The Money Tree

Safely Generating Income in Retirement

Posts Tagged ‘covered calls’

Monthly Results – March 2013

Posted by mounddweller on March 29, 2013

Fellow Traders,

You’ll recall a couple months ago I started a new series of posts summarizing my monthly trading results.   The last trading day of the month being behind us let’s take a look and see how I did.

Number of Closed Positions: 5

Profit on Closed Trades: $1,041.80

Total Capital Used on Closed Trades: $69,790.00

Average Number of Days Trades Were Open: 30

Return on Invested Capital: 1.49%

OK, before I move on to the stats for my open trades, let me tell you a little more about these closed trades.  Of the 5 closed trades, 3 were naked puts and 2 were covered calls.  2 of the 3 naked puts trades (CAT and INTC) expired OTM.  The third, EXC I bought to close after 25 days (out of a total of 36 DTE) when I had captured 75% of the total premium.  One of the two covered call trades (COH) started out as what one of my friend and  investing mentors, Ron Groenke calls the “Double Up” strategy.  This is where you do a covered call and sell naked puts on the same stock with the same expiration date.  The other covered call trade (GLW) was a straight buy/write.  All 5 trades were closed for a profit.

Now let’s look at my open trades.

Number of Open Positions: 5

Net Cash Flow in March from Open Positions: $440.15

Total Capital Used on Open Trades: $76.050.00

Net Cash Flow on Invested Capital: 0.58%

The return on invested capital for my open positions is lower than normal this month because 2 of my 5 positions were initiated in prior months and did not generate any new income.  One of the two (POT) was initiated in late February and the other is GDX which I have been trying to profitably work myself out of for a few months now.  The return on invested capital for new open positions is a more normal 1.09%.

Best of luck to all my readers as we head into April.

Regards,

Troy

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Monthly Results – FEB 2013

Posted by mounddweller on February 28, 2013

Fellow Traders,

You’ll recall last month I started a new series of posts summarizing my monthly trading results.   This being the last day of the month let’s take a look and see how I did.

Number of Closed Positions: 2

Profit on Closed Trades: $(1,338.45) – Yes, I lost money this month.  More on that later…

Total Capital Used on Closed Trades: $39,267.90

Average Number of Days Trades Were Open: 530 – No, that’s not a misprint.  Again, more on that later…

Return on Invested Captial: None, I had a realized loss of capital.

OK, before I move on to the stats for my open trades, let me tell you a little more about these closed trades and the peculiar results.  Actually, I had one losing trade and one winning trade.  The losing trade was a long-held position in EXC that was unexpectedly called away from me.  I had ITM calls that got assigned early so someone could capture EXC’s last $0.525 dividend.  I had held EXC in my account for almost 3 years.  My sale of naked puts and covered calls and the collection of quarterly dividends could not make up for the steady decline in price.  Thus, I lost about $1,500 out of the $20,500 of capital I had in this trade.  I am working to recapture that lost capital by selling a new round of naked puts.  As a result my net loss on EXC is now down to $1,200.

My other closed trade was a winner.  My 3 naked puts in YUM at the $62.50 strike expired OTM.  This resulted in a gain of $214 on $18,750 in capital in 25 days.

Now let’s look at my open trades.

Number of Open Positions: 7

Net Cash Flow in February from Open Positions: $1,288.85

Total Capital Used on Open Trades: $90,340

Net Cash Flow on Invested Capital: 1.43%

This month I am again pleased with the net cash flow on invested capital.  However, I am disappointed in the realized loss of capital from my closed trade in EXC.  I am working hard to learn to avoid sizable losses of capital.

Best of luck to all my readers as we head into March.

Regards,

Troy

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Update – FEB Expiration

Posted by mounddweller on February 18, 2013

Fellow Traders,

Just a short post tonight to update you on my trading activity this past week leading up to FEB expiration.

