Zero(In)Tolerance

Do It To Me: The Hummingbird Stragety

2012-03-06T10:41:00.001-08:00

I don't feel old. I don't feel anything until noon. Then it's time for my nap.
-- Bob Hope

The thing I like about DITM is that it is neither Day Trading (which is very difficult to do consistently with profits), and BYE and Hold (See First Solar, which went from $320 to $20 in four years).
The Hummingbird chooses the prime flower, drains it, and moves on. So was it with TAL, which I only held for a little more than 3 months, since the April call was assigned just before ex-Dividend today. Two reasons for early assignment: imminent ex-D, and a stock run up - both of which happened to TAL. Bought at the end of November for $5163 (200 sh. incl. commission), I got one 8% dividend ($104) call sold, ($798) and early callaway of stock for $4491. Total for just over 3 months: $230, or 13.36% annualized.
Some of us have discussed VALE, which has a semi-annual dividend going ex on April 16. Rather than buying it, thanks to a market/stock selloff today I was able to sell an April ATM put, then hopefully do a buy/write next month!

A computer once beat me at chess, but it was no match for me at kick boxing.

2012-02-28T09:44:00.000-08:00

SMOKIN': Lorillard (LO)is a tobacco company which I did a DITM ( Do It To Me) last July, by selling a put ATM (at the $$). The stock went virtually nowhere until this month when it screamed upwards. Since July it is now up 18%.
Yesterday my position was called away - it had risen way higher than I could roll it, even if I wanted to. My return (as compared to the 18% if I just owned the stock): 16%, with a high degree of safety! The 105 call.

If con is the opposite of pro, is Congress the opposite of Progress?

2012-02-16T10:20:00.000-08:00

Here is the latest update: Conoco Phillips "called" away , for a nice 12.33% annualized gain over a 4 month period.
Bot 200 COP last October at $68: $13670; sold 2 62 1/2 calls for $1608, plus 1 quarterly dividend,($132); and called away at $12491 - Net $562 over 4 months.
Nice trade, right about my average return.
Some upcoming candidates with Ex-D in Feb.: MAT,LO,WM,TAL - and NVS for the Annual dividend!

St. Valentine's Day Massacre:

2012-02-14T10:43:00.000-08:00

It seems everyone, both good and bad, seems to be Bullish these days - not the best environment for DITM, but safe! It actually helps build a larger cushion for existing trades when stocks rise. A couple of blogs ago I mentioned Joe Granville and how to handle his Crash scenario with the DIA. I want to expand on that for tyros just getting into DITM. The DIA does not yield too much, but with a little extra effort one can time it so the weak months of dividends (Jan.,Apr., July, Oct.) are excluded - they contains the stocks of the 30 DJIA that pay the least that month.
Example, Do a buy/write in Feb.-sell the May or June call - missing Jan and maybe getting Apr.'s called away. One can also sell a put (?) until that ex-D date arrives, getting money while you wait and buying it cheaper.
One upcoming Annual dividend - Novartis (NVS) goes ex-D Feb.27; selling the July 55 call ITM one can get an annualized 14% return -depending on the Swiss income tax deal with the US.
A couple upcoming candidates: MXIM and MCHP go ex-D on the 17th; KKR, COP and MAT also up shortly - to buy or (in my case) roll over the call, if feasible.
Knowledge is knowing a tomato is a fruit; Wisdom is not putting it in a fruit salad.

DITM: DO IT "TWO" ME -

2012-02-10T11:07:00.000-08:00

The best part of DITM c-calls in this environment is that I get paid for having Insurance, rather than paying for Puts. Today, after SELLING puts on IP for $200, I did a buy/write to July with a $29 safety net. Ex-D is Monday, Feb.13. I also rolled out my KKR calls - it goes ex-D Feb.15 so I did not want it to get called away at $15 - It is at 15 right now, so I sold the June 14 strike. Although earnings disappointed (duh), they increased their dividend to 8% (if it holds through the 2nd dividend)-first one of $.32 is declared! Extrinsic call premium is $.40.
I still think the market is due for a selloff - because of my sentiment indicators: http://mktsentiment.blogspot.com. despite Larry Fink of Blackrock's 100% exposure for everyone statement this week.
DITM is somewhere in between Buy & Hold and Day Trading. I think I may call it the HUMMINGBIRD STRATEGY - get in just before the flower is blossoming, then get out before it dies out.
One more PLUS for the Home Team: I just got a note from my broker that MLPs (Ltd.Ptnrs) are TAXABLE in an IRA - what next?

FEBRUARY UPDATE:

2012-02-03T09:47:00.000-08:00

Today I received notification from my broker (Schwab, for whom I was a Registered Option Principle for a decade), that I was assigned on my INTC stock, well before the option was to expire in April. As I've mentioned before, the desired direction for DITM is slightly down -on the ring finger of the Visible Hand. Slightly up, however, also has its benefits - farther ITM often results in being assigned early, compressing the option duration, and raising the annualized profit. In this case, I bought Intel Nov.1 for $24.18, sold the April 22 call for 4.50, got 1 dividend of $31 - profit was $143 per hundred lot, or 15.75% annualized.
Although most of my accounts are fully invested in DITM, it is probably wise to invest a portion of assets in DITM (the CD or MMF part), so one can take part in market run ups, such as the January climb.
Despite my profligate lifestyle (!) I notice that my total retirement accounts are at a 4-year high (mid-2008), while my smallest IRA - the purest DITM test tube) is at an all time high, adjusted for withdrawals. DITM covered calls seem to get better and better, especially considering the safety net, and only a vicious HFT-driven Flash Crash can imperil it, although much less than with an Index fund, etc.

PAST, PRESENT, FUTURE:

2012-01-24T10:22:00.000-08:00

Here are three ideas of interest to DITM (Do It To Me) readers:
In one of the family accounts I manage I did a trade earlier this month on Siemens (whose earnings came out today), which pays an Annual Dividend - one of the fine tuning ideas I discussed at the SF Options Group last Saturday-
Bot SI $96.10; STO the April 90 call for $809 (plenty of downside protection)
ex-D was Jan.20 for $404. If/when SI is called in April (3 months)net profit is $585. Dividing net by initial price of stock is 6.08%, or over 24% annualized -for a relatively safe trade; no Hope and very little Fear required.

On Bloomie yesterday an old veteran Technician, Joe Granville, predicted a gloomy 2012: DJIA would drop 1,000 points of Dark every quarter, for a total of 4,000 points, landing the Dow at 8,000 for the year. How to handle this gloomy scenario?:
If you buy the DIA and sell the call 10% lower, you could "Step Down" every quarter to each level and make 100% of your estimated profit. E.g., with the DIA at 126, sell the call $12 lower (114), then the 102 when the DIA hits 114 - then the 90, then the 78! Pretty good risk management for a doomsday scenario.

Finally, I mentioned SeekingAlpha as a good source of dividend stocks. Today's email listed the 2012 Dogs of the Dow:
http://static.seekingalpha.com/uploads/2012/1/22/893960-13272811994744-Zvi-Bar_origin.png

DITM (DO IT TO ME):

2012-01-23T11:37:00.000-08:00

I was very pleased with the Saturday SF Options Group presentations this past weekend at Fort Mason: a packed house, in spite of the conflict with the TSAA meeting with the Martin Pring group at GGUniv. I, and 3 other DITM adherents, spoke with minimum redundancy (I hope) and conveyed the great record of safety and return from each speaker. SFOG fellow members Don Blesi and Bob Price related their experiences with DITM and John Chernicky talked on some related information. All of the information will be posted soon at the SFBAOG Yahoo website for members -
This past option expiry saw some activity in my accounts:
I had another infrequent loser (my six in 3 years) with TOT, it being both European and an oil company, I bailed by rolling out to lower calls, finally called away Friday for a $365 loss (plus $200 from a put spread hedge).
NOC got called away - not worth rolling out- for an 8% annualized profit over 8 months; CVX ran away from me, but gave me a 10.77% gain, also 8 months.
As mentioned in my talk, my small IRA,the purest DITM account of the 5 family ones I invest in, finished 2011 with a 12.87% REAL (not annualized) gain; my brother's IRA, despite his MRD (minimum required distr.) still gained 9.4%.
My loser #5 - BTE, a Canadian oil company which I gave up on (and shouldn't have), I bought at just over $55 and sold at $43.70, but with the dividend and calls, only lost less than $700 per buy/write, rather than $1200 - after selling it in Sept. (see previous DITM blog) it rallied back to today's $57.28 - higher than when I bought it. Another trade I did (outside of DITM, as it didn't qualify with less than 2% dividend) was CAT - I caught the very top at $111, sold a 105 put to scalp some $$, and it dropped to below 70!! Not giving up, I rolled the puts - bot at $2100, resold at $2200, and 4 more rollouts, until the 105 put expired with CAT at 105.67 Friday. Forget IBD's 8% stop price - Buy And Wait (Not Buy And Hold).
Things should even get better - Barron's cover story this week was The Magic 4%; the belief that stocks have to raise dividends this year, due all the corporate cash and nowhere to put it!

THE REAL 1%:

2012-01-16T09:48:00.000-08:00

If the "Occupiers" want to effect real change, they should demonstrate in front of the Federal Reserve. Every month, as I look at the left over $$ in my MMF account earning .01%,(and this is before Income Tax, Inflation, and a rapidly declining Dollar), I think of the Trillions of $$ in Pensions, Retirement accounts, CDs, etc. losing buying power. The top quintile of U.S that has disposable income, can put money to risk in stocks and venture capital to widen the gap above the middle class.
This coming Saturday morning, the 21st, I, and a few DITM adherents, are presenting views and actual trading results to the S.F. Bay Area Options Group at Fort Mason. The purest proxy in my DITM trading is my small IRA (99% DITM), which, as of Jan.1, returned 12.78% ACTUAL returns for 2011.
Considering the primary benefit was supposed to be SAFETY (less risk than an Index Fund, due to the safety net of the Call), this is a bit surprising, since it beat most all other asset classes. When one considers that after going through school, raising a family, etc. they have basically 20 years to seriously prepare for retirement, if it happens to be in the current Lost (Double) Decade of Zero rates and Zero stock returns, a struggling Social Security just won't cut it. At least a portion of one's assets must be put at risk, and one must practice fiscal as well as physical fitness to retire well. At last the media is starting to focus on dividend-paying stocks, in its herd-like fashion.
There is a slight learning curve, and trial and error period, to DITM to do it well. I hope to see some of you this weekend.
Here are some sources of dividend stocks:
SeekingAlpha.com/Investing for Income
DividendDetective.com - Harry Domash
Dividend.com - free trial
TheStreet.com

Puts sold to acquire stock for DITM buy/write:

2012-01-10T13:24:00.000-08:00

DateSold Symbol # PUT $$
6/1/2011 INTC 3 Jul .21 64 expired 0
6/1/2011 LLY 2 Jul.37 66 expired 0
6/1/2011 HCN 1 Jul.50 30 expired 0
6/3/2011 TAL 2 Jul.30 150 expired 0
6/14/2011 SCCO 1 Jul.31 90 expired 0
7/12/2011 VZ 2 Sep.36 122 expired 0
7/21/2011 LO 1 Aug.105 130 expired 0
7/22/2011 LO 1 Aug.105 110 expired 0
6/9/2011 XTXI 3 Sep.10 184 expired 0
8/16/2011 GE 3 Sep.16 172 expired 0
8/16/2011 DVY 1 Sep.49 110 expired 0
7/22/2011 MAT 3 Aug.26 67 assigned
9/17/2011 GE 3 Dec.16 346 rolled
12/15/2011 GE 3 Mar.16 220net
10/20/2011 NEE 2 Nov.50 270 expired
10/24/2011 KMB 1 Nov.70 125 ex-D Dec.7
12/5/2011 NUE 2 Dec.40 148 ex-d Dec.28?
NY2012
12/23/2011 IP 2 Feb.28 221 ex-D Feb.14
1/3/2012 SCCO 2 Feb.31 320 ex-D Feb.14?

