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Income Portfolio – Year End (Almost) Review

8 months already! 

We initiated our virtual income Portfolio way back on April 9th, after dealing with my Father’s death and speaking to many of my Mom’s friends in Florida got me to thinking there must be a way to structure a portfolio that will hold up through thick and thin and throw off a nice monthly income – using a combination of dividends and option sales.  Our goal was to put $500,000 to work and generate at least $4,000 a month in income without reducing the principal.  

As you can see from the chart on the left, this is not exactly a radical strategy but, strangely, it’s also not one that retirees seem to be aware of.  Clearly, since 1990, the difference between dividend paying stocks and non-dividend paying stocks has made quite a difference.  These days, with most stocks moving in very high correlation – that is truer than ever because – if they are all going to go the same way, then any dividends you collect are a bonus, right?  

Of course, we try to outperform the S&P a bit as well and again, it’s a no-brainer to use put option sales to improve your entries because, clearly, if you only enter a stock with a 15-20% discount, then again you are likely to outperform the rest of the index.   The final trick up our sleeve is, of course, Fundamentals – we try to pick good stocks that will do better than the rest of the S&P.

And we HEDGE!  We hedge because, EVEN THOUGH we picked a good stock and we will collect our dividends and even though we gave ourselves a discounted entry – WE STILL MIGHT BE WRONG!  We might be wrong or the market may collapse (as it did on us just 3 years ago) in such a way that nothing is safe – so we hedge.  This virtual portfolio is very different from our more aggressive White Christmas Portfolio or the $25,000 Portfolio we closed out earlier in the year as our primary concern here is Warren Buffett’s Rule # 1 of investing:  Don’t Lose Money!  With that in mind, let’s look at our winners AND losers and see who’s going to be a keeper in 2012.

For the third month in a row, we did almost nothing in the Portfolio.  We set up our positions over the first four months – found a good balance and, aside from a few minor adjustments – let things play out.  That was our intention with this portfolio – it’s meant to be as low-touch as possible and, despite the fact that the S&P has ranged from 1,074 at the beginning of October to 1,292 at the end of that month and back down to 1,158 a few weeks ago and now back to 1,250 – our balance has allowed us to leave things alone – spending more time playing golf and less time watching the market silliness every day. 

In our last update on November 16th, we had recorded $72,089 of realized virtual gains against $28,375 of unrealized net losses from open positions.  We had a big down and up move since then but, as of Friday’s close, we’re in more or less the same place this month – so let’s see how our positions did.  

The following positions were closed (all passively):  

  • 3,000 shares of FTR paid a 0.188 dividend on 12/7 – up $564
  • 5,000 shares of SVU paid a 0.088 dividend on 11/29 – up $440
  • 500 shares of MT paid a 0.188 dividend on 11/18 – up $94
  • 3,000 shares of ACI paid a 0.11 dividend on 11/29 – up $330
  • 10 TBT Nov $18 puts sold for .90, expired worthless – up $860
  • 10 BA Nov $50 puts sold for $1.52, expired worthless – up $1,520 

Don’t you just love dividends?  Keep in mind our goal is to keep buying more and more dividend-paying stocks until, in few years – we really don’t have to do a thing except wait for those dividend dates to get out checks.  At the moment though, we are a little more aggressive, working our way into positions in stocks that either pay us good dividends down the road or have nice option premiums to sell every month.  This month, without taking any portfolio action at all, we picked up $3,808 – just $200 shy of our monthly goal.  