GDX – I thoroughly messed this trade up.  As you may recall I was short both the FEB $44 and $41 puts.  Earlier in the week GDX was trading above $42 and I could have bought back my $44 puts at a small profit.  The $41 puts could have been bought back for pennies.  However, with only a few days to expiration I decided to let both of them ride.  BIG MISTAKE!  Gold fell through support and the Gold Miners Index fell right along with it.  GDX closed Friday $39.89.  Thus, not wanting to accept assignment, I had to move quickly to roll my puts out.  Here’s what I decided to do:

(1) I rolled my FEB $44 puts out to the SEP $41.50 strike for a net credit of $0.05.  The small net credit essentially covered my commissions.  I did this because I expect we’ll get a bounce soon and by now having puts at the $41.50 strike I should be able to extract myself from this trade for a small profit.

(2) I rolled my FEB $41 puts out to the 22FEB $41 strike for a net credit of $0.22.  I thought $0.22 for one week was a fair trade.  If GDX doesn’t bounce by Friday I’ll roll out again and likely down to the $40 strike.

COH – Very strange transaction occurred with Coach.  Recall I was long 100 shares of COH and had sold a FEB $52.50 call.  In addition, I had sold 2 FEB $50 puts.  On Friday (the day BEFORE expiration) I had 200 shares of COH put to me at $50.  The owner of my puts put the stock to me!  Why I have no clue.  He/she could just as easily have sold to close and made a sizeable profit.  Oh well, it didn’t matter to me because I wanted to acquire the additional 200 shares anyway.  Now, I own 300 shares at a net cost of $49.94 share.  Tomorrow, I will sell OTM covered calls against my 300 shares and thereby set myself up to receive the $0.28 dividend in early March.

EXC – I had another embarassing gaff with Exelon.   Long-time readers will remember I have been holding EXC shares and trading puts and calls against them for three years.  My most recent trades had been to write covered calls at the $30 strike in anticipation of the stock going down after the dividend cut was finally announced.  Well, much to my chagrin EXC initially increased after the dividend cut announcement.  My calls were now deep in the money.  Long story short, someone called away my stock earlier this week so they could capture the hefty $0.525 dividend.  I waited too long to roll my calls.

Since I want to own EXC long-term I immediately sold another round of APR puts at the $30 strike for $0.60.

YUM – Last, but not least, I need to update you on my YUM trade.  The lesson to be learned in this trade is not to panic and to be patient.  Many of you know YUM is facing a strong headwind in their largest market, China.  The rumors of tainted chicken have caused sales to fall significantly.  The stock responded accordingly by falling to $60 earlier this month.  At that time my puts were $2.50 in the money and YUM looked like it could fall further.  Rather than panic, I heeded the sage advice of my friend Teddi over at www.fullyinformed.com.  By staying the course I was able to watch YUM recover, closing Friday at $63.99.

This trade resulted in a ROIC of 1.14% in 25 days or 16.7% annualized.

Best of luck to everyone trading this week.

Regards,

Troy

 

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New Trade – GLW

Posted by mounddweller on February 10, 2013

Fellow Traders,

On Friday I entered a new position in Corning (GLW). I executed this trade after watching GLW for the past few weeks. GLW has fallen since hitting $13 in early January. It continued to sink and trace a path along the lower bollinger band finally bottoming at $11.79 on Monday, February 4. On Tuesday the stock bounced off the lower bollinger band and began to move higher. I continued to watch the stock proceed higher on Wednesday and Thursday. By Friday I feared that I had missed my opportunity. However, on Friday morning the stock pulled back and I swooped in buying 1000 shares at $12.14. At first I had tried executing a buy/write for a net debit of $11.78. However, I was unable to get a fill.

I then changed my strategy. I decided to try to time my entry by buying the stock near the bottom and then waiting to sell calls as the stock reached an intra-day overbought condition. Yes, this was a risky move on my part. There were no guarrantees that the stock would move back up at some point later in the day. However, given the previous 3-day rally in the stock I thought it was worth a chance. As it turned out, I was right. I was able to buy the stock as it bounced off its lows of the day. As I mentioned above I bought 1000 shares at $12.14 at 10:59 a.m. Then using a 1-minute price chart and Williams %R I was able to sell the MAR $12 calls at $0.45 around 3:17 p.m. You can see I missed my best chance to sell the calls a short time earlier. Greed got the best of me and I waited too long trying to get one more penny for my calls. Thankfully, I was given a second chance before the market closed to sell the calls at a good price.

