The Money Tree

Safely Generating Income in Retirement

Position Update – EXC

Posted by mounddweller on January 2, 2013

Fellow Traders,

Long time readers will recall that I have a long-term holding in EXC.  I initiated my position in EXC back in April 2010 by selling naked puts at the $42.50 strike price.  Since then I have collected dividends, sold calls and puts, been assigned additional shares, and finally began reinvesting my dividends in new shares.  All of this trading activity over the past 32 months has resulted in me now owning approximately 529 shares with a net cost of $32.11.

I was feeling very good about my position in EXC until November when they announced that a dividend cut was a possibility within the next 6 months.  As you would expect the stock nose-dived on that announcement, falling from $37.50 to $28.50 in about a month.  Since bottoming out it has been hovering between $29-30.

Last week I decided there was little likelihood of EXC moving much higher until there is more certainty about if, when, and how much of a dividend cut is going to occur.  Thus, I started looking at the possibility of selling calls at the $30 strike.  While I was thinking about it (read “procrastinating”) EXC fell from the high $29s down to low $29s.  This caused the premium in the JAN $30 calls to totally evaporate.  I felt victimized once again by my inability to reach a decision and take decisive action.

However, the goons in Washington via their mangling of the fiscal cliff gave me a second chance.  The huge market rally today initially lifted all the boats, including EXC.  EXC jumped from a previous close of $29.74 to as high as $30.24 in the first 45 minutes of trading.  This caused the JAN $30 calls to rally as high as $0.60.  My gut told me this couldn’t last.  I felt people would eventually sell into this strength and push the stock back down under $30.  For a while it was a fight between my gut and my brain on deciding whether or not I should sell calls into this strength.  Thankfully my gut won.  Here’s the trade I made, with the stock at $30.18, I sold to open 5 JAN $30 calls at $0.55.  This netted me just over $264 and reduced my cost basis down to $31.61.

My gut instinct proved correct.  After peaking at $30.24 EXC gradually sold off, going as low as $29.66 and finishing the day at $29.82.

My plan going forward is to continue selling calls and/or put to further reduce my net cost.  I’m thinking that even if a dividend cut is announced the stock won’t fall much lower than $27.  At this point I could buy more shares (dollar cost averaging down) and still end up with a dividend yield of 4% or more.

Regards,

Troy

 

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