Monday, April 22, 2013


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 !!!

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