DITM TRADES - PART II

2012-01-04T10:53:00.000-08:00

DITM CLOSED TRADES -OPENED AND CLOSED IN 2011:
DATE SYM STOCK DIV'D CALL/STRIKE SALE NET MOS.
1/5/2011 VZ 7523 196 Jul.35 623 6991 287 6 7.63%
1/11/2011 SI 11881 270* Apr.110 1035 12479 193 1 19.50%
1/13/2011 TLT 18423 124 Jun.85 1502 16991 194 3 4.21%
1/21/2011 NI 5607 69 Jul.17.5 469 5241 172 3 12.27%
1/21/2011 RY 10857 101 Jul.50 1038 9991 273 3 10.10%
1/27/2011 KMP 7229 0 Jun.67.5 505 6732 8 2 1.00%
2/15/2011 COP 14735 264 Aug.67.5 1352 190 562 5 9.15%
2/16/2011 NVS 11309 0 Apr.55 350 10991 32 1 3.40%
2/17/2011 MCD 7614 61 Sep.72.50 509 7241 197 3 10.35%
2/23/2011 LO 15951 260 Jun.75 1686 17321 614 1 46.19%
3/3/2011 BTI 8069 266 Jun.80 214 8336 217 1 32.30%
3/8/2011 XLU 6505 127 Sep.31 374 6191 187 6 5.70%
6/17/2011 XLU 6609 0 Sep.32 326 6191 56 3 3.40%
6/1/2011 XLU Jun.33 36
3/23/2011 T 5629 0 Oct.22 338 5391 100 1 21.32%
3/23/2011 EIX 7300 64 Jul.35 440 6991 195 3 10.68%
4/8/2011 FL 6270 50 Aug.17.5 1108 5241 129 3 8.23%
4/8/2011 ABT 10089 96 Aug.47 760 9391 158 3 6.26%
4/1/2011 GRMN 6751 0.00 Jul.32 576 6809 57 1 1.01%
5/5/2011 ETR 6907 166 Sep.65 471 6491 221 4 9.60%
5/20/2011 LMT 7969 150 Sep.72.50 770 7241 192 4 7.23%
9/12/2011 TLT 11384 61 Dec.106 919 10591 187 3 6.60%
10/27/2011 TBT 2320 hedge .sld1932 388
9/16/2011 PM 14009 154 Jan.70 448 13991 804 5 13.77%

Average Annualized Gain: 11.31%!

ONLY LOSS-STOCK RECOVERED COMPLETELY
5/23/2011 BTE 200 55.22 11053 83m Jul.55 490 8731 1210 4 32.80%
BTE 83 Oct.55 578net
BTE BCC2 loss 122 see above

2011 TRADES IN DITM:

2012-01-04T10:27:00.001-08:00

DITM TRADES BOT IN '09-'10
LOOK FOR %-SOME MULTIPLE ROLLOVERS

8/7/2009 EXC 4996 318 4/17/10 45 654
EXC 53 10/16/10 42.5
EXC 53 4/16/11 41
EXC 53 7/16/11 39 785 222 24 8.12%
10/14/2009 INTC 6291 184 4/17/10 20 520
INTC 47 10/16/2010
INTC 4/16/11 18 543 17 6.10%
5/24/2010 NOC 12147 282 Jan.55 1428 1102 8 13.60%
10/18/2010 HCN 9961 276 Mar.50 400 706 5 17.01%
10/20/2010 DIA 33429 378 Mar.104 2932 922 4 8.27%
10/22/2010 ETN 8774 58 Apr.80 1109 384 4 13.10%
11/4/2010 CVX 8478 72 Mar.80 646 231 4 8.17%
11/5/2010 LLY 7135 98 Apr.33 598 152 3 8.52%
11/8/2010 SPG 10615 160 Apr.100 1022 1006 11 10.30%
SPG Oct.100 160 net-rollout 288 line 17
11/18/2010 PEP 6484 96 Apr.60 555 158 5 5.85%
11/18/2010 JNJ 6389 108 Apr.60 (2)689 450 6 14.09%
12/1/2010 RYN 5024 54 May.45 612 133 3 10.60%
12/1/2010 MRK 3489 76 Apr.32 345 167 6 9.57%
11/30/2010 TLT 9924 245 Jun.95 600 223 6 4.50%

Average Annualized Gain: 9.84%

PREACHING TO THE CHOIR - MUSIC TO MY EARS:

2011-12-26T14:18:00.000-08:00

With 2011 ending with a positive reversal in the markets and the global/domestic economic outlooks - funny how that happens around Xmas!- I want to wish all the readers and DITM supporters a prosperous 2012.
My Holiday Gift is a trade I tried to put on Friday, but the MM (market maker) was OTL (out to lunch); so I shall reput it on Tuesday, as it goes ex-Dividend Wednesday. So it must be done before then:
Buy shares of DOW, a Schwab "B" rated stock, 4* by S&P, 3.67% dividend; sell the June 26 calls at the marks (they didn't want to split the bid-ask for a Theoretical price). Annualized return should be in the mid-teen range, with a safety net of technical support.
I also wanted to mention a couple very helpful links to aid in DITM trading:
http://seekingalpha.com/dashboard/investing_income has more great ideas than you have money!
The other was mentioned in Steve Sears' Striking Price option column in Barron's this weekend, which closely fits with the DITM strategy - he has allowed me to excerpt it for here and the nonprofit SF Option Group site. The site is CBOE's OIC www.optioneducation.org, which should be extremely useful for any type of option activity - heavens know we could use help these days!
Here is the excerpt from Sears:
"By mid-December, most banks, large and small, release New Year investment outlooks. They hold media lunches. They get a lot of press. Never mind that many predictions prove wrong, or that most sell-side strategists are always bullish about something, and most stockbrokers are always optimistic. And let's never discuss the reality that the performance of most investors' portfolios always trails that of the benchmark indexes.

YET, INVESTORS RARELY TIRE of the old-wine-in-new-bottles routine. This isn't because they are stupid. Each year's set of predictions about which sector is poised to advance appeals to them, because most are trapped and need to make money to retire or send their kids to college or pay for other big-ticket items.

Focus on dividends, and yield-enhancing options strategies. Rather than trying to make the next big score, look at stocks that pay healthy dividends. Dividends, after all, account for about 45% of historical equity-investing gains.
At the same time, resolve to master yield-enhancement options strategies. Visit optionseducation.org, a Website funded by the options industry. Study the covered-call strategy that studies have shown to outperform buy-and-hold investing. By selling calls against stocks that they own, or are interested in buying, investors can potentially increase their returns.

SOME COVERED-CALL SALES can generate more money than the actual dividends on the underlying stocks. If the stock isn't called away, the money received for selling the call increases your investment returns.

If the stock is called away, sell a put and try to buy back the shares at a lower price. If you can't repurchase the stock, keep selling puts to generate more conditional dividends. Again, the money received from selling these could exceed the stock's dividend yield. If you do buy the stock because it slid below the put's strike price, the premium will have lowered the purchase price and increased the shares' dividend yield.
Such strategies aren't exotic; some critics might even call them stodgy. So be it."

HOLIDAY CHEER:

2011-12-20T08:20:00.000-08:00

Finally, a silver lining. Today's 250+ point rally hopefully marks the beginning of a nice multi-week rise in the markets after recent gloomy news from home and abroad. My oersonal scenario for 2012 (despite the Mayan calendar forecast of Armageddon) is a Bar Bell market with rises in the 1st and last Q, and choppy volatility into the election. This is based on 4-year and decennial cycle norms.
Fully invested now, I plan to lighten up somewhat into the summer, and re-institute after any major downturns - resulting in lower prices, higher dividend %, and larger IVs in the Calls. Only five of my 22 positions are currently under water - stabilizing no more than $4 under the sold Calls- and receiving higher % dividends and milking Call premiums, I hope to resell Calls "above" expiring levels at expiry.
One that got away today is PM, which went ex-D today, being called away.
Factoring in the sold Put in late July (5 months ago), 200 PM was put to me at 70 in Sept. - net of Puts, Calls and 1 dividend, I received $804 (net of all commissions), divided by a cost of $14009 resulted in 5.74%, or an annualized (if done over 12 months) of 13.77%.
Here is a great link for finding DITM stocks:https://mail.google.com/mail/u/0/?hl=en&shva=1#inbox/1345c508ea5d3346
Happy Holidays to All!

HELP WANTED:

2011-12-03T11:49:00.000-08:00

The article below is the most recent iteration of my talks around the bay area on DITM, which increasingly appears to be the most optimal of strategies in this volatile, yet lateral market - for now and the immediate future.
I have sent it out to various places in hopes of finding a mutually beneficial situation to domicile my managing funds, while allowing experts to handle the regulatory and legal back office part.
I hope you find it interesting- any suggestions would be greatly appreciated.

WHAT I LIKE ABOUT DITM
By Brent L. Leonard, CMT
* Fully invested, in December 2011 my portfolio received 20 dividend payments, or 1 for each trading day of the month!
* When I buy a $50 stock, and "pre-sell" it 5-6 months later with a $6 call (the 45-strike), instead of an 8% dividend, with my cost basis at $45, the dividend rises to 8.8%. The $1 dividend each quarter is deducted from the part of the stock that I already sold; otherwise the stock would be $46 after a year, excluding appreciation.

* With today's Volatility, I get daily peace of mind knowing any stock loss is minimal, with the safety net in place. If it does fall to $45 at the time of option expiry, I can roll the call down and out to the $40-strike with 100% of my known profit. If it happens to fall below $45, I can resell the next $45 call ABOVE the current price, a la normal covered call writing, waiting until it recovers -meanwhile receiving a higher dividend %.

* In just short of the three years I have been extensively testing DITM with almost all my retirement, all summaries show a 10-13% "annualized" return - with slippage ( waiting for settlement or an ex-dividend date, etc., a more realistic return would be 7-10% for the year.

* According to a recent J.P.Morgan 2011 quarterly report, the following shows annualized returns on other asset classes for the past 20 years:
REITs - 10.5%
OIL- 8.0%
S&P 500 - 7.7%
GOLD - 7.2%
TREMONT HEDGE FUND INDEX - 7.1% (10 YEARS)
BONDS - 6.1%
HOMES - 2.8%
AVERAGE INVESTOR - 2.6%
INFLATION - 2.4%
All the above have no hedge or safety net, as DITM has. Only a 20% or more Bear market can severely hurt a quality DITM portfolio - since 1900, no more than 2 Bear markets per decades (no less than 1) have occurred. (S&P, U. of Chicago)

Since 1790 U.S. securities markets have performed in 18-year alternating cycles: looking backward from the sideways cycle we are currently in - 1982-2000 was the Mother of all Bull markets; before that the sideways 1966-82 (actually down, if inflation-adjusted); before that the 1949-1966 postwar Bull market, and before that the Great Depression, etc.
Contrary to Conventional Wisdom, Buy & Hold no longer works in today's casino environment of hedge funds, high frequency traders. Anyone who gets ready to save for retirement after schooling and raising a family is subject to the 18-year cycle they are born into. The stock market is exactly at the same level as it was, not only a year ago, but 10 years ago.

