Quantifying the LEAP

Quantifying the LEAP: TSL Trina Solar Co.

At the risk of defeating my purpose of Long Term Holding of the LEAP strategy, here is a fine tuning of the TSL trade - a stock that has run up recently. It sacrifices Risk for Reward by rolling up Puts and Calls with the stock, and moving out  in time to 2016 as well.

                                                                        DEBIT          CREDIT

Aug. 2013: Bought 500 TSL at $8.97  :          $4494

            Sold 5 2015 Leap Calls - 10-strike:                            $1211

            Sold 5 2015 Leap Puts - 7 strike:                                $937

Oct 29: With stock "Leaping" to 15,

            Rolled 7-strike Puts up to 10:                                     493      (net of  936-443)        

Nov.18: Rolled Calls from 10-strike to 15        596                           (net of 4093 -3496,

            and out to 2016                                                                       releasing $2500 call

If called in Jan.2016 at 15:                                                     7500

                                                TOTAL:          $5090              $10,141

Current position: In the money covered calls, with stock at $16.77. Per cent profit if called away at 15 or above: 99% over 2 1/2 years (without further tweaking- TSL pays no dividends; most commission costs are included).

If stock settles between $10 and 15 ON! January 2016 expiry date, keep all option money, but paper loss of  $2500 on stock - $5 on 500 shares. Put on another Leap Strangle at current prices, e.g. $12 Call and $7 Put for 2018.

If TSL falls below $10 in 2016 expiry, you will have to buy back Put or take on 500 shares stock and do another OTM strangle.

If done in an IRA account, one must allow for the cash up front requirement of the puts - $7 X 500 ; in a margin account marginability of the stock bought plus Put and Call receipts should cover margin req., although minimum account margin ($5000?) is also required in an account.

GROWING BY LEAPS AND BOUNDS

Subsequent to my talk before the S.F. Bay Area Options Group last month, I decided to update my LEAP portfolio for YTD (year so far) results. I was happily surprised that the amount earned on paper ( marking to the market as no trades have been completed) was so high. Entry into these 15 trades was staggered, starting in Dec. of '12, then pretty much monthly up until October, so I did not expect much profit, especially from the later trades. Much like a long distance track race, each stock starts at a different place, but ends simultaneously, on January 2015, for those Leaps, although I have started doing 2016 Leaps, now that they are out as of October expiry.

Despite several dubious candidates ( e.g., gold, metals) that have underperformed short term - expected to rally by 2015- there were counterbalancing trades such as NOK, RAD, TSL and F that rose enough over their short time to allow a rollout and up with the puts.

Bottom line, of the $60,000 invested over 2013, current profit is just under $7,000 for an 11.67% gain, due to the consistent decay of both calls and puts sold, with an occasional dividend thrown in. There are several metal stocks "under water" (below the Leap put price, which, if they do not rise by Jan.2015 expiry, will force me to take on more stock, do another Leap strangle two years out, and lower down in price - since I already own the original shares there is no cost basis there!

I have run this by several option "experts", such as people in the SF Option Group, Alex Jacobson - the prior instructor at the CBOE , and my old Schwab team who handle Friends of Chuck. Possible risks, but very minor, are total bankruptcy, and either a merger or takeover which have variable consequences. One such high risk trade could be on JCPenney, around for a century or so: a 2016 strangle brings in an immediate 75% return  of principal (no dividend yet). At expiry, another 2-year strangle should double one's money, no matter what the price of JCP. Caveat Emptor!

Obviously, stocks in the $5 to $15 range will probably not be the highest quality, but early profits and exits are also likely, although LEAPs needs very little monitoring or tweaking. My estimates are 20 to 60% returns, with annualized returns in the 20%s.

TWEAKING, PART II

In yet another rollup and out, I rebought the RAD (Rite Aid) put of $3 for 2015 and sold the $4 of 2016 for $.80 10 times; net profit of $576. After buying it only in Aug at $3.58 and selling the Strangle, it LEAPt up to its current $5+ prompting the rollup into a "Calendar Straddle".
Spending $3589 for the stock, I have brought in: $672,437, and now net $576, or $2357. Max loss is only $1232 no matter where it goes. Being in an IRA, I did have to sequester a $4000 requirement in case it gets put to me in 2016. As the 2015 CALL expires, I shall sell another 2016 Call. RAD pays no dividend and there is no appreciation in a Straddle (no Home Run).

TWEAKING THE LEAPS

Even though the Sentiment Indicators I follow are at dangerous levels - lessened by the Invisible Hand of the Fed Nonreserve, and that neither Hallowe'en nor JASON (June thru November) semi-cycle is not over, I feel the need to obvert the ZIRP policy of punitive interest rates by doing what Bernanke wants us to do- take on more risk. That said, I went back to an old fave - ERF (Enerplus) for a nice trade, with Ex-D Nov.1 - a 6% dividend for hopefully 2 quarters before the April 16 ITM call takes it away.

