WHAT WE DO? WE SELL OPTIONS FOR INCOME. WE USE THAT INCOME TO BUY DIVIDEND GROWTH STOCKS!
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Posted by Martin January 19, 2020
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2019 trading and investing results and 2020 goal


It took me a lot of time to kick myself into writing this report. I wanted to be regular in doing so, but it was hard lately. I was busy at work, and also busy at studying trading qand investing. Although I have 14 years experience in investing in stocks and 10 years in trading options, there is still a lot to learn.

It is hard to see that since I decided to go aggressive in trading options – trading SPX spreads – in 2014 I must admit, I got nowhere. I studied a lot and I thought I knew a lot and I could beat the market. I must admit, I failed.

And that admission is painful. It is hard to admit, that for last 5 years I was going in circles and I was, in fact, in a boom-bust type of trading. A wave of great optimism was replaced with a wave of pessimism and vice versa.

And why I did it? Why did I want to be aggressive and trade like a pro all sorts of trades from short term to long term Iron Condors, bull put spreads, or call spreads? Well, I was greedy, I wanted to get rich with limited capital really fast. And being under-capitalized can be very costly. One small mistake and all your gains are wiped out.

And here is the effort of trying to be rich quick:

 
boom-bust trading
 

And this ridiculous performance got me to abandon this kind of trading and go back to what I was doing before – selling puts against dividend stock until I got assigned, then hold the stock, collect dividends, and sell covered calls.

It is slow and small at first, but it can speed up fast. Before, my annual average portfolio returns were around 30% – 45%, compared to 300%+. But what good does it make when I triple my portfolio in a year when I give it all up the very next one? None. And I am becoming too old to keep experimenting. If I was still in my 20s, I wouldn’t mind playing more and figuring out how to trade and not lose.

And here is the post published in October 2019, when I finally decided to return back to the roots. But first, I wanted to consolidate my accounts which after Trump’s reckless trade wars got hit by volatility and I decided to keep the bad trades open rather than closing them.

If I have closed, them, I would have realized all the loses. And I didn’t want that. I knew, that I could fix those trades but it would take time to do so (and I am glad I did it, in fact), because as of today, my accounts are recovering fast – also thanks to the extremely bullish markets.

 

 · 2019 Options Trading Results

 

In 2019 we made the following income from selling options:
 

Business account: $13,548.00
ROTH IRA account: -$5,549.00
IRA account: $1,467.00
 

Overall, the income was not bad. But, what was the problem is that this income was delivered with trades which later on got busted and I started rolling them away to keep them alive. If I closed them, the income would vanish along with the cash and net liquidation value of the accounts.

Here is the cash of each account at the beginning of the 2019 year and the end:

 
boom-bust trading
 

Net liquidation value of the accounts:

 
boom-bust trading
 

 
IRA Equity:

IRA account equity
 

ROTH Equity:

ROTH account equity
 

Business Equity:

TD account equity

 

 

 · Dividend stock investing

 

Dividend investing was doing great. In 2019 we had dividend stocks only in ROTH and IRA accounts holding for the whole year. In our Business account we started buying our dividend stocks at the very end of the year, so the impact was not as visible as in the ROTH and IRA.

The great feature of dividend buying was that the brokers I use for trading went also “commission free”, so I could start buying single shares. That is very helpful in reinvesting dividends and profits from options.

We re-invest all dividends as if we would participate in DRIP but this time, we can choose which stocks to buy, unlike with DRIP where the dividend is automatically re-invested into the same company which paid the dividend.

In 2019 we stopped trading options in our ROTH account (it was too much to manage) and we now engage in dividend investing only. later we may add some small options trading but not at this point.
 

In 2019, we made the following income from dividends:
 

Business account: $2.27
ROTH IRA account: $902.91
IRA account: $1,393.00
 

 

 · Dividend stock holdings

 

Here is a review of our accounts stock holdings:

 
Traditional IRA
Trading Results
 

ROTH IRA
Trading Results
 

Business account
Trading Results
 

So, what happened to our 5 year plan? Well, you guessed it. The plan went down the toilet. As of now, I am grossly behind and without aggressive trading, it might not be possible to actually reach the plan.

