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Income Portfolio – Month 5 – Don’t Just Do Something, Stand There!

SPY DAILY 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)

SPY WEEKLY 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 held quite nicely and, like Warren Buffett – we took the opportunity to "Be greedy when others are fearful" and did a bit more bottom fishing – because that’s what you do when you are a long-term investor – you take the LONG view, and the long view looks more like this:  

See – that doesn’t look too bad at all, does it?  It’s the same market – just shot from a couple of steps further back to put things into a long-term perspective – where we’re having a slight pullback of 25% after a 2.5-year, 100% move up.  I guess it would be nicer if the markets just went up and up and up and up and never-ever pulled back but that’s not the planet we invest on so we have to deal with the fact that even a bull market has pullbacks and learn to deal with them.  

In our last update, we had dumped out of all of our short-term short puts as we were too choppy to comfortably ride out the market gyrations with short-term positions in our long-term portfolio.  Fortunately, we were way ahead of goal with $33,134 taken off the table in our first 4 months, over 100% ahead of our goal of having $4,000 a month to live on without touching our principle.  Knowing we had another round of dividends coming to us in September (the joy of owning dividend stocks!) meant we had no urgent need to do anything as we had already accomplished our year’s goal ($48,000 profits projected to be withdawn by year’s end) in month 4 with only 35% of our cash and margin put to work.  

As we, like Buffett, had our cash ready, willing AND able on the sidelines – we were happy to take advantage of a few opportunities along the way – putting our sideline cash to work at what we HOPE (not a valid investing strategy) is a bottom.  First we’ll review our open short-put positions – the ones we really, Really, REALLY want to own for the net strikes (even IMAX):  

  • 10 KFT Jan $30 puts sold for $1.60 ($1,600), now .35 (up $1,250)
  • 10 EXC Jan $37.50 puts sold for $2.20 ($2,200), now .50 (up $1,700)
  • 10 HCBK Jan $10 puts sold for $1.50 ($1,500), now $4.30 (down $2,800)
  • 10 HCBK Jan $7.50 puts sold for net $0, now $1.90 (down $1,900) 
  • 10 GE 2013 $17.50 puts sold for $2.10 ($4,200), now $3.25 (down $1,150) 
  • 10 HPQ 2012 $35 puts sold for $2.90 ($2,900), now $9.30 (down $6,400) 
  • 10 CCJ Jan $25 puts sold for net $1.25 ($1,250), now $4.45 (down $3,200)
  • 5 RIMM Jan $35 puts sold for net $1.65 ($825),now $11.50 (down $4,925)
  • 10 RIMM Jan $27.50 puts, sold for $4 ($4,000), now $5.70 (down $1,700) 
  • 10 IMAX Jan $25 puts sold for $2.40 ($2,400), now $8 (down $5,600)
  • 10 IMAX 2013 $22.50 puts for $4.90 ($4,900), now $6 (down $1,100) 
  • 30 FTR 2013 $7.50 puts sold for $1.30 ($3,900), now $2.75 (down $4,350)
  • 20 GLW 2013 $17.50 puts sold for $2.40 (4,800), now $5.10 (down $5,400) 
  • 30 NLY 2013 15 puts sold for net $2.43 ($7,290), now $2.85 (down $1,260)
  • 20 VLO Jan $20 puts sold for $3.05 ($6,100), now $1.15 (up $3,800)
  • 10 BA Nov $50 puts sold for $1.52 ($1,520), now .32 (up $1,200) 
  • 10 TITN March $22.50 puts sold for $4.50 ($4,500), now $4 (up $500)

We have a net loss of $31,335 if we stay this low though January 2012 and January 2013 expiration dates.  That’s $1,770 worse than two months ago.  Not so bad with the market dropping 20% on us and the VIX blowing up.  Also, as with any of our portfolios – these are the LOSING ends of spreads – don’t forget we’ve already cashed in $33,084 and we have plenty of calls to sell and dividends to collect.  At the moment, there’s really no point to even adjusting these positions.  I had mentioned, in the past, that we do need to stop out short puts with a 30% loss and, from now on that is going to be a rule but, since it seems many people have not done that, I’m going to play this set through as it’s more educational to follow it over time anyway but PLEASE look over this list and consider how sensible stops could have saved a huge amount of our virtual cash!  

And, of course, that’s what hedges are for and we took advantage of the dip in IYR to cash out our major hedge with a profit that almost entirely covers the losses on our short puts – leaving the cash we’ve taken off the table free and clear.  Remember, it’s the same concept as the $25KP but on a longer time-frame – as long as we have faith, we ride out our losing positions while cashing in our winners to reduce the remaining basis:  

  • 100 IYR Sept $52 puts sold for net $1.10, expired worthless – up $11,000
  • 50 DIA Sept $114.75 puts sold for $1.40, expired worthless – up $7,000
  • 50 WFR Aug $8 calls sold for .32 ($1,600), expired worthless – up $1,600
  • SVU $440 dividend (8/30) – up $440
  • NLY $1,800 dividend (9/28) – up $1,800
  • AGNC $2,800 dividend (9/21) – up $2,800
  • FTR $564 dividend (9/7) – up $564
  • CSCO $60 dividend (10/4) – up $60
  • 70 DIA Oct $95 puts at $1.45, out at $1.65 – up $1,400
  • 25 DIA Oct $111 puts sold for $3.10, out at $2.80 – up $750  
  • 100 IYR Jan $50 puts at net $1.70, out at $4.40 – up $27,000