I also added to my LEAP profit portfolio ( I hope), with trades on both TSL and NOK; raising the put level since both stocks have run up nicely. Schwab willing, I hope to roll the 2015 NOK 2.50 put up to the 2016 $4 10 times for an additional $200 over and above the 22% return I anticipate ( the stock has gone from   $3.50 to over $7.

Likewise, I am trying to roll my recent TSL put from $7 to 10, where the call is (making it a straddle, not a strangle). I'm hoping to bring in (with a Fill) over $500, adding to the 60% expectation. TSL has gone from under $9 to its current $15.40.

SCARE THE CHILDREN

Ho Hum

Due to post vacation lassitude I forgot to roll out my Vanguard Natural Resource DITM position - VNR, which was perfectly placed to do so - $28.10, while owning a covered call of $27.50 for Oct. expiry. Having owned it for 13 months, it was probably overdue, as I find the longer one holds a position and rolls out calls, the less the profit is. Still, it garnered an annualized 13.53% (14.66% for the 13 months) not including a "Present Dollar" fact that it pays MoPay - monthly- and those $$ went elsewhere.

For readers who want to know more of DITM (and LEAPS), I am giving a talk this Saturday about them in the city. If you cannot make it, the lecture notes should be posted at the SFBAOG website for paying ($30/year) members.

http://www.examiner.com/stock-market-in-san-francisco/brent-leonard

 

ALL CLEAR

Now that we are in the "What Can Possibly Go Wrong" era - postponing gov't ineptitude; most of the Sept.-Oct. danger zone; tapering put off; virtually no other alternative investment - US or globally, etc. the sugar high continues as the $$ Crack continues to flow in.

That said, I still continue to hedge, with DITM and the LEAP longer term plans. I just put on a BX DITM going out to March (25 call) - nice option premium, considering a low VIX, and a 4+% dividend. Also looking at CA and CNK later in November.

For LEAPs, I'm considering KBH and PHM for the longer haul.

I hope the reader can attend the SFOG options group meetup next Saturday morning at Ft. Mason (Oct 26) for more on LEAPs and DITM.

OUCH

In another "rara avis" for DITM, it sustained a minor loss (less than just an ordinary stock trade), with Calumet CLMT losing just over $1,000. I even bought 2 Nov.1 Puts to hedge, which I'm still holding for "speculation", although CLMT - so far- rebounded off its low, after shaking me out.

In preparation for my talk to the SFBAOG ( Bay Area Option Group) on Saturday the 26th, I shall recap the last several months, back to the May market top, when DITM started going basically sideways, at least in my small IRA. More my failing than DITM's - going flat in preparation for the slow season of Sept. Oct.; my usual vacation weeks; and some bad Sector selection of precious metals and natural resources.

More on the DITM and LEAP talk next week on:

  http://www.examiner.com/stock-market-in-san-francisco/brent-leonard

NICE TRADE

Final trade before going on vaca:
Bought ERF (Enerplus O&G) eleven months ago for @ $16.5, selling the April $15 DITM call  ; a week later it dropped to 11 1/2, then worked its way back to be called away Monday with the Oct.15 call I sold OTM (above the stock price, but the same as the original)
Monthly dividends plus calls on 300 shares was $800, on Cost basis of $4866, annualized for the 11 months:  17.85%

BEATS MMFs

As I mentioned in my Examiner column:

  http://www.examiner.com/stock-market-in-san-francisco/brent-leonard

DITM has gone into "Stall speed" - still beating Zero rates, but the Volatility caused by an artificially rising market has brought down the average return, as well as activity.

This time of year I usually go on weekly vacations, since it is the worst two months (usually) of the year, and I rather be underinvested, looking for better entry points.

Ergo, I let some positions get called away, rather than roll them forward:

DOW, which had been held for 15 months - usually this means lesser overall profits the longer it is held- actually returned a nice annualized 12.28%, around the average. It took a little tweaking, rolling down, and then up, scalping a few more $$.

My DVY position ran too far to roll, so was called after only 3 months,  with a 7% annualized return. ESV also expired its call, but it has dropped slightly below its call price, so I'll just keep taking the dividend until it rallies.

 Finally, August callaways were LO, for an 8% gains; LMT (only 5.4%); BBY 19% even though the callaways were in 3 staggered lots.  

For now, I am mostly concentrating on my LEAPS strategy, now that the 2016 Leaps are out.

In October (26th) at Fort Mason I am giving a talk to the San Francisco Bay Area Options Group on both LEAPS and a DITM wrapup. 

DITM update

Yet another first for DITM: on Feb.21 of this year I bought 300 shares of BBY @$17 for $5133; they have now been called away in separate tranches of 100, making accounting complicated - so I averaged the time period at 6 months, surrounding Aug. Here is the result:

Bought: $5133, sold 3 June16 Calls for $685

100 called for $1591; rolled UP to Sep.22 for a debit of  $1122 - one must be very careful about rolling up for debits, since they can come back down for a loss. Another hidden benefit of a Bull market is additional profits by rolling up the strikes, and BBY really ran up.

