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Income Portfolio – Still Selling in May and Going Away

Last month, we decided we were going to sell in May and go away in our special update (regular update was here). 

We had turned bearish on the market by the 12th, perhaps a little early but it gave us plenty of time to make good exits and get our prices.  Since our Income Portfolio was running 100% ahead of schedule and more like 250% counting the unrealized gains from our buy/writes as the market zoomed higher on us, we decided it would be good to go back to cash – especially as it would be fun to build a brand new Income Portfolio for 2012 that our newer Members will be able to benefit from following as well as it is, by far, our most popular virtual portfolio.

We're not cashing it all out as some positions still need to run their courses, but we won't be upset to be cashed out on some so we covered conservatively in anticipation of the pullback that just began last week.  We had $97,716 in realized (albeit virtual) gains as of our March 10th update – not bad after 10 months with a $500K portfolio that was only looking to take out $4,000 a month!   

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. 

This month was unusual as we had quite a few action items, mostly per the Special Update, the following positions were closed:

  • 10 GE Jan $17.50 puts sold for $2.10, closed at now $1.30 – up $800
  • 20 RIMM 2014 $22 puts at net $3.52, closed at $10.10 – down $13,160
  • 3,000 NLY .55 dividend paid on 3/28 – up $1,650
  • 10 TITN March $22.50 puts sold for $4.50, expired worthless – up $4,500
  • 1,500 NYB at net $8.70, out at $10 – up $1,950
  • 10 TM Jan $62.50 calls bought for $6.50 ($6,500), out at $23.20 – up $16,700
  • 1,000 CSCO .08 dividend paid on 4/3 – up $80 

That's a very nice $12,520 of cash generated this month, now $110,236 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
  • 20 HCBK July $7 calls sold for .30 ($600), still .30 – even 
  • 15 GE April $19 puts sold for .55 (-$825), now .25 – up $450
  • 15 GE April $19 puts sold for .45 (-$675), now .35 – up $150
  •      We were just playing for the cash so we're done with these on expiration day.  We'll stop the puts at .45 and leave the calls if stopped out.
  • 15 HPQ Jan $30 puts sold for net of $2.23 (-$3,345), now $6.50 – down $6,405
  • 10 HPQ Apr $24 calls sold for .90 (-$900), now .72 – up $180
  •      These are meant to be rolled if over $24 at expiration, at the moment, the May $25 calls are .70 so that's our expectation.  The purpose here was to offset some of the short put losses.  
  • 15 CCJ Jan $20 puts sold for net $2.17 (-$3,255), now $2.70 – down $795
  • 20 RIMM Jan $17.50 calls sold for $1.65 (-$3,300), now $1.10 – up $1,100
  • 20 RIMM Jan $17.50 puts sold for $5.80 (-$11,600), still $5.60 – even
  • 20 IMAX Jan $22.50 puts sold for net of $4.50 (-$9,000), now $3.50 – up $2,000
  • 10 IMAX Apr $27 calls sold for $1.30 (-$1,300), now .05 – up $1,250 
  •      Should expire worthless
  • 30 FTR Jan $7.50 puts sold for $1.30 (-$3,900), now $3.60 – down $6,500
  • 30 FTR April $4 calls sold for .50 (-$1,500), now .15 – up $1,050
  •      Selling 30 Aug $4 calls for .40 ($1,200) and cancelling the Apr $4 calls on expiration day.
  • 20 GLW Jan $17.50 puts sold for $2.40 (-$4,800), now $4.40 – down $4,000
  • 30 NLY Jan $15 puts sold for net $2.43 (-$7,290), now $1.13 – up $3,900
  • 10 ECA 2014 $20 puts sold for $4.60 (-$4,600), now $5.10 – down $500 
  • 20 AGNC Jan $30 calls sold for $1 (-$2,000), now .90 – up $200
  • 20 AGNC Jan $25 puts sold for $1.45 (-$2,900), now .97 – up $960
  • 15 NYB Jan $10 puts sold for .40 (-$900), now .25 – up $225

