$4.75 Stock Trades. Visit OptionsHouse.com Today!      Save 15% on H&R Block At Home Products Deluxe



Archive for December, 2012

Posted by MartZee December 30, 2012

My DMD covered call and fiscal cliff?

Recently I opened a covered call position in DMD using a total return approach, which means that I am expecting and want the stock being called away.

I used a low priced stock, since that would provide a higher return than higher priced stock when using small account (or small amount of money available). I will always use stocks priced between $7 to $15 (at least during time of limited money to invest).

My next step in covered calls or plan is to build a ladder (opening a buy-write positions spread into every month thus having expiration in every month).

I started my plan with DMD, which met my criteria and looked bullish. A covered call strategy is a bullish strategy, when you expect the stock actually rise above strike and you get assigned. Once you get assigned, you take the proceeds and repeat the process. You can do the same with the holdings in your account and be a partial return covered calls writer meaning you do NOT want your stock to be called away.

That however, brings some issues. You have to pick your strike well above the current underlying price to provide your stock some cushion for growth and that will lower the premium received so down that it may not be feasible to write calls unless you can write several contracts instead of only one as in my case. I currently do not have enough money in my account and enough shares to write more than one contract.

I also do not want to deal with potential assignment if the stock progresses too far and I will have to roll the call contract up and far away which may be done at a loss or break even. Other reason would be a potential loss of dividend if you happen to get assigned.

So I was thinking a lot if it makes sense for me to write calls against my core holdings or not and I found out that I wanted a peace of mind when dealing with covered calls and decided to use a total-return approach and buying stocks dedicated for this strategy and which I do not mind if they get called away.

I was recently studying a lot how that works and to demystify all the blurs and myths about covered calls I had. I must say I had a totally wrong point of view at covered calls and how they work.

So how my DMD position works so far?

I bought 100 shares for $9.5 per share for a total of $950. I sold one contract of February $10 strike call at the same time for $0.60 per contract. I received $60 premium. That lowers my base price for the stock to $8.90 a share. That means, that the stock can drop in price to $8.90 and I still will be at least break even. If the stock stays at the current price level (below $10 a share) and above $8.90 a share until February 16th, the current option contract expires worthless, I keep the premium and the stock. I can immediately sell another $10 call option for March, which would lower my base of the stock even further down and allows for the stock being called away in March. Or I can repeat this process indefinitely or as long as the stock is called away. But that can be done if the stock price is neutral or slowly drifting down. Of course the best would be if the stock grows up and reaches its strike or exceeds it and is called away.

So the plan is nice and great so far. But we are facing the fiscal cliff problem. Our politicians seem to have no balls to deal with it. It looks like Obama’s strategy is to let the Bush’s cuts expire, so he can blame Republicans for it and when that happens the country will head to another recession and at that time he would come out with his own cuts, which can be no longer called “Bush’s tax cuts” but “Obama tax cuts” (so that loser can have his name at least on something, some bill) and he could be called the “savior” (I do not want to use capital “S” because that communist doesn’t deserve anything close to it, and there is only one Savior in the world).

So what will most likely happen to stocks when this scenario materializes?

The stocks will tank.

This will be potentially good for the long term investors such as us – the dividend investors, since we will be buying many of the stocks for great low price (and I am actually looking forward to it).

But there will be some positions which will get hurt. One of them is my covered call, which is a bullish strategy and the stock may tank faster and way below my break even price. If that happens, you cannot roll out and away easily, selling more calls won’t effectively offset the loss, and you will stay locked in a losing position. Do you want to take the loss and move on or is there any back-up plan to repair such position?

If that happens and DMD tanks at or below $8.9 a share I will close my existing $10 strike call (buy back) for 0.14 a contract. That will provide me an option income of 0.46 or $46 ($60 of original income – $14 buy back). But I will be losing $60 on my stock position. The net gain would be negative $14.