Aug.30 and Sep.5 (just before ex-D) 2 100 lots were called, each $2191 (times 2) - provoking 3 commissions, not one. Dividends received were $85. Net profit for 6 months (sic): $488, for a % of  9.5%, annualized at 19%. (The $1122 is built into the debit). Not bad.

Still, it falls short of the new strategy that I'm using for another portion of assets - the LEAPS strategy that I wrote about this week in:

http://www.examiner.com/stock-market-in-san-francisco/brent-leonard

LEAPS offer 20 to 60% with less monitoring, fewer commissions - still using the safety of covered calls.

MEA CULPA

After celebrating a four year DITM run of an annual 11% return in my small IRA ( the microcosm of the DITM with 6-7 dividend stocks), the fifth year began with the May 22 top in the market, sending DITM into "Stall Speed", going basically sideways. The main reason was poor Sector selection on my part, not DITM's, going with natural resources and gold. This is now paying off, as we go into another correction. Another reason is that the cyclical rally has pretty much killed volatility (call premium) with the VIX going to 11.

Other than option rollouts, the only recent trade was UVV, underperforming my average with its 8.38% annualized return, but still better than cash ( one account I manage had a muni  bond mature which I refuse to renew at current zero rates - estimated annual return by Wells Fargo for $250,000 - $15!!!

Other than selling puts on NEM which expire worthless today, I sold some puts on POT hoping to take it on before ex-Dividend. As mentioned elsewhere, this is the time I normally take vacations, as well as the market swooning into the "Fall". Ergo, I shall let positions play out, without new ones.

BTW - this weekend I'm writing a review of the Money Show at: Examiner.com.

 http://www.examiner.com/stock-market-in-san-francisco/brent-leonard

DANGER STRANGER

I just cannot get out of Gold! After taking a loss (sic) on NEM recently, today I sold 2 Sept. 29 puts to cover just before ex-Dividend in Sept. Beats MMFs.

Recent research has me worried about this slamdunk market - that most large corrections are preceded by a huge last minute rise. Being dividend-oriented, I took a position in Annaly Mtge (NLY) buying at 13.38 and just selling the 13 Call. Down from its recent  $16 high, I thought it might be oversold, but it keeps slipping. Now at 11.60, if I sold the loss would be: $5361 less 293 for Calls sold, less $160 dividends, less a Sale price of $4600 (using $11.50). Net: ($308); where the ORP (lawyereze for Ordinary Reasonable Person) would have lost more than twice that - $752 ( if selling before dividends).
Another benefit of DITM! /

OUCH!

After a wondrous string of double-digit gains in DITM so far in '13 (see previous columns), I decided to take my first loss - NEM (Newmont) which was more of a gold play than DITM . As it seems to happen more often than not (Behavioral Finance) it appears that after declining since last Oct., it may have bottomed and MIGHT be a good chance to enter NEM,with its dividend and gold prospects (!).
Thanks to DITM, however, the loss was mitigated by the calls sold on 200 shares. Bought for $7903.sold for $5404. But since I bought NEM at $39.47 and sold for $5404, having sold the DITM 37-strike calls for $792 and receiving $155 in dividends, it wasn't as bad as losing 12 points on 200 shares.
After such a large run up in the market, I probably will sit tight on my 25 positions ( some LEAPS to be discussed later); I go into my vacation cycle next month, and the market goes into its bad cycle in Sept.-Oct.

BEAT ME TO IT

My Bad - I assumed Safeway (SWY) was going ex-D on the 21st, but did not check - it went on the 18th, so my positions in two accts. were called away before rolling out to Seps after its nice runup recently. Final tally: Bought 300 for $6819, 1Q dividend for $53, sold 21-strike calls for 778, called away the day before ex-D at $6291 (after comm.) - Net $ 303 after 4 months, or 13.33% annualized.  

DITM UPDATE: June 10,2013

After more than two weeks without a DITM update, now is a good time for one. For the first time in 2013 the portfolio took its first loss of the year, albeit a minor and voluntary one - QRE. This had been a profitable trade in 2012 but, not doing the best effort in Sector selection, I was too heavily weighted in Energy/Natural Resources (since that was where the yields were). Previous loss in 2012 was PGH, also a high-yielding Energy stock.

Although I still feel the DITM is the optimal strategy for zero interest rates, at least for seniors, retirees and other prudent investors - at least with a portion of assets- the reason for fewer updates is being fully invested in DITM, there is not much activity or monitoring needed- a plus.

Although a four-year wrapup of DITM testing yielded @ 10% annual results (the longtime historical yield of stocks), it has underperformed the four-year Bull market from March 2009 ( DITM started in May 2009). The four year record of my small IRA (sans contributions and RMD withdrawals) consisting of 5-6 stocks, hit a record high earlier this year, averaging 11%/year since 2009. Coupled with the safety net and riding through a dozen or so "Corrections" (one near-Bear), so far 2013 closed trades (opened in 2012 and 2013) averaged 15.3% annualized. Without the loss of QRE it would have been 17.1%.

