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Posted by Martin May 26, 2020
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“The stock market fantasy will end…”


Will it?

This is what I keep seeing lately in media and opinions of all sorts of people. While it is true that the market seems detached from reality, the problem is elsewhere. One day, we may see another leg down (or maybe not) but those who bet for it to happen soon may become broke long before it actually happens… if it happens.

 
Optimism
 

Here are the reasons why I disagree with all the gloom and doom predictors:
 

1) Faith
Today, most of the market trades on faith. Like it or not but it is a reality. It is the same as with dollar. Since I have ever been aware of a currency named “the US dollar” for the first time in my life, I kept people predicting its demise, collapse, and being substituted by other, more reliable currency, such as Russian ruble, German Deutche mark (when it existed), Euro, or Chinese yuan… Fast forward some 50 years, and we still have the US dollar around and it still is a world reserve currency no matter what the US government does and have been doing to it for years, and no matter how irrational you may think FED and Treasury is. People still believe in dollar despite gloom and doom predictors foreseeing its inevitable bankruptcy… The stock market is same. As long as people/investors believe what FED and other players do in this market/economy, it will not crash just because you think it is irrational.
 

2) FED
And yes, FED plays a very significant role in all this. Powell has been signalling all day long that they will do anything and everything needed to keep the music playing. They are literally converting the stock market into the US T-bills… No matter what you and other players do in the market and to the economy, you are guaranteed a bailout. The FED will not let your investment go under. Yes, some individual stocks may go down, but the overall market will be let floating with as much hot air as possible. You do not like it? Well, me neither. I think it distorts the very prime function of the market but, hey, if it makes me money with less risk, I will go for it with absolutely no objections. And if FED makes me believe they will protect my investment, great. I will deploy money fullhandedly… And millions of other investors, traders, hedge funds, and big houses believe it too. We are back to the “faith” thing.
 

3) Comparing today’s market with today’s economy
It is a known phenomenon about the market that it is “predicting the future of economy” up to 6 months ahead. It is not a true prediction of the economy as no one, even the market itself, can predict the future. This means that in fact, the market is looking at the future economic expectation of where the economy might be 6 months from now. Investors, mainly those predicting the next crash seem to be forgetting this. If you think that the market is irrational because the “economy is in a very bad shape, we are in recession, we are going to crash, we will have a huge unemployment…” and who knows what else and so the market is manipulated and will crash soon, then you too fell to this same trap of comparing two incomparable time frames. Today’s market no longer cares. All this doom and gloom you are seeing coming – 25% unemployment, 34% GDP loss, crashing EPS… all that was already priced in the market back in March when we lost almost 40% of the market value. The market no longer cares about this. What it cares about is what the future might look like. We are reopening our economies – great, great news!! Companies will be hiring again, consumers will be spending again, recovery will be faster than we expected… All the gloomy economy suddenly is not that gloomy. Then add to it, that the unemployment is not 25% but only about 14% and some… Another great news! Recent earnings were not down more than 25% as expected and GDP didn’t drop by 35% as predicted. Another awesome news! Is it bad? Yes, it is, but not as bad as we thought. Add vaccine on top of it and music will go on.
 

Will we crash again?
Maybe. But not before the optimism of better bad than worst future fades away and market realizes (again), that all the great and bright future economic expectations were too optimistic. Then we will correct that optimism again. Remember, the market doesn’t know where the economy will be. It only expect it to be at some point in the future. If that expectation was wrong (too optimistic) we will correct. If it was still too conservative we will, shoot even higher. It is all perception. And fighting that perception can be costly. So far, optimism rages the Wall Street and it may take years before it goes away.
 




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Posted by Martin May 23, 2020
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How to boost your investing income and portfolio size


The ideas presented here are not new but they are just less known. There is a great paradox when investing in the stock market for the purpose of creating a personal wealth and financial independence. Advisors and gurus tell us that we must invest a lot of money and rather very early in your lifes to retire comfortably.

So, how much money have you been told to save of the course of your lifespan? Susan Orman not so long ago advocated that in order to retire comfortable, people will need $5 million or even $10 million saved in their retirement accounts! That is ridiculous!

