WHAT WE DO? WE SELL OPTIONS FOR INCOME. WE USE THAT INCOME TO BUY DIVIDEND GROWTH STOCKS!
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Posted by Martin March 25, 2019
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Options trading and investing strategy for 2019


I know, it is end of March almost and you may say that it is late to set a strategy and goal now. But I reviewed my 2018 strategy and realized that my trading changed. No too much though. Many principles still apply.

But there is one significant change some of my readers and followers are blaming me of – I am eliminating trading options against stocks and shift to index S&P 500 (SPX).

Why?

As the market became volatile again during 2018 and mainly at the end of 2018 I faced early assignments of my positions and thus losing money. I had no defense against calls or puts assignment to the stocks.

On the other hand, I can hold SPX until the very end of a trading day. I can hold until 5 minutes before the end of expiration day and then decide what to do next – roll, close the trade, or add a defensive position, or any sort of adjustment. And I do not have to fear to get assigned early.

That was a reason for me to start shifting to SPX for trading. I still plan on using naked puts or calls as before and as a mean of getting into or out of a stock.

Therefore, SPX options will be for active trading and generating income, stock options for investing.

Our accounts are not yet large enough to allow buying 100 shares in a single trade. That would exceed our investing amount rules. Currently, we have a limit to use 50% of all options proceeds to buy shares of our interest (dividend growth stocks) and that amount is still too small to buy 100 shares of a stock such as Johnson & Johnson (JNJ). I simply do not make $26,000 in a single month which would allow me to invest $13,600 to buy 100 shares of JNJ. To do so, I would have to wait months and months before I could buy 100 shares of JNJ. And that is not what I want.

So, I have a limit of $600 per purchase. If I make $1,200 or more, I can buy a few shares and spend $600 limit (or more). And as our income growths, we will be buying more and more shares and increase our amount.

 

 · Trading options using SPX

 

As mentioned above, we will be trading options using SPX to generate income during 2019 (or until situation in the market changes). We will be trading put spreads, call spreads, or Iron Condors. Here are the rules and mechanics of our trading:
 

1) Based on the net-liq of the account, spread width, and allowed total net-liq usage based on the current market level (cash rules), we will have max number of trades (or contracts) per account which we can open. For example, if our net-liq is $50,000 and the market is near the all time high, we can use 25% of all net-liq to be invested, then we can open 25 contracts (50,000 * 0.25 / 500 = 25 contracts, [net-liq * allowed max amount of net-liq to be used / spread width]).

2) If in the future all 25 contracts are used and there will be a necessity to start adding more contracts, then we will start widening the spread rather than trading more contracts in a single expiration date. For example, in 45 DTE cycle, there are 9 weeks. SPX has expiration 3 times a week. So, theoretically, we can open 27 contracts to fill all expirations for the next 45 days. If we can open more contracts, we will not have enough “space” and we would have to start selling either multiple contracts within the same expiration cycle, longer expirations than 45 DTE, or start widening the wings of spreads or Condors.

3) Then, as long as we have an “empty slot” in our options calendar (scheme) we can open a new trade.

4) We primarily select 45 DTE or around that time (the range is 30 – 60 DTE with 45 DTE as ideal DTE). We also trade short term trades (zeroes or up to 7 days) but these are different trading rules and different situation.

5) Then we select 1 SD strikes (16 delta) but we can adjust them so to collect at least 1/3 of the spread width of the premium. I am OK to go and adjusting deltas as high as delta-30 but we try to avoid these high deltas. If I can get close to 1/3 with smaller delta I do so (although studies show that delta 30 actually perform better and has better POP and ROC).

6) We can sometimes skew the trade of an Iron Condor to be more bullish or bearish, meaning that if I feel bullish I choose higher delta on puts and delta 16 on calls. If I feel bearish, I do the opposite and select higher delta on calls and delta 16 on puts. My feelings are based on the chart and identifying trends and supports. But I suck in chart reading, so it is still in a realm of feelings rather than chart reading science.

 

 · Managing winners

 

After opening a new trade we will watch the following metrics and close a trade if any of these happen:
 

1) Current profit (CP) / day > Max profit (MP) / DTE

For example, when we open a trade, Iron Condor, and collect 1.90 or $190 premium, then that is our “max profit” (MP) which we divide by the total DTE. If the current profit (CP) divided by days in trade (DIT) becomes larger than CP/DTE, we close the trade.
 