BLOG - GLW 1 day chart

Let’s look at my potential profit on this trade.  By buying the stock at $12.14 and selling the MAR $12 calls for $0.45 I have the potential to make a net of $0.31 per share.  My ROIC is 2.55%.  That’s a nice return.  However, it gets even better.  GLW is expected to declare a $0.09 dividend before expiration on March 16th.  If my calls are not exercised early and I am also able to capture this $0.09 dividend it will boost my ROIC to 3.29%.

Best of luck to all my trader friends in the coming week.

Regards,

Troy

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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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Update – INTC

Posted by mounddweller on October 28, 2012

Fellow Traders,

I want to update you on my INTC trade.  You’ll recall as OCT expiration approached I was short 5 OCT $24 puts and 5 OCT $22 puts.  As I wrote in my previous post (https://troysmoneytree.wordpress.com/2012/09/20/update-intc/) I decided if my OCT $24 puts were ITM at expiration I would accept assignment to position myself to receive the $0.225 dividend in early November.

So, I now own 500 shares of INTC at $24.  However, my net cost is $22.51 since I was able to collect $1.49 in put premiums from August through October.  The next step in executing my strategy for these shares will be to sell DEC or JAN calls at either the $23 or $24 strike.

With the OCT $22 puts I decided to roll out and down.  I bought back the OCT $22 puts for $0.34 and sold the DEC $21 for $0.54.  My plan will be to continue to roll these out and down as necessary to avoid assignment until such time as I have built up a substantial net credit.

Regards,

Troy

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New Trades – CSCO

Posted by mounddweller on October 28, 2012

Fellow Traders,

I know it’s been a couple weeks since my last post.  I’ve really fallen down on the job lately when it comes to keeping The Money Tree current.  So today I want to catch you up on a couple trades I’ve made.

First up is CSCO.  On October 19th  I executed two NP trades.

(1)  STO 5 NOV $17 at $0.33

(2)  STO 5 DEC $16 at $0.24

In both cases CSCO was trading at $18.12 when my trades were executed.

So, why CSCO and why now?  I think CSCO represents a great value.  It trades at <12x trailing earnings and <9x expected earnings.  It has $32B in net cash ($6.13/share).  That’s over 33% of its market value.  Subtract out the net cash/share from the Friday closing price of $17.29 and you’ll see CSCO is trading at 5.34x prospective earnings.  This for a company that generates over $8B per year in free cash flow and has a dividend yield of 3.24%!  CSCO is undoubtedly the Rodney Dangerfield of the stock market; it gets NO RESPECT!

So, that is why I decided to execute the two trades I did.  I would be happy to own CSCO at between $16 and $17 per share.

So, what is my strategy?  Well, if my NOV $17 expire OTM I will rewrite another round of puts at either the $17 or $16 strike with a JAN expiration.   If the puts are ITM as expiration approaches I will roll them out and possibly down depending on price and work to build up my net credit.  If the DEC $16 puts expire OTM I will enter a new trade and do a buy/write in an attempt to capture the dividend in the first week of January.    If CSCO is less than $16 at DEC expiration I will accept assignment and then look to sell covered calls against those newly acquired shares.

My overall objective is to begin building a long-term position in CSCO, reinvesting the dividends until I retire.  At retirement the dividends will form part of my income stream.

Regards,

Troy

 

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New Trade – WAG

Posted by mounddweller on September 30, 2012

Fellow Traders,

As I mentioned in my earlier post, I made two trades this week.  The first was a naked put trade in WM.  The second was a covered call trade in Walgreens (WAG).  I have been following WAG for pretty much all of 2012.  Back in February and again in July I had sold puts at the $30 strike price.  Both expired out of the money (OTM).

Walgreens has had a difficult year.  Their business took a substantial hit when they were not able to mutually agree on terms of their contract with Express Scripts.  However, a few months apart has since convinced both companies that they are better off working together.  Consequently a new contract has been signed and went into effect earlier this month.

