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Income Virtual Portfolio – June Update – Wayyyyy Ahead! (Members Only)

Well, this is embarrassing…  

When we set up this virtual portfolio on April 9th, the idea was to create a virtual portfolio for people like my Mom, who just became a widow, and so many of her friends, who need a relatively safe place to invest their money but would rather not live off the 6% returns generated by the typical retirement fund.  Our primary goals in the virtual portfolio is A) Don't Lose Money, which is Warren Buffett's Rule #1 of investing and B) To generate a relatively steady monthly income of $4,000 against our $500,000 virtual portfolio (about 10% a year).  

Despite the fact that we have allocated less than 40% of our cash, we have accidentally made WAY too much money already and this is NOT the lesson we are trying to teach!  What happened is, this past couple of weeks, we had a really nice dip in the markets and our disaster hedges kicked in – as they are supposed to – but our other positions were already well-hedged and well positioned enough that they haven't really lost anything so we ended up far, far ahead of the curve.  While that's a good thing, obviously, the danger here is getting the wrong idea.  We got lucky – and one day we may get unlucky – so let's keep ourselves grounded and people who are just catching up need to keep in mind that this is not meant to be a get-rich quick virtual portfolio.  

If we made too much money on a dip – it's because we were OVER-hedged and that's something we will attempt NOT to do in the future.  To some extent, it's a discipline problem for me because I essentially BET that the market would go down and then I BET the market would go back up with our DIA adjustments (as well as overriding our original plan to stop out our new short puts with 30% losses).  There was a logic to it because we were only about 25% invested so we had plenty of cash to layer in bullish plays if the market did go up and they we would have rolled our protective shorts (which would have been losing) up to cover.  Instead, the shorts paid off and we didn't have enough bullish positions to hurt us.  As we get more invested, we won't have the luxury of that kind of flexibility.  

As of our last update, on June 8th, we had cashed $3,654 in short put trades and we had withdrawn $6,050 (anticipated profits) from 3 of our buy/write positions so we had $9,704 cash out, which was plenty to carry us through our second month.  On Thursday night, I put out an Alert to Members for our Expiration Day Adjustments and, fortunately, we finally got the market pop we expected, which helped expire our short puts out of the money for very nice profits.  This week, we cashed in another $11,350 by closing the following positions (as I said, wayyyyy ahead now):

  • 100 IYR Jan $50 puts at $1.70, sold for $2.07 – up $3,700
  • 50 IYR June $58 puts, sold for .49, expired worthless – up $2,450
  • 25 DIA June $121 puts, sold for $1.15, out at .75 – up $1,000
  • 25 DIA June $121 puts, sold for $1.65, out at $1.80 – down $370
  • 25 DIA June $121 puts, sold for $1.65, out at $2.05 – down $1,000
  • 50 DIA June $119 puts, sold for .75, expired worthless – up $3,750
  • 10 INTC June $22 puts sold for .47, out at .45 – up $20
  • 5 GS June $130 puts sold for $2.40, expired worthless – up $1,200
  • 5 HD June $35 puts, sold for .75, out at .25 – up $250
  • 5 BA June $75 puts, sold for $1.10, out at .40 – up $350

So, at the end of 60 days, we've already taken out $21,054 and we still have dividends coming to us at the end of the month (another $4,720)!  That's enough for 6 months of our budget so we are in very good shape and we can PATIENTLY wait for our next opportunity.  What is the key to our success (aside from good market timing)?   We have stayed very flexible in cash and we have SOLD premium, mainly through short puts, which gives us a natural cushion against a downturn and allows us to flexibly make adjustments through rolling.  

Take the DIA trade for example.  We started off with our normal Mattress Play with 50 March DIA $110 puts at $4.15, covered with 25 June $121 puts at $1.15.  This was a bullish spread as we had a large position disadvantage but the half-sale kept us flexible.  When the Dow dropped more than we thought it would we sold 50 more June $121 puts at $1.65, early on the 15th, thinking that was the bottom in the morning.  The ideas was to cost-average into 75 short puts (50 covered, 25 naked) at an average sale of $1.48, taking advantage of the very short time remaining to expiration to kill the putter's premium.  

It was not the bottom and the Dow dropped another 150 points that day but we had, wisely, put a stop on 25 of our new puts at $1.80, so we took a small loss there and quickly reverted to 50 fully covered $121 puts.  As we bottomed out (we hoped!) that afternoon at 11,900, we rolled the new 25 $121 puts to 50 $119 puts at .75.  Notice at all times we are trying to make sure we are selling as much premium as possible.  Also note we pursued this aggressive strategy only because it was expiration week and we had a high VIX to sell into so there was a UNIQUE opportunity to sell short premium.  This is not something we would ordinarily do. 

In fact, note how doing nothing was actually more profitable as we were able to buy back those $121 puts on the Friday morning spike for .75, which would have made a fantastic profit if we had just left all 75 short $121 puts alone but you can't take chances like that in a conservative virtual portfolio, tempting though it may be!  Even without the optimum timing, the net of our DIA shorts came out to $4,120 – a whole month's income!  Meanwhile, those March $110 puts are $5.20, so they are doing their job (and that was another reason we were able to confidently over-cover) and we wanted to get back to naked over the weekend as we're not so sure Friday's "Greece is fixed, again"  rally was real.

Other than that, things were pretty dull this month (as they should be!) with just the June 8th and 16th updates and 5 adjustments heading into expirations - that's not too much work to expect to make $10,000 a month, is it?  Keep in mind, these are the early days of a LONG-TERM virtual portfolio and we have a lot of work to do to plant the trees that will bear fruit long-term.  Our first 4 dividend producers already generate $5,290 PER QUARTER in dividends (and just a 15% tax rate!) and are tying up less than $120,000 of our cash (and only $75,000 of margin).  We stay flexible until those are "safe" (we no longer fear we made a bad entry) and then we are ready to add the next batch.  

