Results – June 2013

Fellow Traders,

Another month has flown by exceedingly fast.  It has been a bumpy ride what with the mini-correction.  Let’s take a look and see how I did.

Number of Closed Positions: 2

Profit on Closed Trades: $235.10

Total Capital Used on Closed Trades: $20,050.00

Average Number of Days Trades Were Open: 31.5

Return on Invested Capital: 1.17%

OK, before I move on to the stats for my open trades, let me tell you a little more about these closed trades.  Both of the closed trades were naked puts.   Both expired OTM.  My first trade was Merck (MRK).  I sold the JUN $44 puts back on May 9 for $0.64.  At the time MRK was trading at $45.33.  It peaked at over $49 in early June and is now heading back down and approaching resistance.  I’ve got it on my radar screen and will definitely trade it again once it gets a little lower.  Friday it closed at $46.45.  My other closed trade was in TEVA.  On June 3 I sold the JUN $37.50 puts for $0.42.  At the time TEVA was trading at $37.97.  I have been trading the TEVA naked puts at the $37.50 strike price for 3 months now.  It is trading at multi-year lows and I’d like to establish a long-term position in it.

Now let’s look at my open trades.

Number of Open Positions: 11 (in 8 stocks)

Net Cash Flow in June from Open Positions: $1,104.00

Total Capital Used on Open Trades: $112,012.93

Net Cash Flow on Invested Capital: 0.99%

This month I opened five new positions in CAT, CHRW, KO, OKE, and TEVA.   All are naked put trades.  I’m short CAT with the JUL $80 puts, CHRW at JUL $55, and KO at JUL $38 (first time I’ve ever traded KO!).  I opened a second position in OKE at JUL $42.50.  You’ll recall last month I sold the JUN $47.50 puts.  More about that later.  And last but not least I opened another round of TEVA JUL $37.50 puts.

Now let’s look at the 6 open positions I have that were carried over from prior months.  I still have my two deep ITM positions with GDX.  I’ve dug myself quite a hole in this one.  It will take quite some time to get back to even on these.  I’m short the SEP $41.50 puts and long stock which was put to me a couple months ago at $40.  I also have a previously opened position in OKE.  I originally sold the JUN $47.50 puts back in May.  I have since rolled these down to $45 and out to JAN.  I’ve also had to roll my two positions in EXC.  I rolled my JUN $34 out to JAN $33 and my JUN $32 out to JUL $31.  My last open position is a very old one.  Way back in May 2011 I initiated a trade in WFR.  Eventually I had the stock put to me at $10.  My position has laid dormant for quite some time as I was way under water.  Well, patience is a virtue.  The stock has now come back into favor with the boys on Wall Street and I was able to sell a JUL covered call at the $10 strike price.  By the way, WFR recently changed their name and their ticker symbol is now SUNE.

Going into July I am considering new trades in IBM and a repeat trade in MRK (as I mentioned above).

Regards,

Troy

Calculating ROIC – Follow-up

Fellow Traders,

This post is in response to the comment I received back from Esa regarding more specific questions about how to calculate the total amount of capital employed during a reporting period.  Esa has follow-up questions regarding specific trades.  A visual representation of the trades is shown below.

In looking at this graphic and performing a few calculations I arrived at the following key performance indicators (KPIs) for the month of May:

Minimum Capital: $0.00 (Esa did not have any open trades during the first 5 days in May)

Maximum Capital: $30,250.00 (Esa had 5 open trades the last two days of the month ($3600, $7250, $4150, $9750, and $5500))

Average Capital: $8,982.26.  This can be calculated in one of two ways.

