New Position: LNC

In general, I like to get the proceeds of closed out positions reinvested as quickly as possible – and that’s especially the case on the ones I’ve taken hits on, like I did recently with HPQ.  Still, I had been sitting on a little bit of extra cash over and above the 5% reserve balance I usually reserve in the Rescue My IRA account.  I decided I needed to get to work on getting the money back to work as soon as possible.

The one lesson learned I have decided to take away from HPQ is to not compromise on my selection criteria regarding the stock quality.  Here I take advantage of the research that S&P does to qualify a short list of NYSE and NASDAQ shares, by selecting from the list of four- and five-star stocks (HPQ was a three-star, and I have a few other positions that were, which I will begin weeding out). 

One of the reasons I had compromised this rule was I was finding that there didn’t seem to be as many opportunities for covered call positions as I would have liked – I had further qualified my selection criteria by eliminating financials and banks in the aftermath of the financial crisis that the country went through in 2009.  As I began doing screens for a new position, I decided that this was a rule I could relax now, as the economy continues to improve.  

My screen turned up four interesting positions this time, but three of them were in industries I already have acceptable concentrations in, or they were direct competitors to companies I’m already holding – such as DE, while I am holding a CAT position.  LNC was the only company identified that didn’t fall into that category, and since I had a newly opened mind about financial shares, I pulled the trigger.

Here’s the position starting analysis: 

LNC

Transactions

12/13/2012 Bought 300 shares at average share price $25.84 (total $7,753.00)
12/13/2012 Sold 3 LNC Jan 2013 $26.00 for a total of $202.22

Net Profit:

1) Options Income:  = $202.22
2) Dividend Income: Ex-date is January 8, dividend is $0.12 ($36.00)
3) Capital Appreciation if assigned at $26:  $29.89

Total Net Profit if Assigned and dividend collected:  $268.11
Absolute Return on Investment: ($268.11/$7,753.00) = 3.46%
Annualized Return if Assigned (30 days):  3.46%*(365/30) = 42.07%

If the shares are called away on the ex-dividend date, the actual return goes down to 2.99%, but the annualized return is still 36.42%.  We’ll see how it goes.    

CSCO - Adding Shares and Rolling Up and Out

I added 100 shares to my 400 share CSCO position and then rolled-up and out the covered call I had established.  

Under the current contract, I’ve set up a triple play that rolls out over a six month long investment.  We’ll see how it works out.

Here’s a summary:

CSCO

Added 100 shares and rolled out and up the 19 Feb to 20 Apr

Total Option Premiums:  $308.63

Total Dividends:  $126.00

Total Stock Gain (if assigned at $20):  $450.71

Total Absolute Gain on Position: 11.66%

Absolute Return on Position: 23.64%

So, the position currently has met my annual return goal for Rescue My IRA investments, assuming the contract is assigned in April, even though I will have held the stock for only six months.

Taking the Hit on HPQ

HPQ had a new CEO, and because it met my investment criteria at the time – August 2012, I took the plunge and bought 400 shares.  After some initial bad earning news, I added 100 shares with the hopes of leveraging my basis down, and I decided to adjust my covered call strategy on the position to focus on cash yields.  Finally, last month, there was even more bad news – so I decided to give up.'

Counted by themselves, the returns I earned from call premiums and dividends are almost 9 percent, which annualized meets my goals on returns.  However, I’ve had the position called away this week on the ex-dividend day, so I have taken a sizable stock loss on HPQ. 

That smarts, but I figure that is something that will happen from time to time – it is one of three instances this year where I’ve decided I could do better reinvesting the capital than waiting for a comeback, the others being ACM and ADM. 

I plan on a series of 2012 recap posts later this month, one of which will feature the ACM, ADM, and HPQ trades.  Until then, here’s the story of the HPQ position.

HPQ

Shares

8/20/2012 – Bought 400 shares for $7,919.00.

9/25/2012 – Bought 100 shares at $1,697.99.

Share basis of 500 shares is $19.23

Yields

Total Option Premiums:  $802.16

Total Dividends:  $52.80

Total Stock Loss:  -$3,634.10

Total Absolute Gain/Loss on the position:  -$2,779.14

So my actual loss on this position works out to a -28.90 percent return.  As I noted above, the returns from option premiums and dividends alone worked out to 9.00 percent or so, enough to meet my goals. 

It’s just an example of picking a bad stock.  Fortunately the portfolio model provides coverage for these periodic losses!

