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Income Portfolio March Update – EZ Money!

Who says we're not bullish?

It's interesting how many people think we're bearish just because we talk about the problems in the economy and just because we don't buy into the market hype.  Yes, short-term, we expect a correction and so far – so wrong on that one but, long-term, I don't think we have ANY bearish plays and our largest portfolio, our virtual income portfolio, is 100% bullish (with hedges) and has been since day one.

As of Friday, our $25,000 Portfolio was down $7,500 for the year.  That's not good but that portfolio is supposed to be the aggressive carve-out of a more conservative $250,000-$500,000 portfolio like our income portfolio, which is long-term bullish and doing extremely well.   How well?  Up $73,792 in our first 9 months is an average of $8,199 per month generated off a conservatively invested $500,000 and double our goal of pulling a $4,000 monthly income without digging into our principal.  

This is the kind of set-up that my Mom and many of her friends need to do to supplement their not very generous Social Security checks but it's also using the same principle that applies to any long-term wealth-building strategy, utilizing our best long-term growth strategies combined with a concentration on generating an income collecting dividends and selling short-term options to create our own "dividend" stream on ordinary stocks.  Please see previous posts in our Virtual Portfolio section for our main strategy discussions – this is just an update. 


Prior to making our moves, we had $87,042 of realized gains (positions we had cashed in) against $13,250 of unrealized losses for a $73,792 net gain in our 9th month so averaging a bit better than $8,000 a month and, as I said above, well ahead of schedule. The following positions were closed since then:

  • 20 DIA Feb $120 puts sold for $1.60, expired worthless – up $3,200
  • 20 SDS Feb $18 calls sold for .98, expired worthless – up $1,960
  • 2,000 shares of AGNC paid a $1.25 dividend on 3/5 – up $2,500
  • 3,000 shares of FTR paid a .10 dividend on 3/7 – up $300
  • 1,000 shares of HCBK paid a .08 dividend on 3/8 – up $80
  • 5,000 shares of SVU paid a .088 dividend on 2/28 – up $440
  • 500 shares of MT paid a .188 dividend on 2/16 – up $94
  • 3,000 shares of ACI paid a .11 dividend on 3/1 – up $330
  • 5 HPQ Feb $26 calls sold for $1.38, expired worthless – up $690
  • 10 RIMM Feb $16 calls sold for $1.08, expired worthless – up $1,080

That's a very nice $10,674 of cash generated this month, now $97,716 in realized gains – but let's not get too excited as our hedges got clobbered (we'll get to them later).   Our open short positions are:

  • 20 HCBK July $9 puts sold for $1.45 (-$2,900), now $2.10 – down $1,300
  • 10 GE Jan $17.50 puts sold for $2.10 (-$4,200), now $1.38 – up $720
  • 15 HPQ Jan $30 puts sold for net of $2.23 (-$3,345), now $7.08 – down $7,275
  • 15 CCJ Jan $20 puts sold for net $2.17 (-$3,255), now $1.88 – up $435
  • 20 RIMM 2014 $22 puts at net $3.52 (-$7,040), now $10.27 – down $13,500
  • 20 IMAX Jan $22.50 puts sold for net of $4.50 (-$9,000), now $2.60 – up $3,800
  • 30 FTR Jan $7.50 puts sold for $1.30 (-$3,900), now $3.50 (down $6,800)
  • 20 GLW Jan $17.50 puts sold for $2.40 (-$4,800), now $4.60 (down $4,400)
  • 30 NLY Jan $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 .35 (up $4,150)
  • 10 ECA 2014 $20 puts sold for $4.60 (-$4,600), still $4.60 – even 

Down net $19,910 is $4,500 worse than last month with HPQ and RIMM killing us (owning more FTR for net $6.20 is not a tragedy).  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 $23.57, 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 $16.16 – .62 dividend expected 3/27 ($1,860)
  • 2,000 AGNC at net $27.65, now $29.50 – $1.25 dividend expected 6/5 ($2,500).
  • 3,000 FTR at net 6.29, now $4.42 – .10 dividend expected 6/7 ($300)
  • 1,000 CSCO Jan $17.50 buy/write at net $11.92/14.71, now $19.80 – .06 dividend expected 4/3 ($60)
  • 1,000 HCBK at net $6.83, now $6.79 – .08 dividend expected 5/8 ($80)
  • 5,000 SVU 2014 $7 buy/write at net $2.29/4.64, now $6.42 – 0.088 dividend expected 5/28 ($440)
  • 1,000 RRD Jan $12.50 buy/write at net $6.78/9.64, now $12.94 – 0.26 dividend expected 5/3 ($260)
  • 1,500 NYB Jan $10 buy/write at net $8.30/9.15, now $12.99 – 0.25 dividend expected 5/3 ($375)
  • 2,000 SKX July $12 buy/write at net $7.15/9.58, now $12.62
  • 5,000 WFR Jan $7.50 buy/write at net $3.85/5.67, now $3.87
  • 2,000 SONC March $10/$12.50 buy/write at $6.95/9.72, now $7.29
  • 3,000 HOLI July $10 buy/write at net .10/5.05, now $10.07
  • 1,500 HOV Jan $2/1 buy/writes at net .58/.79, now $2.86
  • 500 MT 2013 $15 buy/write at net $7.50/11.25, now $19.71 – 0.188 dividend expected 5/16 ($94)
  • 4,000 AA Jan $7.50 buy/write at net $5.43/6.47, now $9.81 – 0.03 dividend expected 5/3 ($120)
  • 2,000 F 2013 $10 buy/write at net $7.30/8.65, now $12.58 – .05 dividend expected 4/31 ($100)
  • 3,000 ACI 2013 $12.50 buy/write at net $7.50/10, now $12.08 – .11 dividend expected 6/1 ($330)
  • 15 OIH Jan $36.67/43.33 bull call spreads at $3.33 ($5,000), now $4.30 – up $1,455
  • 15 OIH Jan $33.33 puts sold for $3.83 (-$5,750), now $2.00 – up $2,745
  • 10 BRK.B Jan $70/82.50 bull call spreads at $4.70 ($4,700), now $8.20 – up $3,500
  • 10 BRK.B Jan $50 puts sold for $4.40 (-$4,400), now .95 – up $3,450
  • 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 .55 – down $2,300
  • 5 ANR Jan $25 puts sold for $6 ($3,000), now $9.50 – down $1,750
  • 10 TM Jan $62.50 calls bought for $6.50 ($6,500), now $22.40 – up $15,900 - We are done with these as $85 was goal (close enough)
  • 10 TM 2013 $55 puts sold for $5 ($5,000), now $1.20 – up $3,800

