Next week will be the last week for our very profitable virtual portfolio, that started with $100,000 on April 10th.
This virtual portfolio has already made 19% in 16 weeks and many members wanted to start a new one from scratch. So, by popular demand, we will be restarting a brand new virtual portfolio the week after options expiration, also with $100,000 and also a hedged virtual portfolio but this time with the goal of drawing a monthly income. I got this idea when I went down to Florida last week and spoke to many people who asked me about their investing accounts. Many of these "safe" accounts had been cut in half or worse and the returns they were producing were coming in at 5% year – if that and people were counting on this money for their monthly expenses. I spoke to many people with $1M in the bank who were living off $50,000 a year in interest and dividends!
Using options and good hedging strategies, we have been able to produce a return in our virtual portfolio of 19% in just 16 weeks (12% cash, 7% unrealized). I'm not advocating someone take a whole $1M and shift it to stocks and options but, if you can make 20% on $200,000 while your other $800,000 makes a "safe" 5%, your annual income goes from $50,000 to $80,000 – that's a lot of early-bird specials! I will, of course, be happy to answer any adjustment questions on this virtual portfolio anytime during chat but we will no longer be tracking it weekly or making new plays. The goals of the new virtual portfolio will be similar and the new trade ideas can be applied whether you are looking to draw an income or just start building long-term set of holdings for reinvestment.
In the last $112,007 Virtual Portfolio Update, from July 28th, we remained bullish and it really paid off with another $2,117 in unrealized gains ($6,690 not included in above total) as we made a very well-timed bottom call the week before and ran with it. We have haven't had to call an "audible" in two weeks, sticking to our plan as the market held up nicely.
The first few weeks after you sell options are usually the worst and the rising VIX had boosted the premiums of the puts and calls we sold but none of that matters because we played a little more aggressive to the upside and, despite losing $3,080 on our covers, we are still way ahead of goals. As usual, we are able to demonstrate the joy of doing very little! It's important to get used to the ebb and flow of the premiums over time and not worry about well-hedged positions. We only add the profits as we close positions from our April 10th start with our virtual $100,000. We are not including profits in the header from the positions still working because: IT ISN'T REALLY A PROFIT UNTIL YOU CASH IT OUT…
The primary goal of this virtual portfolio is to be conservatively hedged. The secondary goal of this virtual portfolio is not to mess around with it. These are meant to be nice safe(ish) positions that do not require you to sit glued to a monitor all day. If you are new to this section, please read the May 25th update as there was much wisdom in there. We have a few minor adjustments to make this week (see red comments) but there were none last week so not too fussy with this lot. Keep in mind this is a virtual portfolio and doesn't have to be followed exactly. The main idea is to teach proper hedging techniques and demonstrate that you can make a nice return without putting yourself at constant, daily risk. It should be noted that our new moves (in red) can be treated as new entries by someone starting from scratch and, as always, feel free to check with me in chat if you are not sure.
As usual, we are still looking to confirm our breakout levels before buying more as we move back to the top of what has been a very reliable range. We are well-covered to the downside and are covering more in our new moves as it pays to play conservative until the bull market really proves itself by taking us to new highs AND HOLDING THEM. As I say every week, it's a good thing to do is open the older post in another window and see how the changes we made affected the virtual portfolio.
Our open positions are:
400 GE at $11.84, Aug $11 puts and calls sold for $1.85, net $9.99/10.50
- GE now $14.70 and the Aug $11s are $3.75, net $10.95 ($384 gain on $3,996 = 9.6%).
300 PGF at $12.80, selling Sept $12 calls for $1.95 and June $13 puts for .65, net $10.20/11.60
- PGF is now $16.43 and the Sept $12s are $4.40 and the Sept $13 puts are .10 for net $11.93 ($519 profit on $3,840 = 13.5%)
10 DBC 2011 $15 calls for net $6.35 and 10 Jan $18 calls at $5.90, selling 20 Aug $21s for adjusted .95 net $5.18 (avg)
- The 2011 $15s are $8.70 and the Jan $18s are $5.35 and Aug $21s are $2.25 for net $4.90 ($280 loss on $10,350 = 2.7%).
12 UNG Jan $9 calls for $4.91, sold 8 Aug $14s for .85, net $4.34
- Jan $9s now $4.60, Aug $14s now .35, net $4.33 ($10 loss on $5,208 = 0.2%).
500 UYG at $3.61, selling 5 Aug $4 puts and calls for .70, net $2.91/3.46
- UYG now $5.55, Aug $4s now $1.60 = net $3.95 ($520 profit on $1,455 = 36%).
That was our original group. Now up $1,133 (4.5%) on $24,849 at work for July. Remember, we are looking for CONSERVATIVE opportunities that balance us out. The next group is from our post "Stress Free Investing In Stress-Tested Banks," where we added the following plays:
200 STI for $18.50,selling Aug $15 puts and calls for calls for $2.75 net $15.75/15.38.
- STI now $21.75, Aug $15s now $6.80 nets $14.95 ($160 loss on $3,150 = 5%)
300 KEY at $6.20, selling Aug $5 calls for .60 and 3 Aug $5 puts for .50 nets $5.10/5.05.
- Key now at $6.78, Aug $5s at $1.85 net $4.93 ($51 loss on $1,530 = 3.3%)
100 USB at $17.50, selling Aug $18 calls at $1.10 nets $16.40/15.70
USB now $23.25, Aug $18 calls are $5.20 $18.05 ($165 gain on $1,540 = 10.7%)
- Aug $16 puts bought back for .05, $105 trans to cash
- USB now $23.25, Aug $18 calls are $5.20 $18.05 ($165 gain on $1,540 = 10.7%)
1,000 C at $3.35, selling 10 Aug $3 puts for .70 nets $2.65/2.87
C now $3.85, Aug $3 puts at .04 nets $2.73 ($1,160 profit on $2,650 = 43.8%)
- Selling Sept $3 calls for $1
- C now $3.85, Aug $3 puts at .04 nets $2.73 ($1,160 profit on $2,650 = 43.8%)
We are now showing a gain of $1,114 (12.5%) on $8,870 (of course profits were transferred to cash). I prefer to let the positions look bad as it keeps us mindful of our targets.