November 2012 Results

For all intents and purposes, November was a month where the Rescue My IRA made its numbers – even though I wouldn’t have expected that when the month began, on the heels of Superstorm Sandy and the election that foretold a potential change in the administration.  I expected a pretty bad month in the market, as a matter of fact; however, my statement value on the account is up nearly $2K. 

One of the covered calls was assigned last month – for F.  That was a position I had designed for a quick turnaround and was successful, as I posted earlier in November when the call was assigned. 

Scottrade surely loves me, as I executed 26 BTCs and STOs last month on my way to generating net call premiums of $948.  Some months are like that – although I would hope that when I come close to meeting my goal of 1% in income per month like this, the account value at the end of the year would show it also.  I need to do some more reading up on this in order to evaluate the account’s performance for the year.

It’s likely that some mistakes contributed to this phenomenon – who am I to think I wouldn’t make a few over the course of a year?  I’ve written previously about ADM and ACM – two stocks that cost me some gains last year; now I have HPQ on my hands.

Admittedly, I rushed into this investment (one lesson learned here is not to rush again, my proceeds from the F assignment are still sitting on the sidelines), and bought an S&P 3-star stock with a great brand name.  Then we saw poor financial results and the shares took a hit.  Now we hear that they made a bad acquisition last year, taking an earnings charge this year and having to make up for it in future quarters. 

That stock is going to take some time to recover – I’ve worked hard to try and stay above water on it, but the time has come to take action.  I sold a Dec 12 last month, a last effort to pick up a little cash, I am going to let the stock be called away with a capital loss by the end of the month.  Countering that, I have two positions that look to be ITM on options day – ITW and SWK, both good news stories.

So, here are the statistics for November 2012:

Account Status:

·         Total Account Value, 11/1/2012 Statement:  $129,584.26

·         Total Cash Reserve, 11/1/2012 Statement:  $11,737.76

·         Core Stock Positions (as of 12/1/2012):   CAT (100 shares), CSCO (400 shares), CSX (500 shares), DOW (300 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):  $947.45
Capital Gains Collected (net, month of October): -$39.61

Dividends Collected (recognized on the ex-date): $311.50
Interest on Cash Reserve (total): $0.08
Total, Absolute Return:  $1,219.42
Absolute Return, Percentage Basis:  0.96%
Annualized Return, Percentage Basis:  11.63%

Next Month To-dos:

As a dividend month, December is quite busy, like September.  Seven positions are forecast to go ex-dividend this month, although two or three of them are likely to be called away:  DOW, HAL, HPQ, ITW, SPLS, SWK, and URS. ITW and HPQ are in the money today, and SWK is close.

If these shares are assigned, I will have in excess of $10K to reinvest, and will have some decisions to make later in the month.  I’m looking forward to it, and will keep you posted!

Adjusting Two Mainstays: GLW and CSX

GLW and CSX are two positions that I have held since the start of the Rescue My IRA account – I have 700 and 500 shares in them respectively.  Last week I rolled them out to May 2013.  These transactions did result in their staying on target for my 12% annualized return, although extending so far into the back months does mean I am probably at the end of the run for them, so I would like to see them hit the strike price as these covered calls hit expiration. 

Here’s a summary of the positions as of these most recent trades:

GLW

The most recent roll-out to 13 May 2013 covered calls is the tenth contract I have written on these shares.  In looking over the history of these transactions, I have also written covered calls at the 12 and 14 strike.  It would be good to get 14 for the shares, but for now I am holding with a strike price of 13.

Rolled out the 13 Feb to 13 May

Basis of 700 share position:  $9,241.88, or $13.20 per share

Total Option Premiums:  $1,451.59

Total Dividends:  $276.00

Total Stock Gain (if assigned): -$159.88

Total Absolute Gain on Position: $1,567.71

Absolute Return on Position: 16.96%

On an annualized basis, after holding these shares for 510 days, the return works out to 12.14%

CSX

This is a 500 share position that epitomizes what I am trying to do with this account.  I want to earn returns from option premiums, dividends, and stock price gains.  I’ve been able to do that quite frequently with short-term trades, but here is one I have held for 510 days, since the beginning of the account.  And the shares continue to perform for me.