While we wait for FRUITION (very apt in this metaphorical case), we take pokes at stocks we REALLY want to own at discounted prices by selling puts.  That's pretty much it for the strategy – it's not all that complicated, mainly it's just a matter of getting used to the rhythm of the monthly, quarterly and yearly adjustments over time.  Which brings us to our remaining positions – first the short puts:  

  • 10 KFT Jan $30 puts sold for $1.60 ($1,600), now .77 (up $830)
  • 10 EXC Jan $37.50 puts sold for $2.20 ($2,200), now $1.35 (up $850)
  • 10 HCBK Jan $10 puts sold for $1.50 ($1,500), now $2.15 (down $650)
  • 10 GE 2013 $17.50 puts sold for $2.10 ($4,200), now $2.42 (down $320) 
  • 10 HPQ 2012 $35 puts sold for $2.90 ($2,900), now $3.20 (down $300) 
  • 5 DE July $77.50 puts sold for net (note, "net" indicated there was a roll – see previous posts and comments for details) .67 ($335), now $2.43 (down $880)
  • 10 CCJ Jan $25 puts sold for net $1.25 ($1,250), now $3.80 (down $2,550)
  • 5 RIMM Jan $35 puts sold for net $1.65 ($825),now $8.85 (down $7,030)
  • 10 RIMM Jan $27.50 puts, sold for $4 ($4,000), still $4 (even)
  • 20 XLF July $15 puts sold for .50 ($1,000), now .57 (down $140) 
  • 10 INTC July $22 puts sold for $1.05 ($1,050), still $1.05 (even)
  • 5 BA July $75 puts sold for $2.50, ($1,250), still $2.50 (even)

We have $10,190 in paper losses on the $22,110 we collected.  As with our our more aggressive $25,000 Virtual Portfolio, we tend to get "stuck" with the losers as we cash out our winners but, unlike the $25,000 Virtual Portfolio, we do REALLY want to own each of these stocks for the long haul.  Obviously, the losses were more than offset by the gains on our hedges which means we are actually netting out even cheaper entries in our favorite stocks but we are careful to keep it under control as we don't really want any individual position to get larger than 10% of our virtual portfolio ($50,000).  

The 15 RIMM puts (accounting for 70% of our losses) are mostly premium but that constitutes a large position and leans our virtual portfolio a little more to the Tech/Telco side so we will be avoiding those sectors for additions and we'll also be looking to pick up a long-term Nasdaq hedge if the markets look weak next week.  

By the way, keep in mind that you should NOT look at RIMM as $4,825 worth of puts that are down $7,030 (down 145%), but as 1,500 shares of RIMM that we paid net $40,175 for ($26.78/share average) with RIMM currently at $27.75.  Is that something we should be panic-selling for a $7,030 loss?  When you sell puts in a stock that you don't REALLY want to own, you set yourself up for failure but, when you REALLY want the stock – it's the best hedge you give yourself because RIMM has dropped 25% from when we entered the first position and we're STILL ahead of the game (once the short premium expires)!  This must be a good time to review our hedges:  

  • 100 IYR Jan $50 puts at net $1.70 ($17,000), now $1.90 (up $2,000)  
  • 50 DIA March 2012 $110 puts at $4.15, now $5.20 (up $5,250)

How do we KNOW if we have enough coverage?  Well, that's kind of like asking how do we know how far to lean in which way on a surfboard.  The waves are always moving beneath you and you just have to keep shifting your weight to compensate.  Ignoring our short puts (now cashed out) that were hedging our hedges, the hedges themselves pretty well did their job, offsetting $10,190 worth of short-put losses with $3,700 of cashed in gains (as we took 1/2 the IYR Jan $50 puts off the table when they spiked on the 13th) plus we have our $7,250 worth of paper gains to offset our paper losses in our short put plays.  That, I would say, is balanced!  

As I said, you have to constantly adjust.  That doesn't mean adjust daily but it does mean you need to pay attention and what I noticed on the 13th was that we made TOO MUCH MONEY on our IYR puts compared to how much we lost on the rest of our positions and, therefore, we were over-covered.  Well, that was super-easy to fix, we just sold some of the covers and then our hedges began moving in lock-step with our short put losses and we were BALANCED.  Balance is what it's all about.  Keep in mind we make our living SELLING PREMIUM – so TIME will insure our profits as long as we can maintain neutrality in our positions.

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:

  • 3,000 NLY 2013 $12.50/15 buy/write at net $11.26/13.15 (only 15 puts sold), now $18.40 –  No cash taken.  .62 dividend expected 6/30 ($1,860)
  • 2,000 AGNC Sept $28 covered at net $27.21, now $30.15 – $2,200 withdrawn.  $1.40 dividend expected 6/30 ($2,800). 
  • 3,000 FTR 2013 buy/write at net $5.69/6.60, now $7.87  - $1,800 withdrawn.  .19 dividend expected 9/30 ($570)
  • 20 GLW 2013 $ 25 calls at $1.65 ($3,300), now .82  (up $1,660)
  • 20 GLW 2013 $17.50 puts sold for $2.40 (-4,800), now $2.80 (down $800) 
  • 20 short GLW Aug $20 calls at $1.30 (-$2,600), now .24 (up $1,800) - $2,050 withdrawn – That's GOAAAAAALLLLL, so let's kill these before they come back on us.  Note we withdrew what we expected to gain and killing these calls makes our cash safe and leaves us with just the 2013 short spread and less pressure to buy the stock if it bumps up a bit, so now $22.50 before we have to jump in.    
  • 1,000 CSCO 2013 $17.50 buy/write at net $11.92/14.71, now $14.97. – .06 dividend expected 6/30 ($60) 
  • 1,000 HCBK Jan $7.50 buy/write at net $5.78/7.39, now $8.17 – .08 dividend expected 8/30 ($80)
  • 2,000 SKX Jan $14 buy/write at net $9.75/11.88, now $14.24

Isn't this section nice and relaxing?  It's nice and relaxing for me to review.  NLY – on track, AGNC – on track, FTR – on track, GLW – on track…  We have short GLW 2013 $17.50 puts we sold for $4,800, we collected net $2,200 for the Aug calls and we sold the 2013 $25 calls for another $1,660 so, IF 2,000 shares of GLW are assigned to us at $17.50 or less, we will have spent net $8,840 ($4.42/share) to own them.  Isn't that nice?  THIS is how you buy a stock!  In just 2 months, we knocked 75% off the purchase price if it's assigned to us.  On the upside, if we cover at $22.50 ($45,000), we still have the $8,660 we collected and, if we are called away at $25, that's another $5,000 in profits for net $13,660 potential profit on net $31,340 laid out (43% in 18 months and we haven't laid out the $45,000 yet!).  

