Hello Folks!
So far this year has been a rough one for traders in options. Volatility has been really high until this past week, and with that volatility comes unpredictability. This leads to tough choices in the weekly options market.
My system is designed to give a measure of safety to this very volatile market. Because of this I filter out many trades that could be profitable, but also carry large risk. Many of the paper trades I have shown so far this year have demonstrated that. They were profitable trades, but they did not really fit my system.
The good news is that so far this year we are profitable. That is the ultimate goal. Remember the first two rules:
1. Make money
2. Don’t lose the money we make
Soon I will repost the trading rules for our system with some more annotation than they currently have. This will help the new people and old followers to see how the system has grown and matured over the past year since we last reposted.
Now on to the analysis:
ANALYSIS
GLD 161.00 Put $ 0.10
GLD 160.00 Put $(0.05) This gave a $0.05 Net Credit for a 5.00% ROI
1. At the time we were looking the ETF was up trending so we looked to the put side
2. IV and HV were almost identical so this was a wash
3. Our probability indicator hit 91.2%
4. Our Bollinger Band Indicator showed our confirming mark Thursday Morning just before we actually made the trade
5. The minimum 3% ROI was found at the 160/161 level
At the time of the trade the 161/162 trade was at 90.05%, but I went with the higher probability.
Just after I put this trade in (but it hadn’t been accepted yet) I went back to the GMCR that I had been following all week. All the indicators before I put on the GLD trade were there for the GMCR except the Probability Indicator which languished around 80%. When I went back to look the Probability Indicator had jumped to 94%. I tried to go back and put the GMCR trade on, but was too late. The GLD trade was accepted while I was reanalyzing. BUT with all the analytics on our side the chances of the trade going south were slim. And we banked our gain.
PAPER TRADE
So I did the GMCR trade as a paper trade. Here is that trade:
Summary:
GMCR 48 Feb 08 Call $0.25
GMCR 49 Feb08 Call (.18)
TOTAL GAIN: $0.07 for a Net Gain of 7.00%
Another trade:
Yahoo Sell July22 Call $ 57 Buy Back $104
Yahoo Buy July20 Call -118 Sell Off $192
Yahoo Sell July17 Put 66 Buy Back $ 1
$ 5 $87
So as of right now the trade has increased in value! I like this type of trade. Our cap is $2.00 and we are on our way to that cap. As long as Yahoo stays above $17 we are good. And we have lots of time to have this happen.
COVERED CALLS
We still have our covered calls on Vivus. I would like to keep CBI as a covered call but right now there is no premium over what is right at the strike price so I am looking for another. So far I haven’t found one.
Symbol Company Stock Option Premium Initial Annualized
VVUS Vivus 13.40 Feb16 .63 2,676.00 28.25%
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%
CBI January $50 1.12% 13.39%
VVUS – This stock is still in the $12-$15 range. The option is now trading for $1 ($.01 looking on the option chain), so this looks like a good trade with little chance of call away. This is my speculative play and currently I am in the hole overall for it. But I am continuing to collect call premium on it and I know they have some very promising drugs in the near future coming to market. If these are successful then we will more than likely get our overall investment back. In the meantime we just keep collecting the call premium.
This is the cumulative covered call results for 2013:
Symbol Invested $ Option Prem Call Away Total Return
VVUS $2,676.00 $32 $32 1.19%
CBI $4,480.00 $50 $320 $370 8.26%
Totals $7,516.00 $82 $320 $402 5.35%
I am looking for a replacement for CBI. Ford (F) looks good and I am looking still at CBI for a later buy.
DIVIDEND STOCKS
Here are the two portfolios updated:
Ticker Name Buy Current Date Div
Price Price Yield
KO Coke 38.17 38.77 08/27/2012 2.71%
AGD Alpine Global Dynamic 5.76 4.83 08/27/2012 6.25%
AOD Alpine Total Dynamic 4.37 4.04 08/27/2012 7.41%
MO Altria 34.26 34.69 08/27/2012 5.17%
INTC Intel 22.87 21.00 10/01/2012 3.94%
HIX Western Asset Hi Inc II 10.53 10.15 10/15/2012 9.44%
MCD McDonald’s 91.74 94.87 10/30/2012 3.55%
MSFT Microsoft 28.55 27.55 10/30/2012 3.12%
JNJ Johnson and Johnson 68.03 75.48 11/23/2012 3.53%
PG Proctor and Gamble 68.72 75.75 12/21/2012 3.27%
Current Prices as of 02/08/2013 Closing Price
So far this year the market has been doing really well for Dow stocks. 6 out of 7 weeks were winners and the overall Dow is way up for the year still as the close last week was only down 16 points for the week.
Overall for the market this was a great week. The Dow ended up over 14,000 and the S&P ended up over the 1,500 mark at 1,515. The Russell 2000 was nearing highs as well and the NASDAQ index nearly closed on a multi-year high.
AOD and AGD are the big drags on our portfolio right now. I am looking at another closed end fund and an ETF to take their place, but am not pulling the trigger right now. Our long term perspective is what is keeping us in these stocks. AGD and AOD are closed end funds that give monthly dividends. So as long as the price stays below our initial entry point the stocks are on sale to us on a relative basis. So we pick up more stock than we thought we would and build more dividend earning power.
