Monday, July 28, 2014

Endless Summer

Still waiting for a meaningful correction, but could not resist a trade on Calumet (CLMT) - DITM covered call of Feb 30, with the stock at $33 (10% protection through the best months of the year - Nov.-Jan.
Had to wait for it to go ex-dividend , which it just did. 8% plus some downward Insurance of a few pence.

N.B. as of May 1 - 2014  , 4(closed) trades have netted 14%  annualized; Including closed trades (8) started in 2013 - up 13.4%. No losses, but low Volatility (IV).

Also covered in this blog is the LEAP portfolio, which offers more safety and yield by selling covered LEAP (longterm) strangles - out-of-the-money covered calls and puts. One can put on a trade an just let it stand for months (years), or fine-tune it for more yield and safety (cash brought in.
In the latter case, I rolled my AA (Alcoa) puts upward and out to 2016 for a $300 gain, as the stock has jumped more than a double since I bought it. With the LEAP plan, although my covered calls of 2105 are at the 10 strike (now ITM) it will most likely be called away in January (rolling out deep in-the-money calls is seldom very profitable - extrinsic premium).
2017 LEAPS should be coming out in October, but why sit on a way ITM put that sells for $.02??

Finally, as an example of how DITM can act as a hedge as well as conservative yield-provider (consistently 10%), another trade rears its pretty head today. Just as an infrequent loss can be devastating (but less than just owning the stock) since one can keep from getting "shaken out" with the lower covered call, so can a pleasant outlier occur to the upside:

This week Kinder MLP (KMP) was called away from my IRA after 6 months - with 6 months left on the January 2015 call!!! Very unusual, but happens if the buyer wants to exercise it way ahead!
I bought KMP at above $80 and sold the in-the-money (ITM) call at 77.50; the stock immediately dropped 10 points, but I held on due to the June call, which became int the money again in June, and I rolled out to January '15. Called away at 77.50 I would have lost $300 - but with DITM (call premiums and dividends) I netted $437 after commissions, for a 10.85% annualized profit - right on its usual mark.  

Friday, July 11, 2014


In my latest DITM trade the good news for FCX - Freeport Copper- is that the annualized return, net of commissions, spreads, and other slippage, was 11% - too bad it only lasted 3 months! Buying it in April and having the August call (the 31 ITM) exercised on my, with the stock over $38 it was too ITM to be rolled out in time.

Since this 200 share trade was in my small IRA, I shall probably do another DITM trade soon to keep this statistic "pure", not mingled with the LEAP Strangle plan, which I now prefer, with Volatility as low as it is these days.

Per my Schwab account statement for the semi-annual 2014 period, what with above slippage and sloth, Reg T-3 (3 day settlement of funds, etc.) the IRA gained 3.40%, making it an annualized 6/80%, unless the VIX picks up, and premium returns.

Keep the Faith!

Monday, June 23, 2014

Winner Winner, Chicken Dinner

This past weekend being option expiry (Saturday after the third Friday of each month), another stock was called away in DITM - since the Bull market increased the price of STX (Seagate Tech.) too high  to roll out another six months. Of course the appreciation would have been nice, had I just owned the stock, but the comfort of the cushion was pleasant as well.

Also nice to see was the overall profit for this 8-month holding period:
200 shares were bought at $9,636, ITM calls were immediately sold for $1105, and dividend received were $258, for a total profit  of $918, including the takeaway amount of $9191 (after all commissions).  
That amounts to 14.29% annualized to 12 months, making my 2014 total of 9 completed trades - 12% if annualized from YTD.

Wednesday, May 28, 2014

Semi Annual Update

Those of you still tracking the DITM strategy, as an alternative to Zero Interest rates (stocks with safety and yield), a pleasant surprise after six months of 2014.
Although the steadily upwards rise, thanks to the Fed ex Machina, has flattened option IV (volatility), which results in the price of the calls, after only 8 closed out trades in 2014 (not including rollouts) the results are in. With only one minor (-$57) loss, the average "annualized" gain was just over 10% - 10.22%.
The last one, today, was a call-away of LO, which jumped so far a rollout was not do-able - too far ITM (in the money) for "extrinsic" premium in the call option. The best measure of volatility - the VIX- is now at a recent record low - sub-12 (11.51), which is a bit worrisome if one looks at the 1-year and 5-year charts of the VIX when it breaks down below 12!
More data at:

Despite a fool's errand of trying to time the market, I'm waiting through the seasonally weak June to enter new positions. Possible candidates could be - CSCO, INTC, KKR, STO, even AAPL7 - which is the 10 share lot of APPLE.