We still have the following open puts and we’re not closing any yet but I’m going to color them green for ones I intend to stick with (rolling if still in the money) and red for ones I think we’ll give up on (black is undecided):

  • 10 KFT Jan $30 puts sold for $1.60 ($1,600), now .08 (up $1,520)
  • 10 EXC Jan $37.50 puts sold for $2.20 ($2,200), now .01 (up $2,190)
  • 10 HCBK Jan $10 puts sold for $1.50 ($1,500), now $4.10 (down $2,600)
  • 10 HCBK Jan $7.50 puts sold for net $0, now $1.60 (down $1,600)
  • 10 GE 2013 $17.50 puts sold for $2.10 ($4,200), now $2.83 (down $730)
  • 10 HPQ Jan $35 puts sold for $2.90 ($2,900), now $6.90 (down $4,000)
  • 10 CCJ Jan $25 puts sold for net $1.25 ($1,250), now $6.60 (down $5,350)
  • 5 RIMM Jan $35 puts sold for net $1.65 ($825),now $18.50 (down $8,425)
  • 10 RIMM Jan $27.50 puts, sold for $4 ($4,000), now $11.15 (down $7,150)
  • 10 IMAX Jan $25 puts sold for $2.40 ($2,400), now $4.20 (down $1,800)
  • 10 IMAX 2013 $22.50 puts for $4.90 ($4,900), now $5.50 (down $600)
  • 30 FTR 2013 $7.50 puts sold for $1.30 ($3,900), now $3.10 (down $5,400)
  • 20 GLW 2013 $17.50 puts sold for $2.40 (4,800), now $5 (down $5,200)
  • 30 NLY 2013 15 puts sold for net $2.43 ($7,290), now $2.40 (up $90)
  • 20 VLO Jan $20 puts sold for $3.05 ($6,100), now .65 (up $4,800)
  • 10 TITN March $22.50 puts sold for $4.50 ($4,500), now $2.20 (up $2,300)

Damn, I was sure that I would at least be able to get rid of RIMM but I can’t.  They are too cheap.  However, our targets are clearly unrealistic and not doing us any good so it’s time to get off the couch and re-commit to our worst position.  We have a $15,575 loss to date on the short puts and we can roll these 15 puts to 30 of the 2013 $17.50 puts at $4.55 ($13,650) which obligates us to buy 3,000 shares of RIMM for $17.50 ($52,500), which is just about our size limit for a single position.  When we first began buying RIMM in the $30s, we would have been thrilled to get 3,000 shares for $17.50 – now we’re not so sure but, as long as RIMM holds $15, we know we can make that work.   

Since our ultimate goal is to hold RIMM forever and sell calls and since we’re obligating ourselves to own 3,000 shares anyway – there’s no sense in not selling 15 Jan $19 calls for .72 ($1,080).  A few of those sales will go a long way towards digging us out of our hole.  

I still like the FTR puts because, even though they are down $5,400 – it’s still a net entry at $6.20 with FTR now at $5.16 and paying us a $2,256 annual dividend on the 3,000 shares we already own at net $6.29.  So, we end up with 6,000 shares at $6.25 ($37,500) that will pay us $4,512 in dividends each year (12%).  Do we really care what the PRICE of the stock is when we get that kind of VALUE from our investment?  

Overall, our net on the puts has decayed a bit, to an unrealized loss of $31,955.  We were down $28,375 last month (RIMM got worse and GLW tanked too) so that pretty wipes out this month’s gains but think about that from a long-term perspective.  We net zero for the month but, in the end, we get the above stocks at those low entries with little or no damage – even if we keep treading water like this.  As I noted with FTR, our goal was to have 6,000 shares that pay a 0.188 quarterly dividend of $1,128.  Whether FTR is at $5 or $15 – we just want our dividends!  Any increase in the stock price is simply a bonus.  

Like Buffett says in the video in the comment section of our "Build a Berkshire Workshop" project – the guy who bought KO at the IPO for $40 might have given up and sold when it dropped to $20 the next year but then they’d be missing out on $5M today – from that single share!  We’re not deluding ourselves that RIMM, for example, is going to be any KO but the market cap at $16.50 is down to $8.5Bn and for that $8.5Bn you buy RIMM for, they had $20Bn in sales and $3.4Bn in profits in their last full year and they had a 10% miss last Q (still earning .88 per share for the Q) because they committed the grave sin of spending money on R&D as well as record unfavorable currency exchanges on the weak dollar.

