Income Portfolio – Year End (Almost) Review
by Phil - December 10th, 2011 8:22 am
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…
Facebook
Twitter
LinkedIn 
del.icio.us
DiggWhite Christmas Portfolio – Month 2
by Phil - December 5th, 2011 7:49 am
What a first month we had!
Oddly enough, when I was last on BNN (I’ll be on again this afternoon), we were just about to start our newest virtual portfolio after closing down this year’s virtual $25,000 Portfolio early as we were way past goal, over $130,000 on the 20th (up 420%). As that portfolio went so well, we decided to play a "White Christmas Portfolio" – as I explained on TV on Oct 24th, which aimed to practice making the same kind of small, aggressive trades, with the aim of turning $15,000 on October 24th into $25,000 by Christmas (66%).
In fact, I gave out our first trade idea, GNW, which was $6.30 during my BNN interview, now $6.47 (up 3%). We discussed the Jan $5/7.50 bull call spread for $1.10, which is now $1.40 and that’s up 27% but, more importantly, your gain playing the option INSTEAD of the stock is .30, vs .17 – that’s almost 100% better gain with NO MORE RISK than buying the stock while requiring less than 20% of the cash commitment (and no margin on just the bullish spread).
Of course, our actual WCP trade idea had another component deemed too confusing for TV – we also sold the short Dec $6 puts for .85 as an offset, which lowered the cash cost of the trade to .35 and those puts are now .20, up another .65 on their own and the net of the entire trade has gone from .35 to $1.20, which is a 242% gain on net. Of course, none of that matters – what matters is that you put a net of $350 into the trade (10 contracts) plus about $600 in margin on the short puts on October 24th and you can cash that trade out today (we elected to cover it on Friday) for $1,200 and that is clearly 242% more cash than you started with on October 24th – the margin requirement is gone, but the cash remains!
With that kind of success on our first trade, it’s not too surprising that the whole portfolio has been doing well. We left off last Wednesday with a balance of $35,540 – far better than we expected to do, obviously, in our first month (up 137%) so we decided it was prudent to get back to cash as we were "too bullish".…
Income Portfolio – Month 6 – Doing More With Less
by Phil - November 16th, 2011 7:20 am
Only one move all month!
We added Ford to our virtual portfolio but, other than that – NOTHING! Of course, that’s the goal of this portfolio exercise – our aim is to try to generate a $4,000 monthly income without touching our $500,000 principal – it’s the kind of set-up that would benefit the retired crowd and the last thing they want to do is go running back and forth to their computers every hour to see if the market is up or down 1% (as it can be several times a day lately!).
The current market turmoil has forced a situation where EITHER you jump in and out of trades every time the wind changes direction OR you ignore the gyrations completely and focus on value investing over longer periods of time. While we have had great success with our short-term trade ideas in the White Christmas Portfolio, it’s certainly not a style of trading that is suitable for more laid-back investors.
I’m going to take a hard look at each of our open positions heading into the holidays. We still have half our virtual cash and margin to deploy and we were net plus $37,654, which was practically our goal for the whole year ($48,000) in our first 5 months – so all we had to do was play not to blow it. We already took $54,414 of virtual cash off the table and there was a net loss of $16,760 on our open positions and we closed the following (ALL passively) since our October 15th update:
- 25 DIA Oct $111 puts sold for $3.10 expired worthless – up $7,750
- 1,000 shares of HCBK paid a .08 dividend on 11/2 – up $80
- 1,000 shares of RRD paid a .26 dividend on 11/8 – up $260
- 1,500 shares of NYB paid a .25 dividend on 11/3 – up $375
- 4,000 shares of AA paid a .03 dividend on 11/3 – up $120
- 10 TLT Oct $118/114 bear put spreads at $1.05 expired at $4 – up $2,950
…
I’m Dreaming of a White Christmas – Portfolio
by Phil - October 29th, 2011 8:35 am
Wow, what a market!