The 2013 winner (not recommendations) were LINE,KKR, SIX,INTC,STX,GE,BBY.

Current positions include HRB,NEM,UVV,CLMT,LMT,LO,ESV,DVY.

Disclaimer: If the nasty Bear market that Garrett Jones predicted last weekend at the Bloomberg HQ meetup with TSAA/MTA actually occurs, or any Bear market - DITM will also lose money, if not hedged or exited - but not as much as an index fund (please see my last Examiner.com column on Garrett's excellent Technical presentation at:

http://www.examiner.com/stock-market-in-san-francisco/brent-leonard

SELLING IN MAY

Option expiry saw the call-away of a long held stock - WMB (Williams Cos.). Like the aforementioned MCHP (previous column), it was held over a year, and called in two lots, which makes for ugly FASB accounting. But called after 12 and 14 months, respectively, I averaged it to 13 months, making the 13.12% return become 12.11% annualized.

Not too bad, considering this week's Barron's reports the average hedge fund returned 4.3% the past 3 years, and 8.25% in 2012. The unhedged S&P 500 is up 10.9% over the past 3 years, but only 8.6% annual since 1992.

Despite the historically poor May-Nov. semi-cycle, I am looking for both more DITM and LEAP trades - please see my Examiner.com article for the rationale:

http://www.examiner.com/stock-market-in-san-francisco/brent-leonard

BIRTHDATE PRESENT

Last week marks the anniversary of not only DITM (four years of testing), but my Silver one on the planet (75). As a reward, the DITM gave me a super present - calling away my Seagate Tech stock (STX) with a Sept.(??) 28 call option.

As mentioned in an earlier column, this event is more frequent and likely than a rare torpedo stock, and makes up for the latter. Metrics on STX were:

Bot 200 stock on Dec. 2012, sold 2 March 28 ITM calls , which were rolled up to the Sep. 28s on a rising market. Although DITM doesn't participate directly from a cyclical Bull market it does have a cushion expanded, and the good possibility of an earlier call-away, heightening the annualized profit by freeing up money for another trade.

Profit from dividends, calls and resale: $592 on a $5809 investment for 5 months - annualized return: 24.46%. Also called away last week - DIA for a lot less (4.5% ann.), and MCHP, which I did in two lots. The first was three months which returned 13.78% ann., and the recent trade - 15 months- only 9.19% ann. - typical, that the longer the holding, the less the return (and monitoring as well).

Four year small IRA return - just under 10%, no thanks to gold and oil/resource stocks, which are still providing dividends and call decay.

Advancing LEAPS

One of the "trade-offs" I mentioned in my last blog update was the surprise call-aways that more than balance out the rare tanking torpedoes. As I prepare for my usual Tahoe vaca, I just got my INTC called away with a JULY call - only $3 ITM. Bottom line is an annualized (after 6 months) return of 12.94%. Better than MMFs and probably just as safe. It'll fund my activity at the tables at Stateline.

I also did a LEAP trade this week. Could net 80% total; involves buying AMD Advanced Micro, a D rated stock by Schwab, but up 40% this week - should be around by Jan. '15.  51% annualized over less than 7 Qs until 2015.
Bot the stock at $3.47, sold the 3 1/2 call and 2 1/2 put  for $1.78.
Also bot another thou and just sold the $4 call of 2015 ( no  put, as I don't want the risk of taking on another 1000 shares.
So far my no-monitoring LEAP plan includes: BAC, F, ACI, SWC, IAG, AA, AMD, NOK - Not great stocks (not a recommendation for the faint of heart), but they should still be around by 2015. If below, strike, I take on shares via Put, and write another set of LEAPS!!!

HAPPY ANNIVERSARY - DITM

The month of May marks the 4th anniversary of the implementation of a deep-in-the-money covered call option investment strategy that was designed to combat the low interest rate policy by the Federal Reserve, penalizing prudent investors and retirees, forcing them into riskier investments.

Outlined in the 2010 book from Amazon - Zero (In)Tolerance- the plan has performed beyond the expectations of a "hedged" equity investment which caps the appreciation of stocks, but has consistently, in several tested time frames, yielded the historical return (@10%) of the stock market. As illustrated in the book by the "Visible Hand", the five digits show how the strategy reacts to the possible directions of stocks:

* Up sharply, one gives up appreciation but receives the return from dividend-paying stocks (3% or more) plus some premium from the option that is sold 5 to 10 per cent below the initial Buy price. In return, the rising price increases the cushion of safety for when the inevitable retracement/correction occurs. A good recent example of this is Safeway (SWY) which just lost $5 this past week, but is still above the "call-away" price of $21 in the test portfolio - a small IRA that has no contribution or distributions, and is fully invested in DITM. This account is actually up slightly more than the above theoretical 10% annualized figure. Unforeseen was that the current Bull market in stocks actually started in March 2009, two months before the frustration of low rates led to

DITM.

