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Archive for January 20th, 2012

Update – HGT

Posted by mounddweller on January 20, 2012

Fellow Traders,

I want to update you on my covered call trade in Hugoton Royalty Trust (HGT).  Yesterday, I closed out this trade at a substantial loss.  However, my dismal result was entirely preventable.  I made a couple of mistakes usually attributed to ‘newbies’, not guys like myself who have been trading and investing for 30 years.  You’d think after this long I would be immune to such bone-headed moves.

You may recall that I successfully traded HGT on 2 previous occasions.  This third time was looking to be equally successful before I made my mistakes.    Back in March 2011 I bought 500 shares of HGT and sold AUG calls.  These calls expired OTM and I sold another round of NOV calls.  These too expired OTM.  Shortly after the NOV expiration HGT began to trade a little lower.  I continued to keep an eye on it so I could sell another round of calls 4-6 months out.

Mistake #1 was not keeping up on what was going on in the natural gas market.  Natural gas prices have fallen sharply in recent weeks.  They now trade at generational lows.  Mistake #2, since my position in HGT was a trade and not a long-term holding, I should have exited the postition when HGT approached my break-even price.  Mistake #3 came a week or so ago when I compounded my problems by buying more shares thinking the stock couldn’t fall much further.  How many times have you heard “never try to catch a falling knife”?

After finally coming to my senses yesterday I sold my 1,000 shares of HGT for a sizable loss.  A loss of almost $3,700!  It is mistakes like that that wipe out the returns on many great trades.

Word to the wise…do NOT let small losses turn into big ones.  Admit your mistake in the trade and get out.

Am I going to swear off HGT and never trade it again?  No way!  I made some mistakes but the strategy is still sound.  Once HGT does find a bottom I will be back in it again collecting its monthly dividends and selling covered calls.

Regards,

Troy

 

 

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Update – AMAT

Posted by mounddweller on January 20, 2012

Fellow Traders,

Today I closed my naked put position in Applied Materials (AMAT).  You’ll recall back on December 21st I sold 5 JAN ’13 puts at the $10 strike price.  The premium I received was $1.57/share.  You can read all about AMAT and the reasoning behind the trade here: https://troysmoneytree.wordpress.com/2011/12/21/new-trade-amat/.

So, why did I close the position after just 30 days?  Well, quite simply, I wanted to take advantage in the recent run up in stock prices in general and AMAT in particular.  Back when I entered the trade AMAT was selling for $10.21.  Today it closed at $12.47.  Yes, AMAT like a lot of other stocks in this market has been on a tear of late.  It is up 22.13% in 30 days.  This strong performance had reduced the premium on my naked puts by over 50%.  Thus, I felt  it might be a great opportunity to lock in a gain.

Let’s look at how I did.  As I said earlier I sold the naked puts for $1.57.  Today, I bought them back for $0.75.  Thus, net of commissions, I made $388.10 in 30 days on $5,000 of capital.  My ROIC was 7.76%.  Annualized, my ROIC was 94.44%.  Not bad, huh?

My plan going forward is too continue to watch AMAT.  This market is not going to go straight up.  At some point we will get a correction.  At that time I will evaluate whether it makes since to re-enter this trade.

Regards,

Troy

 

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