Income Portfolio Feb Update – The Joy of Nothing

Nothing!

Not one move since expiration day and that's the way uh-huh, uh-huh we like it in our virtual retirement portfolio because, when we actually retire – who the hell wants to have to work – even when that job is simply pushing a couple of buttons on a computer screen once in a while?  Our long-term outlook has been bullish since we began this portfolio last April and we did nothing when the S&P fell 300 points and we did nothing now that it's back up 300 points – to about where it was when we started. 

Our goal here is to simply generate a monthly income of $4,000 using $500,000 invested without depleting the principal – the kind of thing that my Mom and many of her friends need to do to supplement their not very generous Social Security checks.  Please see previous posts in our Virtual Portfolio section for our main strategy discussions – this is just an update. 

Our last update was on January 12th and we finally had some work to do after taking 4 consecutive months off as we just laid back and collected our Q4 dividends but January had a lot of our short sold January positions coming due or paying off.  We knew this was going to be our time for action as there really is no such thing as a free lunch – even the investing class has to roll out of bed and sit at a desk a couple of times a year!  

Prior to making our moves, we had $80,617 of realized gains (positions we had cashed in) against $39,965 for a $40,652 net gain in our 8th month so averaging a bit better than $5,000 a month and well a head of schedule but this is the month we EXPECTED to do well in so we'll see how we made out.  The following positions were closed:

• 1,000 shares of RRD paid a .26 dividend on 1/25 – up $260 
• 1,500 shares of NYB paid a .25 dividend on 2/3 – up $375
• 4,000 shares of AA paid a .03 dividend on 2/1 – up $120 
• 2,000 shares of F paid a .05 dividend on 1/27 – up $100
• 10 KFT Jan $30 puts sold for $1.60, expired worthless – up $1,600 
• 10 EXC Jan $37.50 puts sold for $2.20, expired worthless – up $2,200
• 10 HCBK Jan $7.50 puts sold for net $0, expired at .31 – down $310
• 15 RIMM Jan $19 calls sold for .72, expired worthless – up $1,080
• 20 VLO Jan $20 puts sold for $3.05, expired worthless – up $6,100
• 20 GLW Jan $16 calls at net $2.55, expired worthless – down $5,100
• 50 SDS Jan $30 calls sold at net $0, expired worthless – even 

That's a very nice $6,425 of cash generated this month, now $87,042 in realized gains – not too shabby!  And this wasn't even a big dividend month.  We also got rid of those worthless GLW calls and finally took the loss but the good news is that improves the balance of our remaining positions, right?  Our open short positions are:   

• 20 HCBK July $9 puts sold for $1.45 (-$2,900), now $2.10 – down $1,300 
• 10 GE 2013 $17.50 puts sold for $2.10 (-$4,200), now $1.52 – up $580
• 15 HPQ 2013 $30 puts sold for net of $2.23 (-$3,345), now $4.30 – down $3,105
• 5 HPQ Feb $26 calls sold for $1.38 (-$690), now $3.10 – down $860 
• 15 CCJ Jan $20 puts sold for net $2.17 (-$3,255), now $2 – up $255
• 20 RIMM 2014 $22 puts at net $3.52 (-$7,040), now $8.15 – down $9,260
• 10 RIMM Feb $16 calls sold for $1.08 (-$1,080), now $1.30 – down $220
• 20 IMAX Jan $22.50 puts sold for net of $4.50 (-$9,000), now $3.60 – up $1,800
• 30 FTR Jan $7.50 puts sold for $1.30 (-$3,900), now $3.70 (down $7,200)
• 20 GLW Jan $17.50 puts sold for $2.40 (-$4,800), now $4.60 (down $4,400)
• 30 NLY 2013 $15 puts sold for net $2.43 (-$7,290), now $1.01 (up $4,260) 
• 10 TITN March $22.50 puts sold for $4.50 (-$4,500), now .50 (up $4,000)

Down net $15,450 is a big improvement from last month (down $20,655) but keep in mind that these are all positions in stocks we REALLY want to buy for the net price.  The way put selling works is an enforced discipline – we never pay retail for a stock.  If we like a stock, like CCJ, which is at $23.76, we don't just buy it – we sold the Jan $20 puts for $2.16 and what we're essentially saying is that we'd like to buy CCJ if it goes on sale and we are willing to commit to owning 1,500 shares if it goes down to $17.84 ($26,760), which is the net of what we collect and the strike. 