UPDATE:

2011-12-01T06:56:00.000-08:00

I just received notice from Schwab that my TLT had been called away 16 days early. Apparently the call - 10 points OTM - did not have enough time premium to prevent it, with ex-dividend due today.
Final tally: annualized return over (less than) 3 month's holding - 6.6%, below my average, but with little risk. What to reinvest in? Probably KMB - Kimberly Clark, ex-d Dec. 7 - a day that will live.....

MY BIG, HIP BROTHER:

2011-11-30T10:02:00.000-08:00

As my poor brother lies in a hospital with a hip replacement I decided to buy him a get-well present:
Shares of CTL, 37+, with a 8% dividend, going ex-d this Friday, the 2nd. Calls sold ranged from the April 35-strike to the 28-, for between a 9.35% and 14.5% "annualized" returns, depending on one's risk/reward predilection. 28 seems pretty safe. This presupposes receiving the March 2 dividend as well, at $.725.
B-rated by Schwab; 3-star by S&P.

Immediate Trades:

2011-11-28T10:38:00.000-08:00

Just back from Holiday, in time to do two trades with ex-D tomorrow (Nov.29). Exceptional returns:
Buy SVU and sell the April 6 call
Buy TAL and sell the Apr. 22 1/2 call
Since I have not been able to connect with a "back office" to handle a DITM fund, despite its promise in this defensive environment, I have bought a surrogate - the GDV Gabelli ETF with similar positions (and a 3+ % management fee).
One of my readers has kindly shared a similar strategist, which warms my heart - please see link below:
tknight@fullyinformed.com

BACK ON TRACK:

2011-11-14T10:27:00.000-08:00

As shown in the previous posting, thanks to the recent rally after the downdraft, my small IRA (@$50k) is back on trend via the histogram on my October Schwab statement. As I've mentioned before, although I trade DITM covered calls in most other family accounts, the small IRA is the purest record of DITM, as there are no more annual contributions, nor MRDs (minimum required distributions) from this IRA. It is fully invested.
I looked back 11 years and it is just a few dollars shy of an all time high, versus the DJIA still off 15% from the October 2008 top. Although I did take out $23,500 early in the decade, it was before the DITM was begun, in May of 2009.
The statement shows a YTD (year-to-date) reading of a 9.5% increase, thanks to a rally in October that brought back most of the "under water" positions to parity. Dividends are obviously included in the IRA, although potential profits from the "missing" $23,500 are not.
Considering the Safety Net implicit in the DITM, this return with 2 months to go is quite satisfactory - approximating my "annualized" estimates since its start.
For those readers using DITM for at least a part of their portfolios, here are some suitable candidates ex-dividend in November:
UPS,CVX,CNK,MSFT,NEE,SVU,TAL, AND WHR. Be sure to check the dates for yourself.

CURRENT CONDITION:

2011-11-09T13:03:00.000-08:00

At the risk of sounding more schadenfreude than sympathetic advisory, I thought I should list all the positions in my personal accounts (fully invested), and how they are performing in relation to their "safety nets" provided by selling Deep-In-The-Money covered calls - especially on this dark day with the Down Jones off over 400 points:

SYM / PRICE /CALL /PTS.ABOVE/BELOW

BMY .. 31 .. 27.... +4
COP .. 70 .. 62 1/2. +7 1/2
CVX .. 104.. 92 1/2.. +11 1/2
DIA .. 118 .. 120 ... -2
EPD.. 44.. 41 ... +3
ERF .. 28.. 29.... -1
GE PUT. 15.9. 16... 0
INTC .. 24... 22 .. +2
KKR .. 13.. 15.... -2
KMB.. 70 ..70 .... 0
LINE.. 36 .. 37 ... -1
LLY .. 38 ... 35.... +3
LO 107 1/2 100 +7 1/2
MAT.. 28 .. 26 ... +2
NEE PUT. 55 . 55... 0
NOC .. 58.3.. 60 .. -1.7
PM ... 70... 70.... 0
SVU .. 6.9... 9... -2.1
TLT .. 118 ... 106.. +12
TOT.. 50.4 ... 50 .. +.4
WM... 31.. . 36 ..... -5

The two Puts were sold to take on the stocks, which were ex-D farther out in time, earning money while waiting to do the Buy/Write. In the case of puts gone bad, such as WM, it is possible to roll them out in time, earning nice premium until recovering - often this equals or exceeds the DITM dividend/extrinsic amount, but is riskier.

RAISE THE ROOF :

2011-10-25T07:19:00.000-07:00

More positive data from my DITM Proxy - my small IRA account - as compared to the overall market. Since the Oct.10, 2007 all-time high of 1562, the SPX has dropped 19.7% below; whereas my Ira (using totally DITM since May '09) has fallen only 3.6% from 2007. This along with much less Volatility due to the safety net of selling lower Calls.
Although I have recently been seeking to manage outside (non-family) funds and accounts to employ DITM, it has been put on hold as I seek more info on the new Dodd-Frank regs requiring more oversight (read gov't paperwork) at the state level. Data from last week's post exemplifies the critical need for an antidote to zero rates eroding middle class wealth, after taxes and Inflation (which will rise even more in the future).
Option expiry saw some activity in my DITM accounts, with more to come, as I expect higher prices through year-end, despite Europe's calamity and the Super Committee inactivity:
Sold a Nov. 70 Put to acquire KMB after its weakness Monday. Will write the Call if put to me before Dec.7 ex-dividend date.
Simon Prop. (SPG) was called away, as it had risen too far to roll out again. Return was 10.3% annualized, which was a rare occurrence that the the annualized (12 month) return was almost the same as the actual/realized return of 11 months!
MAT, WM, and SVU Calls were rolled forward, with ex-d dates coming up - SVU and WM are slightly under water, so I am writing the Calls above the current price, a la traditional CCs.
Regarding the TLT Trade of the Year I mentioned awhile back, it is still doing fine, but it dawned on me recently, that (as shown by charts in my book) the TBT is a very tightly correlated (inversely) ETF, that can be used to hedge the TLT, should it start to drop from the current level - $114 where I initiated the trade. Had I bought the TBT (speculative) when the TLT hit $125, more money could have been made. Any profits on the TBT if the TLT drops to 106 will be additional to the maximum received on the Buy/Write (since I'm not losing money on the TLT until 106). Conversely, since the TLT is capped, any upmove would lose money on the TBT, unlocking the 1:1 "freeze". Complicated?
Finally, KKR, which is slightly under water, looks to be heading up again, so I bought some more shares. It goes ex-d in early November at nearly a 6% rate; will sell the safety net call shortly for more premium.
That's all for now - stay tuned !

POST VACATION POSTING:

2011-10-18T10:48:00.000-07:00

After visiting with my cousin in San Diego, who is a V.P. of Asset Management for JP Morgan, (and an unsuccessful try with Schwab's Laudus Funds), to set up a fund to manage based on DITM, I still haven't come up with anything solid. Based on 2 1/2 years testing, I still feel it is the best strategy for the current and near-future market environment.
My small IRA (which is the purest test tube for DITM) just hit a 3-year high, after all the turmoil in the markets since 2008. Although the S&P 500 has run 30% from when I started the DITM in May '09, my IRA has run 21%; however, based on the safety net provided by the lower call, since the April 2010 high, the SPX has just regained positive territory, up 1.5% for that span as of today, while my IRA is up 12.7% -as I said, to a new high since 2008.
I did pick up the 3rd Quarter report from JP Morgan, a great wrapup of information. For example, retiring Boomers (the largest population group to date)who spent the past 20 years (after raising families, etc.) saving for retirement, received the following annualized returns from 1991:
REITs - 10.5%
S&P500 - 7.7%
Gold - 7.2%
Bonds - 6.1%
Homes - 2.8%
Average Investor - 2.6%
Inflation - 2.4%
Although I've experienced a 10-13% consistent annualized DITM return, a realistic return (dead money, slippage, etc.)would be 6-10%. This is why I want to start a fund - to actually quantify the return.
Since returning I did a Buy/Write on COP, and the TLT -Dec.106 call still looks great.

SAME PAGE - EARLIER EDITION:

2011-09-26T12:29:00.000-07:00

Excerpts from a great article in this week's Barron's Previews (I've been beating this drum via my book and talks for nearly 3 years):
One of the Fed's mandates is employment, but based on its actions since the global financial crisis, you wouldn't know that.
So say economists from the American Institute for Economic Research in Great Barrington, Mass. Their analysis shows that the central bank's efforts at monetary stimulus through quantitative easing have cost the economy as much as $587 billion of spending and as many as 4.6 million jobs.
"The effect on the depressed income of savers is something nobody talks about," says Polina Vlasenko, who co-wrote the study with Visiting Research Fellow William Ford, a former president of the Atlanta Fed. She says the pair examined the effect of low interest rates on the $10 trillion of assets that U.S. households hold in instruments such as Treasuries, time and savings deposits, certificates of deposit, money-market funds and municipal bonds.
Next they looked at data going back to 1952 on interest rates one year into a recovery, and found that the interest-rate spread was an average of nearly five percentage points higher than in the second quarter of 2010. Based on the interest-rate differential on $10 trillion, and assuming an average tax rate of 25%, they calculated that spending would have been at least $256 billion. They also calculated the losses in consumption and jobs, They found that, for every one percentage point of interest lost, nearly a half-million jobs and $52 billion of consumption went out the window. The higher numbers included rate-sensitive holdings of pension funds and insurers.
"With the additional jobs that might have been created…the unemployment rate could fall to 6.8%," they said.
Although I believe we'll have at least another test of the lows before any serious rally into yearend, so far the DITM has sailed through quite well, although, fearing the worst, especially in energy (oil) and defense (NOC) I did take my fourth loss in 2 1/2 years (first in 1 1/2) with BTE, which is probably now a buying opportunity - Crisis = Opportunity.
Also called away, but looking good now XLU, which is UP 6 1/2% this year. Barron's dividend column mentioned S&P's Stovall picks of: GIS,UGI,CVX - which I rolled the call forward this month)-HRS and TRV. MSFT has also raised its dividend to the 3% area.
Were I not slimming down for a vacation (I wish), I would be entering these.
NOTA BENE: When I return from So.Cal. I am meeting with my Schwab F/A about starting a Fund based on DITM, for people who either cannot have option approval, or just do not want to hassle the activity of doing it oneself. Estimating a high single-digit return with the safety net, it should definitely beat the above short term interest rate over time!

MONDAY, MONDAY:

2011-09-19T11:22:00.000-07:00

Welcome new readers from the DITM talk I gave this past Saturday at the monthly SFBAOG (San Francisco Bay Area Options Group) held every expiry Saturday of the month (barring conflict, as with Oct.).
This expiration had lots of activity, as I had several options (sold puts and calls) expire, either OTM (out-of-the-money worthless) in which case I just keep the premium; or ITM (in-the-money)where I take on or sell the stock - puts or calls, respectively.
I am now down to 15 stocks in my portfolio (more in the family), with this Bear market only endangering 3 of the positions. With these, I continue to milk the call premium and take the 3% or better dividends (much better than zero CDs, etc.) and hold them, much like a Bond, until they invariably return to the Buy price - sooner or later.
The only stock put to me last week was PM (Morris Int'l) at 70; since the current price is below that strike/buy price, rather than accept less than the full intrinsic amount (top part of ITM stock), I sold calls ABOVE the buy price - the 70s, as it goes ex-D Friday, the 23rd.
Despite the fact that nearly 100% of analysts and strategists are calling for a higher year-end market, it is possible things are "different this time". Fortunately, the DITM plan works best when markets go sideways to down slowly (not crashing). As I said in my talk, if a stock moves down a few points at expiry, one can "step down" to the next strike price, still receiving the whole amount originally expected, receiving an even higher dividend %.
I also write a sentiment blog every Monday based on my CMT topic - links can be found at:brentleonard.com

THAT'S WHAT I'M TALKING ABOUT:

2011-09-15T12:38:00.000-07:00

1 day before expiry, I rolled out my CHV call to January, from the 90 strike up to 92.50. The stock is currently at 98.85, and I bought it at 101.75 in May ( a $2.90 loss before commissions);then selling the 90 call as a safety net. So far taking in $1437 from the (net of buyback)calls, and $234 from dividends (assuming the Nov. one), net of commissions will be $1671, plus $9241 makes a total credit of $$10,912, less my initial cost of $10,184 ($728), over 8 months is an annualized 10.7%, unless the stock is below $92 1/2 by January 2012. Definitely better than MMFs or CDs!
BTW, had I just bought the stock, sans DITM calls, even with dividends, I would have gained only $56 for the 8 months - or 0.8% annualized.