Up a very nice $31,950 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 10th 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 10 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 $124 puts at $8.52 ($42,600), now $2.85 (down $28,350)
  • 50 SDS June $15 calls at net $6.54 ($32,700), now $1.60 (down $24,700)

Down net $53,050 is the cost of our insurance against our gains, which were $97,716 on positions we closed (you didn't think we got to keep it all, did you?) and $31,950 on positions in progress so net $76,616 after 10 months is 91% ahead of our planned $40,000. Keep in mind, this is a VERY CONSERVATIVE portfolio that is fully hedged.  As I said last month, we were going to spend money to roll up those hedges and we did, as the DIA puts were $112 last month and the SDS calls were $18.

That now puts us in a position where we can add more bullish plays if the market keeps going higher – as well as positioned to sell more short puts and calls against our long hedges.  I identified my 10 favorite bullish trade ideas 2/22 and, for more aggressive players, the idea was to add one per day that the S&P was over 1,360.  We also updated and summarized those picks on 3/2 and, if the markets hold up next week, we may officially add some to this portfolio as well.  

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 $130,000 gain as well as the potential for another $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.  In fact, let's take the calls off the table at this point for $22.50.  

Depending on how the next two weeks go, we are very likely to be making some other adjustments.  There are still plenty of nice stocks we can pick up relatively cheaply (CSCO, GE, more ANR, mor NLY, our top 10…) and some, like TM, have run their course.  We've made 3 trades in 6 months and I never promised we'd never have to work on our retirement portfolio – just that we'd try not to!  

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    Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

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  1. About a month ago a newbie (like me) asked what stocks were recommended….I'm looking at these stocks…being from Canada I'm not as familiar with American stocks and although I don't have $500 K to invest I will be choosing among these for Phils buy/write strategy.Any Canadians out there?

  2. edgewater/
    yes, Vancouver… joined last spring – you?

  3. Phil / tab – it would be useful to have a separate tab for this.  And also when you make a post in your main daily section, it automatically appears in the income portfolio tab.  would make it much easier to track.  so somebody could just follow a dedicated income portfolio idea stream if they wanted to.   

  4. edgewater/cdn stocks
    our dividend tax credit still applies to cdn stocks that trade on the NYSE in US funds, but I have found better liquidity and depth on the TSE for large cap Cdn stocks.  Div tax credit does not apply on US or foreign firms.
    If, for example, you have $100k to invest, then follow the $500k income portfolio and just take a 1/5th position, and if you follow some of the $25k portfolio trades, again, take a 1/5 position.  Just keep the ratio relatively constant to whatever your portfolio amount is.

  5. Terrapin/Tabs,
    what about a weekly (weekend) or monthly portfolio summary like we have for apple, $25k and $5k?  We sure don't need daily on that but it would help people focus and remind them of the larger parts of their portfolio.

  6. Terrapin,
    of course I was speaking of an Income Portfolio position summary

  7. The purpose of these portfolio is to LEARN how to trade for yourself.  It is not healthy to keep making more and more ways where people focus on specific trades rather than learning HOW to trade and adjust positions.  First of all, not everyone comes in at the same time and second of all, not everyone has the same amount to invest and third of all, there are hundreds of other stocks to trade – this just happens to be the selections we made at the time we built this portfolio.  

    If the market does turn down, I'm likely to cash this whole portfolio in and start another after 12 months as this one is well set up for another year.  Constantly focusing on some few trades takes away from what's really important – identifying new opportunities.  As I noted above, we've only added one position since November but we've discussed  dozens of trades that were appropriate for people's long-term portfolios – this one is just full.  

  8. Yes, interesting portfolio. This is how I first became interested in the PSW site, when someone recommended to me that I should look at Phil's income portfolio articles just after this portfolio was started. At first the whole thing barely made sense to me, especially the hedges, but now I understand it very well. I haven't tried to copy it, but when I look at my portfolio now, it certainly holds several of the same names. The portfolio has been very useful as a learning tool.

  9. FTR:  Phil, the dividend has been cut to $0.10 per quarter. I think you had it right in your current payment at the top of the post, but reverted to the old, higher dividend level later in the post.

  10. Thanks Phil…lots to learn.I thought I would make a few trades with you before venturing out on my own.First time trading options.Waiting for a pullback before placing my first buy/write and hedging.
    Vancover…I've been a voyeur for 3 months and took the plunge  a week ago to become a basic member.I saw Phil on BNN and knew I had to learn about options.

  11. Love this portfolio and the especially the spirit of it, because Phil originally made it for his now independent mom and all his retired relatives who are ailing under the reckless policies of the Fed and must grasp for any sort of yield despite the risks that come with it.  There are so many retirees out there are looking for some sort of a beacon to navigate their way safely… hopefully this style of portfolio management and future income portfolios like this can provide that stabilizing guidance.