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Income Portfolio 2012 – Rolling Back to the Future

Behold the value of doing nothing!

Although we were worried last month, my comment to Members was "Don't Panic" as we had faith in our positions (not blind faith – we did go over each one!) and, as always, time was on our side as this portfolio is all about SELLING premium and collecting dividends.  

Now, after literally doing nothing for 4 moths, it is finally time to make some adjustments as our January positions come due and require action.  So time to end the 4-month vacation and start earning our money…

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 right, 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.

In our last update on December 10th, we had recorded $75,897 of realized virtual gains against $37,862 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.  This is good, as it gives us a nice indication of who's really performing for us.  Let's see how our positions did.  

The following positions were closed (all passively):  

  • 3,000 shares of NLY paid a 0.57 dividend on 12/27 – up $1,860
  • 2,000 shares of AGNC paid a $1.40 dividend on 12/20 – up $2,800
  • 1,000 shares of CSCO paid a 0.06 dividend on 1/3 – up $60 

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 $4,720 – $720 ahead of our monthly goal without lifting a finger!  

We still have the following open puts and last month I made the ones I thought we would keep green (and, if those are even or behind, they make nice new entries).  As it turns out, we're keeping them all – even RIMM.  Adjustments to be made are in red and then, hopefully, we can take another few months off:

  • 10 KFT Jan $30 puts sold for $1.60 ($1,600), now .02 (up $1,580) – should expire worthless 
  • 10 EXC Jan $37.50 puts sold for $2.20 ($2,200), now .01 (up $2,190) – should expire worthless
  • 10 HCBK Jan $10 puts sold for $1.50 ($1,500), now $2.70 (down $1,200) - rolling to 20 July $9 puts at $2.10 for a net of $1.45 each ($7.65 net entry)
  • 10 HCBK Jan $7.50 puts sold for net $0, now .40 (down $400) – should expire worthless 
  • 10 GE 2013 $17.50 puts sold for $2.10 ($4,200), now $1.75 (up $350)
  • 10 HPQ Jan $35 puts sold for $2.90 ($2,900), now $8.50 (down $5,600) - rolling to 15 2013 $30 puts at $6 for net of $3.23 each ($27.77 net entry).  Also selling 5 Feb $26 calls at $1.38 ($690) 
  • 10 CCJ Jan $25 puts sold for net $1.25 ($1,250), now $5.75 (down $4,500) - rolling to 15 2013 $20 puts at $3.80 for net of $2.17 each ($17.83 net entry)
  • 5 RIMM Jan $35 puts sold for net $1.65 ($825),now $19.40 (down $8,875) – see next
  • 10 RIMM Jan $27.50 puts, sold for $4 ($4,000), now $11.90 (down $7,900) – rolling 15 mixed puts above to 20 2014 $22 puts at $9.50 ($19,000) for a net of $3.52 ($18.48 entry) and selling 10 Feb $16 calls for $1.08 ($1,080).  Playing for the possible buy-out.
  • 15 RIMM Jan $19 calls sold for .72 ($1,080), now .32 (up $600) – should expire worthless 
  • 10 IMAX Jan $25 puts sold for $2.40 ($2,400), now $3.80 (down $1,400) - rolling to 2013 $22.50 puts at $5.50 for a net of $4.10 ($18.40 entry)
  • 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 $4.20 (down $3,600)
  • 30 NLY 2013 15 puts sold for net $2.43 ($7,290), now $1.55 (up $2,640)
  • 20 VLO Jan $20 puts sold for $3.05 ($6,100), now .27 (up $5,560) – should expire worthless 
  • 10 TITN March $22.50 puts sold for $4.50 ($4,500), now $1.40 (up $3,100)

There, that's not too much work for the quarter, is it?  Don't forget you got paid $12,000 for showing up and making those 5 adjustments.  With any luck, the markets won't do anything too crazy and we can ignore them for another 3 months!  

