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Posted by Martin December 09, 2012
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My experience with options


About a year ago I came across options. Somewhere on the internet I read an article how to use options to boost my income, get more cash to invest, and use options to buy stocks.

The strategy went as follow:

  1. Sell cash covered puts to raise money to buy a stock you want to hold.
  2. Either use proceedings from selling puts or sell a put option and get exercised or buy-write a covered call to get your stock.
  3. Once you have your stock, continue selling covered calls and puts against the stock to get income.
  4. If a covered call is exercised and your stock is called away, start repeating the process.

I was so thrilled about this idea to get money up front to buy stocks that I had to try it and master this strategy. I looked for a good candidate and picked, in my opinion, a promising company Oncothyreon (ONTY). At that point the stock was trading at $7 per share. As it was raising in value I was selling puts and collecting premiums.

A few months later I collected enough to buy the stock without paying a penny from my own pocket. The stock suddenly dropped in price to $4 a share when investors dumped the stock because of the news about postponing results from phase III drug (Stimuvax) testing. Instead of publishing the results during 3rd quarter of 2012, the results were postponed until the 1st quarter of 2013. The reason was to get longer time period for testing due to longer survival rate of the patients being tested with this new drug.

A question I asked was, if the survival rate was longer than expected, wasn’t this actually a good sign that the drug worked?

Well, long story short, because of the price drop and lack of my experience (instead of selling and rolling the put option) I was assigned at $7 dollars per share.

I wasn’t disappointed or mad about it. I wanted to hold the stock as a long term investment and, most importantly, due to selling puts prior to assignment, my adjusted price I paid for ONTY was $0.25. You read it correctly. I was assigned to a 7 dollar stock paying 25 cents for it.

I immediately started selling covered calls against the stock and puts generating income. Today I hold a stock, which on my brokerage account shows roughly 40% loss, but my adjusted loss is actually a gain. Yes this stock already allowed me to bring almost $1100 dollars into my pocket and I paid $700 to get the stock.

This was a success for me, so I jumped into trading advanced options. I doubled my money in my speculative TD account within 6 months (you can see the spike when I started following and recording my trades here). Well, later on I slowly gave up all my gains and ended up where I started about a year ago (the chart doesn’t show the very beginning). But that is another story.

Nevertheless, I finally learned my lesson and decided what I wanted. I stopped trading options for a while and started learning more about them to get back to trading options. Although I am in favor to dividend investing and I will be buying high quality dividend stocks (with a few exceptions, such as ONTY), I want also continue in practicing the strategy I described above:, sell puts to raise cash to buy the stock and later sell covered calls to generate income. With dividends and covered calls income I hope to boost my revenue and grow my portfolio faster.

I am adding ONTY into my TD account. Currently I hold it only in my ROTH IRA account. On Monday I will write-buy a covered call against ONTY. If the trade executes, I will be buying ONTY for $1.55 a share.

Happy Trading!




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Posted by Martin December 06, 2012
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Is Full Circle Capital (FULL) presenting itself as a buy?

Is Full Circle Capital (FULL) presenting itself as a buy?

I hold Full Circle Capital (FULL) shares in my portfolio. As I learned today, this company belongs to a business development companies category or BDC. These companies are investing into small businesses and many of them are regulated investment companies RICs. That means that this type of companies are required to pay at least 90% of their profit back to their investors. Due to the nature of their business these companies are very cyclical and sensitive to economic situation of the country.

Sometimes ago I purchased FULL and now I am holding 128 shares of this company. What I like is that this company pays nice dividends (12% yield) and it pays monthly. However, I wasn’t sure how to evaluate such company to decide whether it is worth buying, holding or selling it.

Recently I found a great article on Seeking Alpha which helped me to understand this stock better and evaluate it better. What I have read convinced me to continue holding this stock amid the recent turbulent trading, which scared me a bit.

FULL

As you can see, the recent drop in price was scary and I couldn’t find the reason for such sell off. Was this sell off a good opportunity to buy or should I dump the stock? After reading about the stock, that its book value is around $8.5 and the stock is trading at lower $7 level I realized that this can be actually a good opportunity to buy more shares.