Wednesday, May 21, 2014


"Into every life a little rain.....". Or - Why I like hedging stocks with LEAP options (Longterm Equity AnticiPation) calls and puts that expire in January of future years - 2105, 2106, etc.
The strategy involves buying a stock of better than average quality ( A or B in the Schwab rating system), with or without dividend, with a price usually between $8 and $20; then SELLING a LEAP put and call, out of the money (called a LEAP Strangle - the same option price would be a Straddle- using the decay of the option to bring in money to hedge any losses. The trade-off or liability of selling these options is - the call limits any profit above the higher OTM (out of the money) "strike" price; the lower OTM put makes one liable to take on more stock, for which sequestered money must be set aside - Cash in an IRA, margin from stocks in a taxable account.

Here is an example of a major loss in one of my accounts, which should be offset with the double-digit returns of successful LEAP trades:

Just Energy was bought in November of 2013 at just under $7 ( 1000 shares for $7000 plus commission). It recently tanked from just above $8 to its current $5 level, a $3000 drop, or loss - $2000 from its original price.
However, by selling 10 calls at 7 1/2 for 2016, and 10 puts at $5, much of this loss was wiped  out.
The call was bought back at: $312; it was sold originally for $1,042 (all commissions included). At the same time the 5-strike put was sold at $1.55 each - 10 cost $1,533.
Due to time decay of the options , the put can be bought back at $1.20 ($1,200) for a $333 profit, despite JE's dramatic fall. The stock can be sold ( a stop loss has been put in at $5.70) for $5700.
So instead of a $2000 loss ($3000 from its top), the numbers are:
Call: $730
Put:    333
Dividends: 6 times $50 (after foreign taxes): $300
Sold stock: $5700
Actual profit (if JE goes lower and gets stopped out) +$63 - not bad for a Torpedo!!

As for the total LEAP portfolio in this account (6 stocks including JE), as of May 1 - six months into the strategy ( excluding NOK, which was bought a year earlier), it is up 12%, or, if annualized for 12 months, using a 5 month average holding period, 29%. 


As for MY personal accounts using LEAPS, also stating with one position in Dec. 2012, adding ladderlike monthly up to over 20 positions currently, I recently closed out my first and only position - as it turned out, prematurely - Trina Solar, a rather risky, Chinese company that looked technically weak, declining fro its recent high of over $18/share to $10! Today it jumped up over $3.

Still the potential "Loss" was ameliorated by the LEAPS, as follows:
Bought 500 shares in August of 2013 just under $9 a share ($4500), selling a 10-strike call and a 7-strike put. When TSL jumped from 8 to 18, I tweaked, or fine-tuned it by rolling both the put and call higher and farther out in time - 2015 to 2016 for more "insurance" money, which I returned when it dropped to 10.

Bottom line, the numbers went:
Stock cost: $4500, sold at $10.45 for $5215 - net $715
Unfortunately, by buying back both puts and calls after a downturn, the IV (Implied Volatility - which is the key in deciding what to sell - or buy back)  was so high, I actually paid more to close out the options - $450- despite the rollup, out and time decay !! Another negative of TSL is the wide Bid-Ask spread; wise to avoid in case of buybacks.
 So after holding TSL for 9 months (no dividends) my net profit (no loss) was $260, or 5.8% - annualized if held 12 months, 7.78% - not bad for a loss - better than MMFunds or CDs.

In conclusion, what I really like about the LEAP Strangle is the high reward with a hedged risk, and very little monitoring until the Leap expires. If the stock then settles lower (or higher) another "Collar" of Leaps can be put on for another two years.