I would have two options – take a loss and move on, or try to repair this position. If DMD falls at $8.9 a share, I can sell ITM (in-the-money) $7.5 May 2013 calls, receive 1.66 premium, and let the stock be assigned. So the numbers will be as follow:

$950 stock – $750 assignment = $200 loss
200 loss – $46 original premium = $154 loss
$154 loss + $14 original call buy back = $168 loss
$168 loss – $166 new premium = $2 loss
(and plus commissions)

With one contract in my account, it probably will not make much sense going thru this repair but in case of having 10 contracts, the difference can be either 140 dollars loss vs. 20 dollars loss when performing the repair. Another option would be to buy back the original call contract and sell one more short term (ideally same month) OTM call contract and when that one expires, then sell ITM contract as described above to eliminate the loss completely and make it a gain. The numbers would look like the following:

$950 stock – $750 assignment = $200 loss
200 loss – $46 original premium = $154 loss
$154 loss – $55 new OTM 10 call = 99 loss
$99 loss + $14 original call buy back = $113 loss
$113 loss – $166 new ITM 7.5 premium = $53 gain
(and plus commissions)

Another thing to remember is that I own a February contract and if the cliff happens in January, I still will have enough time for the stock to recover or enough time to repair the trade such as rolling the call option down and lower the stock base cost and then apply the ITM call repair. There will be a plenty of time to make the decision. One thing is for sure however. If this scenario happens I want to get rid of this trade as quickly as possible. If the stock stays above my current base cost, I am fine keeping the stock and continue selling more calls against it.

I am sharing this strategy as a back-up plan in case the stock drops too low and too fast. If nothing like that happens, fine I’ll be happy taking my 9.15% gain on original trade or continue selling more calls. If the stock falls down or below my break even, I will try to use above described approach to repair it and end the trade with zero loss (commissions included) or a small profit as quickly as possible and move on. Let’s see what January 2013 brings.

Posted by Martin December 30, 2012

My inspiration in last week #3

I often browse the internet to find ideas about investing, trading stocks, options, investing opportunities and strategies. I like to read about investors and what their investing/trading approach to create income you can live on is.

This week I found the following interesting posts:

Holding Vs. Deploying CashDividend Mantra

Time to ReflectBrick By Brick Investing

Investing In Dividend Stocks: Why I Chose The Stocks In My PortfolioSeeking Alpha

How I Invest In Municipal BondsBrick By Brick Investing

Why an Asset Allocation of 5 Percent for Gold is Too LowIacono Research

Posted by Martin December 27, 2012

New trade – adding Abbott Laboratories (ABT)

Today I bought more shares of ABT to my dividend portfolio at $65.37 per share.

12/27/2012 09:40:48 Bought 15 ABT @ 65.3699

Total shares held as of today: 34
Estimated annual dividend*: $73.44
Consecutive Dividend Increase: 39 years
Dividend yield today: 3.44%
Dividend 5yr Growth: 10.23%
Dividend paid since: 1926

* Note: The dividend is calculated using 2.16 per share (a payout prior to company split in January).

Posted by Martin December 27, 2012

New trade – Demand Media Inc (DMD) covered call

Last week I took a position in Demand Media Inc (DMD) and wrote a covered call (buy-write), but posting it now (during Christmas time I didn’t want to post anything). This position was taken as a total-return trade, meaning that I want the stock being called away. Here are some details on the trade:

12/24/2012 11:19:36 Bought 100 DMD @ 9.5
12/24/2012 11:19:36 Sold 1 DMD Feb 16 2013 10.0 Call @ 0.6
Total trade: $890.00
Commissions: $8.78
Total NET trade: $898.78

Option assignment: $1,000.00
Option assignment fee: $19.00
Expected proceeds: $981.00

Expected NET gain: $82.22
Expected ROI: 9.15%

I am expecting the stock to rise at or above $10 per share at expiration in February. If that happens, I will realize the expected return. If it doesn’t happen and the stock stays below the strike price I will repeat the process and sell another 10 strike call against already held position as long as the stock is called away.

Here is a trade adjustment taken on 01/29/2013

Posted by Martin December 24, 2012

♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠

♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠

Merry Christmas

♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠♠

Posted by Martin December 23, 2012

My inspiration in last week #2

I often browse the internet to find ideas about investing, trading stocks, options, investing opportunities and strategies. I like to read about investors and what their investing/trading approach to create income you can live on is.