What happened and why the stock dropped? I think the reason could be the recent public offering of new shares which were offered at $7.50 per share. The stock immediately corrected to that price.

Will this drop have a motion momentum and continue falling? If so, I will be adding another 100 shares of this stock into my portfolio. Thus I placed a trigger order (or contingency order) to buy if the stock falls at $7.00 per share or below.

Another reason for buying more shares is that today John E. Stuart a CEO of the company purchased 2,000 shares of the company, see here.

If the stock doesn’t drop at $7 a share or below I will not be buying.

Happy Trading!




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Posted by Martin December 04, 2012
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How I am preparing myself for a potential price drop


We are still facing problems with “fiscall cliff” and nervous investors dumping their dividend paying stocks. The selling isn’t overly dramatic. Yet. But it can all come.

Since the presidential election, dividend paying stocks dropped in value. Even REITs and MLPs which are not affected by a potential tax hike were driven down by panicking investors.

Media are feeding us with scary tax hikes from current 15% up to 43.4 percent which may cause drop in stock value by 34 percent to make up for a lost yield. It looks scary, but in my opinion it will not be that bad as we are hearing and reading. Many long term investors have their assets in deferred accounts, so they do not have to worry at all. And since the dividends will be taxed as an ordinary income many investors (and even retirees) will end up in a lot lower tax bracket anyway (possibly 15 – 20% bracket) and after all deductions their effective tax rate would probably be even lower. So the impact will not be that large.

However, high earners will see some impact. All that will possibly cause a panic and horrendous selling. Maybe just to adjust the price of the stocks down by that 34 percent so the high earners dumping stocks at current prices will be buying them back again to get better yield on cost.

In my opinion this will cause the price rising back up. Not that dramatically as it will go down for sure, but prices will go back up.

Do you want to sell your stocks and buy them back later too or do you want to wait?

My strategy will be waiting, holding tight and buying more shares at better price as others will be selling in panic. Will that come?

I am browsing internet what others say about potential issues we may be facing and overall you can see a lot of pessimism out there. That makes me believe that investors will overreact, as is typical these days, and send stocks even lower if Congress won’t act and prevent tax hike in January 2013. Everybody is expecting it. A common opinion on the web is that dividend stocks prices are still in all-time highs which creates a potential bubble which may burst. I think it is nonsense but there will be enough people out there who would overreact.

That makes me thinking about my next plans and strategy for next few months. I am a believer in a strategy called Lifecycle Investing. The point of this strategy is using leverage when investing in early (accumulation) phase of portfolio building and start delevering down in second phase and be completely unleveraged by retirement.

This strategy then allows me using margin and other means to boost my investments now in early phases. Thus my portfolio is highly leveraged these days. For those who are skeptical about this strategy I can say I have been practicing this strategy for three years so far and I was able to manage all drops and panic selling without being hit with margin calls.

However this strategy isn’t for everybody, because during sell offs you need iron guts to sustain rapidly declining margin equity to maintenance requirement ratio. To survive I have to maintain healthy cash reserves and that is exactly what I am doing right now. When the markets and my holdings are growing, I save as much money as I can, but keep it in cash. Many times earlier in my “investing learning period” I wanted to be always fully invested. I learned that this wasn’t a great idea.

With free cash available I can sustain a potential drop in value of my portfolio and be ready for buying more shares when the sell off ends. Recently I learned, that value investors shall wait with free cash for great opportunities so they will be ready when the opportunities present themselves. Being fully invested is a foolish idea.

So how I am preparing myself? Saving, saving and saving. Sitting with cash and not buying more shares at this point and wait for the next drop in value.

Happy Trading!




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Posted by Martin November 30, 2012
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Will “Rally Attempt” hold?

Will "Rally Attempt" hold?

Today the market (SPY) provided a follow up in its price action to yesterday’s break above the trend line. It can be a shakeout, but I still see it more likely as a bottoming pattern. Today’s price extended recent rally all the way up to 50 day MA, but it broke thru the two month long downtrend line on higher than average volume.

That doesn’t mean that we should be buying into this rally. We still should be sitting tight, saving cash for more buying and wait for more confirmation. I am still expecting a downward move from these levels. However, since the price extension is quite significant, I am convinced that the market will not go too low to create a new lower low, but it will create a new higher low.

