Hello fellow traders,
GLD seems to be the way to go again. This seems to be our drug of choice as all of our indicators keep pulling us in this direction.
We kept the winning streak going again this week, but it was a little hairy. We will discuss this in the analysis section. But the good news is that we started the second quarter off with a bang!
I got back from my trip to see eldest daughter safely. That is one long trip! But the drive was a fun drive, South Dakota has a high speed limit and it was fun to let the car run!
I am starting work on another cutting for my friend. This one is a Pinter work called Betrayal. I got the script Friday and have got to get cracking because we don’t have much time till we go up.
Ok, here we go for last week.
ANALYSIS
Here is the trade done last week:
GLD 153.00 Call $ 0.1200
GLD 157.50 Call $(0.0707) This gave a $0.0493 Gross Credit for a 4.93% ROI
The GLD market returned to its’ long term patter of down trend this week going down $1.63. But there was a significant upswing on Friday thanks to an abysmal jobs report. The Friday swing was up $2.52 for a closing price of $152.81. that made life Friday a little scary! Everything was fine until the afternoon right around the close of the Gold Metals Market. From that point on there was a rise in the price to almost our strike price. In fact the high water mark was $152.95 then the slow descent to the closing price.
The price stayed below the 50 day SMA until Friday with the big spike, but still is below the 200 day SMA but closing in fast and moving up. If the price breaks the 200 day SMA then this is a great upward signal and this would be time to start looking at going to the put side for our spreads.
Usually when a trade starts to go like that I try to get out and come back to fight another day. But in this instance we couldn’t get out as we were set up to take a big loss until the price started to descend again. This is why sometimes we just have to trust our trading system. Remember we don’t actually take the loss until we sell out, so as long as we don’t get our strike breached we are good.
1. The Bollinger Band filter was pretty clear this week giving a good signal to go call side for most of the week. But on Thursday there was a breakout to the upside which signaled the upward price move, but I don’t think anyone saw the magnitude of the move.
2. The probability was 90.12%
3. The trend was moving lower for the week
4. IV is now close to equal with HV, but with a slight upward trend
5. ROI was solid at 4.9%
PAPER TRADE
The paper trade this week was a spin on a concept I have been looking at with big moves on Friday mornings.
Bought GLD 153.00 Expiring April 5 @ .06
Sold GLD 153.00 Expiring April 5 @ .16
Gain $10/contract or $100/$1,000 margin used
I bought 700 contracts for a $7,000 gain. Again another paper trade I wish I had done for real!!
I did this when I saw the big gain in the pre-market trading Friday and put on the paper trade first thing Friday. This gave me a day trading ding, but I will take the ding for a gain like this any day!
Yahoo ongoing trade:
Yahoo Sell July22 Call $ 57 Buy Back $218
Yahoo Buy July20 Call -118 Sell Off $365
Yahoo Sell July17 Put 66 Buy Back $ 10
$5 $137
We pretty much treaded water again this week on price and so our gain in profit was not so much. We are still keeping above our base price of $20 in the spread so that is a good thing. As our profit gain is starting to plateau I am thinking of getting out of the trade. I have $137 now in net gain, and if the market takes a bounce up like I think it will this next week, I will probably sell out. A $137 profit on the trade is a very nice gain on our investment. Also the same person who gave me this initial idea opened up a bearish trade this week, so that is another sign that it is about time to exit the trade.
COVERED CALLS
We still have our covered calls on Vivus and CBI again.
Symbol Company Stock Option Premium Initial Annualized
VVUS Vivus 10.43 Apr13 .29 2,676.00 13.00%
CBI Chicago Bridge 57.97 Apr60 2.30 5,670.00 48.67%
These are the completed covered call trades this year:
Symbol Month Premium Month ROI Ann Month ROI Cum Prem Cum An ROI
VVUS January $32 1.19% 14.35% $32 14.35%
VVUS February $63 2.35% 25.25% $95 21.30%
VVUS February $63 2.35% 25.25% $95 21.30%
VVUS March $28 1.05% 12.56% $123 13.79%
CBI January $50 1.12% 13.39%
CBI March $ 125 2.31% 27.73% $175 12.94%
VVUS – This stock is still in the $10-$12 doldrums. We are in no danger of having this called away. I am still looking for a replacement for this one, as it has kept in the doldrums now for quite some time. The loss I would take would help offset the gains made in the weekly options and covered call premiums.