(1) Add the total amount of capital required for each of the 31 days during the month of May then divide this sum by 31.    [((0+0+0+0+0+3600+3600+3600+3600+7750…)/31)] or,

(2) Calculate the average capital required for each trade and then sum the 7 results.  [((WFC=3600 x (26/31)) + ((KO#1=4150 x (10/31)) +…]

Now, let’s look at Esa’s other question…

“First of all, am I wrong when I say that you would put WFC and MSI as June’s trades because they expire in June (unless for example bought back in May)? Do you see a problem in putting them into May’s figures? Obviously this might be different with puts and calls as the latter’s profit depends usually on whether the option is called or not. “

I say, it depends.  If the WFC and MSI trades are naked puts (NP) then I put them in my May trades.  If they are covered calls (CC) then I would wait and include them in my June results.  Why, you ask?  Well, for me it’s all about calculating cash flow and ROIC.  If they are NPs then I know the total amount of cash flow I’ll receive right away.  With CCs it depends on whether the call finishes ITM and I’m called away or OTM and I’m left holding the stock and needing to enter another CC trade the following month.   Another approach would be to include the CC premium in the month it was received and any subsequent gain/loss on the corresponding stock position in the month the position was finally closed.  However, this would increase the level of complexity required in keeping track of your trades and their results.

So, for simplicity’s sake let’s assume all 7 of Esa’s trades were NPs.  Let’s further assume each earned a 1% ROIC net of all fees and expenses.  What would Esa’s total return on invested capital be for the month of May?  What would be the annualized result?

 

Esa’s total return on invested capital would be 4.30%.  How did I calculate this?  Well I added the individual 1% cash flows received from each of the NP trades initiated in May (i.e, $36 + $41.50 + $42.50 +…).  This equals $386.50.  I then divide this sum by the average amount of capital used during the month of May.  Recall, this was $8,982.26.   Annualized the return would be 50.66%.   This is computed as follows: [(0.043 x (365 / 31))].

I hope my explanation is easy to understand.  If not, let me know where I failed to clearly communicate.

 

Regards,

Troy

 

Calculating Return on Invested Capital (ROIC)

Fellow Traders,

I recently received a comment and question on my May 2013 Results posting.  Esa, from Finland, wanted to know how I would calculate my Return on Invested Capital (ROIC) and determine the total amount of capital used when I held multiple positions during the course of a month.  Below I provide ROIC and total amount of capital used calculations for three different scenarios.

In Scenario #1 I am placing three different trades on the same day.  Let’s assume the following:

(1) each trade will be held for 30 days,

(2) each trade requires $5,000 in capital,

(3) each trade generates a 1% ROIC net of all fees and expenses.

What is the total capital used?  In this scenario the answer is easy…$15,000.  I had three trades, each requiring $5,000 in capital.  The ROIC calculation in this scenario is also easy.  Each trade had an ROIC of 1% so my total ROIC must also be 1%.  My annualized ROIC is 12.17%.  This is calculated as follows:  [((0.01 x 365) / 30)].

Scenario #2 is a bit trickier.  In this scenario on the first day I place a trade requiring $5,000 in capital.  Like in the previous scenario it is held for a period of 30 days.  10 days later I place a second trade.  It too requires $5,000 in capital.  However, I only have this trade open 20 days.  10 days later I place my 3rd trade.  I hold it for 10 days and it also requires $5,000 in capital.  Like before each trade generates a 1% ROIC net of all fees and expenses.

What is the total capital used?  The answer is $10,000.  Here’s how I arrived at that number…[((5000*(30/30)+(5000*(20/30))+(5000*(10/30))))].  Trade D was held for 30 days, Trade E was held for 20 days, and Trade  F was held for 10 days.  Each required $5,000 in capital.  What was my ROIC?  It was 1.5%.  Each trade generated a return of $50.  Thus, to calculate the combined ROIC we simply divide the $150 earned by the $10,000 in average capital required to place the trades.  The annualized ROIC is calculated the same way as in Scenario #1.  [((0.015 x 365) / 30)].

Scenario #3  assumes three equal, consecutive trades are made.  Trade G is closed out before Trade H is entered.  Likewise, Trade H is closed out before Trade I is entered.  Each trade lasts 10 days.  Each trade requires $5,000 in capital.  As before each trade generates a 1% ROIC.

What is the total capital used?  The answer is $5,000.  I used the same capital 3 times during the month.  The ROIC is 3%, one percent for each of the three trades.  The annualized ROIC is 36.5%.  It is calculated as follows: [((0.03 x 365) / 30)].