Maybe we closed out our $25,000 Portfolio too early last week, with a virtual gain of $105,000 (420%) for the year, but we still have our Income Portfolio, which was quite bullishly positioned and well ahead of goal as well as positions in our very aggressive September’s Dozen List that are winding down, so we decided to set up this new virtual portfolio with the goal of turning $15,000 in to $25,000 between now and Christmas to have a little extra spending cash for the holidays.
The strategy is the same as the $25,000 Portfolio, which is meant to be the aggressive, "risk" portion of a $250,000 or larger portfolio, utilizing excess margin to our advantage with the goal of making a series of hit and run plays, with the goal of making $1,000 a week for the next 10 weeks. Also like the $25KP, we take our winners off the table and work out our losers as best we can because, above all else, this is an exercise in adjusting and managing short-term positions.
This virtual portfolio will be available to Voyeur Members but trade ideas during chat will have their usual 1-hour delay. Premium members will get the trades with no delay Basic Members also see WCP-related comments with no delay as well. New trade ideas and updates will be copied into the comment section of this post or, assuming I write one, the updates of this post. If you are not a Member yet, now is a good time to join. Check out the subscription page – Our EXAMPLE trade on C closed up 200% and our ENP example returned 137% – not bad for free samples, right?
Our first official trade for the new portfolio was one we discussed on the weekend, GNW, which I added to the main post on Monday (and discussed that afternoon, in part, in my BNN interview). We’re not going to re-hash the logic for every trade here, this is simply a review post to track the trade ideas (and, while we do our best to be as accurate as possible, we do NOT include trading fees, which vary greatly so always take that into account) so we can see how they are doing and discuss how they can be adjusted but, of course, all the live commentary…
September’s Dozen Update (Members Only)
by Phil - October 27th, 2011 8:29 am
Two months already?
The Dow hasn’t made much progress (600 points) since we ran our second annual "September’s Dozen" Buy List but it’s a testimony to our guiding principle of "being the house" and selling the premiums that has made this year’s set a rousing success. At the time (Aug 27th), we were dubious of the rally gaining traction so our trade ideas were a little more conservative than last year’s QE2-fueled group.
They say you can’t make an omelet without breaking a few eggs, so let’s see how our trades are performing – some of them are already done, some still have some time to go and some make fantastic new entry opportunities as well!
It is very useful to go back to the original post, where I laid out my logic for each trade as these kinds of reviews are how we put in our 10,000 hours and work to become experts at catching opportunities like these as they arise in the future. Note these were very much hand’s off trades – this is the first time we’ve reviewed them since initiating the trades, mainly at better prices, as we tested the bottom of our range in September. For simplicity in this review, I’m just going by our target entries from 8/27:
BRCM (was $33.91, now $37.22):
- Sept $33/35 bull call spread at $1.11 offset with short Oct $30 puts at $1 for net .11. Bull call spread expired net $2, short puts expired worthless for a $1.89 gain (up 1,718%)
- Jan $31/35 bull call spread at $2.15, offset with short $20 puts at $1.70 for net .45. Bull call spread now $2.90, 2013 $20 puts now $1.35 for net $2.75 (up 244%).
Notice in the January combo, the gains on the bull call spread are not that exciting, even with the big move up in BRCM but the combo with the short puts gives you a lot more bang for your buck. Our formula here is simple, stick with stocks you REALLY want to own for the net "put-to" price and follow our normal entry rules for scaling in and stopping out on a position. Using this system, even longer-term spreads can give you a nice, early payoff although this trade is right on track to make the full 788% potential.
GNW (was $6.51, now $6)
Jan $5/7.50 bull call spread at $1.40…
$25,000 Portfolio – Month 9 – Goaaaaaaaaaaaaaaaaaal!!!
by Phil - October 20th, 2011 7:31 am
$100,000!
Not bad considering we began with $10,000 in our virtual portfolio only last June. We missed our goal last year of making $50,000 in 6 months – perhaps a bit too ambitions – but we got to $35,000, put $10,000 away in the virtual bank and began our $25,000 Portfolio (this one) on January 31st. Here we are, just 9 months later and already at our $100,000 goal.