Down net $8,035 is $11,875 better than last month as we got rid of our old RIMM short puts (taking the realized loss) and HPQ coming back a bit.  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 $20.49, 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 $15.70 – .55 dividend expected 6/27 ($1,650)
  • 2,000 AGNC at net $27.65, now $30.11 – $1.25 dividend expected 6/5 ($2,500).
  • 3,000 FTR at net 6.29, now $4.12 – .10 dividend expected 6/7 ($300)
  • 1,000 CSCO Jan $17.50 buy/write at net $11.92/14.71, now $19.85 – .08 dividend expected 7/3 ($60)
  • 1,000 HCBK at net $6.83, now $6.64 – .08 dividend expected 5/8 ($80) – down $190
  • 5,000 SVU 2014 $7 buy/write at net $2.29/4.64, now $6.41 – 0.088 dividend expected 5/28 ($440)
  • 1,000 RRD Jan $12.50 buy/write at net $6.78/9.64, now $11.92 – 0.26 dividend expected 5/3 ($260)
  • 2,000 SKX July $12 buy/write at net $7.15/9.58, now $13.18
  • 5,000 WFR 2014 $3/Jan $7.50 buy/write at net $2.42/4.96, now $3.54
  • 2,000 SONC Sept $7.50/$12.50 buy/write at $5.20/8.85, now $7.05
  • 3,000 HOLI July $10 buy/write at net .10/5.05, now $11.08
  • 1,500 HOV Jan $2/1 buy/writes at net .58/.79, now $2.00
  • 500 MT 2013 $15 buy/write at net $7.50/11.25, now $17.28 – 0.188 dividend expected 5/16 ($94)
  • 4,000 AA Jan $7.50 buy/write at net $5.43/6.47, now $9.85 – 0.03 dividend expected 5/3 ($120)
  • 2,000 F 2013 $10 buy/write at net $7.30/8.65, now $11.92 – .05 dividend expected 4/30 ($100)
  • 3,000 ACI 2013 $12.50 buy/write at net $7.50/10, now $9.99 – .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 $7.80 – up $3,100
  • 10 BRK.B Jan $50 puts sold for $4.40 (-$4,400), now .75 – up $3,650
  • 5 CAT Jan $80/95 bull call spreads at $6 ($3,000), now $11.10 – up $2,550
  • 5 CAT Jan $55 puts sold for $5.55 (-$2,775), now $1.05 – up $2,250
  • 10 ANR 2014 $25/Jan $40 calendar spreads at $4.90 ($4,900), now $2.30 – down $2,600
  •      There is no point to the Jan $40 caller at .10 so let's buy it back. 
  • 10 ANR 2014 $20 puts sold for $5.65 ($3,000), now $7.60 – down $1,650
  • 10 TM Jan $55 puts sold for $5 ($5,000), now $65 – up $4,350

Up a nice $15,660 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 11th 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 $5,840 in expected quarterly dividends. That's already almost 1/2 of our goal just from the dividends! Over the next year, our goal is to work our way up to $10,000 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 $23,360 a year, this is a portfolio you can be proud to leave in trust for your children or grandchildren – and we're only 11 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 $2.35 (down $30,850)
  • 50 SDS June $15 calls at net $6.54 ($32,700), now $1.35 (down $25,950)

Down net $56,800 is the cost (unrealized) of our insurance against our gains, which were $110,236 on positions we closed (you didn't think we got to keep it all, did you?) and $7,625 on positions in progress so net $61,061 after 11 months is 38% ahead of our planned $44,000. Keep in mind, this is a VERY CONSERVATIVE portfolio that is fully hedged.  

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 $117,000 gain (mostly realized) as well as the potential for another $100,000 gain we have if our buy/writes and stock positions work out.  SVU, for example, is looking good for $23,550 in profits that are not included, HOLI is on track for $29,700, etc.  So, after 11 months, we're well on track for over $200,000 in total gains – up 40% for the first year.  

We'll see how next week goes into expirations but we're so well-hedged that a dip won't really bother us – more like an opportunity to get more aggressive and transfer some of these trades to the new portfolio that will begin in June (after the May Holiday Weekend).  


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  1. Phil,
              Thoughts on buying ACI  at 9.99 w/ 4% yield and selling Jul 10 calls for $1.20 each. ACCI is below book value from what I can tell. Thanks!


  2. You will be hearing this a lot from me while the market is going down —-  Why would you buy ACI when BTU is on sale?  Not just BTU but any best of the best blue chip vs the also-rans of the sector.  There's a great article by Marin Katusa on the main page saying "Don't Believe Every Energy Dividend Story You Hear" that's a must read for all and, while ACI at 4% isn't breaking the bank – the point is now is not the time to chase dividends – now is the time to find the companies that can SURVIVE a crash.

    ACI has a p/e of 13 .5 and a forward p/e of 12.3 based on expectations that the price of coal will bounce and is ALREADY trading below it's 2009 lows.  BTU has a p/e of 8 and a forward p/e of 7 based on the same expectations and is at it's 2009 lows.  BTU also has good cash flow and just bought $2Bn of their own stock last Q (10%) at about $33 so you KNOW they think they are undervalued at $28 but that still doesn't mean they've found a bottom yet.  

    As I keep saying – CASH is King and now look where we are, we're able to buy the best coal company in America back at the 2009 panic lows.  If you were kicking yourself for not buying more stocks in the 2009 crash – now's your chance to do it again – but let's make sure we're at a real bottom first!  


  3. PHIL, Good morning! Looking forward to the NEW INCOME PORTFOLIO, as I am not in the current one and have mostly paper traded the majority of the regular virtual portfoilios. I continue to LEARN. THANKS!


  4. Phil, Since I am not in the INCOME PORT. Are there any trades that I should be part of? I remember a post about the $25K which, at the time, was down and the comment was this would be a good time to start in the $25K, and from then its been UP. So with that said, are there a few, or several positions, to take now or should I wait until JUNE for the next Income PORT.  Thanks


  5. This is not really a good time to start buying as there is much uncertainty.  I like the nat gas trade ideas from this weekend but nothing will be immune if we get a major sell-off.  

    I'd at least wait a few days to see how the beginning of May shakes out.  

    Cash is good!