Here is the plan as of today:

 
Trading Results
 

As you can see, going into year 2 of the plan, the account was supposed to be $42,062 in net liquidation value. It ended with $3,972.70. so, this was a disaster. at least, I will not have to pay those taxes. And in January 2020, I am pretty much where I started. The nice jump in net liquidation value in January 2020 was due to the fact that I could successfully liquidate and close some of the bad trades which either expired worthless or I could close them for a small debit. This is encouraging because now I have a free capital to trade. I wish I could say that in 2019.

 

 · 2020 Goal

 

Our goal for 2020 year is simple:
 

Business account:

1) Keep fixing the bad trades to get out of them by year end.
2) Keep trading options against dividend stocks (see CCC list) using cash secured puts and covered calls, trade around existing positions or buy new positions if assigned.
3) Time to time when opportunity occurs, it would be OK to use spreads against SPX and SPY, for example butterflies, debit spreads, or single long options. At this time, we will not engage in credit spreads unless hedged otherwise.
4) Free the remaining bad SPX trades and free the rest of the net-liq. That would mean, that my net-liq should go back to the cash equivalent of $25,000.
5) Deposit $12,000 dollars to the account this year.
6) Hit 50% gain on the portfolio growth. That would end the portfolio net liquidation value to be $55,000 at the end of 2020.
7) Invest in dividend stocks, re-invest dividends, and options proceeds and make $2,000 in dividend income in 2020.
8) Accumulate high dividend yield aristocrats with 6% + yield (see CCC list). after we reach 100 shares, we start focusing on other stocks to accumulate.

 

IRA account:

1) Keep fixing the bad trades to get out of them by year end.

No other plans at this point.

 

ROTH account:

1) Keep reinvesting all dividends to high quality dividend growth stocks (see CCC list).
2) Select high yield stock to boost dividend income, for example, in the CCC list, there are a few aristocrats with 6% + yield. accumulate these stocks first as long as we reach 100 shares of each stock. Then focus on other stocks.

No other plans at this point.

Good luck all in 2020 investing year. Let’s see how this year goes and what results it brings.
 
 




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Posted by Martin January 18, 2020
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AGNC – Time to say goodbye


I have been invested in AGNC since 2008 and I liked this company. But it is time to depart from this investment as it no longer meets my requirements for dividend investing. I wish, it was. But it isn’t.

At first, the company looked great. They started increasing dividend every year, although the very first increase in 2009 from 2.51 annual dividend a share to 5.15 was large and raised many questions but the company earnings and cash flow could cover the payout. So, why not. I liked it.

Then, in 2010, the company increased the dividend again to 5.60 a share Earnings and cash flow covered the payout well above. And that was the last increase investors ever saw. Two years later, as earnings started deteriorating, the company went on a path of 6 consecutive years of dividend cut.

 
AGNC dividends
 

At first, I believed in the company, and I loved them (a thing a true dividend growth investor should never ever do!) and provided excuses to myself and everybody who asked for the company, that “this is just a temporary, it is to protect the company’s ability to make money and improve”, and all sorts of other excuses. And when the company changed into monthly dividend paying company I loved them even more because I thought, I would be making money faster by re-investing the dividends.

There are better companies than this.

So I am selling all AGNC shares from all my portfolios and re-allocating to Helmerich & Payne Inc (HP) which is a dividend champion, increasing dividends every year since 1973 for 46 years. Their current dividend yield is 6.29%, and annual dividend growth 1.4%.




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Posted by Martin January 16, 2020
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How can I invest in stocks? My income is $2,000 and I left with $400 after all my spending


If $400 is money you can invest, then you have more than 45% of Americans.