What we're doing then (assuming 50% margin on stock) is allocating $13,380 towards buying CCJ –  although the short puts only use a paltry $3,000 in net margin according to TOS.  That's another benefit as it leaves us tons of spare margin for other trades.  For making this commitment, we get paid $3,255 up front so EITHER we get our 1,500 shares on sale OR we get paid $3,255 against our $13,380 allocation, which is 24% against a 2.7% portion of our total portfolio.   

These are nice, conservative bets and, over time, we are "stuck with" the losing positions as the winners get cashed out.  Since we generally will roll our losers down to lower strikes, if we do eventually get assigned, it's generally at a very low price compared to where we started so this system forces us to ONLY buy stocks for significantly less money than they were priced when we started.  After almost a year, even disasters like RIMM, FTR and GLW just don't seem so bad in the grand scheme of things.  

Why?  Because we do REALLY want to own them if they keep getting cheaper (maybe not RIMM!).  FTR, for example, is a terrific stock and, if we get assigned another 3,000 shares at net $6.20, that's fine and dandy with us as they pay a .75 dividend.  Why should we care if the PRICE of the stock is currently $4.51 when 3,000 shares pay us $2,250 a year?  That's still 12% against our $18,600 allocation.  Oh please – spare us from collecting 12% interest, right?  

Traders tend to lose focus on the goal of the trade, which is to make a nice, annual dividend and begin to focus on the "Oh my God, it's down 30%" aspect of the trade.  If you want to be an INVESTOR, you have to look at the VALUE of the position and aside from FTR paying you .19 per quarter in dividends, we can give ourselves a bonus dividend by selling calls – like Jan $5 calls for .35, another $1,050 back on your $18,600 (5.6%).  At the moment, we like FTR too much to sell $5 calls but the point is you need to evaluate your positions based on how much money they can make you over time (like a condo you rent out), not based on what you paid for them versus the current balance.   

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

• 3,000 NLY at net $15.76, now $17.14 – .62 dividend expected 3/27 ($1,860)
• 2,000 AGNC at net $27.65, now $29.70 – $1.40 dividend expected 3/20 ($2,800).
• 3,000 FTR at net 6.29, now $4.51 – .19 dividend expected 3/7 ($570)
• 1,000 CSCO Jan $17.50 buy/write at net $11.92/14.71, now $20.09 – .06 dividend expected 4/3 ($60)
• 1,000 HCBK at net $6.83, now $7.19 – .08 dividend expected 2/2 ($80)
• 5,000 SVU 2014 $7 buy/write at net $2.29/4.64, now $6.98 – 0.088 dividend expected 2/30 ($440)
• 1,000 RRD Jan $12.50 buy/write at net $6.78/9.64, now $11.91 – 0.26 dividend expected 5/3 ($260) 
• 1,500 NYB Jan $10 buy/write at net $8.30/9.15, now $12.69 – 0.25 dividend expected 5/3 ($375)
• 2,000 SKX July $12 buy/write at net $7.15/9.58, now $13.08
• 5,000 WFR Jan $7.50 buy/write at net $3.85/5.67, now $5.19 
• 2,000 SONC March $10/$12.50 buy/write at $6.95/9.72, now $7.53
• 3,000 HOLI July $10 buy/write at net .10/5.05, now $9.02
• 1,500 HOV Jan $2/1 buy/writes at net .58/.79, now $2.82
• 500 MT 2013 $15 buy/write at net $7.50/11.25, now $21.74  – 0.188 dividend expected 2/19 ($94)
• 4,000 AA Jan $7.50 buy/write at net $5.43/6.47, now $10.76 – 0.03 dividend expected 5/3 ($120)
• 2,000 F 2013 $10 buy/write at net $7.30/8.65, now $12.79 – .05 dividend expected 4/31 ($100) 
• 3,000 ACI 2013 $12.50 buy/write at net $7.50/10, now $15.70 – .11 dividend expected 2/28 ($330)
• 5 OIH Jan $110/130 bull call spreads at $10 ($5,000), now $12 – up $1,000
• 5 OIH Jan $100 puts sold for $11.50 (-$5,750), now $8 – up $1,750
• 10 BRK.B Jan $70/82.50 bull call spreads at $4.70 ($4,700), now $8.40 – up $3,700
• 10 BRK.B Jan $50 puts sold for $4.40 (-$4,400), now $1.05 – up $3,350
• 5 CAT Jan $80/95 bull call spreads at $6 ($3,000), now $11.90 – up $2,950
• 5 CAT Jan $55 puts sold for $5.55 (-$2,775), now $1.15 – up $2,200
• 10 ANR Jan $30/40 bull call spreads at $2.85 ($2,850), now $1.75 – down $1,100
• 5 ANR Jan $25 puts sold for $6 ($3,000), now $6.50 – down $250
• 10 TM Jan $62.50 calls bought for $6.50 ($6,500), now $15.50 – up $9,000 
• 10 TM 2013 $55 puts sold for $5 ($5,000), now $1.20 – up $3,800

Up a very nice $26,650 and, don't forget, we don't even count the very large potential gains of our buy/writes or stock positions because – WE DON'T CARE!  We have no intention of selling them, they are there to make us money selling dividends.  Our primary goal is to have lots and lots and lots of stocks that we end up with a very low basis on that simply sit there and pay us dividend month after month after month.  