2) CP = MP * 0.5 and days in trade (DIT) < = 21 days

If for any reason the CP/DIT will not exceed MP/DTE but reaches 1/2 of the collected credit in the first 21 days, we close the trade.
 

3) CP = MP * 0.25 and DIT >= 21 days

If none of the above gets met for any reason, but a trade makes 25% of collected credit anytime after 21 days in trade, we will close the trade.
 

If none above is met, then we will continue holding the trade until expiration and do nothing, but that means that a trade is most likely a loser and one side or the other is possibly breached.

 

 · Managing losers

 

1) When the trade doesn’t meet the criteria above, meaning that after 21 DTE I still see no profit, I sit on it and do nothing.
 

2) If one side gets touched or breached and I still have more than 10 DTE in the trade, I start rolling down the untested side to re-establish the original delta.
 

3) If the market keeps moving and the tested side gets deep in the money, I attempt to roll the entire Condor down and closer to the money. I do this if there is only about 5 – 10 DTE left. If longer than 10 DTE then I only do #2 but try not to invert the Condor. If I would have to invert the Condor, I rather lower the entire structure down to get it ATM. After that I have both – puts and calls ATM.
 

4) Then I hold until expiration. With this adjustment, one side gets closed for 0.10 or 0.05 debit and I roll the opposite side away (usually 45 DTE) and sell new opposite side against it, for example, if put side is tested and in the money or ATM, I roll it to next 45 DTE and sell new call side against it. To do so, I wait till the very last minute (usually 10 – 15 minutes before market close).
 

5) Once rolled, I keep adjusting as mentioned above – I keep track of collected credits/debits, and attempt to close the trade either for 50% or 25 % or roll it as needed to keep it near the money.
 




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Posted by Martin March 25, 2019
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Market performed well given the economic fears but what’s next?


I think, today’s market performance was somewhat promising. Of course, it may be all over tomorrow but given the Friday’s sudden economic growth worries causing the market dropping 1.8% would be propagating into today’s trading. Or are investors no longer worried? Or are the worries actually a BS? Of course, we do not know answers (and in fact I personally do not care).

But one thing is sure – the market which refuse to go down on all sorts of bad news is the market which would eventually go up. And today was the day in my opinion. Although, there was a weakness in the market today, it held the 2800 level fairly good and consolidated nicely.

However, we still may see some down pressure in coming days. We may go all the way down to 2750 level to test the 200 DMA (and the only reason for that would be, that we still didn’t hold 2800 and didn’t close above this important level). But market participants may be irrational and still push this market higher in the coming week.

On the other hand (and matter how much I dislike Trump) the Muller report may actually be bullish for the markets. We need to see the futures tonight and early in the morning (before market opens) to get an idea of what the next day would look like. As of now, I am a bit torn between the two outcomes, although lean towards moving down to 2750 level where we should bounce again.
 

S&P 500
 




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Posted by Martin March 06, 2019
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WMT increased dividend by 1.92%


WMT, Walmart increased the dividend by 1.92% making this dividend champion’s 46th consecutive year dividend increase.

The old dividend rate was 2.08 annual dividend payout (0.52 quarterly), the new rate is 2.12 (0.53 quarterly).

Our current fair value of the company is $49.20 a share so at the current price of $97.85 the stock is overvalued. In order for this stock to be marked a “buy” our three conditions must be met for us to buy the stock.

The three conditions that the stock must meet are:

1) in a correction mode – fail
2) the current stock price must be below a fair value – fail
3) the 5 year average dividend yield must be lower than the current yield – fail

Since only two of the conditions are met, we mark it a “HOLD”.

The current yield is 2.17%.

The 10 year YOC would be 2.59% with no dividend reinvestment and 3.20% with DRIP. This is a mediocre dividend growth and it would not reach 10% YOC in 10 years at the current price even with reinvesting the dividends. The average 5 year dividend growth of this stock is only 2.00%.

The company share price outperforms the S&P 500 index in long term. If you invested 10,000 dollars in 1995 and held for the last 24 years, the stock average total return would be 10.67% vs 8.74% of the index, and your holding would grow to $109,483.11 dollars as opposed to $74,181.33 dollars of the index.