The best strategy would be, in my opinion, to invest in high quality dividend stocks – dividend aristocrats. Here is a list of all high quality dividend stocks – champions (aristocrats), challengers, and contenders, Dividend Growth Stocks CCC list go there, review the stocks, pick few, and familiarize yourself with those companies – what do they do, how they make money, how they performed during the 2008 recession, what are their threats which can eventually put them out of business, etc.

Pick 5 to 10 stocks (later on you may start adding more shares, but for the start 5 companies is plenty). And start buying those shares. Slowly, every month, little by little, a few shares by a few shares.

Pick a broker, which charges zero commissions so it will cost you nothing to buy a single stock.

Apply dividend reinvesting program (DRIP) – so you choose a broker which has this program. This will automatically reinvest all dividends and buy you more shares.

Once your stocks start paying you let’s say $30 or more in dividends every month, you can eventually remove DRIP and start reinvesting your dividends manually into other companies.

In the meantime, educate yourself on dividend growth investing. A good book is The Simple Best Investment by Lowell Miller. It will tell you everything you need to know to pick high quality dividend growth stocks.

Do this regularly for the next 25 years, and your account will grow to over $380,000 paying you approx. $57,000 annually in dividends (calculations based on $400 starting value, $400 monthly contributions, 25 years duration, 8% annual return, 15% dividend YOC, and compounded monthly, so note that the result may be different, but in the above calculated proximity).




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Posted by Martin January 15, 2020
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Is there a sure-fire dividend stock to invest in for an uneducated investor?


No, there is no sure-fire stock for uneducated, unless uneducated are OK to lose money.

Educate yourself first before you commit your hard earned money. Or, would you be OK to go to a doctor to get a brain surgery and be OK with just uneducated but sure fire doctor?

What makes you think people that a stock market is a place where you can show no effort, no knowledge, no willingness to learn and just throw your money at it and hope you won’t lose them. You are the exact sort of people who after they lose their savings go around and spread the myth that investing in stocks is risky.

With your attitude, you will have a better chance of sure fire money in casino.




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Posted by Martin January 14, 2020
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What is the best way to enter stock trading with a limited budget for beginners in 2020?


Are you referring to “stock trading” or “stock investing”? Because there is a huge difference between the two.

If you really mean “trading” then unfortunately you I have bad news for you. You won’t get rich quick. You won’t be able to trade successfully in a small account. You may have some success but long term, you probably will experience a boom bust trading – making money, losing them, making them again, losing them… etc.

Many people overestimate their short term abilities and think they can make it trading while being undercapitalized. But, trust me, I tried myself many times, until I gave up and got back to more decent, conservative investing style.

So, I use trading and options (love options) to monetize my stock holding but I no longer use them as trading only. If you want to trade, you really need capital, if you do not have the capital, fees, commissions, rules and regulation (such as PDT) will ruin you. Plus, a small mistake will cost you a lot. If you make a trade with $500 risk in a $5,000 account vs. $500,000 account, the pain will be very different and very real… And with that a fear will enter your mind and that fear will make you causing more mistakes and more losses.

And, if anyone tells you that they are making money consistently winning all the time, they are certainly lying or not revealing everything. More over, we are in a strong bull market and in a bull market, everyone is a genius.

But if you mean “investing”, building your wealth slowly over time on a limited budget, then it is achievable. Open an account with a broker who charges no commissions so you can be buying as little as one share of a company and all that for free and start depositing your deposits every month and start buying share by share and build up your portfolio. Start buying up to 5 companies and accumulate until you reach 100 shares of each. Once you reach 100 shares of each company, you can start using options. You can start selling covered calls to generate even more income. And if your calls get assigned you just start selling cash secured puts… Sounds easy, right? Well, not necessarily. It is not a quick rich scheme so you still will have to work hard.




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Posted by Martin January 13, 2020
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Do you prefer trading options over stocks even though options are riskier?


Options are not riskier, in fact, they are safer than stocks.

Here is an example:

Trader A buys 100 shares of a stock ABC for $30 a share.
Trader B sells a put contract of underlying ABC with 26 strike and collects 0.31 credit.

Stock drops to $24 a share.

Trader A is sitting at $600 loss.