Y'R WELCOME!:

2011-09-12T12:58:00.000-07:00

Less than an hour after I took my 4th loss in 2 1/2 years (first in a year and a half) on BTE, an energy stock, the market turned positive taking BTE with it. 15% loss after monthly dividends and call premiums. A relief. Watch it soar now!!!

DOING THE TWIST:

2011-09-12T08:35:00.000-07:00

As Barron's outlined a couple weeks ago, it appears that Fed Chairman Bernanke is revising his QE III to the policy of the '60s - to sell short term (driving rates up) while buying long term Tsys (driving rates farther down).
I just put on a fairly safe ( in my view) trade to capture @ 9% annualized returns:
Buy the TLT at 114 while selling an ITM covered call of Dec. 106 (safely below). The "extrinsic" call premium - that which is not part of the ETF in-the-money price- is $1.55 and the MONTHLY dividend is about 3.5%, combining to make 2.25% over the three months, or 9% if done 4 times. Beats less than 2% on the 10-year TSY.

NEEDS VERSUS WANTS:

2011-09-07T10:39:00.000-07:00

In life there are Needs (things we have to have to survive) and Wants (things we'd like to have). The same is true in investing. One wants to preserve the majority of one's capital, but can also speculate for higher returns with a varying amount, depending on the environment.
I just did a study on my DITM strategy from its start in early May, 2009 - ironically, just as the Bull market was starting. Since that time the S&P 500 has appreciated (in price) 32.1%, while my continuously improving and fine-tuning DITM is only up 17.2% - with much more safety, and a much better return than CDs, MMFs, and Treasurys.
With all hubris and schadenfreude aside, since the top of April, 2011, things are reversed: My two smaller family IRA accounts (the purest testing of DITM available) are Down 6.7% and 4.3%, respectively, while the SPX is down 13.1%. Ergo, I am able, so far, to nervously but steadily sail through the violent corrections day to day.
While most investors are heading for the doors, DITM is enjoying higher dividend % and lower entering prices on new stock positions, as well as higher volatility in selling both puts and calls. The hybrid nature (bondlike) allows me to focus on the constant payments, not the price.
Still fully invested, September's expiry will be interesting for both sold puts and expiring calls - in or out of the money.

POST-EXPIRY, AND PRE-VACATION:

2011-08-24T08:44:00.000-07:00

As of last Saturday's option expiration much happened in this volatile market - mostly good: Two LO puts that I had sold to take on the stock before ex-D, expired worthless, netting $240 (ex-D next week); MAT was put to me and I sold some nice 26 calls on them. One of my 3 plungers - DIA - was put to me at 122, so I'll wait on a rebound to sell a call, taking in monthly dividends - a positive.
In this 20% decline only 2 of my 22 stocks plunged - NOC and TOT - so I'll just collect the larger % dividends while I wait as with DIA. Remaining stocks are just above or below water.
Fine-tuning: since MAT was put above the current price (as with the DIA) I wrote calls ABOVE, not the usual DITM below. Any stock that plummets much lower than the market, such as my last (and only) stock losses of 1 1/2 years ago - BP and UVV deserves to be sold. Since there have never been more than two Bear markets in a decade since 1900 (or less than one) let us hope this is one and it is mostly over.
KEEP THE BABY, FAITH!

"Are You Ready For Some DEFENSE?"

2011-08-18T08:26:00.000-07:00

In lieu of today's 500+ point rout, I wanted to update the DITM portfolio in my account:
Of the 22 current positions, 9 are still above water ! Mostly because the rose a bit under QE II, and should rise again by year end.
8 positions (covered calls and short puts) are within 3-4 points of B/E (break even) where I receive maximum return (DITM is a fixed income strategy on the stock market, not hoped for appreciation, which can be done outside of it, such as GOLD).
That leaves 5 stocks down as much as 10 points, BUT I am receiving a much higher dividend % on them while I await their return, as well as milking some option premium.
As much as I hate to make or receive market projections - give me facts, not opinions- the strong position of the US stock market and its appeal from European and other foreign investors make me anticipate a huge rally down the line. At worst, entering DITM positions at this time, for the strong of heart, makes a great deal of sense.
BTW - I just learned that Trader's Press has expressed an interest in selling my books.

WHAT, ME WORRY???:

2011-08-10T12:20:00.000-07:00

For the first time in nearly 30 years of investing (including the 1987 Crash), at no time have I felt the panic or need to bail out of any of my 15 DITM positions. Although at the recent lows of 20%, most stocks were under water, with the Safety Net cutting losses (as well as some timely hedges -puts and Inverse ETFs), my rationale was that as long as I was receiving the dividends and milking Call premium, I would be well ahead when the downdraft was over - which it inevitably is.
The 4 or 5 worst stocks are defense and energy, along with WM.
Here is what I call a hypothetical microcosm of the market decline:
The following theoretical stock trade best illustrates how the DITM defensive strategy works in the typical market cycle:

Stock XYZ trades at $50; in its usual upward path of a normal market, it rises to $60 (stocks normally have a right translation, meaning they rise 50-60% of the time, partially due to Inflation, correct down 10-20% and trades sideways for the balance). XYZ pays a 4% dividend - $.50 a quarter.
The Investor does a Buy/Write on XYZ at $55, selling an ITM (in-the-money) covered call at $50 strike price for $6 , five months into the future ($5 for the top part of the stock to be surrendered later, and $1 option premium).

Upon reaching $60, a Bear Market sets in and it falls 25%, from $60 to $45 ! The Investor's cost basis is only $48, including the immediate and second dividends.
Meanwhile, anyone else who bought XYZ near $60 is at a huge loss - $15- and must consider selling at some point. However, our Investor, being only down $3, will hold on while receiving the dividend and milking call option premium. No panic, no fear!

5 months later, the stock has rallied back to above $50 again - a normal occurrence. As the 50-strike call expires, the Investor "steps down" and sells the $45 call another 5-6 months out (for another $6). Now the stock is paying a higher dividend %, and the Implied Volatility of the call has risen with the fear from the decline, and should they want to buy more, the stock price is now cheaper.
Bottom line: after 1 year, the stock is called away at $45. Profit/loss is as follows-
Cost: $55.
1st call sold: $6
2nd call sold: $6
4 dividends: $2
XYZ sale: $45
TOTAL: $59 - $55: $4 profit, or 7.37%, while the stock has dropped 10-15%!

Although DITM is a defensive strategy, if one considers the other possible stock scenarios, the Investor would have made a similar profit had the stock moved sideways or slightly up. Only a large rise would have profited more, and the Investor has the choice of only investing a portion (CD or money market funds) into DITM, while chasing stocks with options, ETFs, and other stocks.

More information is available at:brentleonard.com. Brent has written a print book and now an eBook on the DITM strategy, called Zero (IN) Tolerance.

JUNE SWOON AND UNRULY JULY:

2011-07-29T10:55:00.000-07:00

Since the start of the cyclical Bull Market of March 2009 (and the start of my DITM strategy the following May) there have been 9 corrections of 5% or more - as of today's low. Including the Flash Crash of May 2010, the strategy has sustained only 3 losses, 2 of which regained some ( BP and TLT )- only the UVV trade was a large plunger. This is over 100 round trip trades, and no losses have occurred in more than a year.
Currently of my 22 positions (fully invested) 14 are safely above water - 8 slightly below. Half of the belows are naked puts which:1) take me up to ex-dividend date 2) add to total return and 3)alert me that the date is imminent, whether the put is ITM or OTM. Upcoming very profitable candidates include LO and MAT.
This has been a very interesting summer so far. In hopes of finding a fund that I could subadvise on to get a pure results reading, I attended a very civilized Schwab dinner at the swank Omni hotel, put on by US Global funds; Thursday, the TSAA held a luncheon at Alfred's hosting Matt Hougan from IndexUniverse.com, an ETF analyzer who will also be at the Money Show.
Also this week I was happily informed that my magazine article on DITM came out in tradersonline-mag.com - an English version of the German trading and T/A Zine; also the eBook version of Zero(IN)Tolerance purportedly arrived at screens such as Nook, iPads, Sony, etc. - everyone except Kindle, which may happen in December.
BTW, I would appreciated any feedback about accessing the eBook, as I do not have an eReader. Although successful in bringing it up on the iPad and Nook -both were prices, 2010 dates and ISBN# from my Print book.
The Money Show is August 10 through 12, with Tom Hudson and Hilary Kramer from Nightly Business Report; Charles Biderman, Harry Domash of Dividend Detective and the SF Chronicle; also the TSAA and GGU will have a booth there, and a room on Thursday evening.
This debt decline poses a possible great opportunity to initiate some DITM trades, starting with the DIA, which pays monthly.

"EXC" STANDS FOR EXCELLENCE:

2011-07-18T07:53:00.000-07:00

What a Weekend! Friday (actually Saturday) was option expiry and several of my short "naked" puts expired -none ITM, so I did not have to take on stocks, although I would not have minded. These July puts: SCCO,HCN,INTC,LLY,TAL, not only brought in several hundred $$, but were a reminder that their ex-D dates were approaching, so whatever extra money in accounts will be spent on buy/writes.
EXC - actually Exelon - was a stock I did a B/W on in Aug. 2009, so I thought holding it 2 years was enough, espec. after Japan. As outlined in my talk Saturday morning to the SF Options Group , the "reversed" annualized return (instead of the normal doubling or tripling of partial year %- I cut it in half for 1 year)was 8.12%.
Cost was $4996 (actually less when discounting the call sold); dividends (9) were $477, net calls sold (after buybacks/rollouts)were $1439; stock was called at my last call strike of $39, or $3891 net of commissions. Net return:$811 or 16.2% over 24 months - a record, beating INTC's 17 month hold. Peace of mind (almost like a 2-year CD):PRICELESS
EXC was not a one-off event for having a stock drop several points after the B/W and still making money; another example was NUE, Nucor, which I illustrated in a magazine article for : onlinetrading-mag.com coming out July 25. Also dropping ten points.
I'm also having my book -Zero (IN) Tolerance -converted to an eBook next week, cutting the price by 1/2.
Next Thursday, the 28th, the TSAA is having a very civilized luncheon at Alfred's with a speaker from ETF Universe, Matt Hougan, who is also at the Money Show in August. See TSAASF.org for details of Alfred's. Universe was also mentioned in the Barron's expansive coverage of ETFs this weekend.
DOES ANYONE KNOW OF AN ETF LOOKING FOR A STRATEGY? I'M AVAILABLE!!!
I also learned some things at my talk Saturday, including TOS (ThinkorSwim) has a capability to reverse or close out a buy/write which could ameliorate the Bear market danger of DITM with a stop order; otherwise spending a few cents on a OTM put (making a COLLAR)would be safer.
Also, a couple DITM websites were suggested to me: fullyinformed.com and borntosell.com for put-selling.