So there you have it.  If anyone has another way of calculating returns please let me know.

Regards,

Troy

 

New Trade – CAT

Fellow Traders,

I executed a new trade today.  As I mentioned in my earlier post on CHRW, I’ve had my eye on CAT for some time now.   In just a moment I’ll explain my line of reasoning for this trade.

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide.  It was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Peoria, Illinois.  (courtesy of Yahoo Finance)

Here are the specifics for my trade:

STO 2 JUL $80 puts at $1.00

This is not my first rodeo with CAT.  I’ve successfully traded it twice earlier this year.  I learned about the potential for trading puts in CAT from my investing friend and hero Teddi over at www.fullyinformed.com.  I’ve kept it on my watch list ever since.

Here’s why I like this trade right now…

(1) It is trading well down in the range its established over the past year ($80 – $90).  It did rally at the beginning of the year to $100 but has since fallen back into the trading range.

(2) Earlier this week it bounced off its lower Bollinger Band at around $83 and now appears to be trending back up.

(3) The slight uptick in volatility has increased option prices such that I could go for a lower strike price and still receive a decent premium

Here’s a 3-month price chart which shows the bounce off of the lower Bollinger Band.

So, why didn’t I sell the $82.50 puts?  Well, despite the bounce off the lower Bollinger Band being a good signal for a price reversal, with the current uncertainty in the overall market I decided I wanted a little less risk in this trade.  That coupled with the fact that CAT has strong support at $80.

Here’s a three year chart which shows the strong support at $80.

That’s it for this one.  I’m still keeping an eye on the NUE JUL $42 puts.  However it didn’t fade as much on Friday so I’ve elected to wait a bit longer before I pull the trigger on that one.

Regards,

Troy

New Trade – CHRW

Fellow Traders,

I executed a new trade today.  I’ve had my eye on this one for some time now.   I sold puts on C. H. Robinson Worldwide (CHRW).

C.H. Robinson Worldwide, Inc., a third-party logistics company, provides freight transportation services and logistics solutions to companies in various industries worldwide. It offers transportation and logistics services, such as truckload, less than truckload, intermodal, ocean, and air freight transportation, as well as other logistics services, including transportation management, customs brokerage, and warehousing. The company has contractual relationships with approximately 56,000 transportation companies, including motor carriers, railroads, air freight, and ocean carriers. It also engages in buying, selling, and marketing fresh produce. It offers its fresh produce to grocery retailers, restaurants, produce wholesalers, and foodservice distributors through a network of independent produce growers and suppliers. The company operates through a network of 276 branch offices in North America, Europe, Asia, South America, and Australia. C.H. Robinson Worldwide, Inc. was founded in 1905 and is headquartered in Eden Prairie, Minnesota.  (courtesy of Yahoo Finance)

Here are the specifics for my trade:

STO 2 JUL $55 puts at $1.10

You’ll notice I didn’t go hog-wild with this one.  By that I mean I intentionally kept this a small trade.  I did so because I’ve never traded CHRW before and thus don’t have any experience in how volatile it is or an understanding of how it reacts to market and company specific news.

However, as I mentioned above I have had my eye on it for some time.  Here’s why…

(1) It is on my Dividend Superstars list

(a)  It has increased its dividend annually for the past 16 years

(b)  It’s dividend growth rate for the past 5 years is 12.9%

(c) It’s payout ratio is relatively low, only 38%, thus it has plenty of room to continue growing the dividend

(2) It is trading at multi-year lows

(3) It is trading at a significant level of support

(4) The first three reasons mean I wouldn’t mind owning it at this price and am interested in possibly establishing a longer-term position in it.

(5) Given the low level of volatility in the market, I liked the potential 2% ROIC if the puts expire worthless.

Here’s a one-year price chart which shows the strong support at $56.

Here’s the three year chart which show just how far back the support at $56 extends.