SPY

Click the image to enlarge.

If that happens we may go down to 137 major support level. This level played a significant resistance and support role during May 2011 and March – May 2012 respectively. I think we may stop at that level if that is the case and move back up. That would be our first higher low.

That’s why I think we are experiencing a “Rally Attempt”. We still can fail and see even more extended down pressure if the negotiations in Congress about the fiscal cliff fail and who knows what else the politicians bake for us and what mess they create. Somewhere on the internet I read a note that they have no clue what impact their comments can have on public. I agree with it and all that can still change the course of the market.

So what’s next? Wait for confirmation, save more cash and let’s see if the market creates its first higher low and reverses. The Rally Attempt can still fail.

Happy Trading!




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Posted by Martin November 26, 2012
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New trade – adding Realty Income (O)


Today I realized a part of my planned buying of Realty Income stock. Maybe little too early since I am expecting more drop in price, but I will be buying more later if that happens. I am also planning on adding SDY to my portfolio, but this didn’t happen today and I moved my buy order lower.

Well, I am learning to better manage my money than before so I will be doing mistakes. Nevertheless I am still buying cheaper than my previous purchases, so I am OK with it in the long term.

11/26/2012 09:39:35 Bought 10 O @ 39.65

Total shares held as of today: 76
Estimated annual dividend: $138.32
Consecutive Dividend Increase: 14 years
Dividend yield today: 4.62%
Dividend 5yr Growth: 3.87%
Dividend paid since: 1994




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Posted by Martin November 25, 2012
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Where is the market heading? Still in correction.

Where is the market heading? Still in correction.

Recently I have read an article on internet by a dividend investor who claimed that he doesn’t care what the market is doing as long as his dividend income is intact or improving.

Basically this is a valid statement to me and I believe many dividend growth investors are not that much concerned about the market or anything else or even the holdings in their portfolio as long as their stocks are paying dividends and there is no danger of cutting the dividends.

So why I am concerned about the stock market direction?

Market timing

The reason why I would be watching the entire market and my holdings where they are heading is because the price correction offers me a better price to buy more shares. That’s it. Seeing my holdings falling, but dividend ratio is intact, I cherish this price action as a great opportunity to buy cheaper.

Recently during the last two weeks or so, this was a great time for me and I could add a few shares of some of “my stocks” to my portfolio. So are we done with decline?

Probably not. When you take a look at the market’s price action what is awaiting us in the next week? The market is still in clear correction phase and we may drop even further next week. There may be many reasons behind it such as fiscal cliff, worries of debt crisis in Europe and who knows what else.

Right now the futures point to lower open on Monday. The market (SPY) reached the resistance and may turn back down. Will we create a new lower low or are we experiencing a reversal when the market creates its first higher low? Time will show and for me this will be a waiting game and if we head further down I see it as a great opportunity to add more shares.

SPY

Click the image to enlarge.

See above picture what I see the market will probably do in coming days. If we see a reversal, this would be a last opportunity to add to my portfolio. If we see more downturn, I will be saving more cash to buy cheaper. Time will show.

Happy Trading!




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Posted by Martin November 23, 2012
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New trade – adding Abbott (ABT)


Today I bought more shares of ABT to my dividend portfolio at $63.58 per share.

11/23/2012 09:30:14 Bought 6 ABT @ 63.5799

Total shares held as of today: 19
Estimated annual dividend: $38.76
Consecutive Dividend Increase: 39 years
Dividend yield today: 3.22%
Dividend 5yr Growth: 10.23%
Dividend paid since: 1926




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Posted by Martin November 20, 2012
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My goal in Lending Club accomplished!

My goal in Lending Club accomplished!

Dividends Today I have reached a goal of saving $10,000 in my Lending Club account. The process is not finished yet and it will take at least two more months to finish it completely, but all the final deposits are on the way and I can move on to next goal.

My next goal is to reinvest all proceedings and gains made in Lending Club and continue this account to grow, but there will be no new contributions. The next step then will be to save $10,000 in my TD account or reach that value. I will be depositing money monthly (at this point I can afford $150 monthly) plus all potential surplus money, bonuses and all money I can afford to set aside and save.

