How to Become a Millionaire by Investing $700 per Month – Part 4/360

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November finished with a bang!

Powell spoke yesterday and indicated the Fed may slow their pace of tightening as soon as the next meeting and it wasn’t news – it was exactly what we expected – but it made the markets happy and now the Dow is only down 5% for the year.  This doesn’t affect our slow, steady investing strategy for our $750/month Portfolio, which began on August 25th and, as of last month’s review, was down 0.7% with $2,100 invested.  

Our goal in this portfolio is to show investors how to use slow, steady, simple options strategies to amass over $1M over 30 years by investing just $700/month ($252,000).  If you can apply this discipline in your early working years – your retirement will be a breeze.  

Our goal is to make 10% a year on our investments and, though it has only been 3 months – the portfolio is up 9.3% already – so we’re back on track.  No dividends were paid out in the last 30 days but Annaly Capital (NLY) did make a nice recovery after reverse-splitting and it’s very hard to stay mad at them when they pay out $3.52 per $21.67 share (16.24%) in annual dividends.  

AT&T (T) has gained about $1 this month and the short puts we sold on Chimera Investment (CIM) are already up 23.4% ($75) in their first month – as we caught a nice bottom with our entry. 

$700 Portfolio - Dec 1 2022

The key to this strategy is picking the right stocks in the first place.  Fortunately, we are Value Investors – it’s what we do…  We would rather have our stock selections stay low long enough for us to accumulate at least 100 shares – which is the point at which we can begin to sell options and I do expect us to be rangebound into next quarter – despite yesterday’s little pop.  

Now, we have another $700 we can put to work and we are fresh off picking our 2023 Stock of the Year, which is Yeti Holdings (YETI), but YETI is a $45 stock (now that we popped it 7% yesterday), so a bit much for this portfolio at this stage of our process.  

HOWEVER, we did have some good finalists including the very reasonable Energy Transfer (ET) at $12.54 and SoFi Technologies (SOFI) at $4.83.  While I do love SOFI as a speculative investment, ET pays a whopping $1.06 (8.4%) annual dividend and we are just $1,254 away from having 100 shares and being able to sell the 2025 $10 calls for $3.30, which would drop our net to $924 – essentially this month’s investment.  

Once we are covered, we’ll still have $476 to spend next month while we can expect $106 in dividends from the ET shares x 2 years ($212) and another $76 when called away at $10 in Jan 2025 (unless we roll the calls, which is likely) and that’s $298 (32%) back on our net $924 investment over 2 years.  

Is that going to be the best use of our $700 this month?  SOFI is $4.83/share but we can sell the 2025 $5 puts for $1.85 and that would give us a net entry of $3.15 – 35% below the current price.  So, over $5, that would clearly make us 35% in 2 years but really we could sell 2 for $390 and that would tie up $630 in margin so our return on margin would be 62% with our worst case being that we own 200 shares of SOFI at a 35% discount.

OR, we could buy 100 shares of SOFI for $483 and sell 1 2025 $4 call for $2.40 ($240), which is a ridiculous premium due to more people than me thinking SOFI is way too cheap.  We can pare that with 1 short 2025 $5 put at $1.85 ($185) and our net cost of 100 share is $58 and we’re tying up $500 in margin (assignment risk) and, if we get called away at $4 we make $342, which is 61% of $558 cash and margin. 

If we could sell 2 of them, them I’d do it that way but we don’t have the margin for it so let’s be a bit more aggressive and sell the $5 calls for $2.07, which raises our net by $33 but gives us a potential $409 profit at $5 out of $591 cash and margin, so a 69% potential return in two years. 

That would be the winner except for the fact that SOFI doesn’t pay a dividend – so why should we pay $483 to own the stock when we could, instead, set up an artificial position using options.  So our $700 play on SOFI will be:

    • Buy 5 2025 SOFI $3 calls for $2.85 ($1,425)
    • Sell 5 2025 SOFI $5 calls for $2.07 ($1,035) 
    • Sell 1 2025 SOFI $5 puts for $1.85 ($185) 

The net of this spread is $205 and we need $500 in margin so $705 cash and margin (we had $58 left last month, so we’re good) and this is a $1,000 spread at $5 that is almost entirely in the money to start.  So now, using the same amount of cash and margin that we hoped would make us $400 at $5 in 2025, we are now potentially able to make $795 against $705 in cash and margin – that’s 112%!  

Meanwhile, let’s not take the rally too seriously until we see what sticks next week.  Powell made some nice noises yesterday and that caused the Dollar do drop 2% and the markets generally move 2x inverse to the Dollar over the short-run and, so far, it’s a very short run:

Cartoon of the Day: Volcker to Powell

See it’s all very logical…

 

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Good Morning.

Good morning!
Our holiday shopping has been and will be low key, almost all online, most things are on sale. My kids are opposed to fast fashion for environmental reasons. They will still get a few things. In fact this year they are rejecting Xmas gatherings and only want a solstice party. I don’t go to malls but I did go pick up some toothpaste the other day. I was surprised to see my usual go from $6 to $9.50. I guess PG is doing well.

Solstice party sounds great!

hi phil could you remind me of the nasdaq bounce lines corresponding to s and p 4160 and 4320
thanks

Phil-MO hasn’t been mentioned in a while. I have 10- 2024 uncovered 40 calls at 7.66 net from an old 45/55 BCS that I rolled down . I am leery about rolling to 2025 and/or doubling down out in time because of the future of the tobacco industry. Also have the 2024 45 short Puts @5.33. Would appreciate your opinion. Thanks

Phil,
Would like help in understanding comments from Dollar General (DG) CEO “that supply chain constraints led to a $40m increase in supply chain costs” whereas physical merch inventories reportedly increased by 28% resulting in an eps miss of 8% (2.33 vs 2.53 expected), whereas sales actually grew by 11%.
#1, If they were short on merch, how did sales increase 11% and, #2, how did selling more stuff cause inventories to increase especially with supply chain problems ?
TIA

I suppose you could say the same about BIG BIg Lots. Their CEO is also 51 years old

Seeing some headwinds for BX. I always thought as largest asset mgr. with almost 8 trillion AUM they had a large moat. UPDATE 1-Florida pulls $2 bln from BlackRock in largest anti-ESG divestment

BlackRock, Inc. (NYSE:BLK) insiders sold US$81m worth of stock, a possible red flag that’s yet to materialize
Blackstone limits withdrawals at $125bn property fund as investors rush to exit’ – Financial Times ( Mon Traded REIT
*VICI Properties to Acquire Remaining 49.9% Interest In MGM Grand Las Vegas And Mandalay Bay Joint Venture From Blackstone Real Estate Income Trust For ~$1.27B, I think that was a 5BB stake at one time.

Phil/BNN: Nice job on the show!

RKT mentioned in our Nov15th post. Today a trader bought 12,000 March $12 calls for about .20 -.25 and sold 6,000 $6 puts for .26 or .26

interesting

CNN The San Francisco Board of Supervisors voted 8-3 Tuesday night to approve a controversial policy that would allow police to deploy robots capable of using lethal force in extraordinary circumstances.

is this the beginning of Robocop or Terminator? to see what could go wrong, just ask Hollywood

oh dont forget I,Robot starring Will Smith