CAN U HEAR ME NOW?:

2011-07-06T10:40:00.000-07:00

No surprise - my Verizon stock, which I dearly love, was called away the day before ex-Dividend date (today). Since I mark all my stocks ex-d and pay dates for my recordkeeping, I saw it coming but decided to let it go, as we are coming into the JASON period of the market (June through November)which not only gets a bit hairy, but I go on vacation a lot during Sept./Oct.
Since I am Bullish on year-end (as everyone else is !), I might just sell an Oct. 36 put ( stock at $37.40) to get an annualized 11% on the put and take the stock on at $36 if it falls to that, or below. That would actually be the same return as if I had rolled the Call to Oct. for $.50 extrinsic plus $.5 dividend today.
Return for the past 6 months on VZ was not that exciting, at 7.63% annualized,since it was held to full term. Bought 200 shares at $7523, got $196 in two dividends and $623 from the calls sold in January.
I'll be discussing the first 6 months' results and new tweaks (selling puts, capturing annual dividends versus quarterly) at the SFBAOG meeting on July 16 monthly expiry meeting at Fort Mason.

6 months Wrapup:

2011-07-01T08:46:00.000-07:00

The tables below represent actual trades in the DITM portfolios. The top table consists of trades opened in '09 and '10, closed out in 2011 before July 1; the bottom table holds trades opened and closed in 2011 YTD.

PLACED IN 2010 IN 2011 FIRST 6 MONTHS
DATE STOCK STOCK DIV'D CALL STOCK TOTAL ANN.NET
.....SYMBOL AMOUNT AMT SOLD RETURN RETURN RETURN

10/14/2009 INTC 6291 184 520
INTC 47
INTC 5391 543 6.1%
5/24/2010 NOC 12147 282 1428 10991 1102 13.6%
10/18/2010 HCN 9961 276 400 9991 706 17.01%
10/20/2010 DIA 33429 378 2932 31115 922 8.27%
10/22/2010 ETN 8774 58 1109 7991 384 13.1%
11/4/2010 CVX 8478 72 646 7991 231 8.17%
11/5/2010 LLY 7135 98 598 6591 152 8.52%
11/18/2010 PEP 6484 96 555 5991 158 5.85%
11/18/2010 JNJ 6389 108 (2)689 5741 450 14.09%
12/1/2010 RYN 5024 54 612 4491 133 10.6%
12/1/2010 MRK 3489 76 345 3191 167 9.57%
11/30/2010 TLT 9924 245 600 9413 223 4.5%
AVERAGE 9.95%

PLACED IN 2011 IN 2011 FIRST 6 MONTHS
DATE STOCK STOCK DIV'D CALL STOCK TOTAL ANN.NET
....SYMBOL AMOUNT AMT SOLD RETURN RETURN RETURN

1/11/2011 SI 11881 270* 1035 12479 193 19.5%
1/13/2011 TLT 18423 124 1502 16991 194 4.21%
11/30/2010 TLT 9924 245 600 9413 223 4.5%
1/21/2011 NI 5607 69 469 5241 172 12.27%
1/21/2011 RY 10857 101 1038 9991 273 10.1%
1/27/2011 KMP 7229 0 505 6732 8 1%
2/16/2011 NVS 11309 0 350 10991 32 3.4%
2/17/2011 MCD 7614 61 509 7241 197 10.35%
2/23/2011 LO 15951 260 1686 17321 614 46.19%
3/3/2011 BTI 8069 266 214 8336 217 32.3%
3/23/2011 T 5629 0 338 5391 100 21.32%
3/23/2011 EIX 7300 64 440 6991 195 10.68%
4/1/2011 GRMN 6751 0 576 6809 57 1.01%
12/1/2010 MRK 3489 76 389(2) 3191 167 9.6%
AVERAGE: 13.32%
COMBINED AVERAGE: 11.64%

6 months Wrapup:

2011-06-27T12:05:00.000-07:00

Here is a complex math breakdown of 2 sets of trading results in my own Schwab accounts using DITM - no losses, although a couple bad miscues on my part in 2011:
Buy/writes opened in 2010, closed in 2011 YTD:
Total invested $98,827 Return -$4,948 total months -65, divided by number of stocks 11. Unit is 5.9 months. $4948 divided by $98827 = .05%; finally, divide .05 by 5.9 months and annualize ( times 12) = 10.18% ROI
Trades opened in 2011 and closed YTD:
$122,733; Return $2,447 -total 32 months with 13 trades = 2.5 months/trade.
Despite 2 miscues - impulsively bought a stock on ex-D instead of a day or 2 before; sold a put that expired ON ex-D, not before; annualized ROI 9.6%
Not bad for a defensive strategy.

MORE VALIDATION:

2011-06-27T10:23:00.000-07:00

It seems everyone wants to get into the act - Barron's had stories from Steve Sears, the option guy, and even Randall Forsyth about buying dividend stocks and selling defensive calls on them (though not ITM). S Lazo notes since 1930 dividends have supplied 51.5% of stock returns - 100% in the 1930s and 2000s.
Meanwhile, I have been asked to write an article about DITM for this German zine:
http://traders-mag.com/-- nice company of authors!
Also, I am preparing my Zero book for eBooks, probably through Smashwords Publishers - price will drop down by 1/3.
I hope to have a meetup with Schwab's proprietary ETF and fund group - Laudus - about possibly helping manage or consult on a fund to purely test the theory, sans GNMAs, bonds, etc. now in my family accounts.
I just put on 2 other trades today: BMY, selling the Dec. 27 calls; and PWE, which is suffering from wildfires in Canada - selling only the July 22 call (scalping for a month, a la Randy Frederick's column in Schwab's Option Letter.
I remain fully invested, unscathed by the recent 7 week downturn -only 2-3 positions slightly under water.

PLAN B:

2011-06-20T10:33:00.000-07:00

As of last week's option "exasperation", having sensed at least a temporary shelf in the market using sentiment indicators (but still employing a safety net), several puts were sold with the intent to take on desirable DITM stocks shortly after the puts either expire worthless (giving me 100% ROI, 10% ROA), or having the stock put to me at a lower price. For example, if I like a stock that goes ex-Dividend in 2 or 3 months, I sell a lower put to expire just before that date and add it to profits.

So far my DITM portfolio has not had a losing trade in over a year -since BP, and TLT declines. However, 2 or 3 of my 18 are slightly under water, collecting option premium and >3% dividends.

June Puts include: ERF put to me at 31, sold the 29 Oct.call
XLU major screwup - put to me Friday, expiry -the same day as ex (as without) div'd. I hope to trade out of it.
KKR Call expired at zero - will take dividends until it rises again, selling a Call.

July Puts include:
INTC
LLY
HCN
TAL
SCCO

August puts include DIA, so far. Other candidates, if I get some more money to invest: DEO,BMY. Caveat Emptor!

VALIDATION:

2011-06-13T10:37:00.000-07:00

It took 5 weeks of down market action to happen, but in the same week, two of the more conservative institutions - Schwab and Nuveen - each came out with reference to the in-the-money (DITM) strategy I have been successfully testing for over two years. Schwab's top option guru, Randy Frederick, advised in an investment letter, to use almost exactly the plan I have been using, although he scalps with a 1-month call, rather than 5-6 months to get 2 dividends.

Nuveen has 3 CEFs (closed-end funds), using Index options and having to rely on premium/discounts, have underperformed the ETF plan. My main source of reference - Seeking Alpha, describes them.

Over the weekend my Merck (MRK) got called away after 6 months. The numbers are:

Bought Dec. at $3490, received 2 dividends at $76 (after rolling out calls to July) and a total return of $167. Dividing $167 by initial $3490 and doubled for 12 months, gets one to 9.57% annualized - sort of like buying two 6-month CDs with the same money.

Since this downturn is the perfect environment for DITM (cheaper stock prices, higher dividend %, more option volatility), I have been selling puts on stocks that are not quite to ex-dividend dates, with the hope of having them put to me.

A good example is McDonald's (MCD) which was exercised in May for my Sept. call - so I sold a put for the next cycle.

SELLING INTO THE DECLINE:

2011-06-03T09:14:00.000-07:00

With the market down 5% in the current correction, 16 of the 18 positions in my accounts are still above water - thanks to the previous bull market. Since DITM is a defensive, fixed income-type strategy, it is getting maximum return at these levels. With even the best fundamental analysts predicting higher levels by yearend, a huge Bear market is not expected - no matter how bad the US and global economies are.
Since this is an optimal time to enter DITM - lower stock prices, higher dividend %, higher option volatility (prices) - I have entered the following positions as mentioned in the last post:
5/31/2011 DIA put 1 Aug.122 250
DIA capture best months: Aug., Nov.,Dec.(spec.)& Jan., May,
6/1/2011 INTC 3 Jul .21 $64
6/1/2011 LLY 2 Jul.37 66
6/1/2011 XLU 2 Jun.33 36
6/1/2011 HCN 1 Jul.50 30
6/3/2011 TAL 2 Jul.30 150
These are good DITM candidates which are not going ex-Dividend for awhile, so I hope to collect put premium (right hand column), but more importantly do the buy/write with a lower stock price, by having the put expire just before the next ex-D date (or just keep the money if still out-of-the-money)-then do the buy/write.

WHERE'S THE BEEF?:

2011-05-31T08:15:00.000-07:00

One of the complaints of DITM is that it works less well in upwardly moving stocks - au contraire!
I bot MCD in Feb. for $62 and sold the Sept.72 1/2 call. After getting 1 dividend, since it had risen to 81, it was called away in May (3 months later). Annualized profit: 10.35%.
Since I am constantly tweaking DITM ( it's now on a 12% course for 2011), I was reading Steven Sears option column in Barron's this weekend about naked puts on stocks you wish to own. I got to thinking -what if you find a stock you like but the ex-D date is 2-3 months away? Why not sell a put past the ex-D date? If it is put to you, fine - you own the stock and get the dividend; if called away, it is done in a compressed timeframe embellishing your premium.
I'm considering the DIA for Aug. ; since the dividend varies due to 30 components, some months are better than other - Aug., Nov., Jan., May -so why not capture them? Also , it pays a special yearend dividend in Dec. (At least it has done so recently).

JNJ position

2011-05-26T10:13:00.000-07:00

Just got word from my broker that my JNJ position was called away early (I had rolled out the initial call to July, but it was deep-itm (10 points) with ex-d today. Here is the math:
Bot 100 JNJ Dec. 17, 2010 for $6389 (incl. commission); sold April call for 455; bot back and resold 57 1/2 call for net 234 (264 less 30 buyback); got 2 div. for $108 - stock called away at $5741. Net profit was $450, or 7+%; annualized was double that. 14.09%
Not bad for almost the same safety as a CD.

SPRING TRADES:

2011-05-06T08:36:00.000-07:00

While on Easter vacation I had NI (Nisource) called away before ex-Dividend after 3 months holding. Results were $172 net of commissions on 300 shares at $5600 cost, or 12.27% annualized.
After returning, I decided to keep my 200 COP (Conoco), rolling out May calls before the May 17 next ex-D date (there's a trade here!!), to Aug., netting me another $322, or 8.7%. With the 67 1/2 call well below the current $73 stock price, there is a nice "safety net" for 3 months.
These are my basic DITM trades, while still playing other trades (gold, silver, etc.) with other money.

