Monday, October 31, 2011

Long Term Secular Bear? How to Play It?



If you look at the S&P chart for the last 10 years a couple of things stand out. First, 10 years out and we're about where we started. Second, the S&P has been been making lower lows and lower highs. I would not be surprised to see the S&P reach the lowest low before the beginning of the next secular bull market. Historically a bear is finished devouring it's prey when the P/E multiples of stocks are in the low single digits and everyone and her cosmetologist has sworn off stocks forever.

Financials usually lead us out of bear markets and into bull markets. Do you see that happening anytime soon?

This girl thinks the best way to play this market is to write in the money covered calls (or out of the money cash covered puts) on select Dividend Champions or commodity ETFs, picking off short term dividends and option premiums. I think income investors should be patient, build cash reserves and preferably enter positions when the herd is scared. 


Patience is a Virtue

There's powder in the keg; it's just not the right time to shoot the cannon. Most of the dividend growth stocks I want to invest in are trading near the top of their trade channels. I like to pull the trigger when the stock is in the bottom 25% of it's trade channel. We need a nice healthy dose of fear selling 'cause momma needs a new pair of shoes :)

Sage Investment Advice

This quote is taken from the mentor of a well known investment guru:

"The secret to investing and growing one's money is to earn small monthly amounts through options on large cap companies that pay a dividend, have strong balance sheets, good growth prospects and have options available."

Ooooh....that's some HOT advice :)



Profitable Trade: SLV Silver Miner ETF

The trade looks something like this:

 10/20/2011  15:43:21         Bought 200 SLV @ 29.6899                                       -5,947.97          
   
 10/20/2011  15:43:45         Sold 2 SLV Oct 28 2011 29.0 Call @ 1.49                       286.47            
 10/31/2011  10:18:09         OPTION ASSIGNED (SLV Oct 28 2011 29.0 Call)

 10/31/2011  10:18:09         Sold 200 SLV @ 29                                                    5,779.89

In 11 days we made $118.39 on an investment of $5661.50 or  2.1%, including commissions.This equates to an annual return of 69.7%.

Report Card: For those keeping track our success rate is at 100% since the inception of this blog although the sample rate of 2 closed transactions is admittedly rather small.


Friday, October 28, 2011

Profitable Trade: Realty Income (O) Covered Call

The trade with commissions is as follows:

10/4/11 Bought 100 shares of O - $3,034.27
10/4/11 STO 1 Nov 19, 2011 30 @1.75 - $164.23
10/28/11 Option assigned at 30 - $2979.95

At the time I bought Realty Income it was trading near the bottom of it's trade channel. We then sold an in the money call which I figured would get assigned. This call was assigned for the dividend. Realty Income pays a monthly dividend of 14.5 cents a share (and rising). I made $109.91 in 24 days or 3.83%, 58.24% annualized. I would have bought more but I have other Realty Income holdings and didn't want to get too heavily weighted in the REIT. Not bad for an in the money call...

BTW, here is a good article on Realty Income's future prospects.


Thursday, October 27, 2011

Trade continuation: GLD Gold ETF covered call

BTC 2 GLD Oct. 28 163's @ 5.15
STO 2 GLD Nov. 19 165's @ 5.95

This is another example of rolling out a short time period and having your cake and eating it too. GLD had a nice run up to ~169 and we were able to write new covered calls that allow us to participate 2 more dollars per share on the increase and bring in income of $80 per contract. This lowers our cost basis by .80 and provides .80 more downside protection. In addition the expiration date for these calls is only 3 weeks out.

I will only roll out a covered call if it brings in income. Chasing price increases and paying for that right brings Don Quixote to mind...

Trade continuation: SLV Silver ETF covered call

SLV has risen sharply in the last few days. I find it hard to resist rolling forward for a short period of time, getting a net credit and increasing the strike price so I can participate some more in the price increase. I had that opportunity today with SLV.

BTC 4 SLV Oct 28 32 Calls @ 1.71
STO 4 SLV Nov 19 33 Calls @ 1.92

This trade brought in $21/contract, lowers our cost basis, increases downside protection and allows us to participate more in the rise in price. With the market rising overall with the easing of Europe fears I'm not particularly excited about entering into new income positions.