The bottom line is, would you like to own a $8.5Bn company that returns $3.4Bn a year?  Duh, right?  How about $1,7Bn?  That’s still 20% on your money (p/e of 5) if their earnings drop 50% (and the company is guiding closer to $4Bn next year) how about $850M?  1/4 of RIMM’s last year earnings are still a 10% return on your purchase.  Of course, if earnings are dropping that quickly, we would lose interest but RIMM is down on speculation and extrapolation based on one bad quarter, not on any actual numbers.  Is any of this a reason to bail out of the stock?

If you are a long-term investor, over the years your stocks will go up and down in PRICE – it’s your job to determine the VALUE.  AAPL was at $200 in November of 2008 and then at $82 in November of 2009 – a hopeless cause right?  Never coming back?  It was down from October ’08 through April of ’09 and I put up the same kind of charts and said BUYBUYBUYBUYBUY until I was blue in the face – the PRICE didn’t matter, because the VALUE was there.

Generally, in our stock portfolio, we don’t really want to be up or down, we just want to collect our premiums and our dividends – which brings us to our Dividend Positions and Spreads.  Notice most of these are solid companies we bought when they were cheap.  Some got cheaper and some have gone up considerably.  We’re not interested in buying more of the ones that went up but the ones that got cheaper are where we’re likely to put more cash:

  • 3,000 NLY at net $15.76, now $16.12 – .62 dividend expected 12/30 ($1,860)
  • 2,000 AGNC at net $27.65, now $28.90 – $1.40 dividend expected 12/30 ($2,800).
  • 3,000 FTR at net 6.29, now $5.16 – .19 dividend expected 3/7 ($570)
  • 20 GLW Jan $16 calls at net $2.55 ($5,100), now .12 (down $4,860)
  • 1,000 CSCO 2013 $17.50 buy/write at net $11.92/14.71, now $18.88 – .06 dividend expected 1/4 ($60)
  • 1,000 HCBK at net $6.83, now $5.93 – .08 dividend expected 2/2 ($80)
  • 5,000 SVU 2013 $5 buy/write at net $2.99/4, now $7.48 – 0.088 dividend expected 2/30 ($440)
  • 1,000 RRD 2012 $12.50 buy/write at net $8.83/10.67, now $14.58 – 0.26 dividend expected 2/3 ($260)
  • 1,500 NYB 2013 $10 buy/write at net $8.30/9.15, now $12.03 – 0.25 dividend expected 2/3 ($375)
  • 2,000 SKX Jan $14 buy/write at net $9.75/11.88, now $12.73
  • 5,000 WFR 2013 $7.50 buy/write at net $3.85/5.67, now $4.42
  • 2,000 SONC March $10/$12.50 buy/write at $6.95/9.72, now 7.17
  • 3,000 HOLI Jan $7.50/5 buy/write at net $2.90/3.95, now $8.19
  • 1,500 HOV 2013 $1 buy/writes at net .18/.59, now $1.58
  • 500 MT 2013 $15 buy/write at net $7.50/11.25, now $18.81  - 0.188 dividend expected 2/19 ($94)
  • 4,000 AA 2013 $7.50 buy/write at net $5.43/6.47, now $9.64 – 0.03 dividend expected 2/3 ($120)
  • 2,000 F 2013 $10 buy/write at net $7.30/8.65, now $11.03 – .05 dividend expected 1/31 ($100) 
  • 3,000 ACI 2013 $12.50 buy/write at net $7.50/10, now $15.54 – .11 dividend expected 2/28 ($330)
  • 5 OIH 2013 $110/130 bull call spreads at $10, now $11.50 (up $750)
  • 5 OIH 2013 $100 puts sold for $11.50 ($5,750), now $6 (up $2,750)
  • 10 BRK.B 2013 $70/82.50 bull call spreads at $4.70 ($4,700), now $7.30 (up $2,600)
  • 10 BRK.B 2013 $50 puts sold for $4.40 ($4,400), now $2.30 (up $2,100)
  • 5 CAT 2013 $80/95 bull call spreads at $6 ($3,000), now $8.60 (up $1,300)
  • 5 CAT 2013 $55 puts sold for $5.55 ($2,775), now $3.55 (up $1,000)
  • 10 ANR 2013 $30/40 bull call spreads at $2.85 ($2,850), now $2.25 (down $600)
  • 5 ANR 2013 $25 puts sold for $6 ($3,000), now $8 (down $1,000)
  • 10 TM 2013 $62.50 calls bought for $6.50 ($6,500), now $10.50 (up $4,000) 
  • 10 TM 2013 $55 puts sold for $5 ($5,000), now $3.20 (up $1,800) 