That’s $54,414 cashed out in two months – not bad at all!  Notice we didn’t touch our positions, we didn’t roll or double down or – well, anything.  We have a balanced portfolio and we let our hedges do their job.  We took off the IYRs and added the SDS hedge (changing to a fresh horse).  Remember – it’s not a profit until you cash it in!    In general 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 at net $15.76, now $16.12 – .62 dividend expected 12/30 ($1,860)
  • 2,000 AGNC Sept $28 covered call at net $27.65, now $29.11 – $1.40 dividend expected 12/30 ($2,800). 
  • 3,000 FTR at net 6.29, now $5.97 - .19 dividend expected 12/7 ($570)
  • 20 GLW Jan $16 calls at net $2.55 ($5,100), now .36  (down $4,380) 
  • 1,000 CSCO 2013 $17.50 buy/write at net $11.92/14.71, now $17.55 – .06 dividend expected 1/4 ($60) 
  • 1,000 HCBK at net $6.83, now $5.85 – .08 dividend expected 8/30 ($80)
  • 5,000 SVU 2013 $5 buy/write at net $2.99/4, now $8.17 – 0.088 dividend expected 11/30 ($440)
  • 1,000 RRD 2012 $12.50 buy/write at net $8.83/10.67, now $15.85 – 0.26 dividend expected 11/3 ($260) 
  • 1,500 NYB 2013 $10 buy/write at net $8.30/9.15, now $12.71 – 0.25 dividend expected 11/3 ($375)
  • 2,000 SKX Jan $14 buy/write at net $9.75/11.88, now $14.27
  • 5,000 WFR 2013 $7.50 buy/write at net $3.85/5.67, now $6.10
  • 2,000 SONC March $10/$12.50 buy/write at $6.95/9.72, now 7.58
  • 3,000 HOLI Jan $7.50/5 buy/write at net $2.90/3.95, now $6.90
  • 1,500 HOV 2013 $1 buy/writes at net .18/.59, now $1.21  
  • 500 MT 2013 $15 buy/write at net $7.50/11.25, now $19.98  - 0.188 dividend expected 11/19 ($94)
  • 4,000 AA 2013 $7.50 buy/write at net $5.43/6.47, now $10.26 – 0.03 dividend expected 11/3 ($120)
  • 5 OIH 2013 $110/130 bull call spreads at $10, now $11 (up $500) 
  • 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 (up $2,300)
  • 10 BRK.B 2013 $50 puts sold for $4.40 ($4,400), now $3 (up $1,400) 
  • 5 CAT 2013 $80/95 bull call spreads at $6 ($3,000), now $6.50 (up $250) 
  • 5 CAT 2013 $55 puts sold for $5.55 ($2,775), now $5.60 (down $25) 
  • 40 XLF Oct $12/13 bull call spreads at .50 ($2,000), now .47 (down $120) 
  • 40 XLF Oct $9 puts sold for .15 ($600), now .01 (up $560) 
  • 20 FAS Oct $12/14 bull call spreads at $1.15 ($2,300), now .80 (down $700)
  • 20 FAS Oct $11 puts sold for .92 ($1,840), now .30 (up $1,240) 
  • 10 ANR 2013 $30/40 bull call spreads at $2.85 ($2,850), now $1.80 (down $1,050) 
  • 5 ANR 2013 $25 puts sold for $6 ($3,000), now $8.60 (down $1,300)
  • 10 TLT Oct $118/114 bear put spread at $1.05 ($1,050), now $2.90 (up $1,850)
  • 10 TBT Nov $18 puts sold for .90 ($900), now .15 (up $750)

Notice we don’t care about the P&L on our buy/writes, they are simply on or off track.  Meanwhile, they are paying us $6,539 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 5 months!).  On the other positions, we are ahead net $5,075 and, as you can see, we’ve taken on a little more short-term risk as we can certainly afford it being way ahead this year already.

The main idea here is to establish inexpensive entries for future call selling and dividends.  We broke up some of our buy/writes and that pushed the losing puts into the earlier section and there are many thousands of call contracts to be sold when the market comes back.  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, now $5.50 (up $6,750)
  • 25 DIA Oct $111 puts sold for $3.10, now .30 (up $7,000) - stop at .50
  • 50 SDS Jan $24/30 bull call spreads at $2 ($10,000), now .85 (down $4,250) 

A nice net $9,500 on our protection, which is not bad considering we’re at the top of our range.  Even if we dip, the DIA Oct $111 puts will either expire worthless or get stopped out and that will leave us well protected on the way down (those DIA March puts were up $19,000 when the Dow was at the bottom of the channel).  