Trader B is forced to buy 100 shares of ABC stock for $26 a share with a cost basis of $25.69 and sitting on a loss of $169.

Trade A losing $600, trade B losing $169…

So which instrument is riskier? Stocks or options?

Yes, you can lose money with options if you do not know how to use them, but you can lose money with stocks too, and in fact even more. If you trade options on margin for example, and you are undercapitalized, then yes, you will lose money.

For example, you have only $5,000 dollar account and you sell a put spread against Amazon stock which is 10 dollars wide. Your broker takes $1000 collateral. But then a stock drops and you get assigned. Suddenly, you need 92,500 (in a margin account) or 186,000 (in a cash account) and you are forced to sell your position for a loss because you get a margin call.

And where is the risk? In the options you traded or your recklessness trading options with underlying for which you didn’t have enough capital because you were greedy and wanted that juicy premium?

So, options are not riskier. Stocks are riskier. But an investor with lack of knowledge is the most risky to himself/herself.




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Posted by Martin January 12, 2020
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Going into 2020, is there too much optimism in the stock market?


In fact, there is not too much optimism despite markets moving higher. Too many people are sitting aside expecting a crash, too many investors are pulling money out of the market (check equity funds outflows), too many pundits are speculating and competing in predictions who would nail the coming crash and recession.

All this is in fact a bullish behavior. At some point, these people who are now scared and pulling out of the market lamenting that they have missed the rally and they start chasing it coming back in. That will be the time when even a plumber in a small rural town in midwest America becomes a stock analyst and investing guru. Then you should start being worried.

However, I am talking about a major bull trend for which I expect additional +/- 18 years to last. But, that doesn’t mean it will be a straight run up. No, there will be pullbacks (up to 5%) corrections (up to 20%) and sideways moves along the way.

Too many people miss the big picture, many do not even look at the big picture, and then lose money (like those who are now pulling their money out of the markets expecting crash. Not only they will miss the rally, but they will enter back at the very wrong time when the market rolls over and crash and they lose again.

Here is a picture from 2016 where everybody predicted end of the bull market saying that it cannot go any higher. It must crash again. The market was going up for too long. This is not normal. Brace yourself… Well, look where we are today.
 

Here is a top

 
Because of the lack of the big picture, people tend to be trapped in their recency bias. All they know and remember id the previous crashes and tops. and there fore they are expecting crash and predicting a top as people did before them, just look at the picture above. When this recency bias end and is replaced with complacency, they you should be worried. But we are not there. if you keep monitoring news headlines, all you will see is who is predicting a crash and when, trade wars worries, economic slowdown and subsequent recession, slowing this and that… just watch it daily and you will get frustrated of how much pessimism is in fact out there.

Here is a big picture indicating that we are in a secular bull market which will last for some time:
 

Here is a top

Here is a top
 




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Posted by Martin January 11, 2020
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How do I select good trend stocks?


Well, you don’t (sort of). No one can predict what the future would look like. And past performance… you know that cliche.

So, it is not about whether the stock is good trend stock or not but about the quality of underlying business. If you know the company you know what to expect.

So, although there is no way to pick a stock which will be trending in the future, there is a guidance which can help you to at least get an idea if the stock is good or bad.

Just look at the long term chart and you will see the big picture.

Look at the two charts below and you can easily recognize which stock is a trending stock and which is not.
 

Trending stocks

Trending stocks
 

Which is a trending stock?

Well, if you picked one, you may expect the same behavior (or similar) in the future. And unless you are a day trader or swing trader, you should have picked Nike chart in those examples above.




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Posted by Martin January 10, 2020
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What are some great stocks to buy? I’m 18 and I have around $2,000 to invest. I want to be extremely risky as I am young and have time in my future to save


If you want to be risky (which at your age is a great approach, because as you said, you have time on your side to make mistakes and repair them).

In this case, individual stocks are the way to go. Forget mutual funds or ETFs. These are average and many do not even beat the market. On top of that, they will charge you fees while stocks will charge you nothing.