We don’t care about the P&L on our buy/writes, they are simply on or off track. Meanwhile, they are paying us $7,089 in quarterly dividends while we whittle away our basis over time (and that time isn’t all that long as we’ve only been doing this for 8 months!). On the other positions, we are ahead net $9,840, paring 1/3 of the unrealized losses on our short put set.   

The main idea here is to establish inexpensive entries for future call selling and dividends. Meanwhile, we hope we have adequate protection from our long-term hedges to see us through things – just in case we fail again.

  • 50 DIA March 2012 $110 puts at $4.15 ($20,750), now $2.80 (down $6,750)
  • 50 SDS March $19 calls at net $4.30 ($21,500), now $2.40 (down $9,500)
  • 50 SDS Jan 30 calls sold at net $0 ($0), now .65 (down $3,250)

Down $19,500 on our protection is much worse than last month as we’re still guarding for a big drop that hasn’t come.  Of course, if it doesn’t come, then we should get our $28,000 back on the short puts AND we have A LOT of money to collect on our buy/writes.  

Last month, we had $72,089 of realized gains and we added $3,808 from our closed positions above for a total of $75,897 less the $28,375 unrealized loss on our puts, the $9,840 unrealized gain on our open positions and the $19,500 unrealized loss on our hedges leaves us with a net of $37,862 – not bad as our goal was to make $4,000 a month and this is just the beginning of our 8th month.

Keep in mind, the real money comes when our long-term buy/writes mature next year (the gains we’re not counting).  If CSCO holds $17.50, the 1,000 shares we bought for net $11.92 gain $5,580.  5,000 shares of SVU at net $2.99 make $10,050 if SVU just holds $5, etc.  On the whole, we’re looking at about $75,000 in expected gains that we’re protecting with our hedges.

Next month is going to be busy, with plenty of adjustments to make after the holidays.  It would be nice to have a Santa Clause rally but, obviously, we’re not counting on it.  We’ve still got less than 1/2 of our $1M buying power in use (ordinary margin) but we’re certainly at the point where we’re not looking to add many new trades until we take others off the table.  No matter what the market does, we’re going to want those hedges over the holidays but then we’ll see how things shake out in January.  

 


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  1. NF**X

    Thanks, Phil. This is fantastic stuff.

  2. NF**X

    Dads – As an aside, though I have three brothers in Denver, my cranky but ailing father has “temporarily” moved in with us in Bethesda. One of 14 kids, he worked from the time he was 10. He and three brothers served in Korea at the same time (“Saving Private Who?”) A money-in-mattress kind of guy, to this day he buys a weekly lotto ticket because he’d “sure like to leave you guys something more than I have…”

  3. jmm1951

    This is great stuff and while I have not tried to copy it completely, my own portfolio is starting to look more like this all the time. The BRK.B bull call spreads look like an especially good play with Buffet having announced the intention to support the price with buy backs. How can one lose?

  4. Burrben

    Phil / "Passively closed"
    What do you mean?  If you collected the div on the first few names, did you sell the stock, or did it get called away?