Here is the outline of my goal and strategy with TD account:

  1. I will continue in dividend investing.
  2. I will be selecting high yielding, good quality stocks with great dividend history and dividend increase of at least 10 years or more (with some exceptions, such as REITs.
  3. Keep 30% in cash which will be used for put selling (cash secured puts).
  4. Reach 100 shares on current holdings (this goal will exceed a time frame of my primary goal).
  5. Start selling covered calls on owned stocks (which reach my 100 shares holding).
  6. Start selling cash covered puts and buying stocks by selling puts.
  7. When the market and my holdings will be rising I will be saving cash and adding more position sparingly (only when a great opportunity arises). When the market or my holdings start declining I will be looking for opportunity to buy more shares from saved cash.
  8. Since I am a believer in leveraging and agree with Douglas R. Andrew’s opinion (see “Missed Fortune: Dispel the Money Myth-Conceptions – Isn’t It Time You Became Wealthy?” by Douglas R. Andrew), that in early years of savings an investor should leverage his investments “to the tilt” and in later years start de-leveraging, I will use the principles in his book to boost my savings. I am aware of the caveats and dangers using margin, but if managed correctly you can sustain even horrible market declines avoiding margin calls.
  9. And last I will reinvest all my gains and proceedings (dividends). I will not be reinvesting them back to the companies who paid, but based on balance of holdings,
  10. I will be balancing my portfolio to keep my holdings equal in dollar amount as well as based on income weight. Having holdings balanced based on income can help in case when one stock drops the dividend or cut the dividend, the income loss will be smaller than when having larger position. For example, when holding FULL which pays 11.23% compared to ABT paying 3.24% I will be forced to have less exposure to FULL than to ABT. If both FULL and ABT will represent 4% of the entire portfolio income, if FULL stops paying I would lose only 4% of the entire portfolio income. With dollar amount weight I would lose 11% of my income. However, I will still keep balance in between both ways, but leaning towards income based balance. Of course in early years my portfolio will be imbalanced and more concentrated, but as time will go this will be fixed.

I think, that is about all I want to do with my portfolio at this time. As I spoke with Dave Landry (whose book “The Layman’s Guide To Trading Stocks”. I strongly recommend to all beginners in investing and trading stocks), he said to me when I was complaining about my trading results:

“Start SLOW and build… have realistic expectations. Also, if you’re happy doing what you are doing, then keep doing that… and be prepared to do some homework!”

Thanks Dave, I will continue in building my financial freedom and keep your advice!

Happy Trading!




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Posted by Martin November 19, 2012
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New trade – adding McDonald’s (MCD)


Today I bought more shares of MCD to my dividend portfolio at $84.61 per share.

11/19/2012 09:30:13 Bought 5 MCD @ 84.6099

Total shares held as of today: 15
Estimated annual dividend: $46.20
Consecutive Dividend Increase: 35 years
Dividend yield today: 3.66%
Dividend 5yr Growth: 20.40%
Dividend paid since: 1976




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Posted by Martin November 16, 2012
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New trade – Armour Residential (ARR)


Today I bought a few shares of Armour Residential (ARR) stock and increased my holding in this company. There were two reasons why I decided to do so:

  1. A huge price drop a sell off which was so scary to me that I was at first doubting whether to hold this company at all, but then I went back in time and saw that these sudden drops weren’t that unusual and always the stock managed to recover. It seems to be the case these days again.
  2. The next reason I see this stock positively is insider buying. Yesterday a CEO and another executive officer bought 10,000 shares @ $6.10 per share. Constantly insiders are buying shares of their own company and that I consider as a good sign. Even in October, when the stock was trading at $7.6 per share, insiders were buying.

Thus I bought more shares as well. It was slightly at higher price than insiders but that was because of my buying rules.

11/16/2012 13:52:51 Bought 73 ARR @ 6.8399

Total shares held as of today: 305
Estimated annual dividend: $329.40
Consecutive Dividend Increase: 0 years
Dividend yield today: 16.85%
Dividend 5yr Growth: N/A
Dividend paid since: 2010




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