You can see why I thought the GLW trade was worth putting in a little work for!  So, where was I?  Oh yes, CSCO (despite the screaming during Member Chat) ON TRACK and HCBK and SKX are new so they'd better be on track.  Keep in mind a full allocation of CSCO is $50,000 and we're only committed to net $29,420 if it's assigned to us in 2013.  If CSCO goes down to $10, then we buy 2,000 more at $10 and we're in for an average of $12.36 on 4,000 shares and if they fall to $6 (assuming we still want them) then we buy another 4,000 shares and we're in 8,000 shares at an average of $9.18.  That's still only $73,440 spent on the stock and we'd be down $25,440 (34%) if the stock was at $6 – assuming we never sold any calls or took any other hedges while CSCO drops another 60%.

Should we panic then, when CSCO gets down to the top of our range when we're early in a scale?  Not at all!  If I offer to sell you 8,000 shares of CSCO now for $73,440 now – do you want them?  So unless our forward view of CSCO makes us think they may not be worth $9.18 a share in roughly 2017 – what do we care what the PRICE of 1,000 shares of CSCO is today?  As a rule of thumb, until a stock's price is 20% BELOW our net put-to price, we don't even make an adjustment.  We would PREFER not to have a 15% allocation of CSCO in 2017 but, as I said, we would certainly sell calls along the way and find other ways to hedge it but that's a TERRIBLE case scenario (the worst being bankruptcy) that we very much doubt will happen.  If we can accept that, then why let a little drop in PRICE bother us?  

So we've cashed $21,054 in our first two months and our major positions are taking up just $150,000 worth of our cash.  The rest is just the margin that is being used on our short puts and, since we REALLY want to own those stocks long-term, it's really just a question of waiting to see which, if any, of those puts get assigned to us over the next 6 months.  If none of them are assigned to us – that's another $22,000 cash in our pockets on the short puts alone and we're done for the year!  

Wasn't that easy?  See you in 2012… (just kidding)



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  1. Phil, I think we only sold 50 of the Jan IYR.

  2. Phil,
    Would it be possible to list what is in the portfolio now after closing out or having postions expire?  I’d like to make sure that my paper trading portfolio matches what you have.

  3. Phil, it is hard to figure out how to hedge properly against your portfolio. I ended up losing a little over the last 7 weeks but trying to balance not losing, hedging, and making a lot, betting, was a constant struggle not taking too much risk either way.
    If you have anything on how to properly hedge for your portfolio I would certainly study it.

  4. These are the most instructive portfolio.  The primarily set and forget investments are the only way to go for those that frequently get tied up at work all day and can’t always keep up with the day trading.  Thanks.

  5. Phil,
    As per the 50 DIA puts the other day, it was totally my mistake. I got out of them with a $54 gain, and a HUGE lesson learned. It is not your responsibility to tell people if you are adjusting a prior position or not. Anyone who sells naked puts and doesn’t know exactly why is nuts. Thanks

  6.  Phil / CSCO
    I like your logic (when it drop to $6…….)
    in this situation what we should do, people who start buying them at $20 (according to your recommendation) :)

  7. and by the way  I still have Jefferson Airplane stuck in my head…. how long will that last?

  8. Good afternoon!  

    Let’s try to use this chat for DIVIDEND PAYING trade ideas as I’d like to add a couple more so that we’re collecting closer to $8,000 a quarter – that takes all the pressure off the short-term trading to make money.  If we can get this portfolio running essentially on auto-pilot by the year’s end, we can start a new set off in January from scratch.  

    IYR/Rp – See previous portfolio post.  I consolidate the comments from time to time along with the links back to the original post.

    Portfolio now/Burr – So impatient!   I said it was in progress…  8)

    Hedging/Rpme – See above comments and let me know what needs clarifying.  I wish there were some magic formula but there’s not, you have to learn to get a "feel" for your portfolio and how it behaves under various market conditions and you have to learn how to use a hedge like a rudder, to steer it between the rocks.  That’s why I favor the DIA’s as a hedge – I have been using them for decades, I know them like the back of my hand and, most importantly, I can be in Bora Bora and I’m still able to find out how the Dow’s doing in 30 seconds and, if something major happens to any of the Dow components (just 30 to worry about) it’s almost certainly to make the headlines of any business section.  

    These are old, pre-web, pre electronic broker habits of mine but the ease and convenience of having a single, over-riding hedge to me that takes just one adjustment to flip your portfolio from bullish to bearish is a tool that is so valuable to me that I just don’t bother looking for a "better" way to hedge.  If you are a Tech investor, the Qs might make more sense, if you are a real estate investor (and we were when we opened this portfolio) then IYR might make sense but, whatever you do – PRACTICE until you become an expert at using one hedge like a surgical instrument so that, in a pinch, you are calm and confident implementing your adjustments!  

    Hedging Your Way to Fun and Profit – Once Upon a Mattress Play …

    How to Have a Happy and Safe New Year with Hedges | Phil’s Stock World

    You’re welcome Seer.  

    DIA/Sparky – Hey, if you learn something and it doesn’t cost you anything – that’s a huge victory! 