  5. Savi

    Phil—if I wanted to start another income portfolio now (for my Mom) with 500k what positions and hedges would you start with—i.e — would you leave out Rimm or hcbk -or do the adjustment position in Rimm etc—
    I am so glad I found PSW
    Thanks

  6. dclark41

    Phil
    It is amazing how many of your members are finding themselves with portfolio’s similar to the one you have shown here. Less trading, less risky stocks (I still have a few losers to remind me of how stupid I was before!) and more buy/writes and well-thought out hedges. Thank you for stabilizing my investment style and teaching me the right way to use options to enhance my positions.

  7. Kwan

    dclark – It does wonders for helping you sleep at night, doesn’t it :)

  8. seer

    I look forward to doing more with this portfolio.  Thanks.

  9. Savi

    Phil—-ignore my question- I should learn to read first—-

  10. drcraig

     It’s embarrassing that I don’t know this yet in all the time I’ve been here, but could someone please explain:
     
    5,000 WFR 2013 $7.50 buy/write at net $3.85/5.67, now $4.42
     
    What does the $X/$Y mean exactly, and how is it calculated. I understand the concept of the buy/write, of course, but I don’t understand these "net entry" calculations. If you bought 5000 WFR and sold 50 $7.50 strike calls, wouldn’t that give you a single $ value for your net entry? 

  11. jmm1951

    Doc

    The two numbers are the net cost of the stock first if it is called away and secondly if it is put to you and you double your position, so the second number will always be a bit higher.

  12. Burrben

    drcraig
    I was referred to this article whenever I asked that question.  Although it would have been nice to have jmm1951′s answer earlier though.
    http://www.philstockworld.com/2009/09/11/how-to-buy-a-stock-for-a-15-20-discount-with-our-buywrite-strategies/

  13. drcraig

     jmm,Burrben – thanks, it wasn’t obvious that these buy writes also included a put sale. Now it all makes sense. 

  14. dclark41

    Kwan
    It certainly does! :)

  15. Phil

    Good morning!

    Fun debate last night, I think Newt won again.  It’s funny to see how they all turn on whoever the front-runner is at the moment.  If you missed this one, don’t worry – there’s another one on Wednesday!  Then a week later, then 6 in January – aren’t we sick of these people yet?

    Thanks NF!

    Thanks JMM, nothing wrong with looking like Berkshire, is there?  Nothing, however, is a no-lose situation.  BRK.B fell from $100 to $45 in 2009 – keep in mind these drops are only opportunities if you aren’t over-invested in the first place.  That’s why we’re not likely to go past 50% invested in this portfolio, you never know when you will need the cash.  

    Passively/Burr – In other words, we didn’t take action from chat comments, they just expired (for the options) or were paid to us (dividends).  There was no call away on the stocks, they are long-term positions we have and dividends get paid regularly. 

    Starting/Savi – The key to our success is PATIENCE!  It took us 4 months to allocate $500K, you just have to look for good stocks to go on sale because, even then, we don’t always get them right.  I’d start with some of our losing short puts like GE, HPQ, CCJ, RIMM (yes, RIMM), IMAX, FTR and GLW and not, of course, the same strikes but sell something that gives you an additional discount like the GE 2013 $15 puts ($1.70), HPQ 2013 $22 puts ($2.50), CCJ 2013 $17 puts ($1.10)…   And there’s nothing wrong with NLY or AGNC but keep in mid they are unhedged so you have to watch the REIT sector carefully.  WFR and SONC are still cheap (and look how well YUM and MCD are doing) and ANR is another one that’s low in the range but I’m not too hot on Basic Materials at the moment.  

    You’re welcome DC!  I’m very glad to see more and more people adopting sensible portfolio strategies – it’s kind of the whole point.  While our short-term trading gets all the attention, it’s the long-term, SENSIBLE building of wealth over time that’s the more important skill to learn for people who want to be serious investors.  