ATM.... AT-THE-MONEY OR AUTO TELLER MACHINE?:

2011-04-21T09:34:00.000-07:00

Dividend-capturers saw fit to exercise my July ITM calls for today's dividend on RY- Royal Bank of Canada. Hence my first dividend in January of $101, plus extrinsic call price and ROP (return of principal) gained an annualized 10.1%.
I shall be on vacation until May Day, watching the market from my Droid.
Full disclosure: a couple of miscues to report - I hastily did a Buy/Write on KMP on ex-dividend date !, not before, so traded out of it for a minor profit; also Garmin which was an experiment in capturing annual dividends, moved their ex-d from anticipated April to whenever (November?), so I closed that out with a 1% gain - still no losses in DITM since the BP disaster a year ago.

These are the days, my friends -

2011-04-18T12:32:00.000-07:00

That it pays to be in DITM. Casually glancing over my fully-invested portfolio of 15 stocks, only 1 - the troublesome TLT (which I hedge with the TBT) - is "under water" with the Down Jones off 250 points. Then the TLT does an about face of nearly 2% upwards.

Options Exaspiration only took one position away -gladly- my PEP, having rolled out a few others earlier in the month. Pepsi was put on in November, so after 5 months i only received just under 6% annualized, only about 1/2 of my current running average.

As I am going on vacation next week, I shall wait until my return to reposition, at which time there are some semi-annual and annual trades to capture.

I've been applying for an author position at SeekingAlpha, which may interfere with my blogging - as they want proprietary claim. It is a great site to retrieve good candidates for DITM, or anything else.

Happy Easter!

A SMOKIN' TRADE:

2011-04-06T08:55:00.000-07:00

BTI - British Tobacco, was just closed out after another experiment in semi- and annual dividends.
Bought on March 3 for $8069 (including commission), it was closed out after receiving the $261 dividend - to be paid in May - and $214 for the call. Thanks to a nice rise in the stock (which rose faster than the $530 call buyback price)I was able to close it out before the June expiry, at $8336.
Total return for a month was $212, or 31.5% annualized. After T+3 settlement, the funds will be deployed elsewhere.

If you have any comments or questions on any trade, or do not wish to receive further e-mail updates, please e-mail brentleonard59@gmail.com

C(NOTE) YOU LATER:

2011-04-06T07:05:00.000-07:00

Never a dull moment in the DITM world. With the Ex-D date looming for AT&T and Verizon at April 6, I did a buy/write on March 23 using the October call for T and the July for VZ.
Overnite I was assigned on the T calls before my first dividend (of a possible 3) - net of commission I earned $100 for 2 weeks, for a 21.3% annualized return. VZ remains in the account.
Nice Telephone "CALL".

1st Quarter DITM results:

2011-04-01T13:03:00.000-07:00

Annualized DITM trades for the 1st quarter of 2011 ( closed out before April 1) resulted in an average of 12.28%. Most of these have been itemized over the past few posts, including my misfire on KMP (buying it on ex-D date instead of before), and a couple stocks which pay annual dividends.
Due to technological difficulties, you can email me at brentleonard59@gmail.com for the complete matrix, if desired.

HEALTHY RETURNS:

2011-03-21T08:54:00.000-07:00

The latest trade was a close-out on HCN, a Healthcare REIT which I had done previously. This time, however, I struggled with the fact that because of option difficulty, I had to do an ATM (at-the-money) Call, so had to delete it from my track record portfolio (but I'm keeping the money!).
Bot 200 HCN on Oct. 18, 2010 at $49.76 (average price); sold two March 50 Calls (sic) for $400; stock called away on Friday's expiry $9991 (net of commission): return $706 over 5 months = 17% annualized (divided % by 5, multiply by 12).

WHAT WOULD YOU DO:

2011-03-18T08:55:00.000-07:00

Here's an interesting DITM trade. A month ago, on Feb.23, I bot 200 LO at $79.71 (as I recounted awhile back) for $15951, sold the June 75 calls for $1686, got the $260 div'd. Would you hold onto the trade, hoping for the May div'd, or exit the position for a $620 profit ? That's 46.6% ITB (in the bank) after 1 month. There is still some extrinsic (OTM) value in the option since the IV ran to 47 on the 7 point runup today. Remember, ATM calls usually only move up 50% (Delta) to the stocks 100%; but the higher it goes DITM, the closer it moves with the stock.
Your call.
It is, after all, a tobacco stock - legislation is pending on menthol now. My BTI dropped 7 points from where I bought it, but due to the Call, div'd, I do not have a loss in it!

HOLY SMOKE!:

2011-03-16T11:54:00.000-07:00

As Ronnie Reagan used to say - There you go again. Just as I bought BTI, Brit.Amer Tobacco, a few days later it started tanking - from 82 to74 (9.8%) as the SPX dropped 6% so far. I should have known, having had this happen a year ago with UVV -Univ.Leaf, another tobacco company (can be hazardous to your fiscal health).
I sold way less than my 10% lower Call, the 80-strike, because it was a test of the semi-annual dividend strategy (my bad, not DITM's).
Still, I hang on to it - down 6 points, I locked in 2.6 pts. dividend and 2.2 pts Call, so I'm basically only down 1+ pts., which I'll try to ride out, hoping it'll improve.
So far, of my 17 DITM positions, only 5 now are barely under water, needing no action yet.

DEE-FENSE, DEE-FENSE:

2011-03-15T08:22:00.000-07:00

As the NCAA basketball March Madness begins, DITM focuses on the defensive part of the strategy. So far the S&P 500 (SPX) is down 6% from its Feb. 18 closing high. As of today, only 4 of my 17 positions are even under water, let alone in a losing - net of call premium and dividends - position. They are barely below the pre-selling price, so far in no danger of being stopped out.

In a couple weeks I shall update 2011's first Quarter results - should be pretty good.

A couple of Behavioral Finance thoughts: although the market has doubled from its March 2009 low, how many folks got in at the very bottom and sold at the very top?

Also, when I say that DITM protects all but BEAR markets (20% or more), due to the Calls safety net and income, how many got in at the very top and got stopped out at the very bottom, without waiting out the Call premium decay and future dividends? That is the benefit of monthly "laddering", safety as well as steady, monthly income from dividends.

And the Beat goes on!

2011-03-08T12:35:00.000-08:00

My Rayonier (RYN) got called away after 1 dividend and 3 months (before the 2nd D); right on schedule:
Cost $5024, Div'd 54, Call 612, stock sold 4991= $133 profit, or 10.6% annualized (done 4 X).
DITM is getting contagious - see Option Maestro at seekingalpha.com

THE WAITING GAME:

2011-03-07T10:05:00.000-08:00

Although I believe in "laddering" positions monthly to not only receive continuous dividends but ameliorate risk as well ( having cash for buying opportunities), if one wants to fine-tune DITM, they could wait out corrections until a bottom seems to be in, to take new positions. That is what I am doing right now.

That way, stock prices are lower, dividend % are higher, and IV (implied volatility) of Calls sold is more. Conventional wisdom says that this is a minor correction, with a major one coming after the stimulus is over in June.

Right now the farthest I am out is July, hoping to get them called away early.

BTW - With the Wisconsin congressmen leaving the state to avoid a decision, is there some way we can get the Federal Congress to do the same?

BOYS OF SUMMER:

2011-02-28T10:40:00.000-08:00

Baseball season hasn't even started but I've already hit a Foul Ball and a possible Home Run:

Novartis -NVS- was bought for its annual dividend capture on Feb.16 (ex-D on 2/24), but was called away before the div'd! I still got the option premium of 3 months, which covered transaction costs plus $32 net (3.4% annualized), but I should have got more call premium, more time. Still testing the annual dividend concept!

LO -Lorillard Tobacco has the best of both worlds - high call premium and a great dividend - it went ex-D last week (please remember that this blog is for educational purposes, not touting get-rich-quick plays). LO immediately started dropping, but is still above my sold call level.

FORGET QE II:

2011-02-18T09:55:00.000-08:00

Although Chairman Bernancke is taking credit for the latest stock market rally, I'd like to posit that it was all my doing!

For almost 2 years I've been espousing the DITM - the optimal strategy for sideways to down markets, averaging an annualized 10%,which happens to be exactly the same return as the S&P 500 since 1926 (dividends included).

Meanwhile the market has rallied the most in several decades: the SPX is up 100% since March of '09 (Nasdaq up 124%); which is why I mention in my talks to use only a Portion of one's assets for DITM. This achieves the safety of diversity as well as the ability to invest elsewhere (like Spiders, Gold, etc.).

Today's trade was a call-away of my DIAs, which are a good entry point for new investors into DITM. With the DJIA at 12,363 (the DIA at 1/100th of it - 123), my March 103.75 Call was exercised early:

Annualizing over 4 months (multiplying the net % by 3), it very safely returned 8.27%. Not quite 10%, but lower down on the Safety pyramid. If/when the market sells off after its record run, I shall re-enter a position.

Next week I'll be giving another talk to the Golden Gate Univ. Learning Program and Finance Club, which is open FREE to the public. It's on the 5th floor of GGU, Wed., Feb.23 at 5:30.

FUELED AGAIN:

2011-02-14T09:43:00.000-08:00

Over the weekend my Chevron -CVX- stock was taken away just before ex-Dividend. I bought it Nov.4 (3 months, 10 days ago - although I calc'd 4 months for the return); selling the March 80 call - CVX is now 97 - the trade had much downside security, but also made it unfavorable to roll out the call.
An early dividend of $72 plus the $646 call price (Intrinsic and extrinsic) netted me a profit of $231 after all commissions, or 8.17% annualized at 4 months. Not bad.

GILD THE LILY:

2011-02-11T11:13:00.000-08:00

Overnight the 200 Lilly shares were taken away by the ITM 33-strike call being exercised by its owner. Having done the Buy/Write in early November, the duration was 3 months, or a 4 multiplier for the annualized return of 8.52%, presupposing that I could do the same trade four times, or its equivalent. Lilly closed yesterday at 35.13, 2+ points ITM (in-the-money) with the expiry the third week of April!

ORINDA LIBRARY:

2011-02-04T11:31:00.000-08:00

Welcome readers from my talk last night to the SF - AAII at the Library in beautiful downtown Orinda. Please scroll down to "older posts" to see actual trading results from 2009 - 2010 that were in the presentation, plus recent closed trades.

I actually had two more this week:

INTC (Intel Corp.) was called away the day before ex-D after having held it for 17 months. Lesson learned here is that to hold it too long produces a lower than average (but still fairly good) return in a low-volatility cycle - 6.1% annualized, vs. average of 11%.

300 shares of INTC were purchased on Oct.14, 2009 at $20.94; it is currently at $21.67, although the last call rolled down was the 18-strike. Total return was $543.

Another stock, 100 shares of Eaton (ETN)was bought at $87.65 in Oct.2010, held 4 months, called away this week at $80 (80-strike price) netting, after all commissions, $384 or 13.1% annualized.

My second experiment in annual dividend-selling paid off (after the Mattel trade in Dec.) with Siemens -SI- although foreign taxes of $100 were deducted. I still netted $193 in less than a month for a 20% annualized ROI. Important to note - the "Delta", or relation of the option to the underlying stock, at the money is usually 50. In other words, if the stock is rising after putting on the buy/write, it becomes more profitable, since the stock goes up $1 and the sold call only goes up $.50.

With SI, I bought it Jan.11 at $119/share; sold the 100 shares on Jan.24 at $125 - it actually kept rising to $131.