    CSCO/Tcha – If you bought them unhedged at $20 then shame on you but that’s water under the bridge so, at $20 on the stock you can still sell the 2013 $17.50 puts and calls for $4.30 and that drops your basis to net $15.70/16.60, which is not too bad with CSCO at $15 (and certainly better than being down 25%).  Don’t forget 2013 is not some wall, there will eventually be 2014 options and 2015 options – if you are a long-term investor then this is just a bump in the road.  You planned to make 20% this year and 20% next year and 20% for the next 8 years so that’s 200% and CSCO at $80 or so in 2022 but now we have you in 2x at $16.60 in 2013 and all CSCO has to do is get to $66.40 now and you have your 200% gain!  

    Airplane/Sparky – I think that’s a function of how many synapses you burned out in college…  8) 

  9. Here’s another great video of our Military/Industrial Complex in action:  

  10. Hi Phil : On NLY,AGNC, and FTR buy/writes, won’t my stock get called away when dividend is declared since the dividend exceeds the small option premium on the call.If yes, how does the position make money?

  11.  Phil / CSCO
    no, I bot them hedged, you just so easy saying: if it will go to $6…..
    I’m just smiling and think : it is not a bump, it is an Everest and I need probably 5 – 7 years to get my money back
    Sorry about that :)
    I understand that you are value investor, and sometimes if good company out of favor it can drop really hard and for long time 
    this is why fundamentally cheep stocks need to be scaled in (my lesson lerned for last 2 years) :)

  12. Phil,
    I have been following the Income Portfolio as a learning tool. I had previously been following the 25KP, but found out that I did not have the time during trading hours to keep up with the appropriate moves. The Income Portfolio is a great idea, as others have already mentioned. The problem for me and many other members is that the bulk of our investable funds are in 401K plans. Because most people are not employed at the same place for life as in the old days, many people have been able to roll funds from their previous employers 401K plans to on-line option brokers that accept 401K or IRA or Roth IRA funds or they are self-employed and have set up these types of plans for themselves. As you know, these types of accounts have limitations. In my experience, most of them will allow a naked put sale (with full margin) and covered calls, but none that I am aware of allow naked calls (neither buying nor selling).
    In the Income Portfolio, you sold naked DIA puts and GLW calls that would not be allowed in many of our accounts. Obviously if you are following you just do not make those trades, but when the main hedge is the DIA’s and people following cannot make the same adjustments you are suggesting it makes adjustments tough. I am not complaining, as I said I am only following virtually. I do suspect that there are plenty of members though (us basic members, the voyeur members, and maybe even some of the premium members) that are trading in restricted accounts. I am not about to suggest that you set up and track another portfolio for those of us with restricted accounts. I have no idea how you are able to keep up with all you are doing currently. I would like to make a proposal though.
    If you would be willing to set up a thread for suggestions and ideas on trades on a 401K type portfolio, I would volunteer to set up a spreadsheet (similar to the one that Pharm has for the 25KP in EditGrid) and enter any trades and adjustments (whoops, I guess I am asking you to set up another). I would be willing to help in any way possible to make this portfolio take as little of your time as possible. We could maybe make it a $100,000 portfolio which would make it easier for people to resize their trades to fit into whatever their portfolio size happens to be. Trades such as the AGNC trade (in a different position sizing) would fit into this portfolio as well as some put sales, so if you could just adjust some of your ideas in the Income Portfolio to fit in this type of portfolio we would be well on our way. I know this sounds rather simplistic and I know you already have a full plate, but I think there are many people interested in simplicity. I am guessing that many of your new Voyeur members have smaller accounts that are probably restricted and (I assume) cannot ask you questions. This would be a good tool for them to learn what type of hedge to use and how to adjust it when they cannot go beyond full cover (for instance).
    I know you often say that this is not a handholding site (even though you end up doing quite a bit of that), but because of your option knowledge I think things that are simple for you are sometimes mind blowing for others. Remember, I would be willing to do as much work as you needed me to do to make this type of portfolio a reality and to keep it as burden free for you as possible.

  13. rj_jarboe
    I don’t know if he is still a member but Revtodd had set up a link with Phils blessing to a similiar thread where members could work on their 401k trade ideas. I don’t have that limitation but I did check over there occaisionally and it was very active for awhile. 

  14. Revtodd had his own blog, but I lost the link.  I recall him writing that he was leaving PSW because he was tied up with other projects so I don’t know if he is still active.

  15. Link to blog I think you guys are talking about. Lets get it in the wiki if it’s correct

  16. Thanks guys! It doesn’t look like the site has been updated for quite awhile.

  17. Phil…synapses… i’ve burned my share…neural networks get pared anyway… so burning synapses can be adaptive… maybe… The links to the older articles are helpful. The posts illustrate your dance with the market. The matress play is something I can learn to do, but it will take time. For dividends DUK and EPD, for a dividend with an inflation hedge PLC. But if you could explain how to hedge the DO that I forgot to trade out of that would be great, too. Thanks

  18. dflam and Phil,
    NLY 50 % of my stk have been called already on a Jan 13 15 caller!
    the other 50 % 1000 stock I sold the call Jan 13 12.5 call for 5.05 now 5.82 dif .77 x 1000 = 770.00, by maintaning the stock the div will by 846.00 and I would be holding the stock at 18.40. However I think the stock will be dropping to 17. 80 after div. still better than the 17.50 I will receive for the called away situation.
    The other 50% of the already called away stock I will wait until after div possible buy it back at 17.80 again.
    Do I have this calculation  right??? thanks

  19. I just stumbled over a link to this article:
    Sounded like someone wanted to spread an evil rumor (especially since it is published in a pakistan newspaper), but surprisingly I found out that there is really an active nofly zone and hardly an news in the big media. Does anyone know anything about this?