This week I found the following interesting posts:

How I Got My Kids Excited About Saving and InvestingDarwin’s Money

Stock Price Calculator for Common Stock ValuationFree Online Financial Calculators

That’s Not What The End Of The Gold Bull Market Would Look LikeSeeking Alpha

Will A Fiscal Cliff Deal Send Gold To New Highs?Seeking Alpha

Posted by Martin December 20, 2012

Futures point to selloff tomorrow

Futures point to selloff tomorrow

The market finished up today, however, as of this writing the U.S. futures point to heavy selling tomorrow morning. S&P 500 is down -23.90 / 1.66%, Nasdaq -40.00 / 1.49% and Dow -211.00 / 1.50%.

So be ready for bumpy ride tomorrow.

Another investment I am closely watching is Gold GLD. Today we experienced another sell off which could have been related to forced John Paulson’s funds selling after Morgan Stanley and Citigroup recommended its clients to sell their stake in Paulson’s funds due to bad performance in 2011 and 2012.

If this sell off continues I would follow my strategy of sequential buying into the gold position. Recently GLD reached my first buy point at $161 a share at 200 day MA. Today it progressed even lower and almost touched my other buy point at $158. My next buy point would be at $151.5 level. These levels were determined based on long term major supports.

Gold (GLD) 3 year chart

Posted by Martin December 19, 2012

Abbott declares $0.14/share qtr. dividend, what the heck?!

Were you also surprised finding out that the Abbott‘s dividend rate fell to 0.14 a share and started creeping what was going on? Well, today my stock spreadsheet showed up with this dividend rate and yield, see a print screen below.

ABT

I knew Abbot was going to split in January 2013, but I didn’t realize that they would announce already split dividend, so I started freaking out, what the heck was happening with our great Abbott company.

Finding some information which would make sense to me wasn’t easy. Everybody was talking a language I didn’t understand. But I found it. Abbott is going to pay a quarterly dividend of $0.14 a share and a new company AbbVie will pay the remaining $0.40 a share dividend. Both companies combined will pay $0.54 a share which is 6% increase of the dividend.

The company will split 1:1 and each shareholder gets 1/2 of Abbot and 1/2 of the new company AbbVie.

I only wonder how they want to split my 19 shares in half…

Happy Trading!

Posted by Martin December 18, 2012

New trade – adding Gold ETF (GLD)

New trade - adding Gold ETF (GLD)

Gold retreated to its 200 day MA today and I decided to add a few shares to my holding, since I consider this attractive price. I see some similarities and pattern in GLD corrections, (see the chart below) and thus I believe we are in similar pattern as in 2008.

GLD

Also I want to be buying Gold as some protection against FED and its money printing. I believe, there is more devaluation of dollar coming so as a long term investment, GLD is a good choice. Today I added a few shares (as far as my available cash allowed) and if the stock continues falling, I will be adding more shares.

12/18/2012 13:40:36 Bought 5 GLD @ 160.99

Total shares held as of today: 12

Posted by Martin December 18, 2012

My Goals 2013

We are heading towards the end of 2012 year and it is time to review the progress of the goals we made last year and set a new set of goals for the upcoming year.

I hope you all had a great year and that the next one will be even better.

In past years I barely set my goals publicly so this upcoming year will be my first approach to do so. In the following lines I will try to describe my goals and set the way for monitoring the progress.

My investing achievements in 2012

Those of you who read my blog may know that I have several investing accounts with different investing purposes or strategies. I would like to review them and describe my achievements and changes I want to implement in the following year.

Lending Club

Investing with Lending Club was one of my greatest achievements and a great success. I was able to develop a strategy which protected me 100% from defaulting or late notes and helped me to achieve a great rate of return of 13.39%.

My 2012 goal with Lending Club:

My goal was to reach 10,000 dollars of account value and I met this goal.

My 2013 goal with Lending Club:

During 2012 I focused my savings and learning to Lending Club. In 2013 I want to focus on my TD account instead. In Lending Club account I will contribute only $220 monthly and reinvest all proceedings. I want to reach min. 14% annual rate of return. You can continue watching my progress on this page which is updated online, (well anytime I download data from my Lending Club account).

I MET THIS GOAL ON MARCH 10, 2013
ANNUAL RATE OF RETURN 14.00%

ROTH IRA

Currently I am not planning on focusing on this account. I will continue on doing what I am doing right now and basically mirroring a strategy being used in TD account. I didn’t have any specific plan in 2012 for this account either.

401k account

I will continue contributing 3% to my 401k (which is equal to my employer’s match), monitor my holdings, and rebalance every 6 months. That is basically all I can do anyway.