LATEST RESULT:

2011-01-24T08:58:00.000-08:00

Last week's option exaspiration brought only one expiry - NOC. The paucity of transactions is explained by my seasonal fear, coupled with annual vacation away from the market, that few trades were entered in the early Fall.
Results were great: 13.6% annualized, after commissions. Here is the trade -
May 24, '10 I bought 200 NOC at just above $60 for $12,147;sold the 55 call (almost 10% below), rolled it once into Jan.(last week), called away at 55, for a $1102 net profit in 8 months.
My latest variation I am testing is capturing semi-annual and annual dividends with a 3-4 month ITM call to keep from an immediate callaway and additional revenue. It seems logical that getting the whole year at once should be more provident than quarterly. I don't know the tax consequences of this, as most of these - which I got from my acquaintance, Harry Domash of the SF Chronicle - Dividend Detective.com- are foreign stocks.
The annual dividend went ex-D Friday on Siemens -SI - I'll probably sell it in the next few days or weeks, depending on its price action. Long stocks usually rise 2:1 versus the short call, so I'm even more ahead if it rises - selling on weakness.
Stay tuned!

2010 DITM TRADING RESULTS:

2011-01-08T13:20:00.000-08:00

The results are in - happily, after adding up the 2009 trades that closed in 2010, and also the 2010 closing in 2010, the average percent combined was exactly the same as the DJIA for the year, with a lot more safety via the ITM calls! The 11.06% was a combined total of 13.27% for the 2009 opening trades and the 8.85% of the ones in 2010 - thanks to torpedoes of BP, UVV ( a tobacco company that tanked on earnings), and a misstep into the TLT (twice).

Since the DITM is designed to accommodate all markets but the BEAR (20%), the May FlashCrash was not a problem. 11% also happens to be about the historical average of stocks for over a century, and certainly much of an improvement over the past "Lost" decade of flat returns - with the expectancy of similar returns for the next decade.
The returns were calculated by averaging percentages, rather than total debits/credits, since the 5-6 month trading duration involves using the same dollars more than once, making an annualized number impossible.

The next variation will be to ladder annual and semi-annual dividends captured with a ITM call each month. Harry Domash of Dividend Detective (and the SF Chronicle) has kindly sent me a list to screen.

CHRISTMAS TOY BONUS:

2010-12-31T10:32:00.000-08:00

I just closed out my profitable Mattel (MAT) position after holding it for 1 month. As mentioned earlier, I'm trying a new variation of DITM - capturing the annual dividend instead of just the quarterly, securing the payment by writing a call 3-4 months out in case of a dividend play against me.

Nov. 29 -Bot 500 MAT ($25.54) - $12780
Sold 5 April 24 calls - $1051
Closed out Dec.31, (at same stock price),net $224 after commissions, 1.75% for a month, 21% annualized.
Thanks to Harry Domash's sharing a huge list of annual dividend-paying stocks from his excellent Dividend Detective.com website, I have many more to choose from for this plan - laddering 1 a month (12)will get me annualized.
With Sentiment (my other passion) indicating a flat to down nearterm future, I am closing out and not opening positions now - a sharp downdraft is perfect for future DITM investing: lower stock prices, ergo higher dividend %s, and higher Implied Option Volatility (premium).
A prosperous 2011 to all, starting tomorrow !

"STEELING" MONEY:

2010-12-29T09:30:00.000-08:00

Latest trade before year-end (and before I wrap up the 2010 results next week: Nucor Steel (NUE) was bought last March at @$45 (200 shares)and 2 $39 calls were sold below it. With a dividend of 3.27%, which grew as the stock 3 months later went into a 37-40 trading range for 5 months. It was called away overnite (ex-dividend was today) at another lower call sold later at $37. So instead of a $5 to 8 loss in the stock, DITM resulted in a 4.55% gain over 9 months, or 6.1% annualized. Not great, but better than a loss!

CHRISTMAS GIFT:

2010-12-22T09:17:00.000-08:00

Latest position called away the day before its Ex-D : IYR, the Real Estate trust, yielding 3.45% at July's purchase at $52; now at $55 it hss a little less dividend %.
Net return after 5 months after commissions, annualized: 11.1% (if done over a 12-month period).
HHs !

TOY STORY:

2010-12-19T09:09:00.000-08:00

Here is an interesting trade for DITMers - a variation on a variation of covered call writing (or (non)-standard deviation for technicians:
Mattel pays an Annual dividend, not quarterly; many other stocks also do, especially pharmas and foreign stocks (note tax consequences - apparently UK stocks have a no tax agreement with the US).
Still a WIP (work-in-progress), I bought MAT, Mattel the toy company, the end of Nov., just before ex-D, and sold the
April call:I got paid its annual dividend last week. Now my choice is close the trade out now for a SURE 21.4% annualized profit (1.78 X 12months), or hold to milk the small call premium until called away in April at 24 (unless the stock is below 24), for a 12.73% annualized profit, but slightly more $$. Here is the trade:
Bot 500 MAT @ $25.54 $12,779
Sold 5 calls -April 24 for $1051
Received div'd - $415
If called in April at $24, $11,991 -after commission
Net $678, or 5.3% in 5 months. Divide by 5 , then multiply by 12 to annualize:12.73

OR:
Monday, buy calls to close (higher than sold), at $2.55 for $1285, up from $1051
Sell stock at $25.67, also higher, for $12,826; receive $415 div'd - net:$228.
$228 divided by initial stock purchase of $12,779= 1.78%, times 12 months: 21.4%.
Now if I can just find 11 more stocks with annual or semi-annual dividends!!! Feel free to email me if you know if any.

Christmas Bonus:

2010-12-17T09:33:00.000-08:00

Twas the week before Christmas and my XLU position got called away the day before the ex-Dividend. The numbers are as follows:
Bought 200 shares exactly a year ago: $6337 (all figures include commissions)
Dividends received: $253; net call premiums (sold and rolled): $672
Stock sale (after $9 commission): $5991
Net profit for a year: $579, or 9.14% annualized, with very little risk or monitoring.
Happy Holidays !!!

HAPPY HOLIDAYS !!!:

2010-12-15T08:02:00.000-08:00

For some reason, this time of year brings a multitude of dividend payments in the DITM accounts, ho ho ho...

After the Holidays I shall "mark to market" the year 2010 - that means on paper close out all positions, buying calls and selling stock at current prices, just to evaluate and exhibit the results.

I'm pleased to report on one position - Exelon Corp., a utility - which I've held for 16 months. This displays what I have believed to be a critical part of DITM - the safety net. On August 7, 2009 I bought 100 shares at $49.87/share. It currently trades at $41, so if I'd just bought the shares I'd be out $900.

During that time I took in $5425 in call premium, dividends, and the sale at $41, if it is called away before the next Feb. ex-D date. So in 18 months I will have received 13.1% - annualized at 8.75%. If it is not called away on an ex-D play, the call will expire in April's expiry date: 20 months with the extra dividend makes the total $709 profit on $4996 initial investment, or 8.5% annualized -not bad for a stock that dropped nearly 20% in price.

WHAT A WASTE:

2010-11-29T11:40:00.000-08:00

Waste Management, ostensibly bought by Warren Buffett, had been vascillating between a C and D at Schwab (sell and hold). DITM position was called away Friday before today's ex-d date, with the January call being exercised. Total annualized return based on a 10-month holding (sans this dividend): 10.8%, just about the average (minus the plungers like BP). Glad to get rid of that position, as it has been falling well before the market.

Nota Bene: Jeremy Siegel, of Stocks For The Long Run fame, stated in his book that for over a century no 20-year slice of market history ever contained a lower level than at the beginning- that string broke as of 2000.

Today on CNBC Michael Thomson of Standard and Poor's mentioned that dividend increases on S&P500 stocks doubled year-over-year ; he said people are buying stocks for INCOME now, not bonds!

New position taken today (don't try this at home) - I noticed MAT, on a nice uptrend, going ex-D this week with an ANNUAL dividend of $.83 and over $.50 extrinsic call value on the April call, would return an annualized 12.8% if all goes well (no special adjusted option, etc.)

WHIPSAW SERENADE:

2010-11-16T12:28:00.000-08:00

The question I have to ask myself today is "Which is worse - taking my third loss out of 70+ trades so far in the DITM strategy, or getting a root canal?" Actually I did both, one leading to the other. Since the TLT was tanking and I had made the error of not selling a 10% ITM call, rather one that was right at technical support, as well as "insured" by Uncle Ben's QEII, I had to put a stop on it since I was in the dentist chair at 7:30 a.m. Tuesday, and all market reversals really looked cascading the last couple days, including the Calif. Muni Bond funds I so dearly love - NCA,NCP, TFI, MUC, etc. Luckily I hedged the TLT with the Ultra (2X) TBT and got 1/3 of the loss repealed:
Bot 300 TLT at $102 - $30,650
sold 3 Mar. 98 calls for $1650 (bot back at $520)
got 1 dividend - $100
closed out TLT at $28250, whereupon it bounced back immediately whilst being drilled on.
Net on the TBT -$375, also stopped out at open.

LEMON ADE FROM LEMONS:

2010-11-14T12:19:00.000-08:00

This update illustrates an egregious exemplum (e.g.) of why I like DITM covered calls in this investment environment: NUE
Although the SPX has run from 1115 to 1200 YTD (UP 7.6%),Nucor Steel, a DITM candidate with over 3% dividend and liquid options, has dropped from $46.65 to 40 YTD (14.3%). The buy/write occurred on March 26 with the stock at $45.93.
In sum, with dividends and call premiums, if called away at yearend at 37-strike(next ex-D), it will have returned an annualized +6% while the stock dropped 6%.
Bot stock 200 shares: $45.94 or $9196
Dividends rec'd (3): $216
Call premiums (3): net $2007
Net profit at 37: $416, or 6% annualized over 9 months. (10 months if not called away).

YET ANOTHER ASSIGNMENT:

2010-11-10T09:39:00.000-08:00

I just got the dreaded (?) phone call from Schwab's auto-phone that my DD (Dupont) was called away prematurely yesterday. Bot in August, the Call was due to expire in the 3rd week of January (ex-D is today). Unlike the previous callaway - DUK- I timed this correctly, so sans today's dividend, my net profit (net of my commissions) was an annualized 12.4%, much better than the SIR DUK.
Cost: $4174
Call sold:$571
Dividend:$41
Stock called:$3691
Net:$129 for 3 months

UPDATE:

2010-11-09T10:55:00.000-08:00

DUK, Duke Power,was called away today just before ex-Dividend, by a Call due to expire Jan.22, 2011. Even with the compressed time (and poor decision-making in my "trial period" of DITM) the return was only 4.75% annualized - still better than a year's CD or T-Bill. It is best to do the Buy/Write 1 or 2 weeks ahead of the first ex-D date, to ensure at least 1 dividend, plus Call premium ( I received 3 dividends).
TLT has slipped below my call price and bears watching, or even hedging with TBT. Down 12%, it might be a good B/W candidate, unless the dollar rebounds greatly.

FORTUNATE CORRECTION:

2010-11-08T09:57:00.001-08:00

My EIX (Edison) DITM position was called away on October 12, when I was away on vacation. I naturally assumed it was just prior to ex-dividend; it was a pleasant surprise to receive an additional dividend of $63 which was from an ex-D in late September.

So my annualized return for the 4 month holding was 9%, not 6.1%.
Although Utilities pay high dividends, their options are not that attractive for selling calls, nor is this a great environment for the Sector. Telecoms are better - VZ, T.

Standard and Poor's reports that for the decade just past, stocks' dividends comprised 84% of Total Return. Morningstar has an attractive rating for EXC -Exelon, and Leggett -LEG.

Pleasant Correction II

2010-11-03T09:22:00.000-07:00

Received from EIX an extra Xmas present - a dividend of $63, although I had thought being called away on October 12, while away on vacation, I would receive none. EIX actually went ex-D in late September, so I was surprised that it was called away early. Still, the extra dividend makes it a 9% annualized return on the 4 month holding, not 6.1%
Standard and Poor's notes that 84% of the Total Return from stocks in the past decade 2000-2010, was from dividends.

