The Money Tree

Safely Generating Income in Retirement

Archive for April 17th, 2011

Shaking the Money Tree

Posted by mounddweller on April 17, 2011

Fellow Traders,

Before I jump into the purpose of this post I want to let you know that I have updated the Historical Results and Open Positions tabs on my blog to reflect activity through expiration on April 16th.

In updating my records to reflect trading activity this month I noticed it had been exactly one year since I first initiated my position in Exelon (EXC).   Exelon is a nuclear utility which operates primarily in Pennsylvania and Illinios.  It pays a quarterly dividend of $0.525 or $2.10 annually for a current yield of 5.2%.

Like a lot of other stocks EXC has gone nowhere in the past 12 months.  However, between collecting 3 quarterly dividends and shaking the money tree every few months I have been able to generate a decent return.  Specifically, I have generated an annualized ROIC of 13.57%.   Below is a “scorecard” of my transactions which shows how I did it.

Exelon tends to drift up in price in the week or two immediately prior to going ex-dividend.  Then, like alot of high dividend stocks, it tends to fall for a couple of weeks after the ex-date.  My strategy with Exelon has been to try to exploit these tendancies by selling calls immediately prior to the ex-date and selling puts after the stock has appeared to bottom out.  As you can see in the scorecard this doesn’t always work out.  However, my goal is that over time I will gain more experience and get better at timing these events.

As you can see my most recent trade, selling the APR $40 puts, expired OTM.  I had hoped to have the stock put to me at that price thereby increasing my position from 200 to 500 shares.  However, I am in no hurry.  Thus, since the APR puts expired OTM, I will wait for the next down day to sell the JUN puts.  The strike price I choose will be dependent upon the stock price at that time and the premiums available at the various strike prices. 

Exelon should be declaring it’s next dividend very shortly.  The 2nd quarter ex-date is generally around the 10th-12th of May.  If you like the strategy I just layed out now could be a good time to start a position in EXC.  I would start by buying  Exelon stock at the current price, then as we get closer to the second week of May I would look to sell CCs three months out. 

One last comment, often it is possible to buy back the puts and calls at a substantial profit well before their expiration date.  Doing so frees up capital while also giving you the possible opportunity to do the trade again later if the stock  moves up or down fairly quickly.

Regards,

Troy

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