  20. Hi Phil: Hope you’re having a great Father’s Day. Spent mine yesterday with family --dinner out, movies, and relaxation. And a new watch for Dad. Good time. Anyway, back to our conversation from Friday on selling out of the money straddles on stock owned, but more importantly  for me to understand, is what the extrinsic component of the sale is all about. I’ve taken the liberty of copying and pasting some the discussion below so you wouldn’t have to back and look it up.
    How can selling a straddle now bring down cost basis, it the stock moves a lot and you have to roll the straddle at a loss, regardless of the extrinsic?
    If you can help me get this important concept, I think it will be of great help. Thanks in advance for the help on this Phil.
    WFR/Morx – Are you buying it fresh at $8.40?  Much as I love them, when you have a chance to buy a stock for $8.40 and conservatively sell the 2013 $7.50 puts and calls for $4 to drop the basis to $4.40/5.95 with a 70% gain if called away at $7.50 (11% down from here) or a 2x entry with a 29% discount – you should probably go that way…
    June 17th, 2011 at 1:07 pm | PermalinkIgnore this user WFR – sorry, they are in my long term account for 13.54. Just got out of June 9s and looking where to go next
    WFR/Morx – Same spread then, still lowers your basis and you’ll eventually roll. 
    June 17th, 2011 at 1:54 pm | PermalinkIgnore this user Phil and Morx: Perhaps this would be a better conversation for the weekend and have have been watching your conversation with regards to WFR b/c I too have a long stock position in WFR with cost basis  higher than current (about $14.50). I had never thought to sell leaps straddle on it. I ran the numbers on Morx’s, and I am not sure I understand how it really works. Selling the $7.5 puts and calls now, for about $4.00, it the stock were to get to Morx’s cost basis on the stock of $13.54, the puts would be worth zero, but the calls would be worth about $6.00 (using a theoretical calculator). Obviously you are thinking of some other adjustments between now and them? What am I missing? No hurry on this one. Thanks in advance

    June 17th, 2011 at 2:12 pm | PermalinkIgnore this user
    Jbur / WFR — what I suspect you’re not taking into account is that the sale of the call and put contain about $3 in premium that is guaranteed to go to zero by expiration (ie. in your pocket).

    June 17th, 2011 at 2:34 pm | PermalinkIgnore this user
    PhilRain:  WFR. This is obviously a concept that I still struggle with. Yes, we sold about $3.00 worth of premium, but when it’s time to buy back the  straddle before expiration, assuming the stock is at Morx’s c.b. of $13.54, it’s going to cost $6.05 ($6.05 for the call, the puts are dead). So, to roll, you’d have to buy for $6.05, what you sold for about $4.00.. I don’t really understand how this lowers cost basis on the stock.  I really need to understand this concept foundational concept so please set me straight if you can

  21. This article for members only and we pay membership fee to read today, but in its free?  Is it fair?

  22. Hey, I hope everyone had a nice Father’s Day! 

    Not much going on in the futures but the Dollar’s at 75.70, indicating Greece is not totally fixed.   Oil still $93! 

    Called away/Dflam – If it does, you can just buy it again.  As long as you are the owner of record on Dividend day, you’re good – just keep an eye on your portfolio if you are worried.  If you make sure you pick up some premium in the call sale, that then becomes your dividend anyway.  I find that, while you often get called away, you don’t usually get called away.  I have noticed lately that the premiums have gotten worse – not sure what’s causing it but if it leads to more call-aways, we may need to change tactics  so let me know if it happens to you.  Also, by the way, you can always buy your caller back before dividend day and then sell a new one right after – another way not to get called away. 

    CSCO/Tcha – If you are serious about long-term investing then what you really need to think about when value-shopping is:  How can you drive the basis of the stock down to zero over 10 years?  With CSCO, we talked about getting to $6 in 6 years so that’s a good start.  If you take a stock like WFR, at $8.50 and you sell the 2013 $7.50 puts and calls for $4 then it’s $4.50/6 and then maybe we sell 2015 $5 puts and calls for $3 and then we’re down to $2.50/3.38 etc.  What are we doing then?   We’re taking a $8,500 net position in WFR and it drops to $4,500 and then to $2,500 – you can call it no profit but you have $6,000 worth of cash that can go to work elsewhere and what do you end up with?  FREE STOCK!   And what can you do with that free stock?  SELL CALLS!  THEN you start making a nice income…

    401K/RJ – If you want to put the time into building a restricted portfolio and making a post out of it, I will be happy to suggest trades and comment on it but I can’t start tracking a whole other thing.  Once we did look into something like that and it quickly became a nightmare because everyone seems to have different rules to follow.  Obviously, trades we’re already selecting for the Income Portfolio are a good place to start and all you have to do is say to me "this one doesn’t work because I can’t do this – what’s a good alternative" and then we’re off.  So put something together and we’ll publish it as a post and you can moderate a comment thread underneath it but it seems to me that some brokers are more liberal than others and maybe you want to check that out first because some of the restrictions I hear about are ridiculous and then other people say "I don’t have that restriction in my account."    I think it would be very valuable for people to know where a good place to trade is first.  

    Revtodd/Dave – He’s been in and out lately, very busy with real-life things..  I think he quickly found out what a huge pain in the ass it is to keep up a portfolio.  Everyone seems to think it’s no big deal but it takes me hours to do an update – it’s a major commitment!  Even worse than trying to keep up the portfolios and having to make decisions about a dozen different positions is the amount of minutia that ends up getting discussed.  Like right now, I came in to go over the news and look at positioning for the week but now we’re discussing what to do if something is maybe called away at dividends or what to do for people who can’t make a certain kind of trade (and the solution is to do more custom portfolios, of course) – you can see where this is kind of a nightmare for me…

    Thanks you Sparky for actually doing what I asked people to do in this thread!  I think looking for good trade ideas and discussing them is SO much more productive.

    NLY/Yodi – NYL was $17.23 and we sold the 2013 $12.50s for $4.95 so net $12.28 and, if you got called away at $12.50, that was a .22 profit right?  That trade was from April 9th, and it’s about a month and you made 1.7%, which is 21.4% a year!  NLY "only" pays a 13% dividend so, if they want to call you away for .22 every month ($2.64/year) – I’d say, let them…  So keep fixed on that and think of what "safe" money this is.  Even if you only pick up .22 4 times a year, on ex-dividend, that’s still .88 on $12.28 or 7.1% without taking the risk of naked stock.  There are many funds that would sell that sort of return for quite a bit of money!  Long story short is – don’t worry about it, you either get your dividend or you get your premium – just make sure you don’t rebuy the stock UNLESS they are going to give you a little premium to make it worth your while.  