CBI – The price has retreated below our strike, but is on the upward move again. We have a week to go until the option expires and I am hoping that the price stays below the strike price. BUT if we are called away, like we have been before, it won’t be such a bad thing. We will have gain on the price we are called away at + option premium + this month we were paid a dividend since we held CBI past the EX-Dividend date. So this month we are at least two time winners and possibly three time winners!! If we get all three streams our return for the month would be 9.90%, if we get the call away and the option premium we are at 9.87%, and if we only get the option premium we are at 4.05% (I know that I had a typo for this last week stating 4.50% - I just noticed it when writing this and rechecking my calculations---sorry for that, we will try to do better)
Some people would say that we have had a great year already for the portfolio. True if we go on return based on premium, but if we go with the traditional measure of call premium PLUS liquidation value of underlying stock then we are hurting. But I like to look at cash flow and we are doing well with this. This is the cumulative covered call results for 2013:
Symbol Invested $ Option Prem Call Away Div Total Return
VVUS $2,676.00 $ 123 $123 4.60%
CBI $4,480.00 $ 50 $320 $370 8.26%
CBI $5,409.00 $125 $ 91 $5.00 $221 4.08%
Totals $12.925.00 $298 $411 $5.00 $714 5.52%
DIVIDEND STOCKS
Here are the two portfolios updated.
This portfolio is made up of 100 shares of each stock:
Ticker Name Buy Current Date Div
Price Price Yield
KO Coke 38.17 40.08 08/27/2012 2.71%
AGD Alpine Global Dynamic 5.76 4.77 08/27/2012 6.25%
AOD Alpine Total Dynamic 4.37 4.02 08/27/2012 7.41%
MO Altria 34.26 34.84 08/27/2012 5.17%
INTC Intel 22.87 20.94 10/01/2012 3.94%
HIX Western Asset Hi Inc II 10.53 10.03 10/15/2012 9.44%
MCD McDonald’s 91.74 100.42 10/30/2012 3.55%
MSFT Microsoft 28.55 28.70 10/30/2012 3.12%
JNJ Johnson and Johnson 68.03 82.04 11/23/2012 3.53%
PG Proctor and Gamble 68.72 78.23 12/21/2012 3.27%
Buy Price Portfolio Value = $37,300.00
Current Price Portfolio Value = $40,407.00
Gain/(Loss) So Far = $3,107.00
Portfolio Return = 8.33%
Dividends Received So Far = $640.49
Portfolio Return w/ Dividends = 10.05%
Current Prices as of 04/05/2013 Closing Price
We keep our slow and steady climb with this portfolio. This past week many of the stocks in the portfolio paid the quarterly dividend. Total return is now over 8% with the portfolio portion at almost 7%. This is great! This portfolio is showing my primary philosophy with stocks – buy great companies on sale and then let them ride.
Both portfolios will carry a 15% stop on them. Portfolio #1 has 100 shares of each stock and will generate $1,198 in dividend revenue assuming no reinvestment. This gives a 4.01% return. Portfolio #2 will have $5,000 invested into each stock and there will be dividend reinvestment. I will carry shares out 3 decimal places. So here is how Portfolio #2 shakes out:
Ticker Name Buy Current Ex-Div.
Price Price Date Shares
KO Coke 36.89 40.08 06/13/2013 135.917
AGD Alpine Global Dynamic 5.76 4.77 04/19/2013 982.153
AOD Alpine Total Dynamic 4.37 4.02 04/19/2013 1,257.549
MO Altria 34.26 34.84 06/22/2013 148.894
INTC Intel 22.87 20.94 05/03/2013 240.000
HIX Western Asset Hi Inc II 10.53 10.03 04/22/2013 527.137
MCD McDonald’s 91.74 100.42 05/28/2013 55.425
MSFT Microsoft 28.55 28.70 05/19/2013 183.492
JNJ Johnson and Johnson 68.03 82.04 05/25/2013 71.547
PG Proctor and Gamble 68.72 78.23 04/19/2013 72.529
Buy Price Portfolio Value = $51,996.01
Current Price Portfolio Value = $53,063.67
Dividends Received So Far = $490.41
Dividend ROI = 0.94%
Stock Return = 2.05%
Total Return = 3.00%
The difference in the portfolios is the timing in the buying of the securities.
Here is the watch list. Our three keys make getting on the list and then getting into the portfolio rather difficult. Here are the three keys: (1) a moat business model, (2) dividend of at least 3%, (3) solid fundamental analysis numbers.
Ticker Recent Date Div Target
Name Price Yield Price
WFC Wells Fargo 37.15 2.85% 35.00
COP ConocoPhillips 58.54 4.53% 58.00
BAC Bank of America 11.97 0.35% 11.00
BRKB Berkshire Hath B 104.15 No Div Pd 100.00
STI SunTrust Bank 28.04 0.69% 29.00
TCPC TCP Capital 15.24 9.46% 15.60
PSEC Prospect Capital 10.83 11.57% 10.75
The first thing that should jump out at you is that these stocks really don’t fit the dividend portfolio model except for COP. These stocks were picked more on the basis of anticipated growth.