And the paradox?

When we are young and plenty of time to invest and build our wealth, we do not have enough money to invest.

When we have enough money to invest as we progressed in our professional careers, we do not have enough time for the market to grow our wealth.

Due to this paradox, we only capture a small potential of the market wealth. We save less and give the market less time to grow.

Fortunately, there is a way to change it!

Well, at least, improve it. You can adopt leverage to your portfolio and invest more money when you have little money, diversify, and leverage your portfolio over time.

Ian Ayres and Barry Nalebuff wrote an excellent book about this less known strategy: Lifecycle Investing. It is an excellent approach to safely leverage your investments in your 20’s without endangering your savings. I myself am implementing these strategies in my own portfolios.

The greatest strategy I use and consider an excellent idea (derived from the book) is to use LEAPS calls to capture the market move with less money. Let’s say, if you buy 100 shares of SPY index (typically advocated by Warren Buffett), you will need $29,544 at the current market price. How many starters do have this amount of money? I didn’t have it. I still do not have that much.

Even if you decide to use margin it will cost you $14,779 to buy 100 shares of SPY. Still beyond reach of many 20 years old today. And given that many Americans do not have enough saved (average is $60,000 in the retirement accounts) it is beyond reach for many to pust that much money into SPY.

If however, you buy 3 years LEAPS call contract, it will only cost you $4,210 (when you buy 290 strike in the money call). So, you control 100 shares of SPY for only $4,210 !! A brilliant idea! And when do you think the market will be in three years? A high chance is, it will be up. Significantly up! If the market (SPY) goes up to $400, you will make $6,790 on your $4,210 investment in three years! A nice 161% ROI compared to only 23% if you bought shares out right.

But what if the market tanks and it takes for more than 3 years to recover in order to make any money on your calls? What if the calls end out of the money and lose all the value?

Then you implement covered calls strategy against those LEAPS you own. You keep selling monthly (or even shorter) covered calls to lower your cost basis. If done correctly, before the end of the LEAPS you will own them for free. And then you can decide to let them go and expire them or if there is any value (mostly there will be a value), close them for additional profit or roll them up and into the next 3 years term…




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Posted by Martin May 23, 2020
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Trades as of May 23rd 2020


OPEN OPTIONS POSITIONS
 

June 2020 expiration
PPL – June 19 (monthly) pmcc 29.00 call for +0.26
GILD – June 19 (monthly) bull put spread 67.50/65.00 puts for +0.40
AMLP – June 12 (weekly) 5.50 puts for +0.70
BAC – June 19 (monthly) 19.00 puts for +0.41
HP – June 19 (monthly) 22.5 covered call for +0.35
KBE – June 19 (monthly) poor man’s covered call 30 for +1.07
KBE – June 19 (monthly) 26 naked put for +0.61
SPY – June 19 (monthly) poor man’s covered call 299.00 call for +2.37
T – June 19 (monthly) put butterfly 29/26/23 for -0.55
CHK – June 19 (monthly) 17 naked call for +0.12 (+2.37)
SIG – June 19 (monthly) 8.00 naked puts for +0.40
 

July 2020 expiration
AMLP – July 17 (monthly) 5.00 covered calls for +0.45
SIG – July 17 (monthly) 11.00 covered calls for +0.70
 

September 2020 expiration
MDP – September 18 (monthly) 25.00 put for +1.25
 

December 2020 expiration
BA – December 18 (monthly) bull put spread 350/340 puts for +6.00
BA – December 18 (monthly) bear call spread 365/375 calls for +2.33
 

January 2021 expiration (LEAPS)
PPL – January 15 (monthly) 30 call for -5.59
 

January 2022 expiration (LEAPS)
KBE – January 21 (monthly) 25 call for -10.26
 

December 2022 expiration (LEAPS)
SPY – December 16 (monthly) 285 call for -35.57
 

EXPIRED OPTIONS POSITIONS
 

HP – May 15 (monthly) 20 covered call for +0.21 – WINNER
 

ROLLED OPTIONS POSITIONS
 

SPY – May 26 (weekly) poor man’s covered call 295.00 call for +3.83 (-3.79)
CHK – May 29 (weekly) 14.5 naked call for +0.75 (-1.89)
CHK – June5 (weekly) 15 naked call for +0.66 (-2.25)
 