    Nebraska/Pentax – I have been hearning about this but maybe the news blackout is real because it doesn’t seem to be confirmed anywhere.  WSJ did report on accident two weeks ago but then nothing.  Scary World when we can’t trust the Government OR the Media…

    Cost basis/Jbur – Well, see above on WFR.  Not sure what’s not to understand, you spend $8,500 for 1,000 shares of WFR and you collect $4,000 for selling the 2013 $7.50 puts and calls so now you are out of pocked on 1,000 shares of WFR for net $4,500.  That means your basis is $4.50 per share and, if you are called away at $7.50, you will get $7,500 in your pocket for a profit of $3,000 on your $4,500 investment (66.6%).  If, however, the stock is put to you – you will be assigned another 1,000 shares for $7,500 and now you have 2,000 total shares that you paid a total of $12,000 for.  So what is your cost basis?  $6 per share?  

    Now, let’s say the stock was down to $5 per share (40% below the current price) and you did nothing all the way until you were assigned 1,000 more shares in Jan 2013 and you have your 2,000 shares of WFR that you paid net $6 for and the stock is trading at net $5.  So you are down $2,000 on 2,000 shares, which is actually a damned site better off than you would have been if you had just spent $8,500 on the stock and not hedged ($3,500 loss) and only $1,000 worse off than if you had just sold the calls for $2.50 to drop your net to $6 when you first bought it.  

    If you KNEW for a fact that WFR was going to drop to $5, then of course selling the puts is a bad idea but, if you knew that – then WHY THE F*CK DID YOU BUY THE STOCK FOR $8.50?  We’re buying stocks because we’re bullish on them and we’re selling puts because, given the information we currently have on the stock, we are fairly certain that if they want to sell us another round at a 20% discount, we’d be happy to buy it.

    Now, here we are back with our WFR in Jan 2013 and we have 2,000 shares at $6 and WFR is at $5.  Now you look to 2013 and you see you can sell the $5 puts and calls for $3 so you do that or maybe you are scared to own 4,000 shares of WFR at net $4 (even though you are paying just net $4,000 for 2,000 more shares if assigned) so you just sell $5 calls for $1.50 and reduce your basis from $6 to $4.50 with a call away at $5.  Whether you choose to take $6,000 for selling 20 $5 puts and calls for $3 or $3,000 for just selling the $5 calls for $1.50 – you are still reducing your cost basis.  If you don’t REALLY want to own 4,000 shares of WFR at net $4 ($16,000) in 2015, then take your $2,000 loss in 2013 and cash in your $10,000 worth of stock (at $5) and you’re done.  

    Of course, if you have a trading plan and you have these possibilities mapped out, then you should know at the point that WFR fails $7.50 that you want to take the loss and walk away because – if you don’t fully intend to DD and roll out to longer months – why would you let the position go past a 40% loss.  

    Meanwhile, I want to point out that you are buying 1,000 shares of WFR at $8.50 ($8,500) and you end up owning 4,000 shares of WFR at $4 ($16,000).  If you had done this with every stock you ever bought – would you be better or worse off?  

    Article/Pahurik – That was my fault, I failed to tag it Members Only to restrict affiliates from picking up the full article.  No biggie, there were no new plays in it, just a review.  That’s why I prefer to keep new trades in comments – that wall is fairly bullet-proof.  

  23. Now I can get to what I wanted to get to this evening.

    Everyone likes these income trades but it seems to me you all go for small potatoes and I’m not sure buying calls and puts every month is really efficient.    How about trying this one:  

    • Buy FAS Jan $28 calls for $2.55
    • Buy FAS Jan $18.33 puts for $2.30
    • Sell FAS weekly $23 calls for $1.15
    • Sell FAS weekly $24 puts for $1.05

    So that’s net $2.65 on the spread with about 30 weeks left to sell and roll.  Some weeks we will be unlucky and some weeks we will be lucky but if we can sell $1 worth of premium each week that’s $30 so we’d have to be REALLY unlucky not to make some good money on this one.  

    Is that something people would like to try tracking.  I figure it’s a good one as we’re already FAS fixated in the $25KP so we’ll be watching them every week anyway.  This is, of course, an active income producer.  If you wanted to do it more passively, I’d sell the July $22 puts for $1.10 and the July $26 calls for .65 for net $3.10 with 5 months to roll and sell but that’s still about $7.50 likely to be collected so a pretty wide range for success there too.  

  24. Posted some QQQ anc copper chart on my blog. I put the links on Friday’s post as I wasn’t sure which one would be updated for Monday morning: 

  25. Hello from Cap’s brand new Ipad2 ! Pretty neat.

    I see Phil has been busy w/ what looks like some neat plays that have been ringing up nice profits in this downturn.

    I have been bus myself and by and large have banked some nice gains on my short mono strategies plus some good swing trading profits plus profits off of put and call sales.

    The only things not working so well are my increasingly longer exposure to energy names like BEXP NOG and others and my REIT shorts which are stubbornly high.

    Will try to spend some more time here consistently but you can also follow me on Twitter @cap cube and on my blogs.

    No idea where we go from here but if I had to guess I would bet on short squeeze bounces that fail and possibly lower lows, at least thru most of summer.

  26. I’ve been out of the REIT action this year, I never got up to speed enough to understand the trade.  PSW doesn’t seem to have abandoned the idea, so the idea of getting into a favored trade late and cheap is obviously attractive.
    Is it still a good idea?  My impression is that 1/ the mortgage logjam will be broken up, with any number of methods possible, and 2/ a rising dollar will tend to move foreign money into a U.S. real estate market that might have bottomed.   I’ve committed nothing yet, but would hate to miss what could be a "long throw" trade at it’s bottom.  Opinions welcome from anyone on top of the U.S. real estate picture.