* Up slightly, in a normal right translation (due to Inflation) is also positive for DITM, again providing the full return expected by the dividend and option price, after subtracting the difference between the Buy price and the eventual price (5 or 6 months out) that it must be "pre"sold at. An example of this is buying XY at $50 and selling a 6 month call option at the 45 strike price, for $6. The $5 "loss" is immediately return (to reinvest elsewhere) and the remaining $1 is added to the return. Done twice in a year with the same money, it becomes "annualized".

* The safest digit or direction of the stock/ market is sideways, wherein at the end of the option duration, another like call is sold (written), while keeping the stock, and avoiding its commission.

* The ideal digit or direction of the stock/ market is slightly down , so that if it descends to where the call was written, on can roll down another 5-10%, six months out and receive a higher % dividend due to the lower price.

* The only losing scenario is the Flash Crash, or Bear market (20% or more), when and if it stays there. Charted examples of these have been: BP, CLF, VALE, and a few more. Even then, one will lose considerably less than someone just long the stock, unhedged. These rare events are balanced out with occasional early exercises, where the profit is improved greatly.

For info on the book, see: brentleonard.com

MAYDAY Post Script:

Afterthoughts to the previous blog:
I did a DITM B/W (buy/write) on CLMT (Calumet) using the 35 strike.

On the LEAP side, After a trade on NOK, I'm assuming (!) that it will again declare and pay its annual dividend (although again reduced) around the first of May. I had sold an April 3 1/2 Put, which was assigned so I sold the 2015 3 1/2 call, and another 2015 put (2 1/2) for a combined $1.25, which, along with two annual dividends - hopefully another $.50, will cover much of the cost of the stock, espec. if it is called at 3 1/2 in January 2015.
NOK would have to fall and STAY below 2 1/2 by then for me to be assigned another 1000.  

MAYDAY!

Or as they say in France: m'aidez (help!)

Patience seems to have paid off - today, most of the energy sleepers that have (as mentioned in past posts) kept paying dividends and milking call premiums, have at least temporarily had a jumpstart. Even Cliff Resources (CLF) left for dead, has rebounded.

Also mentioned previously, although DITMers have not participated as fully with a portion of their assets as long marketeers, when events such as Safeway - today down 5 points, nearly 20%- tank, due to the cyclical Bull, it remains above water ( the Call strike) , garnering (so far) 100% of intended returns.

Also provisional, is the possible acquiring of the above-mentioned energy/resource stocks in the portfolio: erf, vnr, hl, swc, aa, aci, nem, qre, and pwe. Worth a look after doing Fundamental due diligence - or having some other service due it for you!

May is the fourth year (think Presidential or Kinchen cycle) of my DITM experiment; it also marks my silver birthdate anniversary, which I shall be celebrating at Lake Tahoe and Redding, CA. Hence weekly postings of this and the sentiment blog : http://mktsentiment.blogspot.com/, and Examiner.com column:

http://www.examiner.com/stock-market-in-san-francisco/brent-leonard

will be slightly offset.

Meanwhile, new candidates for the LEAPS strategy (selling 2015 covered calls and puts) include WU, FTR, GLW.

LEAP FORWARD

Just as with the stock market, the DITM blog has been at stall speed - mostly fully invested, taking in dividends and milking call option premiums. Of my many positions, only four are slightly "under water", so I am letting them sit there enjoying the above revenue sources, until I can again sell a call - this time above the current stock price, rather than 5-10% below.

The four were due to my less than expert analysis of Sector rotation - being in the energy and gold areas. The recent strong Bull market popped the remaining stocks well into the money so they could afford a retracing decline without a  loss - making up for the large profits given up by the ITM calls.

Instead of trying to time the decline, I have been initiating position in a second strategy - LEAPS. Looking for stocks in the $5 to 15 range that have LEAPS, I put on a Buy/Write with the 2015 calls slightly above the stock price and also sell a LEAP put slightly below. This defrays the initial expense of buying the stock while providing a hedge as well.

Positions (not recommendations) include: BAC, F, ACI, SWC, IAG, NOK, and AA.

Using the last one - AA - as an example, I bought AA at $8.00, sold the 2015 Call at 10, and the Put at 7. Combining the two premiums of $.70 and .85 with 7 dividends until expiry ( now less than two years) , at the same price it amounts to 22%, or 12.6% annualized over 7 quarters. If the stock goes to or above 10 by Jan. 2015, the return is 47%, or 26.9% ann. These stocks are pretty risky and oversold now - if they drop below the Put price, one must take on more stocks - assuming the company won't go out of business. Then another two year set of LEAPS can be sold, almost matching the total outlay.

Unlike Tim Martin's excellent LEAP presentation this weekend at the SF Options Group, using weekly options, this is a longer term strategy, with almost no monitoring or commission generation. It looks like Zero rates   will continue to 2015 !!!