CLOSED OPTIONS POSITIONS
 

AMLP – July 17 (monthly) 5.00 covered calls for +0.45 (-0.65) – LOSER
PPL – June 19 (monthly) pmcc 29.00 call for +0.26 (-0.05) – WINNER




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Posted by Martin May 17, 2020
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Poor Man’s Covered Call (KBE)


BTO 1 KBE Jan21 2022 20 strike call (LEAPS) for -10.26 debit
STO 1 KBE Jun19 30 strike call for +1.07 credit
Total cost -9.18 debit
 

The trade has been adjusted as the prices jumped up overnight significantly. We opened the LEAPS call for 10.26 debit and short call for 1.07 credit. Even adjusted trade meets our criteria.
 

Poor Man’s Covered Call (PMCC) trade is a cheap version of a regular buy-write covered call.

When using a covered call you typically buy 100 shares of underlying stock. In a margin account, buying 100 shares of KBE would cost you $1,333.08 (see first picture) if you buy 100 shares at $26.66 a share. Buying 1 call LEAPS contract would only cost you $8.35 dollars. Thus you control 100 shares of a stock for less money. Also, your purchase price (if you decide to exercise your calls) could be less than when you buy at the current market price. In this trade, we selected 20 strike for the LEAPS. There is a reason for it. I will try to explain why I am selecting strikes the way I did.

 
KBE
 

I created a spreadsheet which helps me to quickly calculate metrics I need to see in order to open this trade. The most important metric is the “Initial Setup Criteria” row. This tells me whether the trade is doomed to failure or make money in case it gets assigned right away. The goal of this trade is to own the LEAPS for some time (and eventually make money as the stock goes higher) but if let’s say I open this trade on Monday and on expiration Friday the stock goes above the short call strike, it will get exercised (or if it is exercised early). If this row doesn’t meet the criteria and the trade gets assigned early, you lose money.

 
PMCC KBE
 

So what is this criteria about? It is basically what you get if assigned and that number must be larger than what you paid for LEAPS. If I get assigned, i will receive the difference between the strikes (30 short call minus 20 long call = 10 dollars, or $1,000) plus premium from the short call, in this case 0.35 (or $35). Total premium I would receive would be 10.35 in this trade. We will pay only 9.70 for the LEAPS, so we will get more if we get assigned early than what we paid and thus this trade will be profitable.

Another requirement is that the LEAPS delta needs to be larger than 0.75 so the option price will move as close to the stock price as possible. That is why we chose 20 strike. Another reason was that if we chose 25 strike, the trade initial setup would fail:

The delta would be below 0.75
We would receive less than the cost of LEAPS
You may say, let’s raise the short strike from 30 to 31 or even to 32, but there is almost no premium and it would not help us either. Even with a higher short call strike,m this trade would still be a loser if assigned early or at expiration.

 
PMCC KBE
 
PMCC KBE
 

So, now that I have the strikes selected, and I am happy with the trade, I placed an order for Monday morning. If the short call expires worthless in June 19, we will sell a new call and keep selling calls and lowering our cost basis. Also, if KBE starts going higher, our LEAPS will be making money too. A pre-crash price of KBE was in average at $45 a share, so let’s say, the stock will go up in the next two years and lands on $45 a share. We would be able to sell our LEAPS for $1,834 dollars (intrinsic value between the future price $45 a share, and current price 26.66 a share). Our cost was $7.50, or $750, and thus our profit would be $1,084 on the LEAPS. But let’s say, we manage to sell short calls for average $50 premium every month. That would generate additional $1,000 in premiums in those next two years (I didn’t add the first month and the last three months to the equation as if this trade works, I will roll LEAPS 3 month prior to expiration, so it would be $50 premium x 20 future months). Our total profit would be $2,084. It would be 278% annualized return…

Hope this helped to explain this trade. Let me know, if you have questions.