    Ignore/Savi – Oh now you tell me!  That’s OK, it was a question I’m sure many had so…

    Buy-write/Dr C – This is just shorthand for the original entry.  We bought 5,000 shares of WFR for X and sold the 2013 $7.50 puts AND calls for XX and that gave us a net entry of $3.85.  BUT, we do have an open $7.50 put so, if WFR is below $7.50, we get another round put to us at that price and that means our first round at net $3.85 plus our second round at $7.50 added together equals $11.35 and we divide that by 2 to give us an AVERAGE entry on 10,000 shares of $5.67 – IF it’s put to us.  So, at the moment, WFR is at $4.42 so our potential loss is $1.25 ($5.67-$4.42) on 10,000 shares or $12,500.  That’s getting to the point of being "off track" and, of course, we’re not in a position to double down on WFR but we can roll the 2013 $7.50 puts ($3.50) to 2x the 2014 $5 puts ($1.85) and that would drop us to net $3.85/4.62 and we’d end up owning 15,000 shares at net $4.62 ($69,300) vs 10,000 shares at net $5.67 ($56,700) less whatever calls we sell in 2014 that can knock another dollar ($5,000) off the total net.  So – on that basis, we have no reason to dump out of WFR yet as the fallback position is still acceptable.

    The reason I find owning 15,000 WFR for $69,300 ($4.62) to be acceptable is that, with WFR currently at $4.42, we can sell the 2013 $5 calls for $1, which is $15,000 back on $69,300 or 21.6% a year.  Pretty much, as long as WFR doesn’t go BK over the next 5 years, we’ll get our money back and then, for the rest of our lives, it’s all gravy.   

    Speaking of being like Buffett: 

    If you are willing to risk owning 2.000 shares of BAC for net $4.55 ($9,100), you can pick up the 2013 $2.50/5 bull call spread at $1.70 and sell the 2014 $4 puts for $1.15 for net .55 on the $2.50 spread.  All BAC has to do is hold $5 and you make $1.95, which is 34% of the current stock price and $3,900.  The nice thing here is, even though you get BAC put to you at net $4.55, since you have the $2.50 calls, your break-even is between them at $3.53 (38% off current price).  If that doesn’t appeal to you – then you probably shouldn’t be keeping your money in US Banks!  

    RIMM at $16.46 is down 50% since September and down 75% since the beginning of the year.  You can buy the 2014 $20/35 bull call spread for $2.15 and sell Jan (2012) $15 puts for .90.  Get away with 2 sales  like that and you don’t care if they go BK but, if they get bought – you’ll cash out early (see pricing on long VRUS spreads, for example).  Of course, you don’t have to sell RIMM for the offset, you can sell puts in something you REALLY want to own and play the RIMM spread as speculation.  

  16. stjeanluc

    On the subject of portfolios, here are the recap for the other ones we are tracking, complete with trade lists. AA Money first.

     

  17. stjeanluc

    FAS Money 

  18. stjeanluc

    IWM Money 

  19. stjeanluc

    AAPL 50K Portfolio 

  20. stjeanluc

    And my little FAS Strangle Experiment 

  21. Savi

    Phil—thanks--it did not go wasted – I am going to start my moms port on Monday with some of the positions you highlighted
    Btw do you live anywhere close to Ambler PA--suburb of Philly near the NJ border—-going to be there during Christmas can meet for drinks if you have time—I know it is a busy time

  22. Savi

    Stj —- FAS short experiment looks good—- are you going to keep posting the trades? I would love if you do and also a big thanks for all the other posts on the various trades

  23. stjeanluc

    Trades / Savi – The FAS Strangle is just something that I am trying out but I’ll try to keep everybody updated with the trades. If you have a lot of spare margin, this has looked pretty good so far – in 3 weeks about 10% on regular margin and 15-20% on PM depending on brokers!