Wells Fargo – This stock is starting to reap the benefits of getting itself out of a lot of the mortgage mess it found itself in for the past few years. The dividend is likely to increase as the Feds loosen up on the banks
ConocoPhillips – This stock has great potential as the move significantly higher as the recent earnings was good and it has beat the street consistently.
Bank of America –This stock is keeping up a pattern of growing revenues and earnings after nearly collapsing in the banking crisis. This is a stock that I wish I had gotten into at this time last year at around $4.00
Berkshire Hathaway B Class – This is the way more affordable way to get into Berkshire Hathaway and Warren Buffett than the $150K+ regular Class A shares. Over any period of time 2years or greater an investment in Berkshire has made money. This past year (2012) the S&P beat Berkshire, only the 5th time that has happened in the history of Berkshire – over 40 years. So this is one that is purely price appreciation. DISCLOSURE – I own this in my personal stock portfolio –one of the few stocks I do own.
STI – SunTrust Bank – This is a regional bank that didn’t pass the stress test the first time around but did in the results announced Thursday. Regional banks seem to be where the action will probably be in the financial sector. It has a paltry dividend ROI right now, but now that the stress test is passed the bank will be able to modify this and will probably open up the dividend some more.
TCPC – This is a business called a business development corporation. These types of companies are basically like venture capital groups in that they invest in new businesses, but mostly they invest in the senior debt or hold some type of debt instrument or warrants for stock upon issue instead of investing directly in the companies. TCPC is considered the best of breed in these types of companies and with an 8% yield it is paying a great dividend. Now BDCs (Business Development Companies) must pay out most of their earnings like a REIT that is why the dividend is so high
PSEC – This is another business development corporation. It specializes in small to mid-size privately held companies. It makes its’ money by buying debt instruments issued by these companies and occasionally investing directly into these companies. PSEC and TCPC are the best of breed for business development companies.
QUESTIONS
I am continuing the series of trading rules from Jim Cramer. Here are Rules 16-20 of his 25 trading commandments:
Rule 16
That's all well and good, until you need money.
Most fund managers have fabulous marketing teams that are able to hype their funds regardless of performance. Despite that and despite the shameless way this industry supports just about anyone who runs money if the money-runner is willing to kick back to the sources of funds, managers do get cash calls. They periodically have to redeem shares they own for cash to send back to unlucky investors.
When they do, that tendency to keep the dogs develops a sinister side: Good stocks get sold to subsidize the losers. You then get a self-fulfilling spiral as the bad stocks stay bad. They usually keep going down. And the fund, without the good stocks, keeps sinking. They never learn my rule:
Never subsidize losers with winners.
Individuals do the same thing. They have only a finite amount of capital to invest. Rather than take the medicine — the loss — they hold on to the losers and sell their winners.
My advice to anyone who is stuck in this position is quite simple: Sell the losers and wait a day. If you really want them, go buy them back the next day. I also am certain that you never will.
Rule 17
Hope is not part of the equation.
Don't "hope" for anything. Hope is emotion, pure and simple. And this is not a game of emotion, other than to take the other side of the desperate. Yet, I hear "hope" more than any other word, particularly with troubled tech stocks. Those stocks are filled with hopeful people betting that something good eventually will happen that will drive the stocks higher.
Hoping and praying are excellent things in religion. They are integral to sports. You know that the coaches of some of these come-from-behind NCAA men's basketball teams keep players motivated through hope.
But hope is a mistaken emotion in our business. It supplants reason, it supplants rigor — especially when it comes to low-dollar-amount stocks.
No company ever set out to have a low-dollar-amount stock. The companies fight like heck not to have them. When they have them, it is a judgment rendered by the market that is harsh, difficult to accept and ultimately, far more right than wrong. When you suffuse your thinking with hope, you end up holding on for something that most likely will never occur. Cut your losses and move on.
Remember, we don't care where a stock has been, we care where it is going, and it is most likely headed down if you are hoping.
Recognize and be open to the unexpected shifts in the market because business, by nature, is dynamic, not static. More
Rule 18
Be flexible.
You have to be flexible because business, by nature, is dynamic, not static. Things change. Markets change. Competitors start new price wars to win share. Companies execute poorly. Customers cancel orders. Events happen that make buying decisions more difficult or postpone them.
Of course, our buy-and-hold brainwashing totally precludes many of us from ever thinking like this. We have made up our minds that things are great for Coca-Cola (KO - news), say, and we don't want the facts to get in the way of the story. Or we decided in 2000 that Cisco (CSCO - news) was a winning stock and we are not going to be dissuaded by the change in the fundamentals to sell it. Our "love" for stocks is so misplaced in this rough-and-tumble world of business.
Let me tell you a story of what happened to me a couple of years ago by way of illustration. I thought that Charter Communications (CHTR - news) would be a terrific stock if the largest shareholder would simply pony up more money with the rest of us to improve the balance sheet.