That’s it for this one.  Other trades I’m currently keeping an eye on include the NUE JUL $42 puts and the CAT JUL $80 puts.  Both ran away from me today but given the recent volatility I expect they’ll come back down and I’ll get another chance to pull the trigger.

Regards,

Troy

 

New Trade – TEVA

Fellow Traders,

 

No, your eyes are not deceiving you and no a whole month hasn’t passed quite yet.  Yes, it’s only been one day since my last post.  This is my first effort to try to get better at writing more often and in a more timely manner relative to my trades.

So, here goes.  In my post yesterday I mentioned I was interested in TEVA.  Today, while TEVA was bouncing around just above and below $38, I decided the time was ripe to sell JUN puts at the $37.50 strike.  I put in a STO limit order on 3 contracts at $0.42.  A short time later my order filled when the underlying was trading at $37.97.

With only 19 days to expiration my ROIC is 1.12%.

This is my second trade in TEVA.  Last month I executed the same trade.  Those options expired OTM.  My objective with these trades is to acquire a block of shares in TEVA for my long-term portfolio.

TEVA is a pharmaceutical manufacturer.  It is headquartered in Israel.  It is the world leader in the manufacture of generic drugs.  It also manufacturers its own patent protected, proprietary drugs.  It is about to lose a patent on one of these drugs.  This has caused the stock to fall significantly.  The stock peaked at $63.75 in March 2010.  It bottomed out at $35.26 in September of 2011.  Since then it has bounced between $45 and $37.

The stock currently yields 2.8%  Over the past five years it has consistently raised its quarterly dividend from $0.13 to $0.32.  My intent is to acquire shares while it is out of favor and begin to collect its ever rising dividend.  When growth returns it will return to favor and the price will go back up.

That’s it for now.  I’ll be back later this week if I place any more trades.  I still have my eye on CHRW.

Regards,

Troy

 

 

 

May 2013 – Results

Fellow Traders,

Another month has flown by and I haven’t managed to post a single message.  My apologies for not keeping you up to date on my trading activities.  My usual monthly summary will once again have to suffice.  Let’s take a look and see how I did.

Number of Closed Positions: 7

Profit on Closed Trades: $817.80

Total Capital Used on Closed Trades: $80,550.00

Average Number of Days Trades Were Open: 31

Return on Invested Capital: 1.02%

OK, before I move on to the stats for my open trades, let me tell you a little more about these closed trades.  6 of the 7  closed trades were naked puts.   5 of the 6 naked puts expired OTM and 1 (CAT) I bought back before expiration at a profit.  My puts expiring OTM were in NUE, CCJ, OKE, TEVA, and CSCO.  My one and only CC trade was in GDX where I sold and BTC the JUN 32.50 calls for a profit.  Regular readers will recall I’m trying to dig myself out of a whole in GDX.  I had the stock put to me a while back at $40.

Now let’s look at my open trades.

Number of Open Positions: 4

Net Cash Flow in April from Open Positions: $425.80

Total Capital Used on Open Trades: $34,900.00

Net Cash Flow on Invested Capital: 1.22%

This month I opened four new positions, two in EXC, one in MRK, and another in OKE.  My objective in the EXC and OKE trades differs from that of the position in MRK.  My objective in the MRK trade is for it to expire OTM and then re-evaluate if it looks suitable for a follow-on trade next month.   My objective in the EXC and OKE trades is to eventually own the shares and establish long-term positions in these companies.  It appears I may get my wish sooner than I originally anticipated because with the recent sell-off in high yield utility shares both EXC and OKE have fallen below my strike prices.  I am short EXC at both the $34 and $32 strike and OKE at the $47.50 strike.  Depending on what happens in the next week or so I likely will roll the EXC $34 options out and down and except assignment of EXC at $32.   With OKE I may except partial assignment and roll the remainder of the position out and down while expanding the number of open puts at the lower strike.

Going into June I am considering a repeat trade in TEVA at $37.50 and new trades in CHRW at $55, GME at $28/29, and KO at $38.  If anyone else cares to share trades they’re considering please let us know!

 

Regards,

Troy