  27.  P.S. – Normally peaceful Spanish youth are showing surprising militancy in recent days.  I believe selling the Euro much over 1.40 is a gift.

  28.  Phil,
    I’m definitely interested in the above FAS trade.  Just so I know I understand – the strategy is to sell weekly calls/puts that are both just in the money.  One will hopefully expire worthless (both can’t), so this week FAS needs to be less than $23, or more than $24 for one side to expire worthless.  At the end of the week, you roll the Put or Call that is in the money, to the next week, and sell another call or put.  We buy the January Put and Call to cap our exposure in case FAS spikes way out of the bracket.  If I do this on 10 contracts, the goal will be to generate $1,000 a week.  Is that correct?
    Am I right to assume this will only require an adjustment once a week?

  29. Correction, we would prefer FAS to end between $22-25 so we gain about $1.00 at the end of the week.

  30. Looks like the week after June expiration doesn’t have a good track:

  31. Good morning!

    Europe still dragging out, now we’re waiting for Greece’s no-confidence vote so the Dollar is up and the markets are down.  

    China was down half a point but that’s misleading as the Hang Seng fell almost 400 points from open to close.  Japan was flat but then dropped 50 points after the close and Bombay was at least honest about it and just fell 2%.  Might have been a time-zone thing because the G7 had a late-night meeting that once again solved nothing.    Here’s a good summary:  

    Meanwhile, finance ministers and central bankers from the Group of Seven industrialized countries held a conference call late Sunday to discuss the crisis, according to people familiar with the matter. Natalie Wyeth, a spokeswoman for the U.S. Treasury Department, confirmed a G-7 conference call was held but declined to provide any details. A senior euro-zone official said the U.S. urged a fast resolution of the Greek issue.

    In Athens, Prime Minister George Papandreou said his country was negotiating a new deal of roughly the same size as the one granted just last year—about another €100 billion—and urged his parliament to back him in a vote of confidence scheduled for Tuesday. The Greek premier, fresh from a cabinet reshuffle meant to lift his political fortunes, will travel to Brussels on Monday for talks with European Union leaders.

    Europe thought it had put Greece’s troubles to rest last spring with a mammoth bailout that rewrote the contract among the euro’s member countries. Now, Greece needs more help, and there’s fatigue all around.

    Voters in stronger countries—Greece’s new creditors—are watching in anger as the costs rise. Greeks are rebelling against their leaders’ determination to press the searing budget cuts that are the price of their rescue.

    Europe went straight down at the open and are drifting around 1% off so far.

    Dollar 75.80, Euro $1.422, Pound $1.616 and 80.30 Yen to the Dollar.  OIl is $92.21, gasoline $2.907, nat gas $4.297.  Gold $1,539, silver $35.57 and copper $4.056.  Looks like it will be a wait and see kind of day.

  32.  Phil
    Sorry, I didn’t get to the income trader email this weekend but based on your comment above thought I’d comment here:
    As you know I appreciate the income trade very much, and have learned a great deal from it. Because Kojo has, in my opinion, thoroughly researched a single type of trade, It has caused me to dive deeper on it myself. I have since read several books on condors – some of value, some not- and attended multiple online webinars. The discussion and references to the greeks, which are typically very limited here, have added depth to my understanding, and the adjustment methodology given me some comfort with the trade. The trade does (at least for me) use a great deal of margin, and causes some concerns when its not going our way (sleeplessness).
    That said, Income Traders very limited participation in discussion diminishes the value of the education on this type of trade – it has been great to make the profits, but I don’t think he’s here to teach, he’s more interested in marketing to the user base. I appreciate the "fishing", but my goal here is to learn to fish – so we are not completely aligned. I would not look to be paying more for the trade – its just not educational enough by itself to warrant the cost.
    I am going to study the FAS trade above as an alternative/addition and will likely try that as well. 
    Thanks for adding this – and I hope others chime in as well.

  33.  @Dave, Phil, RJ/ Covered call IRA portfolio –  Last summer I did blog a monthly covered call portfolio, but Phil hit the nail on the head.  Not only is running a blog time consuming, but doing monthly covered calls takes a great deal of time.  To do it right, you have to diversify into at least about 10 positions a month and there are lots of decisions to make on downturns.  But an even bigger factor in doing monthly covered calls is the low VIX over the last few months.  When the VIX is in the teens, it is tough to get decent premium, so profits are low and downside protection is minimal.  I felt the risk/reward picture just wasn’t worth the effort.  I made good money after a big downturn with a high VIX doing covered calls, but I don’t find it to be a good all-weather strategy.
    The limits of IRA accounts make premium based strategies difficult.  As RJ points out, selling puts is a pain because they have to be cash covered.  I’m interested in where you go with this RJ, as I have love Phil’s strategies for margin account trading, but have yet to get comfortable with an IRA strategy that makes a decent profit without a lot of time commitment.  Lately I have been reading Mebane Farber and The Ivy Portfolio.  He has several low touch sector based portfolios that make 10 to 15% yearly and you just look at it once a month.  I like it in part because I manage portfolios for my wife, mother and myself, and a trust for my two sons.  It would be a full-time job otherwise, so I just put some of the IRA money on autopilot this way.  Maybe we can discuss this next weekend.

  34. REITs/Cap – BXP is crazy high, might make a good short if the economy tumbles again.  

    REITs/ZZ – I think homes are another commodity priced in Dollars so a rising Dollar will not be good for housing prices short-term but that’s a dip I’d buy into.  

    Spain/ZZ – 25% unemployment and a hot summer are a dangerous combination.  

    FAS/Palotay – I wouldn’t get too hung up on targets.  The expectation is only that we can sell AT LEAST .50 of premium each week for 30 weeks.  That puts $15 in our pocket, or net $12.35 after spending $2.65 on our longs.  With $28 calls and $18.33 puts, anything within that range will make us at least $2 (we collect net $12 and owe $5 to the caller and $5 to the putter) while outside the range we make money as long as FAS is under $40 or over $6.  That’s at .50 per week.  If we sell $1 per week – we get an extra $15.  While it may "require" an adjustment once a week, as you may have noticed from the $25KP, you can often take advantage of FAS moves several times in the same week.