T G I ditm

Veteran traders remember TW3 ( That Was The Week That Was) - what a way to start the end of Tax Season: First Gold tanks , after a steady drop from late last year; then the stock market tanks after a steady and boring rise. And, of course, capped off with the terrible tragedy in Boston!

Finally the frustration of lagging the huge Bull Run with most of AUM paid off with the Safety Net of DITM today. Of all my 20-something positions, only 4 went "under water", since the Bull's pushing stocks way  up above the Call-Away strike price. Only the Oil stocks - PWE, ERF, QRE, and, of course the recent  NEM buy are "temporarily?" under water, but still paying a nice dividend and milking option premium.

Although constant monitoring is required, this could be  a great buying opp. Since by being pretty much fully invested and rolling out calls has kept DITM activity in the blog dormant, I thought I'd incorporate some results from my new LEAP strategy as well.

In my Examiner.com column,

http://www.examiner.com/stock-market-in-san-francisco/brent-leonard

which I titled Leap Into the Future, I discussed a few $5 to 10 stocks - not recommendations, but examples. With gold down bigtime, I'm now looking at IAG and KGC to capture huge premiums. More risky stocks would be HL, HEK ( a water play), NOK. With only 7 quarters left until January 2015, annualized returns are substantial, and losses minimal - even if they disappear entirely (unlikely). If they don't rally, another set of 2-year Leaps could cover the entire cost of the stocks, especially with dividends rising.

FOOL ME ONCE...

I should have known when I recommended to a friend Saturday at the SF Options Group that I had just bought UVV - Universal Leaf tobacco- which had been one of my 10 big losers over four years, that it would bomb again. Luckily, it's in the DITM account. It fell nearly four points today on a downgrade (Schwab has it as a rare "A" stock), so it fell just below my Sold Call of $55. Might now be a better buying opp.

J P Morgan got called away at expiry (ran up too far to roll out) - a mere   8 1/2% annualized return from Oct.1 (nearly 6 months), lowering my average. But still better than MMFs. Bought 200 at $8269, sold Calls for $908, dividends of 120 (2); called away at $38, to net $350.

Also called away was Hasbro, which I held for 11 months - rolling UP a strike. Its annualized was a little better than JPM - 8.74%. With the VIX at a 2007 low (!!!) of 11+, not much IV in the stocks. Still, the dividends plus  a safety net (see UVV above), makes it worthwhile for most of my assets.

THE NEW NORMAL?

In the previous post the unusual event of a partial call-away of TAL was noted - a few days later it happened again with WMB. Apparently that was all the investor/marketmaker needed. Hopefully this is not a trend, as it will increase commission costs slightly.

Today, with STX (Seagate) hopefully going ex-dividend very soon (still not declared from Dec.12, 2013), it has been raised twice the past year, is rated B by Schwab, but still should be hedged. Therefore, the March 27 strike call (5 points ITM) was rolled UP to the 28 in Sept. The call alone should garner an 8.8% annualized return (over the six months), plus the dividend (2), would be nearly 15% - more if called away in June.

Nota bene: Despite excellent returns so far this year in DITM, the question has to be posed: is trading really worth it? With the new GI Bills (Gov't Intervention), the logic of a trade is such -
Do a Buy/Write giving up the bid/ask spread; pay commission(s); if profitable, pay state and federal taxes on it, pay ( in my current case) a tax preparer big bucks to analyze the trades (brokers do not have to report cost bases in options until 2014, so Gain/Loss has to match 1099B). Not to mention any losses or break-evens. Once again our wise solons are contemplating a transaction tax again.  

EX-DIVIDEND

In an unusual circumstance, the most recent call-away came on two separate days - the 1st and 4th of March. It was 100 shares each of  TAL (Tal Int'l). However, since the return was an annualized 24.52% I shouldn't complain of paying two commissions. Purchase price in mid-Oct. was $6909; net return after rolling UP a set of calls was $706, net of all commissions. If extended over twelve months, not five, the return would be nearly 25% with the same money.

Kinda makes up for any past or future losses that may happen.  

MARCH MADNESS

As reported in my last blog, Sentiment is flagging Caution, so for the first time in awhile, I'm not reinvesting, although I keep looking for DITM candidates from SeekingAlpha.com and Barron's. Over the weekend my 100 shares of Six Flags (SIX) got "waved" away: Bought/Wrote on November 1of last year, the four months netted a 15.68% annualized gain. Bought SIX at $56.55 ($5664 incl. comm.), sold the Mar.55 for $379 - called away at $5491 ($9 comm.).

 I still have laddered positions out mostly to June (plus 1 July - VNR).  So far in 2013 - no losses (knock wood).