    I am looking at other possibilities, like using more TA to enter in the trades and also maybe using ratios to protect one side (but also possibly limiting profits). Maybe for the next year! 

  24. Savi

    stj—I do have spare margin and maybe will  try the FAS strangle trades—small positions
    thanks

  25. dclark41

    Phil or other board member:
    Could you please explain in better detail the following article?
     
    http://www.philstockworld.com/2011/12/11/unreported-bedlam-in-treasuries-signals-massive-panic/
    Specifically, the impact of the indirect bidders on this 4 week bill. I don’t understand why this is so bad in the authors opinion. Thank you.
     
    At the same time, foreign central bank purchases of Treasures are falling off a cliff again. But the markets aren’t paying attention or have not noticed these negatives because they have not had to. Massive tidal waves of panic capital flight have been overwhelming the Treasury market in never before seen numbers.
    The indirect bid tendered on the 4 week bill last week was a mind blowing $61.8 billion, or 5 to 10 times the norm!
    Even more startling, Primary Dealers (PDs) bid $268 billion on that issue. That’s over a quarter TRILLION! One third of the PDs are foreign banks. Seven of them are European banks. Is something rotten in Denmark, Brussels, Rome, and Paris? You bet your bippy.

  26. barfinger

    Here’s a little food for thought before you folks go rhapsodic about the beauty of the buy/write: I remember entering a trade on WFR at, let me see, 13. When owning 2x WFR at 10.60 looked like a great deal… Now I own 6x at 7.33, and at the start, that sure looked like the bargain of a lifetime. It is all relative. Now we are saying " Pretty much, as long as WFR doesn’t go BK over the next 5 years, we’ll get our money back and then, for the rest of our lives, it’s all gravy. " Well, nobody put the concept of BK on the table for WFR a year or two ago, and if they had, I would have run away.
     
    Well, I felt really encouraged about the future of solar energy, the progress on efficiency, the ridiculous price of oil and all. However, how comfortable do you feel about owning a stock that depends on government subsidy in these times?
     
    Yes, I have sold calls against WFR right along, and even got some puts to expire, so you always have chances. Here’s the problem with that : One mistake (and I can’t believe Phil still doesn’t consider this a prime example) we make is that we expand our ownership of LOSERS, some of which WILL NOT COME BACK, EVER.  See YRCW.
     
    Oh, and the vaunted dividend stock? Wow, its like printing money to collect the dividend and sell premium on the side. And, it really, really works great. Except for one thing: One of every 4 or 5 stocks like that I have invested in have blown up. One blow up and your entire cohort of dividend stocks turns into a loser for the year. See HCBK, or maybe FTR, which hasn’t blown up but the price action seems to be telling me that a whole lot of people think it will.
     
    Phil is doing a great job teaching the option strategies, but the problem with individual stocks is that 0 is a possible price for nearly everything. See: Kodak.
     
    Before I advanced beyond the covered call write (another suboptimal system, imho), my group used to talk about "averaging down" when our pick-du-jour went the wrong way on us. Now chart guys will tell you that the right strategy is "averaging up", buying the breakouts. No system works if you pick the wrong freakin stock, something I do just often enough to ruin the party.
    Sorry for the negative vibes.

  27. i zega

     stjeanluc.- many thanks for keeping track of portfolios!! Helps a ton!

  28. Phil

    Wrong stocks/Barf – Well, as you say, see Kodak.  5 years is 5 years, not 1 year and not even two years.  If you enter WFR at $13 with a buy/write to commit to 2x at $10 and you get assigned at $10, then you can turn that into a buy/write for 4 x at $8 and then 8x at $6 and yes, WFR is at $4.75 and your basis is $6 but you can sell the July $5 calls for .75 and now your basis is $5.25 with a call away at $5 for a .25 loss (5%), which isn't terrible for a stock that dropped 70% on you.   No, you will not win every time but, IF YOU DIVERSIFY and IF YOU DO NOT MAKE A WHOLE PORTFOLIO OF NON BLUE CHIPS, then you have an excellent chance of having more winners than losers.   