This makes this stock an acceptable source of income by a stable and solid dividend growth payer, but I would recommend adding this stock to a portfolio only when trading at a better price or when your portfolio is already matured. It would be a good capital growth position as it is in some sense a great competitor to Amazon (AMZN) as long as they keep doing it right and getting involved in online shopping the way they do. If the trend of adjusting their business continues, this may be a good cheap alternative to Amazon. However, to buy in, we would need a price drop to a more favorable level.

Note, that during accumulation phase, I recommend seeking both – the dividend growth and capital appreciation. If you are a retiree and plan on living solely from your dividends then you do not need capital growth and this income stock is a safe investment.

 
Disclosure: Currently, I am long WMT shares. It is in our watch list and since it is now ranked as “HOLD” I do not plan adding more shares to our portfolio at current price.




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Posted by Martin March 05, 2019
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KO increased dividend by 2.56%


KO, Coca Cola increased the dividend by 2.56% making this dividend champion’s 57th consecutive year dividend increase.

The old dividend rate was 1.56 annual dividend payout (0.39 quarterly), the new rate is 1.60 (0.40 quarterly).

Our current fair value of the company is $35.44 a share so at the current price of $46.65 the stock is overvalued. In order for this stock to be marked a “buy” our three conditions must be met for us to buy the stock.

The three conditions that the stock must meet are:

1) in a correction mode – pass
2) the current stock price must be below a fair value – fail
3) the 5 year average dividend yield must be lower than the current yield – pass

Since only two of the conditions are met, we mark it a “HOLD”.

The current yield is 3.50%.

The 10 year YOC would be 6.33% with no dividend reinvestment and 9.50% with DRIP. This is a good dividend growth but it would not reach 10% YOC in 10 years at the current price even with reinvesting the dividends. The average 5 year dividend growth of this stock is of 6.80%.

The company share price doesn’t outperform the S&P 500 index in long term. If you invested 10,000 dollars in 1995 and held for the last 24 years, the stock average total return would be 6.83% vs 8.74% of the index, and your holding would grow to $47,568.28 dollars as opposed to $74,181.33 dollars of the index.

This makes this stock an acceptable source of income by a stable and solid dividend growth payer, but I would recommend adding this stock to a portfolio only when trading at a better price or when your portfolio is already matured. It would not be a good growth position when you need it the most in the accumulation phase.

Note, that during accumulation phase, I recommend seeking both – the dividend growth and capital appreciation. If you are a retiree and plan on living solely from your dividends then you do not need capital growth and this income stock is a safe investment.

 
Disclosure: Currently, I am long KO shares. It is in our watch list and since it is now ranked as “HOLD” I do not plan adding more shares to our portfolio at current price..




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Posted by Martin March 05, 2019
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Are we stuck below resistance and heading lower?


The market seems to have a lack of strength (not enough buyers) at 2800 level to break and move higher. Fortunately, bears do not have enough power to push the market lower either. You can see that, so far, every selloff has been bought up; but this strength seems to be weakening every day.

Unfortunately, this is to the advantage for bears and if we do not break 2800 level (and ultimately 2814 level too) soon, this market will drop.

The odds of going lower are larger every minute. As of now I favor a drop back to 2750 level (200 DMA) to find buyers down there. Tomorrow seems to be crucial to determine the market’s direction. If declining keeps accelerating, more and more bulls will start panicking and running to exit to avoid an imaginary rout they have experienced in December. And they will self-fulfill their own “prophecy”. We need a breakout soon, ideally this week. If it won’t happen, expect going down.
 

S&P 500
 




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Posted by Martin March 05, 2019
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HD increased dividend by 32.04%


HD, Home Depot increased the dividend by 32.04% making this dividend contender’s 10th consecutive year dividend increase.

The old dividend rate was 4.12 annual dividend payout (1.03 quarterly), the new rate is 5.44 (1.36 quarterly).

Our current fair value of the company is $210.25 a share so at the current price of $183.81 the stock is undervalued. In order for this stock to be marked a “buy” our three conditions must be met for us to buy the stock.

The three conditions that the stock must meet are:

1) in a correction mode – pass
2) the current stock price must be below a fair value – pass
3) the 5 year average dividend yield must be lower than the current yield – pass

Since all of the conditions are met, we mark it a “BUY”.

The current yield is 2.96%.

