I’ll have to do it with call premiums and stock gains. 

There are two positions that have October contracts – 100 shares of SWK at a 72.50 strike, currently in the money, and 100 shares of URS (out of a 400 share position) at a strike of 35, which is also in the money.  Neither of these will produce stock gains – they have been positions that simply yielded dividends and call premiums since I have held them.  As a matter of fact, they actually set the month up with a pretty deep hole to climb out of!

Assuming the SWK and URS positions are assigned later in the month, I will have about $11,000 in fresh capital to invest – not much to work with.  So my focus will have to be looking at the upcoming positions to see if I can take any adjustments by rolling out or up existing contracts.

So I’ll keep posting on my progress and we’ll see how it goes.