That brings us to our newest group, the Dividend Plays! These were from the Memorial Day weekend articles that started here. If you haven't read this series, please do as we will be going back to that original group of 21 dividend-paying stocks. I have decided to add dividends to cash otherwise we'll never know how we're doing. Just don't expect it to happen on the right day! Keep in mind these are long time-frame plays and will be pretty dull overall.
500 LYG at $4.25 (adjusted), selling 5 Jan $5 puts for $1.48 nets $2.77/3.89
LYG now $7.12, Jan $5 puts at .20, net $6.92 ($2,075 gain on $1,385 = 149.8%)
- Jan puts should be bought back for .20, Jan $7.50 calls sold for $1.
- LYG now $7.12, Jan $5 puts at .20, net $6.92 ($2,075 gain on $1,385 = 149.8%)
200 TNK at $11.09, selling 2 Nov $10 puts and calls for $3.90 for net $7.19/8.60
- TNK now $9.62, Nov $10s are $2.20, net $7.42 ($46 gain on $1,438 = 3.1%)
800 PGH at $7.50 (average), selling 4 Jan $7.50 puts and calls for $2.82, nets $6.09/6.40
PGH now $8.38, 1/2 Jan $7.50 combo is $2, net $7.38 ($1,032 profit on $4,872 = 21.2%)
- $74.40 dividend paid 7/29 – transferred to cash.
- PGH now $8.38, 1/2 Jan $7.50 combo is $2, net $7.38 ($1,032 profit on $4,872 = 21.2%)
100 KMP at $47.55 and the Jan $57.50 put for $12.35. Selling Jan $37.50 put for .95 and 2011 $55 call for $1.20, net $57.75 (put is covered so no buy obligation)
KMP now $52.77 and Jan $57.50 puts are $6.80. Jan $37.50 puts are .20 and 2011 $55 calls are $2.60 for net $56.77 ($98 loss on $5,750 = 1.7%)
- $105 dividend paid 7/29 – transferred to cash. This one was not meant to make money other than the dividend. Notice how perfectly balanced it is. This position is a great example of how you can lock a stock down completely.
- KMP now $52.77 and Jan $57.50 puts are $6.80. Jan $37.50 puts are .20 and 2011 $55 calls are $2.60 for net $56.77 ($98 loss on $5,750 = 1.7%)
200 CAT for $34.31, 2011 $35s sold for $12, net $22.31
- CAT now $47.78, 2011 $35s now $14.38, net $33.40 (up $2,218 on $4,462 = 49.7%)
We have a $5,273 gain on $17,907 (29%) over 10 weeks, not including divdidends collected. There's not much to be done with the dividend payers, they will go up and down but we sold long positions against them and there's no sense messing around with them. That brings us to our two cover plays and new play:
40 FXP Sept $10 puts sold short at .38
FXP puts now $1.15 (down $3,080 on $1,500 = 205%)
- Damn, these suck! It's really fine as they are all premium (FXP is $9.76) but they LOOK terrible. SKF vertical of 7/24 was weekend protection and we got out even.
- FXP puts now $1.15 (down $3,080 on $1,500 = 205%)
5000 TASR at $5.11, selling Aug $5 puts and calls for .83, net $4.28/4.64
- TASR at $5.18, Aug $5s are .45 net $4.73 (up $2,250 on $21,400 = 10.5%)
Our new plays have lost us $830 (4.1%) on $19,900 so far but that's what covers do in the case of the FXP. Don't forget this is a conservatively hedged virtual portfolio so something would be very wrong if we made $7,520 on the first 3 groups and lost nothing on the covers! Only time can demonstrate the wisdom of short put covers in a bull market but we will roll and roll and roll as long as China wants to keep going higher.
Our net unrealized gain is then $6,690 so our net gain on the virtual portfolio to date is $18,981 on $71,526 at work (26.5%), that's 26.5% in 15 weeks or 19% of the original $100K - pretty good since our goal for the year was to make 20%! A lot of managing this kind of virtual portfolio is learning to accept negative moves and trusting that, over time, the premiums will come to you. We've certainly seen that in our first three months!
We are still only making weekly adjustments and we barely make any of those. There is still $40,765 of unused capital, plenty of dry powder still on the side and that is one of the most important lessons of this virtual portfolio – it took us 3 months to finally cross the 50% zone in positions to cash – you don't need to jump "all in" right away and, in fact, it's counterproductive. We are achieving our directive of: No heart attacks, no scrambling, lots of good sleep. You do not have to take a lot of risks to make a nice return. As our old friend Charles Dow likes to say:
"The man who begins to speculate in stocks with the intention of making a fortune usually goes broke, whereas the man who trades with a view of getting good interest on his money sometimes gets rich."