Trade continuation: GDX covered call

GDX jumped up to 59 so I decided to continue this trade rather than close it out. The transaction now looks like this:

10/25 Bought GDX @56.72
10/25 STO GDX Oct. 28, 2011 56 Call @ 1.52
10/27 BTC GDX Oct. 28, 2011 56 Call @ 3.00
10/27 STO GDX Nov 19, 2011 56 Call @ 4.10

With the recent  rise in the market and precious metals, I'm not too excited about entering into any new income positions. I like to swoop in during fearful times, not euphoric times. I decided to take advantage of the herd's hopefulness and increase downside protection from $55.20 to $54.10 and bring in additional income of $110 per contract. This is a very conservative roll out as GDX is deep in the money.

If we get called out we get 3.4% in less than a month or ~45% annually. Not bad for a very conservative trade...




Tuesday, October 25, 2011

Paper Trade: GE Diagonal Spread

After the run up in the market lately I'm not too excited about any trades right now. While I'm waiting I'm going to paper trade a GE Diagonal Spread. GE was trading at 16.32 at the time of entry and my chart reading tells me that is trading near the bottom of the trend lines I've drawn.

BTO 3 Jan 19 2013 LEAPS 15's @ 2.77
STO 3 Nov 19 2011 17's @ .19

I'm a proponent of diagonal spreads, however, last time I had multiple active spreads, the Lehman debacle hit and I had to unwind quickly and painfully. This time I'm dipping my toe back in the water and waiting to swing at the fat pitch.

Note: it is Thursday morning 10/27 and GE is up to 16.97. I could sell the LEAPS for 3.05 and buy back the short calls for .22. That would be a profit of .25 per contract in 2 days or nearly 10%. I would most likely pull the trigger on this trade although we should start seeing some nice time decay on the short calls after the weekend.

Note: it is Friday morning 10/28 and GE has risen to 17.29. The LEAPS can be sold for 3.20 and Nov call can be bought back for .64. Both calls have moved about the same with the rise. If I tried to exit now it would not be a profitable trade. I'm going to check each call's delta.

Note: on Friday November 8 we could have BTC the Nov 19 17's @.05 with no commissions and then sold the Dec 21 17's @.31. GE was trading at ~16.30. the LEAPS was still ~2.77. This would have lowered our outstanding investment to 2.31. This is exclusive of commissions. I'm liking this paper trade a lot and light bulbs are going off. The only issue is that enhanced income strategies using Dividend Champions and covered calls and put selling is so much less volatile and it's hard to argue with their double digit returns. This trade, however, is like enhanced income on steroids.

Note: with GE dropping below 16 on the week of November 13, this trade would be tricky...sell the Dec 16's? Managing these trades take much more attention. The LEAPS is down to 2.47, our 17's would have expired worthless but new 17's only pay .10. The December 16's pay .39, the weekly 16 pays .12. Perhaps the monthly 16 would be the way to go? That would have brought in a total of 2 writes, .58 against our LEAPS investment of 2.77. Very interesting...


GDX Covered Call Trade

Bought GDX @56.72
STO GDX Oct. 28, 2011 56 Call @ 1.52

This in the money weekly option has only 3 days left before expiration. If it gets called out we'll make $80 per contract for 3 days on a $5520.00 investment. That's a 1.45% return for 3 days or 176.41% annually. These calculations are exclusive of commissions.

Precious metals seemed to have bottomed and began their ascent once again. We would prefer to get called out but if not we'll simply write next week's call of our choosing. If it really craters we might write a monthly call. We have downside protection on this 3 day  trade to $55.20.



Sunday, October 23, 2011

Weekly Options

I'm going to open this blog with a post about weekly options. For an income investor who sells options, the advent of weekly options is the greatest thing since sliced bread. For many option income strategies, time decay will be the option sellers best friend. In a weekly option, time value decays extremely fast. In addition, a new option can be sold weekly rather than monthly. (Of course some savvy traders buy and sell an option multiple times in a month as it moves through it's chart's price cycle.)