WAG closed Friday at $36.44, very near it’s 52-wk high of $36.90.  It’s 52-wk low is $28.53.  Normally I do not like to buy or trade stocks that are trading near their 52-wk highs.  I’m cheap and thus am almost always looking for a bargain.  However, in this case, I believe WAG is a bargain despite trading near yearly highs.  Why?  Well because of the difficulties I referenced earlier.    The stock has been beaten down all year and now that investors have a more favorable outlook its price has begun to recover.  Despite this recovery it remains well below its multi-year high of $45.  It also is reasonably priced at 12.5x trailing and 10.5x expected earnings.  The 5-yr price chart is below.

There are a couple of reasons that I decided to go ahead and enter a covered call trade in WAG.  First, its another stock that I want to own in my long-term portfolio.  Amazingly, it has increased its dividend almost 200% in the past five years, from 9.5c to 27.5c per quarter.  It currently yields 3.1%.  With the baby-boomers (of which I’m one) beginning to retire in droves, I believe the substantial dividend increases are sustainable .  Second, I liked the recent price action in the stock.  It has formed a classic ‘cup with handle’ formation that generally results in an upward break-out in price.

Here’s the trade I made and my intermediate term plan for this stock.  I bought 300 shares of WAG at $35.86 and simultaneously (buy/write) sold 3 OCT $37 calls at $0.46.  This gives me a net cost of $35.42.  If assigned at expiration, I’ll have a 4.46% ROIC with a holding period of less than 30 days.  If WAG remains under $37, I’ll be in a position to capture the upcoming dividend when it goes ex-dividend around November 9.   After OCT expiration I may sell another OTM round of calls.  If WAG begins to fall, I’ll look to add to my position by selling puts at the $32 strike price.

Regards,

Troy

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New Trade – Another Round of GME

Posted by mounddweller on August 20, 2012

Fellow Traders,

My apologies for the sparcity of postings of late.  I’ll try to do better in the coming weeks.

Today I’d like to tell you about my most recent trade in GME.  However, before I do that I need to update you on the results of my previous GME trade.  You’ll recall I originally entered this trade back on June 1st by selling 6 JUN $18 puts.  The details are posted here: https://troysmoneytree.wordpress.com/2012/06/01/new-trade-gme/.  GME ended up moving against me and I had to work to manage myself back into a profitable position.  My interim trades are discussed here: https://troysmoneytree.wordpress.com/2012/07/25/trade-update-gme/.   This past weekend my AUG $17 calls were called away and I ended up making 2.43% over 80 days which annualized comes out to just over 11%.  Not great but not bad either.

So, now let’s discuss my new trade.  I did a buy/write.  I bought 500 shares of GME at $18.59 and sold 5 SEP $18 calls at $1.08.  Why was I so interested in getting right back into GME after having to work to get myself out of it?  Well, primarily I saw the opportunity to capture a good call premium while at the same time setting myself up to capture GME’s next dividend.

GME recently announced they were raising their quarterly dividend to $0.25/share.  The stock goes ex-dividend on 8/28 so you still have time to enter a trade if you’re interested.

With the $0.25 dividend, assuming I am called away at $18 next month my ROIC will be 3.98%.  If I get called away before the stock goes ex-dividend my ROIC will be 2.64% in about 8 days.  Either way I like the trade.

Now, I know a lot of people have concerns about the long-term prospects of GME.  People see it going the way of Blockbuster.  However, I see it differently.  I don’t think the video game industry is going away.  I just think they’re in a lull right now.  There haven’t been any new gaming platforms released in the past couple of years.  Once the next release of Xbox or Wii comes out we’ll be off to the races again.

GME is well managed.  They have no debt, signifcant cash on their balance sheet, and are buying back shares at great prices.  I will continue to buy and trade GME when they slip under $20/share.

Regards,

Troy

 

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Trade Update – GME

Posted by mounddweller on July 25, 2012

Fellow Traders,

I want to give you an update on my GME trade.  You’ll recall I originally opened this trade by selling 6 JUN $18 puts.  As JUN expiration approached I rolled half of my position out to JUL $18 and the other half down and out to the JUL $17.  Earlier this month I bought to close the $18 puts.  At JUL expiration I decided to let the stock be put to me at $17.

Today I sold to open the AUG $17 calls for $0.28.

If my stock is called away at AUG expiration I will close the position with a small net profit equal to a ROIC of 2.36%.  If the calls expire OTM I will continue to sell calls until called away.

Regards,

Troy

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