TD account

This account will be my main account I will be focused on during 2013. It is a taxable account, but I still want to pay more attention to this account over my ROTH IRA. You may ask why I am preferring a taxable account over a deferred account. There are the following reasons:

  • I can contribute as much money as I want, while ROTH has a limit, which is what I want to do this year.
  • I can use leverage which is prohibited in IRA accounts.
  • I can apply strategies which are not allowed in IRA accounts such as shorting stocks.
  • I can withdraw any cash in any amount I want, whenever I want, and use it any way I want.

That doesn’t mean I want to neglect my ROTH, not at all. I just want to focus on ROTH next time as soon as I reach my goal in TD account.

What was my achievement in 2012?

I learned a lot about trading options. I made good money, but I also lost them. I got caught in a trap every beginning investor and trader gets caught. I thought I was the king of option trading and slowly gave up all my gains.

You can see this process on the following chart. See the spike at the beginning? I started trading options with $2500 in my account and I reached almost $8000 (the very beginning isn’t reflected on the chart, since I started tracking this account later on when the account was at $4500 value).

When I was back at $2000 I realized that this wasn’t what I wanted. At that time I read a book “The Layman’s Guide To Trading Stocks” by Dave Landry (you can check his website) and I shortly communicated with Dave via emails. I described him my frustrations, his responses were funny, but he also gave away a great advice: “Stick with what you are comfortable with”.

That was the breaker. I knew it was dividend investing and that there was no quick rich method in trading. Thus I went back to the roots of investing and decided to stay with the most comfortable method = dividend growth investing.

My 2012 goal for TD account:

Honestly? I had no goal or nothing solid. Time to change it.

My 2013 goal for TD account:

  1. Rebuild my portfolio.
  2. Reach min $10,000 value of the account (after I reach this goal, I will start focusing on my ROTH IRA account).
  3. Reach my dividend income of $100 monthly.
  4. Reach options income of $100 monthly.
  5. Raise cash to 30% of my account value.

Dividend income

The following chart shows my current income (it doesn’t have December complete as of this wiring). I will continue investing into stocks paying dividends at 3% or higher rate. The companies must have a great history of paying and raising dividends (with few exceptions in REITs). I will be purchasing only during price drops (either significant corrections or when the price retreats to support level). That’s a change in my approach. In past years I wanted to be always 100% invested. Not anymore. I want to wait for my price. When the stock reaches that price level I will use a formula (described here) to calculate my entry price. If the stock reaches that price I will buy.

I will do whatever it takes to increase my monthly dividend income to $100 a month and reinvest all proceedings. I will use leverage to boost my investments during this early phase of rebuilding my account.

Options income

I am not dashing options trading although I lost money. I understand risks of trading options, but I also see great potential options offer. In 2013 I will focus on learning basics and trading covered calls (CC) or cash secured puts (CSP). I will be selling puts or calls against my current holdings as well as buy-write covered calls strategy (buy-write CC strategy means I will be buying a stock and write a call option against it expecting the stock be called away – option exercised). I do not have 2012 track of my options trades and there were so many trades that recreating the track would be an enormous work, so no chart here. I will however track my 2013 results of option trading and post it. The goal will be reaching $100 monthly selling covered calls or cash secured puts.

The chart above shows my plan for 2013 and progress. I added December 2012 as my starting point.

Cash

Recently I realized the value of cash. In the past years I hated having cash idle in my account and I was striving being always 100% invested. Then a great opportunity arrived and I had no cash to act. Next, since using margin, I got hit by margin calls. I wanted this changed. My new strategy is contributing to the account when the holdings grow or the market is in uptrend, but leave it as cash in my account and use it as a collateral against put selling or buy-write covered calls. This strategy helped me a lot. I no longer experienced margin calls and I was able buying stocks which I wanted at better price. My goal in 2013 will be to raise cash to 30% and maintain such cash allocation (currently my cash is only around 4%).

I hope the next year 2013 will be prosperous, the United States as a country and republic will be able to steer away from socialism and communism and that we will all prosper. I like and love all of you who strive on your own to reach your goals and work hard. I like learning from you, because that is what helps me a lot reaching my own goals. Thanks for stopping by and reading.

Merry Christmas and Happy New Year!