I’ve decided, since we’re done so early, to reset the clock and let’s make a White Christmas Portfolio, where we’ll start with a $15,000 XMas Budget and limit our losses to $5,000 (so we don’t end up with a Tiny Tim Christmas) and see if we can earn enough money (virtual, of course) to put a few extra gifts under the tree. It will be a good chance to practice our loss limits!
Keep in mind that these are very aggressive portfolios that are meant to be the risk portion of much larger portfolios – this is in no way, shape or form a sensible way to play with money you care about (see "Smart Portfolio Management – the $10,000 Portfolio").
Meanwhile, we still have a little bit of cleanup to do with this portfolio. Our last update was on the 29th, when our realized gains had climbed to $98,480 and we only needed $1,520 more to hit our goal. Fortunately, we were very bullish with our remaining positions at the end of September, still playing our range. We have been pretty busy the past two weeks, closing the following positions:
- 40 GLL Oct $17 calls at net $1.76, out at $2.75 – up $3,960
…
Income Portfolio – Month 5 – Don’t Just Do Something, Stand There!
by Phil - October 15th, 2011 6:11 am
Nothing!
That is pretty much what we did with our virtual Income Portfolio since our last major update on August 13th. Of course we made some adjustments in Member Chat – taking advantage of the top and bottom of our range but, on the whole, we ignored the 1,300-point up and down moves in the Dow because this portfolio is well-hedged for a 20% drop – so there’s nothing about a 10% drop that’s going to make us panic.
We did have a 20% drop in late July to Aug but (and see our last update) again – as we were Cashy and Cautious – all that did was make it a fine time to buy MORE stocks that were on sale – picking up stocks like WFR, SONC, IMAX, VLO, OIH, TBT and HOLI at 20% discounts to their already low prices. The volatility was expected and as I said at the time:
We stuck to our guns this week and had a lot of fun playing the wild gyrations with our short-term betting but the Income Portfolio is an exercise in managing a "low-touch" portfolio – one that does not require us to make daily adjustments. I am aware that can be frustrating for people who stare at the markets every day but that is what our short-term trade ideas are for in Member Chat. That goes for people who are retired or semi-retired too. You don’t HAVE to play every day – or any day for that matter but you do need to work one week a month and that would be this week – the week of options expirations, when we do our update (this post) and then next week we make our adjustments (if any).
I know it’s hard to take the long view of the markets, especially if you are also a short-term trader – as it can be very difficult to switch gears as you go back and forth between portfolios but you MUST learn to take that other view. On Dave’s daily chart above, we see our range was clearly broken in early October and we spent almost 48 hours below that major support level but OUR major support level was at 10,431 (10% below our must hold line) and that…
$25,000 Portfolio – Month 8 – Madness Continues
by Phil - September 15th, 2011 7:34 am
We’re over the $80,000 mark in our aggressive, virtual portfolio with more than 3 months to go.
That puts us right on track for our $100,000 goal for the year so let’s not blow it. It’s all fun and games trying to turn $10,000 into $25,000 (last year’s goal) and then $25,000 into $100,000 because you know it’s a long-shot and it’s all fun and games but trying to turn $80,000 into $100,000 is RISKING $80,000 and that is NOT what we signed up for when we originally decided to risk $10,000. This is a classic trading mistake and not just with portfolios (virtual or otherwise) but with each individual trade – as the trade goes up in value, your risk increases and, very often, your potential additional reward decreases.
You need to understand this well enough to internalize it in order to make better trading decisions. We had the same issue last year when we were up to $35,000 in November off our $10,000 Portfolio and we decided to take the virtual money and run rather than risk going for $50,000 into the holidays. We’re not at that point yet as we’re still finding lots of fun things to trade but this week was substantially thinner in trading than the week before and we took our small profits quickly and were glad about it…
It is a very natural tendency to feel that, since you are up $70,000, you can afford to make bigger bets or take bigger chances – THAT IS EXACTLY THE URGE YOU MUST LEARN TO FIGHT! It’s the same urge that makes you want to make a big bet to "catch up" after taking a big loss – also a bad idea. If you can usually make 10% a month with a system and one month you lose 50% (as happened to spread traders last month), the best thing to do is just go right on making 10% a month. Over the course of a year, you can still make 70% – but only if you stick with your plan!
