CHRISTMAS TOY BONUS:

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:

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:

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:

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:

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 !!!:

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:

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:

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:

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:

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:

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:

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

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:

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:

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:

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:

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

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.

DATE	STOCK	NUMBER	BUY	STOCK	DIV'D	DIV'D	ANN	Q$.
	SYMBOL	SHARES	PRICE	AMOUNT	Ex-Date	PayDate	DIVD%	DIVD
5/7/2009	XLE	100	50.15	5024	19-Dec	Jan.1	1.85	0.25
5/7/2009	GDX	200	36.7	7349		0
12/31/2009	GDXcont
5/8/2009	HCN	100	34.09	3418	closed	20-Aug	8.00
5/12/2009	CAT	100	37.69	3778	16-Oct	20-Nov	3.72
5/15/2009	T	200	24.98	5005	8-Oct	3-Nov	6.46
5/18/2009	WMT	100	49.5	4959	9-Dec	2-Jan	2.11	0.27
6/18/2009	BWP	200	22.41	4491	30-Oct	10-Nov	8.50
6/11/2009	EP	300	10.8	3219	3-Oct	3-Nov	2.15
6/23/2009	BP	200	47.24	9457	12-Nov	8-Dec	6.64
7/24/2009	ETN	100	51.1	5119	20-Oct	21-Nov	3.75
8/7/2009	EXC	100	49.87	4996	12-Nov	10-Dec	4.26	0.53
8/17/2009	BKS	300	20.05	6024	5-Dec	30-Dec	4.77
8/20/2009	TLT	100	95.1	9519	M3rd	M7th	.32m	0.32
9/10/2009	VZ	100	31.15	3124	7-Oct	2-Nov	6.15	0.48
9/10/2009	SLX	100	50.21	5030	26-Dec	31-Dec	2.77An	Ann
9/14/2009	DIA	100	96.13	9622	M15-21	M11-17	4.00	Var
10/1/2009	CTL	200	33.6	6729	3-Dec	21-Dec	8.60	0.70
10/13/2009	NM	1000	5	5009	16-Dec	2-Jan	5.40	0.06
10/14/2009	INTC	300	20.94	6291	4-Nov	1-Dec	2.73	0.14
10/21/2009	PWE	300	17.08	5133	M28	M13	8.4fgn	.14mo
10/21/2009	DD	100	34.01	3410	12-Nov	14-Dec	4.84	0.41
10/28/2009	MO	200	18.26	3661	28-Dec	11-Jan	7.50	0.34
11/11/2009	NLY	300	17.8	5349	29-Dec	29-Jan	15.00	0.69
11/13/2009	BX	300	15.27	4590	25-Nov	11-Dec	7.88	0.30
1/4/2010	Bxcont
11/23/2009	LEG	300	19.8	5949	11-Dec	15-Jan	5.33	0.26
11/24/2009	LMT	200	77.06	15421	27-Nov	31-Dec	3.26	0.62
12/11/2009	LMTcont
12/7/2009	HUN	500	10.68	5349	11-Dec	31-Dec	3.78	0.10
12/11/2009	XLU	200	31.64	6337	18-Dec	31-Dec	3.90	0.31
12/18/2009	DVY	200	43.78	8765	22-Dec	28-Dec	4.16	0.40
12/22/2009	PM	100	49.46	4955	23-Dec	11-Jan	4.71	0.58
12/22/2009	DRI	200	35.96	7200	7-Jan	1-Feb	2.81	0.25
12/30/2009	VZ	200	33.39	6687	6-Jan	1-Feb	5.68	0.48
12/30/2009	VZ	200	33.39	6687	6-Jan	1-Feb	5.68	0.48
12/30/2009	TLT	100	90.37		9046	29-Jan	5-Feb	3.91	0.32

"FED" UP WITH ZERO INTEREST RATES!

                                   

                  "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.