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Posted by Martin May 16, 2020
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Trades as of May 15th 2020


OPEN OPTIONS POSITIONS
 

May 2020 expiration
SPY – May 26 (weekly) poor man’s covered call 295.00 call for +3.83
 

June 2020 expiration
PPL – June 19 (monthly) poor man’s covered call 29.00 call for +0.26
GILD – June 19 (monthly) bull put spread 67.50/65.00 puts for +0.40
AMLP – June 12 (weekly) 5.50 puts for +0.70
BAC – June 19 (monthly) 19.00 puts for +0.41
 

July 2020 expiration
AMLP – July 17 (monthly) 5.00 covered calls for +0.45
SIG – July 17 (monthly) 11.00 covered calls for +0.70
 

September 2020 expiration
MDP – September 18 (monthly) 25.00 put for +1.25
 

December 2020 expiration
BA – December 18 (monthly) bull put spread 350/340 puts for +6.00
BA – December 18 (monthly) bear call spread 365/375 calls for +2.33
 

January 2021 expiration (LEAPS)
PPL – January 15 (monthly) 30 call for -5.59
 

December 2022 expiration (LEAPS)
SPY – December 16 (monthly) 285 call for -35.57
 

EXPIRED OPTIONS POSITIONS
 

May 2020 expiration
HP – May 15 (monthly) 20 covered call for +0.21
 




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Posted by Martin May 16, 2020
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Should you be investing now?


TDA
 

No crisis, slump, selloffs, recessions, and even depressions last forever. The markets eventually recover so when you start buying and adding when the markets are low due to panic and media hysteria, you will end up ahead of the game at the end.

Even in 1930 depression, which lasted some 20+ years (if you bought at pre-crash highs) and you added or bought during the market slump you still got better off.

People like to compare 1930 market with today’s market and freak out about a prospect of a prolonged recession/depression and future lost decades, but they are comparing something which is not comparable.

It is the same as with this covid-19 artificial hysteria being compared to 1918 flu pandemic. But again, here you are comparing uncomparable. How can you compare a healthcare system of 1918 with capabilities and capacities of healthcare 2020?! In 1918 we didn’t even have penicillin! Ventilators? Forget it! Health insurance? Forget it… It didn’t exist back then. And same goes with the stock market. SEC didn’t exist (whether they matter much or not these days), regulations didn’t exist, FED failed to respond as aggressively as it is responding today: they lowered interest rates only once from 6% to 4% and completely failed in purchasing debt from banks, they started purchasing debt note in 1932 when the damage was already done, there was no employees’ safety net such as unemployment insurance, food stamps, or other measures the FED and government have and use today.

So saying that today, we are heading to a long term suffering and depression is ignoring today’s social and economic power of our society and economy. And it doesn’t matter, what wide range of FED conspiracy, economy, and market manipulation theories you believe.

Let’s look at the market history and how long would you have to wait for the markets to recover if you were unlucky enough to buy at the very top:
 
TDA
 

1929 – 1960
If you bought in 1929 at the top, it took about 31 years for the market to reach those same levels. But, don’t forget how the market operated back then vs. today. It would be yet another mistake to say, the market today is the same as it was in 1929. It was not. Investing in the stock market back then, and well into 40’s to 60’s, was considered a speculative game which the true gentlemen avoid. A true gentleman buys bonds, not stocks (re: “Common Stocks As Long Term Investments”, Edgar Lawrence Smith), so only a very little public participated in the stock market (e.g. Jesse Livermore). Stock buybacks were extremely rare back then and up to 80’s semi-legal or pure illegal.