Our last update was sent out on the 3rd, at which point we had $78,910 of realized gains, offset by $5,115 of unrealized losses. As I said at the time: "I’m not too psyched about overly committing into this mess, which is why we have a constant mix of bullish and bearish…
Range Trading 101 – The Balancing Act (Part 2)
by Phil - September 11th, 2011 10:45 am
Now, where were we?
Oh yes, in Part 1, we covered the run from the bottom of our range on August 19th through Friday, the 26th, the day of Bernanke’s speech. Things were very much going according to plan and the Dow had climbed from 10,800 on the 19th back to 11,284 at Friday’s close – bullish enough that Saturday Morning I put up 9 of the 12 aggressively bullish plays (13 actually) that we would call the "September’s Dozen." Unfortunately, they came with a caveat:
What we’re looking for is simple, a repeat of the action we got last year coming out of the Jackson Hole conference so we’ll be making some of the same plays with a couple of new ones as well. Keep in mind that THIS IS OUR PREMISE – we expect the S&P to go up from this line (with, perhaps, a rocky start the first week), certainly not falling below our -5% line at 1,173! We expect the Dollar to go down from 74 and TLT to stay below $108. If these things don’t happen – then our premise is blown and we DO NOT want to stay in these trades – as they are very aggressive.
Although the week did indeed start out VERY well, we topped out at 11,700 on Wednesday, re-tested it on Thursday and proceeded to give it all back, all the way back to 11,240 on Friday and, currently, our futures are down another 2% on Monday night. Remember, we expected a much better reaction than we got so it will be interesting to see how we handled it during the week:
Monday Market Movement – 1,300 or Bust (again)
We have often used S&P major support lines as make or break targets. It’s good to have lines in the sand as it helps keep your trading honest and grounded – otherwise it’s easy to get carried away and get "rally fever." Very often in Member Alerts, you’ll see me say "If it’s a real rally then…." Because that’s what real rallies are – not just a couple of things making levels but pretty much everything does well. IF this had been a real rally, then the Financials wouldn’t have sucked so badly – easy to…
Range Trading 101 – The Balancing Act (Part 1)
by Phil - September 2nd, 2011 7:29 pm
What a crazy month we’ve been having!
We were fortunate enough to go bearish at the beginning of the month, when I cautioned we could correct 20% from our highs and then we became "Cashy and Cautious" for the next couple of weeks because we anticipated the middle of our W pattern, leading up to the Fed’s hinting at QE3 in Jackson Hole so we could repeat the rally we got last year, on QE2. It was all looking good – from our bottom call of the 19th until the last day of the month, when we we now see that my Tuesday title "Breaking Higher or Dressing Windows" seems to have been answered with the latter.
This, however, is not an article about that. This is a good time, I thought, since we came off a very cashy bias – to talk about how we look to make additions and subtractions to our portfolios over time (in this case, the past two weeks). Of course we are talking about virtual trades and virtual portfolios – keep that in mind, we’re just going to do our best to see what trade ideas worked, which ones didn’t and which ones COULD have been used to build up a balanced collection out of the many, many trade ideas we have each week.
Keeping our eye on the Big Chart and thinking about where we were each day, I’ll try to lay out the trade ideas in order and comment when appropriate so bear with me as this article will have loose structure as it’s main goal is to begin a conversation about trade selections.
Also, Elliot (our Stock World Weekly Editor) has designed a cool graphic to give us a quick view of our virtual asset allocations. Coming off our very Cashy, day-trading weeks in the middle of the month, we are pretty much back to where we like to be early in a market cycle:
Friday, Aug 19th: TGIF – Are We There Yet?
I led off the post saying "We are now officially getting silly." That day began only 350 points below where we are today on the Dow so keep that in mind going forward! This is not an outlook post though, we’ll do that later in the week as first I like to look backwards before…
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(