    WFR, YRCW, EK, HOLI, CROX, HCBK, SVU, IMAX even RIMM now – ARE NOT BLUE CHIPS!  They are undervalued stocks we like and, from a diversification standpoint, NONE should be more than 10% of your portfolio (see Income Portfolio above for an idea of how we diversify our picks).  In fact, I'm here now to do the update so let's see how it came out.  

  29. Phil

    Submitted on 2011/12/12 at 3:30 pm

    IMAX/Rustle – As I said yesterday, it doesn’t pay to try to time the movies and if the market wasn’t shakey I’d be gung-ho bullish (we have no reason to sell them in the income portfolio as a long-term play) but, to commit new capital to them at the moment makes it questionable when cash is king. 

     

    NLY/Yodi – I don’t see an announcement yet.  In the income portfolio, I just add 3 months to the last one (9/28) so I know around when to keep my eyes on them.  The dividend is .60 so strong likelihood of being called but so what?  You just buy the stock back on the dip with the strike cash plus what you got paid for the call and no harm, no foul.  There’s really nothing you can do with NLY because, now that the VIX is down, the premiums are total crap to sell so you’re just picking up protection on the stock and making the real money on the put side and those times you don’t get called away – which should be most – it’s not like it happens every time.  

     

    NLY and AGNC/Neet – Yep, they are in our Income Portfolio as they seemed to be the most stable of the group but it’s very difficult to hedge big dividend-payers when the VIX is low so, at this time, I think I prefer simply selling puts as an initial entry.  On NLY, you can sell the 2013 $17.50 puts for $3.40, which is a net entry of $14.10 (16.5% off) and, if NLY holds $17.50, it’s a lot more than the $2.40 dividend and TOS says it only ties up $3.30 in margin so a 100% return on margin in a year is a nice way to enter a stock.  

    AGNC’s 20% dividend is hard to match but, at $28, you can sell the 2013 $30 puts for $7 and that’s net $23, which is 18.4% off and, again, way less cash committed but here it could be argued that you might be better off buying the stock for $28.25 and selling the 2014 $27 calls for $1.80 and the 2014 $25 puts for $7.70 for net $18.75/21.88, which is a nice healthy discount on 2x – especially if you also get that $5.60 a year in dividends as that would effectively lower your net to $7.55/16.28 BUT – keep in mind that the main reason this trade would collapse would be BECAUSE they cut the dividend and then the whole plan RAPIDLY falls apart – so never get carried away with REITS or other big dividend payers – there are risks….

    Submitted on 2011/12/28 at 9:03 am

    Good news for HOLI, again, on China finally placing the blame where it belongs and not scapegoating them.  We sold the Jan $7.50 puts for $2.40 back in Julyon the crash news and those were already in good shape with HOLI back at $7.  Our more conservative play was the August buy/write with the stock at $6, selling the Jan $7.50 calls for $1.40 and the $5 puts for $1.70 for net $2.90/3.95 in the Income Portfolio – 30 of those are on track (get it?!?) to make $6,300 off $8,700 committed in just 5 months – that’s why we love to play the Fundamentals when other people are panicking!  

    Submitted on 2012/01/10 at 12:36 pm

     

    DIA/Income Portfolio, Savi – Good idea!  I don't remember the roll to $119 though but, from the March $110 puts, now .88 listed in the last post on the subject (12/10), we can spend $2.15 to roll out to the June $112 puts at $3.05.  If you are in the March $119 puts, now $2.27, it's worth $1.23 to roll out to the June $114 puts at $3.50 as that money, in both cases, is easy to get back from a sale.  

    Also in the Income Portfolio, we have 50 SDS March $19 calls at $4.30, now $1.03 and those can be rolled to the June $18 calls ($2.15) for $1.12 and again, with 3 months to sell short calls, it's money we should be able to get back over time.  

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