That's What I'm Talkin' About

Last week's expiry brought a quickie - GE getting called away very early (one of the great questions I got in  my talk to the SF Options Group). Since profits are capped by the covered calls, losses must be kept to a minimum to balance them. However, surprises occur on the upside as well. The GE trade, put on in mid-December, only lasted two months (1 dividend) but garnered just over 20% annualized from the June call which was exercised for some reason. GE was bought at 21, call sold at 20, yet the stock is only 23 today. With an expected correction upon us, I'll wait for a further investment.
Also, part of my MCHP was called away after its run up (finally). It was the 27 strike call - the 34 remains.
My sentiment blog has warned of a downturn (as has the media), so I've put on a SPY put spread and the SDS inverse SPY to hedge. So Far....

DITM History

The table below is from the talk to the SFBAOG last weekend (see prior post: GOOD DAYS,BAD DAYS)). a nearly four year history of trading the DITM strategy:

		DITM	Deep-	In-	The-	Money
Date	opened	#	#		Avg.	#
From	To	Stocks	Months		Return	Losses
May.'09	Dec.'09	18	3.7		18.33%	0
Oct.'09	May.'10	22	5.1		9.45%	4
Aug.'09	Nov.'10	14	7.5		9.84%	0
Oct.'09	Nov.'10	12	4.5		9.95%	2
Nov.'10	Apr.'11	14	2.5		13.32%	0
Jan.'11	Oct.'11	23	3		11.31%	0
May.'11	Dec.'11	20	5		9.31%	2
Jan.'12	Nov.'12	21	4.5		6.19%	4
	TOTAL	104	35.8		59.92%	12
	Avg/Yr.	17	4		10.00%	1.33

GOOD DAYS, BAD DAYS

If one chooses to only remember the sunny days instead of the rest, the happy days but not the sad - then one can say 2012 was not the best year for DITM, compared to the previous three. If a mistake was made, it was overinvesting in Energy and Materials  stocks, which had good dividends and juicy call premiums, and the hope of "Fracking", etc., to lift stocks such as symbols PGH, PWE, VALE, CLF, and ERF.  Ergo, it vastly underperformed the SPX on the year.

Although most went slightly under water ( below the In-The-Money call option sold) and was held on to with normal covered call rollouts of the same price, enough (four) were sold at a loss, bringing the year down to a less-than-average return of just over 7% (still much better than MM funds, CDs, etc.).

As the end of four years of testing/investing DITM ends in May, I was asked to update results last weekend before the San Francisco Bay Area Options Group. Below is posted the 2012 results ( both opened in 2011 and in 2012, but closed out in 20120; also  the "annualized" results of other time frames, totaled.

Finally, and best of all, is the result of actual trades in my small IRA from the start of DITM in May of 2009 - a microcosm of DITM with no contributions or distributions, losses, experiments - such as capturing stocks paying annual dividends with an ITM call- and the beginning learning curve. 

OPENED	2011	2012	DITM
DATE:	SYM	#MOS.	ANN.%
5/24/2011	WM	17	5.66%
6/27/2011	BMY	9	9.09%
8/20/2011	DIA	8	6.06%
8/20/2011	MAT	7	8.56%
7/21/2011	LO	7	16.00%
9/16/2011	PM	5	13.77%
10/12/2011	COP	4	12.33%
10/25/2011	EPD	3	5.56%
10/26/2011	LLY	4	9.65%
11/1/2011	INTC	2	15.75%
11/28/2011	TAL	3	13.36%
12/1/2011	KMB	9	10.13%
12/1/2011	SDRL	9	10.13%
12/5/2011	MRK	3	9.55%
12/16/2011	NUE	4	17.72%
12/27/2011	DOW	3	22.47%
5/16/2011	CVX	8	10.77%
5/20/2011	NOC	8	8.00%
		TOTAL%:	204.56%
5/10/2011	TOT	8..	9.37%loss
5/20/2011	SVU		8.9%loss
		TOTAL%:	18.27%
		TOTAL:	186.29%	div.2= 9.14% #TRADES: 20 9.31%
********	OPENED	2012
1/3/2012	VZ	6	8.06%
1/19/2012	SCCO	8	18.20%
2/21/2012	JNJ	5	5.00%
2/21/2012	NVS	5	10.40%
2/27/2012	TLT	3	4.31%
6/5/2012	PEG	6	10.33%
4/19/2012	MAT	4	10.92%
4/24/2012	STX	4	16.45%
4/27/2012	LLY	4	8.93%
5/1/2012	APL	6	23.80%
5/22/2012	SDY	4	7.82%
5/25/2012	SFL	4	16.29%
6/11/2012	HUN	3	40.00%
6/19/2012	IRM	3	5.60%
7/16/2012	QRE	3	14.87%
8/7/2012	AHGP	3	14.19%
4/19/2012	LINE	12	8.24%
	TOTAL%:		223.41%
2/1/2012	ERF	4	39.05%
9/17/2012	VALE	2	7.73%
4/16/2012	CLF	2	18.89%
10/18/2012	CLF	2
11/13/2012	PGH	3	27.09%
	#months	96	92.76%
	23.19%	avg.mo:	4.5mo.
TOTAL:	130%	#TRADES:	21
	YEAR(Open)	#trades	net%
GRAND	2011	20	9.31%
TOTAL	2012	21	6.19%
full year		41	15.50%
average		21	7.75%