All in all that leaves us in month 5 with $54,414 in realized gains from which we are using $4,000 a month to pay our bills off this $500,000 retirement account.  Our unrealized positions are down net $16,760 so plus $37,654 is just right and we still have only about 1/2 our cash and margin deployed.  Keep in mind our goal for the year is $48,000 in profits and we still have 7 months to go.  Obviously, getting ahead is fantastic as it allows us to build our portfolio down the road.  

Next month, we’ll be taking a hard look at all of our positions to determine if any of our horses are looking tired.  


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  1. Phil/BK.B
    You have said before that this stock tracks the SPX pretty well.

    I wonder if that is going to change now that W. Buffett had put his full faith and confidence behind buying BRK.B any time it falls below book value or up to 10% over book value.
    It seems to me that in his dotage W. Buffett has increasingly devoted himself to good works, such as saving the world from destruction, although like the early missionaries in Hawaii: "They went there to do good, and they did right well.". He saved Goldman Sachs, and then for an encore had a shot at saving BofA. He has been hanging out with well-known philanthropist B. Gates, and has hosted fundraisers for B. Obama, (possibly a descendant of those Hawaii missionaries), and even has part of the Obama jobs bill named after him.

    He has even indulged in a bit of class warfare, suggesting that "job creators" like himself might be able to pay a hair more in personal taxes without having to fire all the help.
    Is it then possible that he sees his support of BRK.B as a way to hold up the SPX? What happens now if SPX crashes? Will billions be spent on supporting BRK.B and what effect will that have on SPX, if any?
    Anyway, what I am leading up to is that BRK.B seems like a particularly good income trade at the moment. Why not sell monthly $75 calls and sell $72.50 puts for about $400 per month income? Obviously you can’t just switch your model portfolio in midstream, but is this viable for an investor who does not yet have a position in BRK.B?

  2. Income Port/Phil – Awesome review. Since I’m just back, tho, how do I begin to track (trade with) the income portfolio?

  3. RIMM….nothing to really get excited about just thought I’d share..

    If you’re going to give your devs a nugget of info about some of your unannounced devices on a publicly available site, we hope you won’t be so surprised that word actually gets out about them. That’s exactly what happened to Research in Motion, as the company let it "slip out" to devs that two future BlackBerry OS7 smartphones — the Bellagio 9790 and Curve Touch 9380 — are inbound. The whole point in the message was to inform developers of what kind of resolution to expect in the new phones’ displays. From the bits and pieces we’re given, it appears that the Bellagio will have a 2.4-inch screen using 480 x 360 resolution to produce a respectable 245 PPI; the Curve Touch, on the other hand, will feature an identical res on a larger 3.2-inch display, resulting in a PPI of 189. The probability of hearing an official announcement this week is pretty high, but we’d say the intended (and likely unintended) message has come through loud and clear for now, wouldn’t you?

  4. NF**X – phil often says if you only enter stocks he doubles-down on you’d probably do better than his own (pretty stellar) performances, so my first guess would be to do the same thing here. 
    Does anyone know of a tool to generate a list of stocks with low correlation? For example, I’d like to be able to say I want 15 stocks with low correlation and I’d like the tool to produce a dozen different portfolios with increasingly greater correlation between the equities in the list.
    Probably too much to ask for, but thought I’d ask here…

  5. kustomz – so both devices are still behind the 326 PPI of the iphone 4/4S. (print/magazines are generally 300 dots per inch if I remember correctly). 
    Also FWIW, Dow Corning (finally) added iphones to the list of phones available for employee/VP use a few months back, which only included RIMM devices previously. They claimed they were trying to keep up with the times, which says a lot given they’re generally slow to adopt anything not "tried and true".

  6. Some kid has already managed to get Siri running on the iPhone 4 (albeit it ran slowly). 5 hours later he posted a video and the performance was more what you’d expect. 
    So here’s a thought – how long before Apple hires this guy / releases a software update so Siri can run on the iPhone 4, now permitting the sale of cheaper hardware to everyone who won’t shell out $300+ for a current generation one?

  7. Thanks, Kwan.

  8. Submitted on 2011/10/19 at 10:00 am 

    F is also a buy now. It’s a little chasey at $11.80 but we can offset that by selling the 2013 $10 puts and calls for $4.50 for net $7.30/8.65 so 2,000 of those in the Income Portfolio is a nice start.

    Submitted on 2011/11/03 at 12:37 pm

    Retirement/L4 – That’s what the Income Portfolio is. I started it when my Dad died and I realized what poor returns my Mom and her friends were getting from regular investment accounts. The goal was to take $500K and make $4,000 a month to live on without digging into the principal. The way this market trades, no single strategy is going to work – it’s just not, so don’t fool yourself. I think anything where you say "I intend to do this one thing for a long period of time" is very dangerous. CASH is the best strategy and put some money into diversified longs that you intend to build up to over time (as the market becomes, hopefully, less uncertain) and then take a little of the cash to play with shorter-term. The key to a buy/write is you don’t believe the thing you are buying will drop more than 40% or, if it does, you will be willing to hold it for a few years while we ride out a collapse. Is that how you feel about IWM or are you just gambling?