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 38.77 02/27/2013 135.917
AGD Alpine Global Dynamic 5.76 4.83 02/19/2013 970
AOD Alpine Total Dynamic 4.37 4.04 02/19/2013 1,240
MO Altria 34.26 34.69 03/22/2013 148.894
INTC Intel 22.87 21.00 02/05/2013 240
HIX Western Asset Hi Inc II 10.53 10.15 02/13/2013 523.091
MCD McDonald’s 91.74 94.87 02/28/2013 55
MSFT Microsoft 28.55 27.55 02/19/2013 182
JNJ Johnson and Johnson 68.03 75.48 02/25/2013 71
PG Proctor and Gamble 68.72 75.75 01/17/2013 72
Buy Price Portfolio Value = $51,996.01
Current Price Portfolio Value = $51,523.74
Dividends Received So Far = $169.75
Dividend ROI = 0.33%
Portfolio Return = - 0.91%
We are still slightly negative on the overall portfolio value, but we are going to get a big boost this month as many stocks have dividend payments coming in the next couple of weeks. AGD, AOD and INTC are still the drivers of the loss and for AOD and AGD they will be there for most of the year unless a price spike happens. Our monthly dividend payers AGD and AOD will make the loss in dividend toward the end of the year, and that is double good. We get more shares and we come back to even. INTC is still recovering from a bad quarter two quarters ago bit is slowly climbing out of that hole.
Usually there is a watch list portion for the Dividend portfolio. But I have put all the watch list stocks into the portfolio. Now I am looking for replacement stocks for underperformers in the portfolio. But this will not be an easy task. 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
QUESTIONS
I am a college student and am interested in getting started in investing. I have been reading your blog for a while, but am scared to take the leap into options. Is there a way I can get started slowly and build into investing.
This is a great question. Yes! There is a way that you can get started slowly and build. But it might not be what you think. If I were in my 20s today I would start with a dividend building portfolio and then break into stocks. You have a great thing on your side – TIME! Time is the friend of the young investor. For example – the two monthly closed end funds that are dragging down my portfolio performance are on sale right now. This would be a time to buy them up and they are cheap! Most online brokers require $2,000 to open an account. 100 shares of both AGD and AOD would cost you less than $1,000 and you would get $5.00 a month with 100 shares of each. If I was just starting out and had to develop a $2,000 portfolio this is what I would do:
AGD 100 Shares $ 483 $3/month in dividends
AOD 100 Shares $ 404 $2/month in dividends
HIX 100 Shares $1,015 $7/month in dividends
$1,902 $12/month in dividends
Now reinvest these dividends in the stock and that way the dividends will earn dividends. That is compounding and that is that great thing about being young. As you can add to this portfolio, and I would suggest that every spare penny you can put to this account do it. The more you compound now the less you have to worry about later in life. $12/month on $2,000 doesn’t deem like much, but that is $144/year- and that is a 7.2% overall return assuming no dividend reinvestment and will go to close to 10% with reinvestment. These are spectacular returns. Using the rule of 72 with no reinvestment you will double your money in 10 years and with reinvestment it will be about 7 years. Then add to that some extra investments over the years and you have the basis of a great retirement.
Add to this basic account until the account balance hits at least $5,000. If you want to have more than three stocks in your portfolio that is fine, but before you buy make sure you have a pattern of diversification and a target of how many shares (either $amount at buy or # of shares) will be added to the portfolio. Don’t go overboard and have a lot – like 40 or 50. 30 is the absolute max and I would try to keep it to around 10-15. When you are picking stocks remember our mantra:
1. Find businesses that have a moat
2. Find businesses that have dividend payout of at least 3%
3. Find businesses that even if mature are growing
Stocks like Microsoft (MSFT) and Johnson and Johnson (JNJ) or Proctor and Gamble (PG) fit this bill, as does both of the dividend portfolio (either version) above. These are designated for income generation and preservation of base capital. If you want growth and dividend income then you will have to research and find those on your own. That is not my focus.
For every stock you need to run through its’ information for about an hour every two weeks. Guys like Jim Cramer say do this every week. If you hear news of a company that is in your portfolio then by all means you need to see if this changes your outlook. Short term ups and downs are a part of every stock, if you in for the long haul then as long as the reasons why you bought the stock are still there, buy on the dips to get to your target holding for the stock.
While you are building your dividend base – PAPER TRADE the options so you get experience without costing you actual money. Use the trades I put here and try them. Try similar trades on your own. Use the rules in the trading system to try and find your own trades. All of this down in a paper trading account will have you gain confidence and learn how options work and how the trading system works. Plus if you do lose money it isn’t really your own money yet.
Once you have a good base that is earning for you then you can start to play in the options market. There are lots of folks out there selling “systems” that say you don’t need any experience in options or stocks to make a killing in the market. I have bought a few of these systems when I was starting out and the vast majority of them are systems to make a killing for the guy pitching them – not you.
Now I am also assuming that you are contributing to your 401(k) at work. Go as close to the full company match as you can. This is free money and as the old financial saying goes – ain’t no better money than free money!
Now I use Trademonster business trading account and Optionshouse for my personal options trades. I do this for business purposes only, both are very good platforms. Many of my friends use TD Ameritrade’s Think or Swim platform and/or Options Express. Pick an online broker that fits you. There really isn’t a formula for it other than after doing your homework and researching the broker you feel comfortable with them. They all have some of the same features, plus some proprietary features to lure you in. You have to judge for yourself which ones fit what you want to do and how intuitive they are for you. There are others like Fidelity and Schwab that you can choose from.
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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Twitter: @awagel01
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TTFN
Ash