The 10 year YOC would be 17.59% with no dividend reinvestment and 33.34% with DRIP. This is a great dividend growth and it would reach 10% YOC in 10 years even without reinvesting the dividends. This makes this stock a great payer and dividend grower for matured portfolios already allowing an owner to redirect dividend stream to different stocks and still get a great dividend growth and YOC. The average 5 year dividend growth of this stock is of 21.90%.

The company share price outperforms the S&P 500 index in long term. If you invested 10,000 dollars in 1995 and held for the last 24 years, the stock average total return would be 15.09% vs 8.74% of the index, and your holding would grow to a staggering $275,944.40 dollars as opposed to $74,181.33 dollars of the index.

This makes this stock a great source of income in the long run, but also provides a good source of growth for your portfolio. I consider this stock a good addition for dividend portfolio accumulation and growth phase. If you are looking for both – dividend yield, dividend growth, and capital appreciation outperforming the index, then this stock is for you.

Note, that during accumulation phase, I recommend seeking both – the dividend growth and capital appreciation. If you are a retiree and plan on living solely from your dividends then you do not need capital growth and this income stock is a safe investment.

 
Disclosure: Currently, I am long HD shares. It is in our watch list and since it is now ranked as “buy” we may initiate a position in this stock in the near future (given, it still stays ranked as BUY at the time of purchase).




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Posted by Martin March 04, 2019
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DPZ increased dividend by 18.18%


DPZ, Domino’s increased the dividend by 18.18% making this dividend challenger’s 7th consecutive year dividend increase.

The old dividend rate was 2.20 annual dividend payout (0.55 quarterly), the new rate is 2.60 (0.65 quarterly).

Our current fair value of the company is $255.16 a share so at the current price of $248.57 the stock is undervalued. In order for this stock to be marked a “buy” our three conditions must be met for us to buy the stock.

The three conditions that the stock must meet are:

1) in a correction mode – pass
2) the current stock price must be below a fair value – pass
3) the 5 year average dividend yield must be lower than the current yield – pass

Since all of the conditions are met, we mark it a “BUY”.

The current yield is 1.05%.

The 10 year YOC would be 6.52% with no dividend reinvestment and 8.29% with DRIP. This is a great dividend growth but won’t be able to reach 10% YOC in 10 years, at least not at current yield. However, the average 5 year dividend growth rate of 22.50% makes this stock a great holding in a dividend growth portfolio.

The company share price outperforms the S&P 500 index in long term. If you invested 10,000 dollars in 1995 and held for the last 14 years, the stock average total return would be 28.05% vs 8.74% of the index, and your holding would grow to a staggering $374,142.76 dollars as opposed to $32,949.48 dollars of the index. And since DPZ is also involved in technology, rather than just making great pizza, there is a great potential for more growth in the long run (just ignore what others say and all the gloom-doom scary cats say, they just see the stock until the next quarter and due to their short sight they miss the bigger picture). Therefore, the recent selling is a good opportunity.

This make this stock a great source of income in the long run, but also provides a good source of growth for your portfolio. I consider this stock a good addition for dividend portfolio accumulation and growth phase. If you are looking for both – dividend yield, dividend growth, and capital appreciation outperforming the index, then this stock is for you.

Note, that during accumulation phase, I recommend seeking both – the dividend growth and capital appreciation. If you are a retiree and plan on living solely from your dividends then you do not need capital growth and this income stock is a safe investment.

 
Disclosure: Currently, I do not own DPZ stock at this moment. It is in our watch list and since it is now ranked as “buy” we may initiate a position in this stock in the near future (given, it still stays ranked as BUY at the time of purchase).




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Posted by Martin February 26, 2019
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PPL increased dividend by 0.61%


PPL increased the dividend by 0.61% making this dividend contender‘s 18th consecutive dividend increase.

The old dividend rate was 1.64 annual dividend payout (0.41 quarterly), the new rate is 1.65 (0.4125 quarterly).

Our current fair value of the company is $36.27 a share so at the current price of $31.93 the stock is undervalued.However, in order for this stock to be marked a “buy” our three conditions must be met for us to buy the stock.

The three conditions that the stock must meet are:

1) in a correction mode – fail
2) the current stock price must be below a fair value – pass
3) the 5 year average dividend yield must be lower than the current yield – pass

Since only two of the conditions are met, we mark it a “hold”.

The current yield is 5.17%.

