Called on the ex-date for a Hat Trick: BA

Yesterday, my BA position went ex-dividend and was called away – the stock has had a good run in the new year so far and has traded in-the-money since January.  The call was not unexpected; in fact, since I scored a hat trick with it – earning income from covered call premiums, a dividend payment, and a stock gain – it is one of this year’s Rescue My IRA success stories.

Next steps for me are to put the proceeds back to work, so I’m getting busy with research now.  In the meantime, here’s the final analysis of the BA trade, net of commissions and fees:

BA

Shares:

Bought 100 shares in September 2014 at an average price of $129.37, total position basis $12,937.00.

Sold on unwind 100 shares at $13,500.00. 

Total stock gain:  $545.70

Options:

Total options income:   $141.21 (for the term of this trade, strike prices ranges from $130 to $135)

Dividend:

Total dividends collected:  $73.00

Net Profit:
Total Net Profit after Unwinding:  $759.91
Absolute Return on Investment: ($759.91/$12.937.00) = 5.87%
Annualized Return (140 days):  5.87%*(365/140) = 15.31%

Rescue My IRA January 2015 Results

January saw some volatility in the markets, but it seems that a trading band has formed for now. This is a good situation for a covered call trader – my plan is to continue taking call premiums, dividends, and a capital gain here and there in order to meet my Rescue My IRA goal of 1% return per month and 12% annualized.  Compared with this goal, January’s results were okay, but did not perform up to the benchmark – the net of $666.85 in income works out to 0.40% return for the month, or 4.77% annualized. 

The bulk of this underperformance can be attributed to one event – the unwind I did on my WIN position. I wrote a post on that position here; basically, I failed at due diligence and sold the shares for a loss, although that was somewhat offset by call premiums and dividends.  If that loss hadn’t occurred, the results would have been improved by almost $1,400 – easily meeting my goals for this account. 

After my annual results post, which you can find here and follow-up here, there was a good dialog amongst connections on the Yahoo “Just Covered Calls” board and on the Google+ “StockOptions Traders” community about how I calculate my results.  Based on those insights, I’ve settled on this equation to explain how my account value changes every month:

(new value) = (old value) + (dividends) + (call premiums) + (capital gains) + (unrecorded gains/losses)

Essentially, that last variable is a complex one, which I why I haven’t spent a lot of time on working out the math – maybe I should, so that would be a future topic.  It boils down to this:  because valuations for both stocks and options are based on the market at any given time, the change in that last variable is not predictable, and in any given month Rescue My IRA could see an increase or a decrease in the account value, despite how well or poorly I do at the other three variables. I’m comfortable with that – and it leads me to the conclusion that I should focus on the ones I can do something about.

Finally, here is the monthly summary of Rescue My IRA statistics for January 2015, based on the market close on January 30. 

Account Status:

·         Total Account Value, 1/30/2015 Market Close:  $166,116.66 - down from the December 2014 close of $167,659.68)

·         Total Cash Reserve, 1/30/2015 Market Close:  $34,186.66, compared to December end $38,484.88.

·         Core Stock Positions (as of 1/30/2015):  BA (100 shares), CA (300 shares), CNP (400 shares), COP (100 shares), CRUS (400 shares), DOW (200 shares), EMC (400 shares), FB (100 shares), GE (400 shares), GM (400 shares), HAL (200 shares), JPM (100 shares), QCOM (100 shares), T (400 shares)

Performance Metrics:

·         Option Premiums Collected (net, month of January):  $1,050.91 (0.63%)

·         Capital Gains Collected (net, month of January):  -$572.36 (-0.34%)

·         Dividends Collected (recognized on the ex-date): $188.00 (0.88%)

·         Estimated Interest on Cash Reserve: $0.30

·         Total, Absolute Return:  $666.85 (0.40% absolute return, annualized return

4.77%) 

Next Month To-dos:

In February, there are four positions with contracts expiring:  BA, CA, FB, and HAL.  At the time of this writing, only BA is in the money, although the volatility of FB suggests it will be ITM during the month, and thus potentially called away; CA and HAL are likely candidates for roll-outs.  If all are called away, there is the possibility of $1,108.31 in capital gains, or 0.66% return; if only BA and FB are called away, the gains would be $656.30, or 0.39%; and if only BA is called away, the gain is $545.00, for a return of 0.33%.

February’s dividend forecast is better than January’s, where I collected on T only:  BA, CA, CNP, and COP will have ex-dividend dates during the month.  Total estimated yield is $338.00, or 0.20%, but adjusting for the likely assignment of BA the amount adjusts to $247.00, or 0.15%. 