Hopefully, in our 9th month, you are already beginning to see the light as it's been fairly painless building up to this level but this strategy takes many years to unfold.  This is why we require all our Members to watch "The Man Who Planted Trees" over and over again – until they learn to think of the BIG PICTURE – not just the day to day nonsense in the market that can distract you from building a future.  

Already, the positions we've worked into are paying us $7,089 in expected quarterly dividends.  That's already almost 2/3 of our goal just from the dividends!  Over the next year, our goal is to work our way up to $12,000 in quarterly dividends – at which point, any money we make off trading will be a bonus, which we can use to plant more dividend trees that will yield us a lifetime of quarterly fruit.  Already, yielding $28,000 a year, this is a portfolio you can be proud to leave in trust for your children or grandchildren – and we're only 9 months into building it.  

Meanwhile, we hope we have adequate protection from our long-term hedges to see us through things – just in case we fail again.

• 50 DIA June $112 puts at $6.30 ($31,500), now $1.60 (down $23,500)
• 20 DIA Feb $120 puts sold for $1.60 ($-3,200), now .10 (up $3,000) 
• 50 SDS June $18 calls at net $5.42 ($27,100), now $1.20 (down $21,100)
• 20 SDS Feb $18 calls sold for .98 (-$1,960), now .13 (up $1,700)

Down net $39,900 is the cost of our insurance against our gains, which were $87,042 on positions we closed (you didn't think we got to keep it all, did you?) and $26,650 on positions in progress so net $73,792 after 9 months is 100% ahead of our planned $36,000.  Keep in mind, this is a VERY CONSERVATIVE portfolio that is fully hedged – frankly, we made too much money this month because we were bullish on Jan 12th and didn't spend money to roll up our hedges (money we would have/should have lost if we played it more conservatively).  

We were able to take that chance because we were already well ahead of goal – especially as, in my head, I do sort of count how far ahead we are on buy/writes and stocks as a tie-breaker (about $100K).  Meanwhile, I WILL be making adjustments this week, depending on what happens Monday and Tuesday so be ready to do a little work as, in the very least, I want to roll up our hedges (and sell more short positions against them to pay for it).  

That's where that hedging loss can be deceiving as we do sell short positions against them from time to time and that money becomes part of our cash gains while we carry the loss until we finally do close the hedges.  That's something I think a lot of Members need to work on as people often say "my hedges are killing me."   The are SUPPOSED to kill you!  Complaining about your hedges losing money is like complaining that you didn't collect your life insurance this week – you shouldn't WANT to win on your hedges – they are to protect you from disaster only.  

When we spend money to roll our hedges, we don't care about the loss on the hedges, we are locking in that net $73,000 gain as well as the potential $100,000 gain we have if our buy/writes and stock positions work out.  There are also other ways to hedge.  For instance, TM is way up already and we'd LOVE to get to own them for $55 so we aren't worried about the short $55 puts but we're up $5,000 on the $62.50 calls and we HOPE TM gets to $85, which would be up $22,500 less the net $1,500 we paid or $21,000.  

That, then, is our best realistic case but we can sell the $70 calls right now for $10 ($10,000) and that puts money back in our pocket now, protects us from an unexpected pullback and STILL gives us room to make another $7,500 if TM holds $70 through next Jan (now $76.47).  Rather than having $1,500 cash plus $5,500 in margin tied up in the trade, we have a net $4,500 credit which drops our net potential entry on the $55 puts to $50.50 as our worst possible case on TM.  

Is $16,000 in the hand (assuming we're over $70) worth $21,000 in the bush?  You're damned right it is – especially as that then becomes a position we don't have to hedge and, since we generally hedge about 1/3 of our upside – that's saving us $7,000 of hedges – a no brainer!  

We'll take an official look at hedges for this portfolio during the week – meanwhile, it's important to think about WHY we hedge and what we hope to accomplish.  That's how we keep our portfolios on track.