LATEST TRADE:

2010-10-21T08:31:00.000-07:00

Overnight my CAT (Caterpillar) position was called away. Started in July, 3 months, 1 dividend:
Cost $6564, return $350 after all commissions -annualized return 21.3% (if done 4 times in a year).
Beats Money Markets-MMF.

LATEST ACTIVITY:

2010-10-20T09:31:00.000-07:00

Having held INTC for some time, I rolled out/down calls to an April 18 strike today. Despite INTC being down over 1 point from where I bought it a year ago, if called away in April at 18, it will return an annualized 6.4% (9.5% over the 1 1/2 years).

CLOSED TRADES - YTD: 2010:

2010-10-17T20:41:00.000-07:00

DATE	STOCK	No.	BUY	STOCK	DIV'D	CALL	Stock	TOTAL	ANN.NET
EntryDate	SYMBOL	Shrs.	PRICE	AMOUNT	AMT	SOLD	Called	RETURN	RETURN
10/13/2009	NM	1000	5	5009	60	802	4991	844	40.40%
10/21/2009	DD	100	34.01	3410	143	435	2991	*173	8.70%
11/23/2009	LEG	300	19.8	5949	78	808	5241	178	12.00%
11/24/2009	LMT	200	77.06	15421	252	520	14991	*870	16.92%
12/7/2009	HUN	500	10.68	5349	50	1011	891	partial100	>>>>>>
12/7/2009	HUN			closed			3591	194	14.50%
12/18/2009	DVY	200	43.78	8765	86	934	7991	246	11.20%
12/22/2009	PM	100	49.46	4955	174	414	4491	*364	9.79%
12/22/2009	DRI	200	35.96	7200	50	810	6591	251	10.50%
12/30/2009	TLT	100	90.37	9046	0	406	8691	51	6.77%
January	2010			56739					January
1/29/2010	BP	100	56.57	5666	84	721	4420	.ls-550	9.70%
2/2/2010	ETN	100	64.97	6506	100	736	5991	321	9.87%
2/26/2010	MRK	200	36.95	7400	152	758	6791	*491	11.40%
3/25/2010	UVV	200	54	10810	94	1250	7991	.ls-1665	15.40%
5/12/2010	DIA	500	108.85	54434	524	4671	50991	1752	9.66%
5/24/2010	CTL	200	33.57	6723	145	182	6991	595	26.60%
5/27/2010	KFT	200	28.79	5767	58	508	5391	190	9.88%
6/1/2010	BP	200	38.05	7617		1218	6945	.ls-546	7.17%
11/13/2009	BX	300	15.27	4590	210	892		rollout
	BX						2946	.*loss-156	3.40%
5/7/2009	GDX	200	36.7	7349	22	1468	7991	*1630	20.50%
7/14/2010	PFE	400	14.92	5977	0	881	5191	95	19.07%
2/30/2009	VZ/FTR	400	mltpl.	12800	mltpl.	mltpl.	13396	596	6.21% * Add'l Calls sold

EXELON TRADE:

2010-10-15T13:03:00.000-07:00

Today I again rolled out/down my DITM call options to April 2011, from the 42 call to 41. Since buying the stock at $49.87 in Aug. of '09.
To prove that DITM is a "defensive" strategy, the stock is currently down 6 1/2 points - I have received $2042 in call premiums and dividends (4.26%), for a 14.2% gain over the 20 months to April 2011 (if called away at $41, and including 2 more dividends). Annualized, that is 8.5% with a safety net for the price drop of $650 (another 2.2%).

RESULTS OF ACTUAL 2009 TRADES:ANNUALIZED RETURNS

2010-10-14T21:37:00.000-07:00

DATE	STOCK	NUMBER	BUY	STOCK	DIV'D	OPTION	CALL	TOTAL	cld=called	ANN.NET
	SYMBOL	SHARES	PRICE	AMOUNT	AMOUNT	SYMBOL	SOLD	RETURN	away-ex-D	RETURN
5/7/2009	XLE	100	50.15	5024	50	WGHAS	890	407	12/17/2009	13.9%
5/7/2009	GDX	200	36.7	7349	22	KFWAI	1468		rollout
12/31/2009	GDXcont					GDXFN	1842
5/8/2009	HCN	100	34.09	3418	0	HCNLF	700	273	cld8/6/09	32.0%
5/12/2009	CAT	100	37.69	3778	42	WKTAU	1024	279	cld10/16/9	17.7%
5/15/2009	T	200	24.98	5005	82	TAR	754	322	cld10/6/9	15.4%
5/18/2009	WMT	100	49.5	4959	27	WWTAI	700	259	cld12/8/9	9.0%
6/18/2009	BWP	200	22.41	4491	98	BWPLX	210	308	cld10/27/9	20.6%
6/11/2009	EP	300	10.8	3219	30	EPJK	765	267	cld10/16/9	19.9%
6/23/2009	BP	200	47.24	9457	168	BPAI	1015	717	cld11/9/9	31.6%
7/24/2009	ETN	100	51.1	5119	50	ETNAI	811	233	cld11/4/9	13.7%
8/7/2009	EXC	100	49.87	4996	106	EXCAI	654
8/17/2009	BKS	300	20.05	6024	75	BKSAW	1090	434	cld11/23/09	28.8%
8/20/2009	TLT	100	95.1	9519	93	ILTAL	660	225	cld12/1/09	8.8%
9/10/2009	VZ	100	31.15	3124	48	VZAB	355	70	cld12/29/9	7.0%
9/10/2009	SLX	100	50.21	5030	0	EZNLV	593	354	cld12/2/09	28.2%
9/14/2009	DIA	100	96.13	9622	27	DAVAL	837	233	cld11/19/09	14.5%
10/1/2009	CTL	200	33.6	6729	0	CTLAF	788	50	cld11/27/9	4.5%
10/13/2009	NM	1000	5	5009		NMCA	802
10/14/2009	INTC	300	20.94	6291	42	NQAD	520
10/21/2009	PWE	300	17.08	5133	72	PWECC	652	82	cld12/28/9	9.6%
10/21/2009	DD	100	34.01	3410	41	DXTAF	435
10/28/2009	MO	200	18.26	3661	0	MOCR	310	40	cld12/24/9	6.6%
11/11/2009	NLY	300	17.8	5349		NLYAW	241	133	cld12/21/9	44.8%
11/13/2009	BX	300	15.27	4590	90	BXAV	892		rollout
1/4/2010	Bxcont					BXFG	742
11/23/2009	LEG	300	19.8	5949		LEGCW	808
11/24/2009	LMT	200	77.06	15421	126	LMTLO	520
12/11/2009	LMTcont					LMTCO	1088
12/7/2009	HUN	500	10.68	5349		HUNBI	1011
12/11/2009	XLU	200	31.64	6337		XLUCD	396
12/18/2009	DVY	200	43.78	8765		DYVFN	934
12/22/2009	PM	100	49.46	4955		PFYFA	414
12/22/2009	DRI	200	35.96	7200		DRIDM	810
12/30/2009	VZ	200	33.39	6687		Jul.31	586
12/30/2009	VZ	200	33.39	6687		Apr.31	506
12/30/2009	TLT	100	90.37	9046		Mar.87	406

			TOTAL:	98661	1289		12395	6200


			6200/98661			7mo:	6.29%	(10.77ann.%)
			closed trades only			rollout calls not incl.

"FED" UP WITH ZERO INTEREST RATES!

2010-10-14T21:12:00.000-07:00

"FED UP WITH LOW RATES?"

by Brent L. Leonard

"FED" up with zero interest rates on CDs, Money Market accounts?

My name is Brent Leonard; I have been a professional and private investor for 25 years, and, having retired recently, was very disadvantaged by the Fed's zero interest rate policy, mostly to help big banks, which greatly impacted my retirement income. Say a person such as myself retires when rates were 6%. If they had $1 Million in savings, they would receive only $10,000 a year at the current CD or T-Bill rate of below 1%; at 6% that amount would have been $60,000.

Over a year ago I happened onto an unconventional and neglected investment strategy that provided me with surprisingly high return while also offering a safety net for the stock market. It is quite simple and requires very little monitoring or investment knowledge.

This strategy involves finding high quality, dividend paying stocks and writing covered call options BELOW the Buy-in price, combining to produce historic annualized double-digit income, while "pre-selling" the stock around 6 months out. Those of you who are familiar with covered calls understand that the usual procedure is to sell a call option ABOVE the Buy price of the stock, and then hope that the stock rises! After the biggest Bull market in history from 1982 to 2000 and the most recent 80% rally of 2009, I do not feel this can continue, especially when you consider the global economic condition.

If the stock does not rise, you keep the option premium, but can lose money if the stock falls, just as if you had only bought the stock. With the DITM (Deep-In-The-Money) Call plan, you have already sold the top part of the stock months out, so a small loss is not possible.

For example, let us say you buy ABC at $50 and sell a $45-strike Call on it for $6 (1 dollar more than the difference of 50 and the price it will get "called away" from you in 6 months). I found through extensive testing that this return on an annualized basis was 10% or higher. While 10% is not an impressive number, when made consistently it is slightly above what the 100-year average of Blue Chip stocks has gained - in the first decade of the new millennium the return was actually negative.

There is also the possibility that someone on the other side of the Call (who bought the one you sold) will "exercise" it prematurely just before it goes ex-dividend. While this prevents you from getting that dividend, I've found that the annualized return was closer to 20%, since it compressed the time that you held the stock. Commissions are a factor, but they are much lower now than they have ever been in the past.

What is especially nice about this plan is that it works well in almost all market scenarios. Markets that rise sharply or gradually put an extra cushion of safety above your Loss price! A sideways market lets you buy back the call near expiration and resell another 6 months out without losing the stock, if it still appeals to you.

A market that slowly declines is even better, if your stock does not go down much below your Sell price - because, your stock and others you might like, will get cheaper to buy - the decline causes a spike in volatility, which raises the price of the Call option you are selling, and the dividend percentage goes higher!

So, the only real drawback to this strategy is a full blown Bear market - by definition, one that falls 20% or more. Over the past 100 years or so, we have seen 1 or 2 of these per decade - we saw 2 in the first decade of the 21st Century. Usually they occur in stages, so one should be able to recognize the danger, and adjust - maybe even "step down" the Calls as the stock descends for no loss.

As a veteran of the stock market who has seen all types, it is especially gratifying to have stocks tank and not have to worry about whether I should hedge it, ride it out every day- or sell it and watch it turn around and run back up without you.

If there is a sudden drop in either the market or an individual stock, such as BP after the oil spill, a diverse group of stocks should be very profitable over time. One can even diversify further by using some ETFs that pay dividends and have liquid options, and even the Spider ETFs, such as the DIA ( one hundredth of the Dow 30).

What was initially a solution to the nearly $9 Trillion of "dead" money that was sitting in 1% Money Market funds for an "extended period", became a defensive answer to a volatile stock market - relying on secure income rather than the "hope" of possible appreciation.

In today's markets where around 70% of daily volume is done by the High Frequency Trading Quants - MIT Ph.Ds with a huge technology advantage, the average investor is like the "patsy" at the World Series of Poker table, which most of the Quants were successful at in Vegas!

The current market environment is optimal for this strategy since we have just come off a good correction which lowered stock prices and more than doubled the Volatility of options to be sold.

Finally, for those wanting to pursue this concept, there is more information available at www.brentleonard.com, including my new book - Zero InTolerance - on Amazon.