Instead, the largest shareholder took a powder and the company went to hedge funds and offered them the right to short as much common as they wanted to in return for lending them money. The hedge funds obliged. If the company had adopted my funding method, or if the company simply had done a huge equity offering, we would be looking at a win, not a loss. But the company made the wrong move and the stock went from being a good stock to a bad one.
Many people thought that I had gone from being a good stock picker to a bad stock picker because of Charter. Frankly, I think that management and the largest shareholder made moves that weren't rational. It's hard to invest with someone who exhibits irrational behavior after that person had not exhibited such behavior before. So I had to cut my losses and run. I mention all of this because the unwillingness to recognize this turn for the worse, as bad as it was, would have led to much larger losses than I already had accrued in the stock. This is what happens if you are inflexible (see Rule No. 18), too, if you believe too much and don't shift when it's clear that management doesn't care.
Stay flexible and recognize the vicissitudes of the market and of individual businesses. Or, own bonds.
Your call, as always.
High-level executives don't quit a company for personal reasons, so that is a sign something is wrong. More
Rule 19
CEOs don't quit for personal reasons. CFOs don't quit for personal reasons. These are fabulous jobs. You get them after giving up much of what people enjoy about life, such as family, friends and nights out. Competition is so fierce for these positions that when you finally land one, you don't up and leave. You leave because something's wrong at the company. Hence, my rule:
When high-level people quit a company, something is wrong.
"Aha!" you say, "I know a CEO who quit because he had an epiphany about climbing K2." Or, "I know a CFO who left because she wanted to spend more time with her family."
Fine. There are exceptions.
This is a game about the rule, not the exception. There will always be some situation in which it is a mistake to sell when a high-level person leaves. I don't care.
As you can tell, if you have read the rules to date, I am giving you the stuff that has kept me in the game all these years, that literally has kept me from losing more money than I have made.
In the midst of its scandal, AIG (AIG - news) felt like Enron to me. We have no idea what kind of reserves AIG really has at all, and the high-level departures are unnerving. This one seems like Fannie Mae (FNM - news) at best, Enron at worst.
This is why on some sleepy August night with Enron at $47 a share, I told everyone and anyone that I would sell it nine ways to Sunday because Jeffrey Skilling, the man who would have given his eye teeth to get his CEO job, suddenly quit. Of course, there were those who said, "Cramer, if you had done more homework, you could have gotten out at $90." Yeah, maybe. I didn't.
I didn't keep you in till zero, though, either.
I see so many people throwing in the towel on companies that have real assets and real worth just because they aren't working now, and it angers me. I recall an interview I did a year or so ago with the CEO of Superior Industries (SUP - news), a wheelmaker for auto companies. At the time, its stock was at a 52-week low. It had a big short position. It was getting lumped in with ne'er-do-well companies.
And I asked myself, "Why sell that one? It's already down so much, it has a clean balance sheet, it can make acquisitions, buy back shares, do so many things." But people didn't want to wait until the cycle turned to get the profit that most certainly would come to those who waited for Superior. That's because it was cheap and good. It was cheap because it sold at book value; it was good because it had plenty of business.
Or take the situation I see developing in banks like J.P. Morgan (JPM - news) and PNC (PNC - news). If the Fed doesn't tighten forever — which it won't — at a certain point, the value in these banks will be realized. Great brands, great branches.
But no one cares.
At any given moment, I like to have a portfolio of what's working now and what will work in the future. I think that after 16 tightenings, you have to start thinking that the Fed will have an impact and when it does, the Fed will be through. When the Fed is through, you are going to want to own the financials. I think they are a lot easier to own now than Phelps Dodge (PD - news) or U.S. Steel (X - news) are.
It takes patience. Most don't have it. If you don't, frankly, I think you should let someone who has patience run your money. You don't deserve to.
And by the way, stocks like EMC (EMC - news) and Cisco (CSCO - news) and Sun Micro (SUNW - news) don't qualify. They are expensive, not cheap. They don't represent value ... at these prices.
All charts from freestockcharts.com. This is not a paid endorsement. They are a good free app that only asks for credit on their charts when you use them.
DISCLAIMER: Hashley Capital Management, LLC; as well as I are not giving any trading advice. All data is historical in nature and is intended for use as an educational tool. Trading in stocks and/or options is risky and can result in loss of capital. Stocks and options carry inherent risks and should be well researched before any buy/sell decision is made. There is no attempt to sell any brokerage services or act as a broker or dealer by Hashley Capital Management, LLC. Any forward looking comments on this blog are not attempts to solicit business for Hashley Capital Management, LLC and are the opinion of Hashley Capital Management only. If you choose to follow the same path and invest in the strategies and trades used by Hashley Capital Management, LLC after doing your own due diligence, that is your decision and yours alone.
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TTFN
Ash