Woulda, Shoulda, Coulda

Here's am interesting, hypothetical (since I didn't do it), edifying trade to digest:

In my testing of DITM over the past 4 years, I considered annual dividends, with mixed results - usually depending on how they traded after the buy/write. I saw that Siemens (SI) was again coming up ex-D on Jan.24 (today) so I played it on paper, although I did make money last year on it after waiting it out. Here is the hypothetical trade
Jan.17 - buy stock $110.70, sell call (theoretical or mark price in the middle- wide spread) $5.95, for a net $104.75 before the $9 comm.
Jan.24, after ex-D- $107.87 (and rising), buy back call at 5.35 - net  $102.52, add in the dividend to receive -$3.90= $167 on 100 shares. 1.6% in a week. Or one could wait for April expiry. If SI is above 105 then, profit would be:$415, or 4% in 3 months or 16% annualized (if done 4 times- theoretical).  BTW - 1.6% annualized is 83%!!

That's What I'm Talkin' About

2013's first Option expiry was quite propitious for the DITM portfolio:
 First, my deeper DITM DIA was called away prematurely from  its March 122 call, thanks to the current rally. For the 3 month's holding period the annualized % was 14.50%
Three stocks had risen too far to roll out farther ( not enough extrinsic option premium):
AYR (Aircastle), which was held 11 months had an annualized (nearly identical) return of 13.73%.
KKR which had a rollUP of calls, plus an additional purchase of 200 shares, totaled an annualized 24.91% for 8 months holding.
IP (Paper) was also hel 11 months and netted of commissions (always) 15.78%
Finally, WAG (Walgreen's) after being held 5 months, was called away for a measly 9.85%.
Love these rallies, but don't expect them to continue throughout the year.

DJIA Vu

Although a Bull Rally is the next-to-least direction of the 5 possibilities (of my "Visible Hand"), the safety of getting 100% of my return is welcome. One of my DIA positions was called away early ( the March 122 call), rendering a 14.5% annualized return. It was held only three months, but to get $491 back, net of commissions, with a fair amount of safety - safer than an Index fund, for example- on an investment of  $13,548 is O K.
Below is a compilation of several time frames since the inception of my DITM. 

		DITM	Deep-	In-	The-	Money
Date	opened	#	#		Avg.	#
From	To	Stocks	Months		Return	Losses
Aug.'09	Nov.'10	14	7.5		9.84%	0
Oct.'09	Nov.'10	12	4.5		9.95%	2
Dec.'10	Apr.'11	14	2.5		13.32%	0
Jan.'11	Oct.'11	23	3		11.31%	0
May.'11	Dec.'11	20	6		9.31%	2
Jan.'12	Nov.'12	21	4.5		6.19%	4
	TOTAL	104	28		59.92%	8
	Avg/Yr.	17	5		10.00%	1.33

DITM REDUX

Although it is just a snapshot in time (much like a stock chart) my year-end statement of the small IRA, (which is a microcosm of my 4-year-old trading system: Deep-In-The-Money Covered Calls) showed a return of 9.27%. It reflects the purest example of DITM, as there are no MRDs ( minimum required distributions), nor contributions to, this IRA.

9% is not a world beating return, but it is somewhere in between the DJIA and the S&P 500 of 2012, without much of the whipsaws - due to its "safety net". Several timeframes of DITM have consistently returned around the 9-10% area.

Combining the two previous tables - stocks opened in 2011 and those opened in 2012 - here is the total for 2012:

	YEAR(Open)	#trades	net%	.......avg.mo.
GRAND	..2011	..20	..9.31%	....6
TOTAL	..2012	..21	..6.19%	....4.5
full year		..41	..15.50%
average		..21	..7.75%	....5.25

Using the conservative "covered call" option, and selling it below the Buy price of the underlying stock, one avoids most of the sine wave corrections and noise of the volatile market, while receiving (based on 20-25 stocks) a dividend every 3 trading days - Payday!   The DITM investor is also receiving decay from the sold call option every day ( called negative theta, to the Greeks), while the market stumbles in a sideways direction, which it basically has since 2000. With DITM as the base for the investment pyramid, one can also play Bull rallies outside of it with SPYs and other sector ETFs, call options, favorite stocks, etc.

After spending 3 1/2 hours last weekend at a lecture by legendary market analyst Martin Pring and his group, the prospect of an extended Bear market ( in Inflation adjusted terms) is corroborated by 18-year cycles - especially after the largest Bull market in present history - 1982-2000. Although extended rallies are probable, the timing of them - especially with current government intervention- is unlikely and unrealistic.

Obviously DITM is not for everyone. Only persons with the consistent interest in the stock market, who would be dedicated to monitor the plan occasionally would be successful at it. An interest in the most basic of option strategies - covered calls - is desired, but can be learned easily.