Then your stock selection will depend on your strategy.

Are you planning to buy stocks and hold them until retirement?

Or are you planing to play a bit and buy and sell (note, excessive trading will however lead to losses over time)?

If you want to build a portfolio which will bring you income and allow you to retire early, then you need to choose stocks which have a great potential to grow steady, slowly, and safely. You need to look at stocks which will be around 20 years or 30 years later.

I would recommend you to open a margin account and start slowly buying dividend growth stocks. These do not require much work on your part and you can afford to buy them and forget about them and while waiting, collect dividends which can be re-invested back to grow your portfolio.

In this case, I would look into dividend aristocrats. They are relatively safe and grow and will most likely grow. You just need to monitor your holdings time to time to check that the stocks you have still meet the criteria for investing in them. If not, get rid of them.

Now, when I mentioned margin account, do not use margin at this phase. Your account is too small and if you leverage your account using margin, interest rates would not only offset the dividends and capital gains but may even eat your principal.

Then start saving money, so you can start trading options and that is when you use margin.

I personally use a strategy of selling cash secured puts to buy 100 shares of a stock and do this as long as I get assigned. Once I get assigned, I hold the stock, and then start selling covered calls as long as I get assigned. With this strategy you monetize your positions. You collect premiums when selling puts, you collect dividends when holding a stock, and collect premiums when selling covered calls. And with this strategy it is handy to start using margin.

Example: Let’s say, you want a stock ABC which trades at $60 a share. In a cash account you would need $6,000 to buy 100 shares. In a margin account, you will need only about $3,000 initial margin to buy 100 shares.

So, you sell a 55 strike put and collect 0.60 credit (or $60 premium). For this, the broker will collateralize about $1,100 of your buying power. If the stock stays above 55 by expiration, your put expires worthless, your collateral will be returned to you and you will keep the premium you collected. If the stock drops below $55 a share, you will be required to buy 100 shares at $55 a share but your cost basis will be 55 – 0.60 or $54.4 per share and your collateral will be added to the margin of $2,600 (since now you are buying for $55 and not the original $60).

While you hold your 100 shares, you start collecting dividends and start selling covered calls. By selling the calls, you again receive premiums. If the stock stays below your call strike price, the call expires worthless, you keep the premium, and you can sell a new call. If the stock goes above your strike, you will be required to sell your 100 shares (for example, you bought in at $55 a share, so you sell 58 strike covered call and collect 0.25 or $25 premium. If the stock stays below 58 at expiration, the call expires, it the stock goes above, let’s say to $60 a share, you will be forced to sell your 100 shares at $58 a share. Your profit will be premium received + the difference between the stock and strike, in this scenario additional $2 per share).

If your shares are sold, you go back and start selling puts again. Rinse and repeat.

This is as “aggressive” strategy as I would recommend to go. There are riskier strategies of course, but, with those, you can easily wipe out your account (my experience). Later on, as you get proficient, you can use other strategies to generate more income.

However, in order to do this, you will need at least $5,000 or more account and proper options trading approval from your broker. But you can start slowly, invest your first $2,000 and study the strategy until you raise money for more trading.

As far as the stock selection, I recommend using dividend aristocrats, Here is a link to a David’s Fish list of the dividend champions (aristocrats), challengers, and contenders:
Dividend Growth Stocks CCC list This list has enough stocks to pick from and if you study them carefully, you can even pick a real winners.

And what you can expect? Well, I have been trading this strategy (I also traded other strategies not so successfully though) and my average annual return on investment is between 30% and 45%. If you do your work, read, study, pick your stocks carefully, and do not deviate from the plan, you will be able to double your account every 3 years.




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Posted by Martin January 09, 2020
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What are the stock market tips?


What are you looking for? Recommendations? Tips of what to buy (or sell)? Or investing strategies?

My tip is: start thinking what you want to do in the stock market, what you want to achieve, develop a plan, read some books to educate yourself, and then execute the plan.

There is an old adage – plan your trade and trade your plan.

Everything other than that doesn’t work.




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