We were down $31,955 last month and we decided to wait PATIENTLY and let time (theta decay) do it's work because WE ARE THE HOUSE and we WANT our call and put buyers to keep playing because the odds are firmly stacked against them and, given enough time – they are very likely to lose.  Now the net loss in this section is down to $20,655, so a nice improvement and, essentially, it was all RIMM, which we're willing to stick with (and just paid us $1,080 this month on the short calls with another $1,080 sold next month).  

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 $16.28 – .62 dividend expected 3/27 ($1,860)
  • 2,000 AGNC at net $27.65, now $28.16 – $1.40 dividend expected 3/20 ($2,800).
  • 3,000 FTR at net 6.29, now $5.04 – .19 dividend expected 3/7 ($570)
  • 20 GLW Jan $16 calls at net $2.55 ($5,100), now .02 (down $5,060)
  • 1,000 CSCO 2013 $17.50 buy/write at net $11.92/14.71, now $19.07 – .06 dividend expected 4/3 ($60)
  • 1,000 HCBK at net $6.83, now $7.29 – .08 dividend expected 2/2 ($80)
  • 5,000 SVU 2013 $5 buy/write at net $2.99/4, now $7.37 – 0.088 dividend expected 2/30 ($440) - let's take advantage of the dip to roll the $3.10 combo to the 2014 $7 puts and calls at $3.80 to drop the net to $2.29/4.64 so risking $3,200 more on assignment to make possible $10,000 more at $7.
  • 1,000 RRD 2012 $12.50 buy/write at net $8.83/10.67, now $14.74 – 0.26 dividend expected 2/3 ($260) - rolling $2.30 calls to 2013 $12.50 calls and puts at $4.35 drops the net to $6.78/9.64
  • 1,500 NYB 2013 $10 buy/write at net $8.30/9.15, now $13.23 – 0.25 dividend expected 2/3 ($375)
  • 2,000 SKX Jan $14 buy/write at net $9.75/11.88, now $12.91 - rolling $14 puts at $1.20 to July $12 puts and calls at $3.80, dropping the net to $7.15/9.58
  • 5,000 WFR 2013 $7.50 buy/write at net $3.85/5.67, now $4.75 
  • 2,000 SONC March $10/$12.50 buy/write at $6.95/9.72, now 6.75
  • 3,000 HOLI Jan $7.50/5 buy/write at net $2.90/3.95, now $9.26 - rolling $1.80 $7.50 calls to July $10 puts and calls at $4.60, dropping the net to 0.10/5.05
  • 1,500 HOV 2013 $1 buy/writes at net .18/.59, now $2.40 - rolling $1 call ($1.40) to 2013 $2 call ($1) for net .40, raising net to .58/.79
  • 500 MT 2013 $15 buy/write at net $7.50/11.25, now $19.33  - 0.188 dividend expected 2/19 ($94)
  • 4,000 AA 2013 $7.50 buy/write at net $5.43/6.47, now $9.63 – 0.03 dividend expected 2/3 ($120)
  • 2,000 F 2013 $10 buy/write at net $7.30/8.65, now $12.07 – .05 dividend expected 1/31 ($100) 
  • 3,000 ACI 2013 $12.50 buy/write at net $7.50/10, now $15.69 – .11 dividend expected 2/28 ($330)
  • 5 OIH 2013 $110/130 bull call spreads at $10, now $10.50 (up $250)
  • 5 OIH 2013 $100 puts sold for $11.50 ($5,750), now $9 (up $1,500)
  • 10 BRK.B 2013 $70/82.50 bull call spreads at $4.70 ($4,700), now $7.80 (up $3,100)
  • 10 BRK.B 2013 $50 puts sold for $4.40 ($4,400), now $1.40 (up $3,000)
  • 5 CAT 2013 $80/95 bull call spreads at $6 ($3,000), now $9.50 (up $1,750)
  • 5 CAT 2013 $55 puts sold for $5.55 ($2,775), now $2.10 (up $1,725)
  • 10 ANR 2013 $30/40 bull call spreads at $2.85 ($2,850), now $1.75 (down $1,100)
  • 5 ANR 2013 $25 puts sold for $6 ($3,000), now $7.35 (down $675)
  • 10 TM 2013 $62.50 calls bought for $6.50 ($6,500), now $11.50 (up $5,000) 
  • 10 TM 2013 $55 puts sold for $5 ($5,000), now $2.45 (up $2,450) 