Rolled out the 22.50 Feb to 22.50 May

Basis of 500 share position:  $10,861.01, or $21.72 per share

Total Option Premiums:  $1,479.74

Total Dividends: $338.00

Total Stock Gain (if assigned): $370.99

Total Absolute Gain on Position: $2,188.73

Absolute Return on Position: 20.15%

Annualized Return on Position (held 510 days): 14.42%

I’ll continue to manage this one, but I do wish that they would all work out as well as CSX has.

November Adjustments, Continued: SPLS, URS, and DOW

Last week, I mentioned that I was going to focus on managing Rescue My IRA according to my trading plan as a way to keep earning returns through what looks to be a volatile market despite – or in spite of – a tepid expansion.  Making things a bit more complex are the ongoing budget crisis in this country.

So this post will be about three more positions I’ve made adjustments on this month.  I still have a couple to report on and will get that post up soon.  Meanwhile, with the proceeds from these options and the F call assignment I need to find a new trade to complete the month.

Here’s a summary:

SPLS

Here is a stock that gets a great S&P rating, but has been trading out of the money since I established the position last February.  My solution has been to roll down and out the 500 share position to continue to produce a yield.  I’ll manage carefully to ensure a break-even or better result when I finally allow the stock to be called away.

Rolled out the 13 Dec to 12.50 Jan

Total Option Premiums:  $762.56

Total Dividends:  $259.00

Total Stock Gain (if assigned): -$1,555.60

Total Absolute Gain on Position: -534.04

Absolute Return on Position: Negative

In order to get this position to breakeven or better, I will need to sell the shares at $13 or better.  Assuming I will have one more adjustment before I terminate the trade, this seems doable.

URS

In contrast to SPLS, here is a 400 share position that has generated better than 10% between the call premiums and dividends that I have collected on it.  Plus, at the 40 strike there is a small stock gain, so this trade is going as you’d hope they all would.

Rolled out the 40 Jan to 40 April

Total Option Premiums:  $1,477.91

Total Dividends (including forecast ex-dividend dates through contract): $240.00

Total Stock Gain (if assigned): $155.82

Total Absolute Gain on Position: $1,873.73

Absolute Return on Position: 11.84%

Annualized Return on Position (held 330 days): 13.09%

So this position will meet my 12% goal, even if assigned under the current contract.

DOW

Here is a 300 share position that is working out according to plan.  I sold the 32 Dec in order to have a call premium that met my requirements for individual transactions (I like to net at least $100 where ever I can).  The tradeoff at that strike would have been a small stock loss but I fixed that with this trade.

Rolled out and up the 32 Dec to 33 Mar

Total Option Premiums:  $632.69

Total Dividends (including forecast ex-dividend dates through contract): $256.00

Total Stock Gain (if assigned): $327.47

Total Absolute Gain on Position: $1,216.16

Absolute Return on Position: 12.73%

Annualized Return on Position (held 270 days): 17.21%

As with URS, this position meets my goal of 12% return if assigned under this current contract.

Called Away on F

This is one of those cases where I wish I could put more trades together like this more often, but my little position in Ford, symbol “F,” has been called away during the November expiration.  This was a 60-day trade, and I set it up as basically an in-the-money trade – the average share price was just a little more than $10, and I sold November 10 calls when I established the position with some proceeds from call assignments back in September.

Basically, I was trading for the option premium and a dividend, at first with the hope of an early assignment – which should have happened but didn’t – because I would have turned the profit a few weeks early.  As it happened, because the call wasn’t assigned, I was able to collect the dividend on these shares as well. 

All totaled, I netted $128.38 on the trade, which had a basis of $4,022.50.  That’s 3.19 percent that I collected over a 60 day investment, working out to an annualized return – remember I calculate this simply as a metric to help evaluate trades – of 19.42%, which exceeds my goal of a 12% return.

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

F

Shares:

9/18/2012 Bought 400 shares at an average price of $10.06, total position basis $4,022.50.

11/16/2012 Sold on assignment 400 shares at $3,982.89, average share price $9.96.

Total stock gain(net of commissions):  -$39.61

Options:

9/18/2012 Sold to open 4 10 Nov 2012 contracts, net $147.99

Total options income:  $147.99

Dividend:

Total dividends collected:  $20.00

Net Profit:
1) Stock gains:  -$39.61

2) Options income:  $147.99

3) Dividend Income: $20.00

Total Net Profit after Assignment:  $128.38
Absolute Return on Investment: ($128.38/$4,022.50) = 3.19%
Annualized Return (60 days):  3.19%*(365/60) = 19.42%