1965 – 2007
The recovery took 30 years but we were in the same boat as before. The share buybacks took place after 1980 and in 1995 computers started being involved in trading. Although NASDAQ was founded in 1971, the true electronic trading as we know it today started picking up in wide scale when personal computers (PCs) reached households in 1995. There you can start seeing a sharp rise of market as general public started participating in trading. This was also a period when 401k plans were started (1980) and started picking up on a larger scale when defined benefit plans were slowly and inevitably abandoned by companies. Today, as I know, only teachers (and possibly only some) and USPS still operate and provide defined benefit plans. Everyone else is participating on defined contribution plans. Add to it that computerized high frequency trading started in 2000 (it was here since 1930 though the speed and scale skyrocketed in 2000 and beyond). All this caused the markets rallies became sharper and higher, leading people into thinking that FED, HFT, and aliens from Mars manipulate the market. Declines too became sharper, deeper, violent, but shorter in duration.

2000 – 2007
Computerized trading, 401k funds, ETF funds, hedge funds, algorithmic trading, massive public participation in the stock market, speed, instant information about the market and economy, FED’s aggressive policies compared to the past make the markets responding faster with greater volatility to any economic blip in the news. This caused the true recovery took 7 years instead of 30 years.

2008 – 2013
The information speed, computerized trading, access to cheap cash, all that causes reckless trading and overextending the markets or economic policies. This will be happening and there is no way to prevent humans greed or fear. We will always screw things up no matter how many rules you put in place. This crisis took about 5 years to recover.

Will today be different?
And it is my belief, that this trend of faster trading, faster declines, and faster recoveries will continue to certain extend. But yes, you need to be prepared for a situation that you buy stocks and the market will decline and stay down for a prolonged period of time. This will also be happening. But should this prevent you from investing? My answer is a resounding no. On the contrary, you should be buying now. You should have been buying back in March. And if we decline again in the near future to retest the lows, you still should be buying. Even if the market stays down longer than 5 or 7 years, you still will be better off if you keep buying now.

How do I protect myself in this market?
To protect myself in this market is to use a strategy which is less affected by declines. First, my strategy is oriented to generating income. If you are a growth investor and buy stocks which generate nothing, only growth, you may stay underwater for a very long period of time. Look at the Apple (AAPL) chart. Apple could drop and stay down for up to two years before it picked up again. If you bought in September 2012, it took until September 2014 to recover. If you bought in 2015, it took until 2017 to recover, and in 2018 it took until 2019.

And there are stocks which stayed down for years or never recovered (for example Yahoo!). That is a reason I seek income from my assets. One way to monetize my assets I hold is, of course, buying dividend stocks, ideally those, which increase dividends even during crisis. Another way, an investor can add to protecting income and value of her portfolio is using options and monetizing their portfolio selling covered calls against assets you own, or selling puts to buy assets you want to own. That way, you collect premiums (you may look at it as another dividend) on top of the dividends and it allows you to generate income. And that income can be then used to purchase more assets, or just withdraw from your account and spend however you want, for example pay your bills, or buy an ice cream. And you can do it even in time of crisis, recession, or depression, no matter how long it lasts.

 
TDA
 




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Posted by Martin May 10, 2020
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I bought a stock, it fell like a rock, what shall I do now?


Someone asked. He bought 100 shares of SWK (Div Aristocrat, now one of those Kings). Stock was at $173.35 and dropped to $129 and he thought well it is a King, what could go wrong. Continued dropping to low of $72 and now at $117.33 and question is, what should I do to make money, do I just wait and it will be ok? He is ok buying another 100 shares. Any suggestions?

 
SWK
 

This amazes me all the time. People buy stocks and then ask what to do. Did you heck had any plan why are you buying it in the first place?
Same as many long term investors, they are long only till the next selloff…

If he bought in for a long haul of the next 20 – 30 years as a dividend growth investor, his question is irrelevant and since he is asking, it probably was not his intent (long term investor like Buffett, or didn’t do his homework).

If he bought for short term speculation to make a quick buck, he missed the boat and should have sold in February.

If you have a short term plan and now changing it into a long term plan because the stock fell down, you have no business in the stock market.

If you have a long term plan and now changing it into a short term plan because the stock fell down, you also have no business in the stock market.
Sort out what you want before you invest.




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Posted by Martin May 08, 2020
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Stock market expectations (May 08, 2020)


The market completely invalidated all my expectations in the last week. We were range bound and we broke the range on April 29th just to give it all back the very next day. We returned back into the range. A false breakout? It seemed like one. Until this week.