Considering the most likely scenario of BA being called away, the resulting capital gains and dividend payments result in an estimated monthly return of $892.00, or 0.48%.  That has been my typical experience for most of 2014 and continuing until now – about a half of a percent from those sources.  In February, if FB is also called away, the return will be a little higher, totaling $903.30 and 0.54%.  To meet my goal of 1% per month, I’ll need to sell about $700 worth of premiums – and will have a good start from the likely roll-outs on CA and HAL. 

Happy trading in February – until next month, all the best!

Taking the Hit on WIN

It’s probably been a couple of years since I decided to cut my losses on a covered call position, but I recently did just that on my WIN position.  I did well with two WIN trades in 2014, so I thought I might just return to the well for another go – the stock has typically had a great dividend, and it traded in a narrow range that set up a nice roll-out strategy.  That’s not how it worked out this time, however.

I should have done a better job with due diligence, which would have red flagged the stock for me.  A planned split had been announced for the shares, with many assets being spun out into a real estate investment trust, or REIT.  Holders of WIN shares would receive shares in the new REIT, but a dividend cut was also planned.

All these unknowns made me increasingly uncomfortable with the choice of WIN, so I started making plans to unwind my covered call trade early this month.  I did collect a dividend along the way, so even though I knew I’d take a loss there were some premiums and the dividend to soften the blow.

Still there was a net loss on the trade of about $1,000, or -13%.  That’s going to happen in a portfolio from time to time, which doesn’t make it any more fun, but it is the reason I keep between 12 and 15 trades going at any given time, and I’ve already reinvested the proceeds.  For the most part, my trades hit the mark of a 12% return annualized, so this one will be easily made up, probably will be made up for during the month of January, as a matter of fact! 

Here are the final results of this most recent WIN trade, as always, net of commissions and fees:

WIN

Transactions

Bought 800 shares in late November with an average share price of $9.85 (total $7,879.00)
I sold covered calls at a $10 strike price for the duration of this position.

Net Loss:

1) Options Income:  = $109.00
2) Dividend Income (December): $200.0-
3) Capital Loss when unwound at $8.14 per share:  -$1,363.15

Total net loss on the unwound position: -$1,054.14
Absolute Return on Investment: -$1,054.14/$7,879.00) = 13.38%
Annualized Return not calculated due to net loss status of the position.

New Position: JPM

After the DIS position was called away, I decided to move quickly back into a new position, and chose JPM as the basis for it.  I’ve held JPM and done well with my covered call strategy on the stock, and sure enough that looks to be the case this time as well. I sold April covered calls with a $57.50 strike price, and the timing is such that I have the possibility of a hat trick, with income coming from stock gains, dividends, and covered call premiums.

Here is the position plan for JPM, with results estimated net of commissions and fees:

JPM

Transactions

Bought 200 shares at average share price $56.12 (total $11,223.00)
Sold 2 $57.50 Apr 2015 covered calls

Net Profit:

1) Options Income:  = $358.49
2) Dividend Income (April ex-dividend): $80.00
3) Capital Appreciation if assigned at $57.50:  $259.00

Total Net Profit if assigned on the ex-dividend date:  $697.49
Absolute Return on Investment: ($697.49/$11,223.00) = 6.21%
Annualized Return if Assigned and Dividend Collected (90 days):  6.21%*(365/90) = 25.20%

Called Away for the Hat Trick - DIS

In the fall of last year, my thoughts began to turn to that nice annual dividend that DIS pays.  I opened a position in September, but it was very conservative and was quickly called away – the ex-dividend date for this stock is in December.  So I waited a few days until October and opened a new position in DIS, one that was just called away last Friday.

As a matter of fact, that first transaction of the year was a success in another way:  DIS earned me a hat trick, which means I collected covered call premiums, a dividend payment, and there was a capital gain on the sale.  In total, the position earned $381 over the course of 90 days.  That works out to a calculated return of 4.35%, or annualized return of 17.65%.

Here’s the analysis of the DIS position, net of fees and commissions; the position was called away at expiration last week. 

DIS

This was a 100 share position established at $87.59 per share in October 2014, total basis $8,758.99.  During the holding period I sold covered calls at strike prices ranging from $87.50 to $92.50, the final strike price was $90.00.

Total covered call premiums:  $42.72

Total dividend payments (there was a single, annual dividend):  $115.00

Total stock gain at $90:  $223.01

Total, absolute gain on the position:  $380.73

Total, absolute return percentage ($380.73/$8,758.99):  4.35%

Annualized total return percentage (held approx 90 days):  17.65%

Follow-up to 2014 Results

There was a great follow-up question yesterday about the Rescue My IRA annual results I posted – a colleague wanted to know a few more details about the returns.  Although I answered the question directly, I’ve decided to post a follow-up here with additional information.

I report the totals for dividends, capital gains, and covered call premiums on a monthly basis in a wrap-up post, but I hadn't totaled them for the year - I haven't come to terms with how to use that as a metric to improve managing the account, since I feel that the statement value is the best gauge of progress. 

