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