    Thanks Deano.

    Thanks Rev – I’m sure we can put something together along those lines.  

  35. Companies Push for Tax Break on Foreign Cash
    Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent.
    “For every billion dollars that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly,” Jim Rogers, the chief of Duke Energy, said at the conference.
    But that’s not how it worked last time. Congress and the Bush administration offered companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage.
    Though the tax break lured them into bringing $312 billion back to the United States, 92 percent of that money was returned to shareholders in the form of dividends and stock buybacks, according to a study by the nonpartisan National Bureau of Economic Research.
    This money comes from overseas operations and in some cases accounting maneuvers that shift domestic profits to low-tax countries. The study concluded that the program “did not increase domestic investment, employment or research and development.”

  36. America flirts with a fate like Japan’s

    First, since the recession was unusually deep and the recovery unusually slow, the US is experiencing unheard-of long-term unemployment rates. The housing slump and its associated plague of negative equity aggravate this by making it harder for the unemployed to move to find work. Long-term joblessness erodes skills and employability. Structural unemployment is surely inching closer to European levels.

    The second danger also works through productivity, but arises from the role played by debt in this cycle. Under circumstances such as today’s, with households striving to cut debt and interest rates at zero, economies can behave in strange ways. In a paper last year, Paul Krugman of Princeton and The New York Times, and Gauti Eggertsson of the Federal Reserve Bank of New York drew attention to the possibility of a “paradox of toil”, akin to the paradox of thrift (whereby if everyone tries to save more, the economy shrinks and so does aggregate saving). The logic of the paradox of toil is simple. Suppose the supply of labour increases, or productivity rises. Initially, prices would tend to fall. If nominal interest rates are stuck at zero, the real interest rate and burden of debt both rise. This leads overleveraged consumers to cut spending still more. Demand is not just slow to respond: the economy shrinks.

  37. Revtodd,
    Thanks for your input! I will do some more research and would like to discuss this further, maybe next weekend as you suggest. I am not sure what thread Phil would want us to keep any discussion on though. I have been going over dividend payers for several weeks and have not found many I like at today’s prices, but will continue to look.

  38. Phil, thanks for the hedging links, it helped a lot. Being from So Cal, I could relate to the surfing analogy.
    I particularly liked the article where you used dollars.  If I have a $100,000 in stock and want to protect a 10% downside move and I cover with a DIA spread, do you always buy enough to hit the $10,000 and give yourself some upside, knowing that you will probably not keep the hedge to expiration?

  39. Hedge/Rpme – Generally, you want your hedge to cover about 1/2 your anticipated losses.  You don’t want so much of a hedge that you’d rather go down than up, do you?  Keep in mind that if the market falls 20% and you lose $20,000 on your stock and gain $10,000 on your hedge.  You put the $10,000 into improving your $80,000 worth of stock so you buy 12.5% more stock (effectively, maybe you are rolling calls or whatever) and that means you have 92.5% of the stock you started with.  

    Now, what happens if the market comes back just 10%?  Then you’re already at 101.75%.  Then you hedge again for the next cycle and, over time, you end up forcing yourself, through they cycle to buy low over and over again.  Effectively, hedging enforces the good practice of deploying more bullish cash at the bottoms as your hedges stop out and you deploy new cash at the bottom of each cycle.  When we have a good run (like we just did), we hedge some more so we’re also buying our protection low and, hopefully selling it high.  


    NLY/Income Portfolio, Yodi – Ask for a .20 premium on the calls and then cover if they fill.  If not, not worth it.  You can also try selling the 2013s as it doesn’t matter to you as long as you get the protection and, if they call you away, they blow the same .20 as the Jan callers would.  Also, rather than rebuying the stock, you could sell the Aug $19 puts for $1.10 for a net $17.90 re-entry.  

    Submitted on 2011/06/24 at 11:13 am

    FCX/Rain – Wow, I would have loved to have caught that one.  That pumped up FCX puts a bit and you can sell the July $47 puts for $1.21 so let’s sell 10 of those in the Income Portfolio.  

    Good morning!  

    Now it’s the first day of the month and USUALLY we get a nice inflow of fund money.  If we don’t get it – I can’t see what’s going to support the market.  Perhaps they are waiting on the June ISM numbers but we have no reason to think they’ll be good (below 50 is contraction, 52 expected) and, if we do get contraction, oil will fall off a cliff.  

    Russell Futures (/TF) opened at 825 so still time to short them again (in case you aren’t short enough) below that line and oil is a re-short (/CL) below $94, of course.  The Dollar already popped 74.80 so we’re BEARISH!!!!! 

    I’m sending this out now to make sure BEARISH is clear – let’s kill our long positions in the $25KP as well as the Income Portfolio (the short puts) and get cashy and safe(ish) over the weekend.  I still love our disaster hedges and they are about the same price as yesterday but hold off on selling offsets if you can as you’re likely to get a better price for short puts if you wait.  

    Jan puts/Income Portfolio, Rev – Not necessary if they are on target.  I don’t have them in front of me but I was thinking more of the July and Aug short puts – why risk it over the weekend, especially with the VIX so low again (15.38 now)?  We can always sell more… 


  41. IYR/Rpme – Ah, no position at all!  We bought the IYR Jan $50 puts for about $2.70 and sold 1/2 front month $60 puts for $2 to knock $1 off the net.  That was our initial entry but we took it when we expected that $60 would hold as a bottom.  Now it’s a tough call but the Jan $50 puts are just $1.45 now and you can sell the Aug $55 puts for .53 with a stop on 1/2 at .65.  You only need a few good sales to have free protection.  The premise is that if Real Estate collapses – it won’t be short or small and those $50 puts are not that far away.