Amid bad data people were expecting this market to fall badly. Pessimism out there is the highest since 2015. And today, we have received another batch of bad employment data. The market rallied up +1.68% and everybody is outraged and complaints about the market being overbought, manipulated, fake, and whatever else emerged again. But if you look at the underlying data, the picture shows that this market is not overbought at all, manipulated at all, and it still has a room to go higher.

I would also prefer some retreat and longer consolidation to give this market some more strength to run and align itself with the economy, but, today’s market is not about today’s economy! It is about future expectations.

For example, unemployment data. Everybody was expecting a carnage at labor market. Everybody was predicting 20% – 25% unemployment rate. I have seen people saying that the bad data are yet to come due to a reporting delay. And the data came. Data were bad, sure, but not as bad as expected. Instead of 20% unemployment, we only got 14%. Instead of expected 22 million job losses in April, we only saw 20.5 million lost jobs. Not good, but better than expected.

Add to the mixed bag of apocalypse that some companies are reporting rehiring employees at a faster and higher pace than expected as the economy starts slowly reopening. With these reports of slowing down unemployment claims, speeding up rehiring employees, FED stimulus, companies reporting better than worst earnings (yes, not all of them, but some are, and they are used as those first sparrows indicating spring coming) and the market suddenly appears as not high enough.

For example, after Shanghai Disneyland reopened this Friday, it got immediately sold out. This again indicates that people are willing to go back to pre-virus activities than expected. And the gloomy expectation was set by German experience earlier last month when people didn’t go shopping as expected and reopened businesses saw slow starts. It is all past and the future looks differently all of a sudden. And remember, the market looks at the future. It doesn’t predict it, it expects it. And it tries to price that expectation in.

The question would be, is it too optimistic? If so, it will correct itself again. If not, it will rally even more. And today’s momentum is “a bright future ahead of us.

I have a friend, who is in the same engineering field as I am. He works in a different company which stayed partially open, unlike mine. And whenever we talk, he says the same thing: “We will see a very sharp recovery. I have tons of new proposals coming in and clients bombarding me with new requests for proposals, they are all coming back and fast…” At first, I didn’t believe him. I though, when people start losing jobs, there will be no new demand for services, jobs, etc. But it is not happening.

Of course, this may all come to an end if those bright future expectations fail to materialise and and the future will not be as bright as expected. Or the future still be bright, but not as bright as the market is pricing in. Then we will see a decline. But as of today, do not blame the market for acting irrationally because of the data we see today. It is all about hope. It always has.

When looking at the market trend it is apparent that the sideways trend broke to the upside. It may return back inside next week, but the underlying data indicate rising strength behind this market which may push us higher.

People say the market is again overbought, but if you look at the weekly chart, it is not true. The RSI reading is slightly below 50 (a midpoint). The distribution is on a decline, accumulation is on the rise, this is also apparent on a daily chart, where accumulation is on a rising path again. Big players are buying shares. Nothing to throw a party about but it is happening. A weekly trend is still up although weakening, which doesn’t mean a trend reversal is in. And there is still a lot of room to go.

I expect the market to respect the new trend lines (either a major one or the secondary one and crawling slowly higher towards the 3020 resistance. Unless we fail again and go back into the previous range (see the two black lines indicating the sideways channel). The trend is still quite bullish.

 
SPX 05082020 -01
 
SPX 05082020 -02
 
SPX 05082020 -03
 




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Posted by Martin May 08, 2020
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Leverage investing, mainly in these times of selloffs!


I keep struggling with enough cash to invest. I want to invest a lot be buying equities, hold them, collect dividends, and monetize those holdings to generate even more cash. But family life, bills, kids in college, and situations like “something always happens int he worst time ever” is preventing me from investing more. So I was searching for opportunities how to boost my investing while using less cash.

And of course, one way to do it is to trade a Poor man’s covered call (PMCC), where you buy a long term LEAPS and start selling covered calls against it. I like this strategy because, instead of buying 100 shares of a stock for full price, you buy a LEAPS for less than a quarter of the full price.