The 10 year YOC would be 6.23% with no dividend reinvestment and 10.20% with DRIP. This small dividend growth makes this stock more of a lagging stock however, as a utility stock, it appears to be a stable stock and dividend payer. In my opinion it is an acceptable holding in a dividend growth portfolio.

The company share price outperforms the S&P 500 index long term. If you invested 10,000 dollars in 1995 and held for 23 years, the stock average total return would be 10.83% vs 8.74% of the index.

This make this stock an acceptable source of income but also provides a good source of growth making this a good stock for dividend portfolio accumulation and growth phase. If you are looking for both – dividend yield, dividend growth, and capital appreciation outperforming the index, then this stock is for you.

Note, that during accumulation phase, I recommend seeking both – the dividend growth and capital appreciation. If you are a retiree and plan on living solely from your dividends then you do not need capital growth and this income stock is a safe investment.

 
Disclosure: Currently, I am long PPL and own shares of this company. It is in our watch list and when it appears as “buy” we may buy more shares of this stock.




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Posted by Martin February 14, 2019
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VLO increased dividend by 12.50%


VLO increased the dividend by 5.88% making this dividend champion‘s 9th consecutive dividend increase.

The old dividend rate was 3.20 annual dividend payout (0.8 quarterly), the new rate is 3.60 (0.9 quarterly).

Our current fair value of the company is $81.97 a share so at the current price of $82.33 the stock is overvalued and in order for this stock to be marked a “buy” the three conditions must be met for us to buy the stock.

The three conditions that the stock must meet are:

1) in a correction mode – pass
2) the current stock price must be below a fair value – fail
3) the 5 year average dividend yield must be lower than the current yield – pass

Since only two of the conditions are met, we mark it a “hold”.

The current yield is 4.37%.

The 10 year YOC would be 71.89% with no dividend reinvestment and 360.44% with DRIP. This rapid growth is something which worries me a bit as I think it is too steep so be prepared to possibly see a decline in this growth. On the other side, I do not think this makes the dividend safety endangered.

The company share price outperforms the S&P 500 index long term. If you invested 10,000 dollars in 1995 and held for 23 years, the stock average total return would be 16.37% vs 8.74% of the index.

This make this stock a great source of income but also provide a great source of growth making this a good stock for dividend portfolio accumulation and growth phase. If you are looking for both – dividend yield, dividend growth, and capital appreciation outperforming the index, then this stock is for you.

Note, that during accumulation phase, I recommend seeking both – the dividend growth and capital appreciation. If you are a retiree and plan on living solely from your dividends then you do not need capital growth and this income stock is a safe investment.

 
Disclosure: Currently, I am long VLO and own shares of this company. It is in our watch list and when it appears as “buy” we may buy more shares of this stock.




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Posted by Martin February 14, 2019
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MMM increased dividend by 5.88%


MMM increased the dividend by 5.88% making this dividend champion‘s 61st consecutive dividend increase.

The old dividend rate was 5.44 annual dividend payout (1.36 quarterly), the new rate is 5.76 (1.44 quarterly).

Our current fair value of the company is $191.49 a share so at the current price of 206.57 the stock is overvalued and in order for this stock to be marked a “buy” the three conditions must be met for us to buy the stock.

The three conditions that the stock must meet are:

1) in a correction mode – pass
2) the current stock price must be below a fair value – fail
3) the 5 year average dividend yield must be lower than the current yield – pass

Since only two of the conditions are met, we mark it a “hold”.

The current yield is 2.79%.

The 10 year YOC would be 9.66% with no dividend reinvestment and 15.18% with DRIP. The company share price outperforms the S&P 500 index long term. If you invested 10,000 dollars in 1995 and held for 23 years, the stock average total return would be 11.64% vs 8.74% of the index.

This make this stock a great source of income but also provide a great source of growth making this a good stock for dividend portfolio accumulation and growth phase. If you are looking for both – dividend yield, dividend growth, and capital appreciation outperforming the index, then this stock is for you.

Note, that during accumulation phase, I recommend seeking both – the dividend growth and capital appreciation. If you are a retiree and plan on living solely from your dividends then you do not need capital growth and this income stock is a safe investment.

 
Disclosure: Currently, I am long MMM and own shares of this company. It is in our watch list and when it appears as “buy” we may buy more shares of this stock.




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