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 9months!). On the other positions, we are ahead net $11,940, paring 1/2 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 June $112 puts at $6.30 ($31,500), now $3.30 (down $15,000)
  • 50 SDS June $18 calls at net $5.42 ($21,500), now $2.15 (down $16,350)
  • 50 SDS Jan $30 calls sold at net $0 ($0), now .02 (down $100) - selling 20 SDS Feb $18 calls for .98 ($1,960) and 20 DIA Feb $120 puts for $1.60 ($3,200) to start catching up (or pay for the next roll)

Down $31,450 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 $20,655 back on the short puts AND we have A LOT of money to collect on our buy/writes.  

Last month, we had $75,897 of realized gains and we added $4,720 from our closed positions above for a total of $80,617 less the $20,655 unrealized loss on our puts, the $11,940 unrealized gain on our open positions and the $31,450 unrealized loss on our hedges leaves us with a net of $40,652 – not bad as our goal was to make $4,000 a month and this is just the beginning of our 9th month – so two months ahead already!

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 and this is a CONSERVATIVE portfolio – we don't want to make too much or we're doing something wrong.

Next month, if this rally continues, we should have some really big additions to cash as we terminate some of those outstanding short puts and we will be looking to sell a few new puts so keep an eye on Member Chat for additions.  


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  1. projectwise

    Net on rolling / Phil
     
    I really like this portfolio since I keep telling my parents and other people how having a lot of their money put in stuff giving < 2% per year, when inflation is above that, is really stupid. They usually then look at me as if I was trying to sell them something, as if I was a Madoff for telling them there are better place to park your money out there. Sometime I get really sad when I think about that because I know for sure that some of them will live in poverty in a couple of years. Oh well…
     
    At least my father is now letting me invest some of his money where I go for a really safe 6% with waaaay otm put on safe dividend stocks for 3-4%, and then some more with monthly play I can safely roll out. I'll definitely look to put some money in a portfolio just like this one, so I took a closer look and I was wondering about how you were keeping track of those rolls as the one under for example:
     
    10 HPQ Jan $35 puts sold for $2.90 ($2,900), now $8.50 (down $5,600) - rolling to 15 2013 $30 puts at $6 for net of $3.23 each ($27.77 net entry).  Also selling 5 Feb $26 calls at $1.38 ($690) 
     
    I would usually just take the new sale (15 X 600$) minus the lost we take on the initial write (5 600$), which give us 3400$ and then divide it by the new number of put (15) for a net of 2.26$ each. So I was wondering what we weren't calculating the same way as I don't arrive at your numbers for any of the roll on this update. As a nice bonus for the net you have (3.23$), you will get a nice surprise if the stock his put to you as the net entry will be 1$ lower at 26.77$ instead of 27.77$ ;)
     
    TIA,
    Projectwise

  2. Phil

    Rolling/Project – I had the math wrong as I mixed myself up on the change of number of spreads as the 10 HPQ Jan $35 puts are sold for $2,900 (credit) then we have to pay $8,500 (debit) to cash them in and then we're selling 15 new ones for $9,000 (credit) and that all net's out to a $3,400 credit on 15 contracts, which is just a net of $2.26 each credit on the $30 puts for a net $27.74 (rounded) entry if put to us.  The 5 calls sold for $690, I keep as a separate transaction and usually I'll just credit those short calls to cash if they are a winner as our goal is to generate cash for a monthly income off the long positions.  

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