For example, I bought LEAPS for PPL stock. It cost me $570 per contract. If I decided to buy 100 shares of PPL, it would cost me $3,000 instead.

 
PPL poor man's covered call trade
 

The picture above indicates my PMCC trade and what I have done with it since opening. A nice part is that I have collected enough premiums to lower the original cost of $527 down to $349. And I will keep doing this until the cost is zero and / or the LEAPS gain in value again to close the position and reopen a new one.

However, the problem with this is, I do not own the asset and I do not collect the dividends. And I want the dividends. The dividends are true passive income. Selling PMCC is not as you have to work for it, monitor the position, keep selling new calls against the LEAPS and eventually close the position, roll the LEAPS, sell new calls, etc. If the market closes today for several months, the dividends will keep coming, the PMCC will stop generating cash.

So I like to be trading true covered calls (CC) rather than PMCC but, during the period of low cash, I have no choice.
 

But this hasn’t satisfied my thirst for more leverage, safe leverage though. But what is a “safe leverage”?

Is it margin? Or any other debt to leverage your investment?

No, it is not margin or any other debt. These can actually get you into trouble and eventually ruin your investments.

And then it struck me. Why not using PMCC as a leverage? It will be a safe leverage, exposing myself to the market at a very low cost but controlling the same (larger) amount of shares as if purchased at full cost. And my new strategy has been born.

We can agree that over the long period time the stock market tends to go higher. Yes, there will be periods of time when the market will go down and struggle. It may be for a prolonged period of time (a typical bear market lasts up to 3 years, average is 1 and a half year), but generally, it will go up. and I am going to take advantage of this phenomenon and buy the entire index (here, it will be IWM, and SPY). But to buy 100 shares of IWM or SPY would require $11,691 and $27,910 cash respectively. I do not have it! So, how can I buy 100 shares of each!?

Well, that’s where PMCC comes handy. I can buy 3 years LEAPS on both indexes and it will cost me little less than $2,000 for IWM and $4,000 for SPY (talking about ATM LEAPS calls). I will be exposed to, and control 100 shares of each index for a fraction of its price. And we can safely assume that in the next 3 years the market will be higher (mainly when we recover from this covid selloff). And here is my “safe leverage”. Yes, I can lose all I paid for those LEAPS if the market doesn’t go higher in the next 3 years, but that would happen if I keep sitting on those LEAPS and do nothing. But, this will be a PMCC strategy so immediately, I will start selling covered calls against those LEAPS and lowering my cost basis.

Today, for example, IWM is trading at 116. I can buy 120 LEAPS, pay about 18.00 (or $1,800) for it. If the stock reaches $140 a share, an goes no more higher for the rest of the LEAPS life, I lose nothing. Add premiums for covered calls to it and it is a win-win trade.




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Posted by Martin May 07, 2020
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3 Dividend Kings For Rising Income


The coronavirus crisis has dealt a severe blow to the global economy in 2020. Stocks have not surprisingly performed poorly as a result. While the S&P 500 Index is meaningfully off its 52-week low, it remains down 11% year-to-date. For income investors it is particularly challenging, as the Federal Reserve recently lowered its benchmark rate to zero.

As a result, investors should use the recent market dip as a long-term buying opportunity. But danger still lurks, especially among the hardest-hit market sectors, which means investors should also be selective when considering stocks for purchase.

We believe the Dividend Kings are a haven for dividend growth investors. The Dividend Kings are a group of just 30 stocks that have each raised their dividends for at least 50 consecutive years. They have demonstrated an ability to withstand recessions without skipping a beat. These 3 Dividend Kings should continue to increase their dividends every year, even during recessions.

 

 · Dividend King #1: Johnson & Johnson (JNJ)

 

Johnson & Johnson is a healthcare conglomerate with a diversified business model that includes pharmaceuticals, medical devices, and consumer healthcare products. Johnson & Johnson was founded in 1886 and currently generates annual sales above $82 billion. The company currently has a market capitalization of nearly $400 billion.