At my broker, that accounting goes like this - cash and stock values is positive, and covered call values negative.  I simply use the starting value and the ending value as the way to calculate growth.  If any readers have thoughts on how to reconcile the two, I'd love to hear them.

That said, the following are the total itemized returns in the account: 

• Dividends:  $3,473
• Cap Gains: $15,166
• Premiums $3,200
• Total:  $21,838

That percentage is 14.13% - but the increase in account value was only 8.5%. I attribute this variance to the fact that since I won’t need the funds from Rescue My IRA for 7 to 10 years, everything is reinvested – and so market ups and downs don’t translate to equivalency of cash flows. 

As a second note, I will often unwind my transactions early when the delta reaches 1.00, which has the effect of offsetting premium revenue for capital gains on the shares. My justification is to take those profits as soon as possible and then get the funds reinvested.

That’s all for today, just a little additional information on how Rescue My IRA operates.

Rescue My IRA - 2014 Annual Results

The year just ended, 2014, is the third full year of my “Rescue My IRA” initiative, which employs a covered call strategy to both help recover from the poor results achieved by professionals from 2005-2007, when I entrusted my IRA to them.  Although the account was active for a few months during 2011, activities during that time were focused on consolidating the old 401(K)’s and writing the trading plan, so I consider January 2012 the official start date for reporting results.  Thus, January to December 2014 is the annual period I’ll be using for this year end post.

Bottom Line Up Front – or “BLUF,” as we like to say at my office: Rescue My IRA started the year with a statement balance of $154,520.55, and ended the year at $168,107.47, for a net gain of $13,586.92, or 8.50%.  On the face of it, this return is much less than the 2014 gain achieved by the S&P 500 index (reported in various financial media as 14.04%); however, that is probably not an apples-to-apples comparison, as I’ll explain below.

In dollar terms, the account’s statement value has increased from $127,606.44 at the start of 2012, to $168,107.47 at the end of 2014, a gain of nearly $41K.  Besides the S&P 500 results, a second benchmark I use is a goal of a 12% annualized return. Here’s a summary of the results, by year:

• 2012: 4.11%
• 2013: 16.31%
• 2014: 8.50%

The average annual return for these three years is 9.64% - that’s not bad, but it is short of the 12% goal I’ve set for Rescue My IRA. However, it is very close to the average S&P compound average growth rate for the 1970-2012 period, as outlined in this Wikipedia article:  10.40%.    

It would be useful to consider some of the differences between my approach and an approach that is based on a straight indexing method, so let’s take a moment to consider the differences in approaches.

• First, I am a “small time, retail investor” – as such, my fees are fairly high, and I don’t spend all of my time managing the Rescue My IRA account at Scottrade, although I do find time to check in on it every day. 
• Second, my sense of market risk for much of 2014 suggested that I keep a larger cash reserve than I had in the past, so I kept the average reserve level at about 30% of the account value throughout the year.  Adjusting the S&P’s 14.04% return by 30% yields a return of around 10%, so my results aren’t that far off.
• Finally, I don’t use the entire S&P 500 universe of stocks – to limit some of the risk in such a stock market intensive approach I generally focus on the shares that are rated 4- or 5-stars, outsourcing some of my due diligence on stock research in this manner.  With few exceptions, I also look for dividend payers in the range of from 2% to 5% annually, further limiting which shares I will use in Rescue My IRA.  The effect is to limit “home runs” somewhat, but it also reduces the downside risk of a major loser.

All of that said, I don’t have anything to complain about with these results.  I have a good feeling about what I’m accomplishing by being in control of the investment choices and approach in Rescue My IRA – and that is one of my primary goals for this account. 

That’s about the extent of the annual wrap-up for 2014, if I were keeping it brief.  However, there are resolutions that are due for 2015, so I’ll take a moment to post them here. 

• First, I’d like to find a way to put those cash reserves to work for me while they are not invested in stocks.  I looked into bond ladders during 2014, it is possible I could invest 20% of the account value in them and get some interest back that way.  That's a multi-month prospect, so as an alternative I may just find an interest paying ETF for this purpose…it wouldn’t take much to beat what Scottrade (as much as I love them!) pays on the cash balances I’ve kept this year!
• Second, I’m going to work on retooling the Rescue My IRA trading plan, which I wrote back in 2011.  With three years’ worth of experience with the covered call approach, there are probably some insights I can apply to improve my results by a few percentage points, but there won’t be major changes. 

That’s it for the 2014 wrap-up.  It’s onward and upward for Rescue My IRA, and I will continue to use the covered call approach for 2015.       

I hope my readers were successful in 2014 as well – and here’s to happy trading next year!