The company has performed relatively well to start 2020. In the first-quarter earnings report, the company grew revenue by 3%, while adjusted earnings-per-share increased nearly 10% for the quarter. Johnson & Johnson lowered its full-year outlook owing to the coronavirus impact on the global economy. The company now expects sales in a range of down 3% to up 0.5% for the full year. However, investors can be confident that the company will return to long-term growth, thanks to its world-class business segments.

For example, Johnson & Johnson has a robust pharmaceutical pipeline to bring multiple years of positive growth to the company. Oncology sales increased 22% last quarter, while immunology sales increased 13%. The company also has an excellent balance sheet, with a AAA credit rating, to help it navigate the coronavirus crisis.

Johnson & Johnson has increased its dividend for 58 consecutive years, and the stock has a solid yield of 2.7%. With an above-average yield and steady dividend growth, Johnson & Johnson remains a strong dividend growth stock, even if a recession hits.

 

 · Dividend King #2: The Coca-Cola Company (KO)

 

Coca-Cola is the largest beverage company in the world. It owns or licenses more than 500 unique non-alcoholic brands. It now sells products in more than 200 countries around the globe. The stock has a market capitalization above $200 billion, while the company generates approximately $39 billion in annual sales.

The company reported solid first quarter earnings on April 21st, with revenue and earnings beating analyst expectations. Total revenue declined -1%, while organic revenue was flat year-over-year, at $8.6 billion. North America posted a 4% gain in organic sales, driven by pantry-stocking ahead of and during stay-at-home orders due to COVID-19.

However, this only offset a decline in organic sales in Asia-Pacific, driven primarily by China. Pricing and mix were flat during the quarter. Operating margins were 30.7% on an adjusted basis in the first quarter, up from 28.2% in the year-ago period. Earnings-per-share were up 8% on an adjusted basis to $0.51 from the year-ago period.

Coca-Cola has benefited from the pantry-stocking of consumers during the coronavirus lockdowns, but has also warned investors that away-from-home volume would likely continue to suffer as sports arenas, restaurants, and other public gathering areas experience large traffic declines.

Coca-Cola has increased its dividend for 58 consecutive years, including a recent 2.5% raise. Investors can expect continued dividend growth in the years ahead even during a recession, as consumers will keep stocking their pantries to help offset declines in restaurants and other public venues.

It has also been expanding its presence in still beverages and coffee, to help diversify away from sparkling beverages. Coca-Cola acquired Costa for $4.9 billion, which is a significant future growth catalyst due to the company’s impressive reach in coffee. At the time of the acquisition, Coca-Cola estimated that the global coffee market was growing at 6% per year.

 

 · Dividend King #3: Altria Group (MO)

 

Altria is another recession-resistant dividend stock. It operates the flagship Marlboro brand in the United States. In recent years, the company has diversified away from cigarettes by expanding into a number of adjacent product categories. For example, the company owns the smokeless tobacco brands Skoal and Copenhagen, wine manufacturer Ste. Michelle, and it also owns a 10% investment stake in global beer giant Anheuser-Busch InBev (BUD).

Altria has performed very well to start 2020. In the first quarter, revenue increased 15% to over $5 billion, due to over 6% growth in smokeable products volumes. Consumers loaded up on cigarettes in the first quarter, in anticipation of lockdowns that have taken place in multiple cities across the country. Altria’s adjusted EPS increased 18% last quarter. The rest of the year is not likely to be as strong for Altria, as the benefits of cabinet-stocking fade.

However, Altria has a strong balance sheet and sufficient liquidity to get through the coronavirus crisis. It recently drew $3 billion on its revolving credit facility and suspended its share buybacks. However, it continues to target a competitive dividend payout ratio of 80% in terms of adjusted EPS. Therefore, it would take a significant decline in EPS for Altria’s dividend to be in danger, which seems highly unlikely given the company’s leading market share and brand loyalty.

Altria has a high dividend yield above 9%. Investors should view such high yielders with some skepticism, and continue to monitor the company’s future earnings report. But barring a near-depression in the U.S., Altria’s dividend appears secure. The company has increased its dividend for 50 years in a row, an impressive track record that proves it can withstand recessions.




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