Instructions

OK heirs, for the most reliable return and with reasonably low risk the existing portfolio of stocks should be liquidated whenever obligations related to options contracts sold on those positions have been satisfied either through expiration or assignment.

The current portfolio strategy requires lots of trading and lots of maintenance and is designed to evolve into one that requires neither of those two.

Instead of making 2000+ trades each year and constantly on the prowl for new positions, the strategy that I would like to have implemented might require 10-20 trades each year and potential replacement from a list of pre-selected blue chip companies.

Once liquidation of those stock positions occurs the assets should be reinvested according to the portfolio guidance that I laid out in the spreadsheet. That lists stocks to buy and in what quantity, based upon the value of the portfolio at the time of liquidation and the then current prices for the proposed new stock positions. Instructions for the use of the spreadsheet are included in the spreadsheet. Basically, all that needs to be done is to enter the current stock price of the various stocks listed and to link that file to another file, as directed.

As of April 2021 those proposed stocks, their ticker symbols and their relative portions of the portfolio are:

INDUSTRIALS: 3M (MMM 7%) and Dow Chemical*(DOW 5%)

TECHNOLOGY: Cisco* (CSCO 4%), IBM (IBM 5%) and Intel* (INTC 5%)

CONSUMER: Coca Cola (KO 6%), McDonalds (MCD 8%) and Proctor and Gamble* (PG 10%)

COMMUNICATION: Verizon (VZ 4%)

ENERGY: Exxon (XOM 5%) and Chevron (CVX 8%)

RETAIL: Home Depot (HD 10%) and Wal-Mart* (WMT 8%)

FINANCE: JP Morgan* (JPM 9%)

HEALTH CARE: Merck (MRK 4%) and Walgreens* (WBA 3%)

There is nothing sacred about any of these stocks, nor their relative proportions in the portfolio. All of these stocks are Blue Chip Dow Jones components and pay relatively high and safe quarterly dividends. Currently, the weighted dividend yield is about 3.3% which means that for every $10,000 invested there will be $330 of annual dividends deposited into the account on a quarterly basis.

A portfolio comprised of those stocks will require far less maintenance and trading than the current portfolio and would be well suited to a “buy and hold” approach, but perhaps with an added twist of boosting income through the occasional hedging strategy of selling long term dated call options.

At any moment in time the market may be depressed or expensive or a given sector may be out of favor or booming. Because that may be the case there may be reason to not invest all of the funds at once or to wait until relatively expensive stocks may become more reasonably priced.

In this example, you can see the price history of Verizon stock over the course of the previous year:


(Click image to enlarge)

The current price is about $4.50 per share higher than its lowest price over the past year and about $4.20 lower than its highest price of the past year. That is often a good level to consider buying shares.

I recommend, in order to generate greater revenue, but without the need for significant efforts to maintain the portfolio that long term call options (LEAPS) be sold on each of the positions. Ideally a one year option would be sold each January for the next January. However, if the portfolio is re-invested in these new positions in June, August or any other time, the options sold should be for the very next January. Then, if those expire new one year options can then be sold.

I recommend selling options with strike prices (the price that you would be paid if the shares are transferred to the holder of the option contract you sold) that is 10% above the price of the shares on the date of sale.

For example, if Verizon is trading at $57.65 per share, I would recommend selling $62.50 options. The price is generally mid-way between the “bid” and the “ask.” In this case, today’s price would be about $1.18 per share for an option expiring about 9 months later, in January 2022.

If you had 1,000 shares you would “Sell Open” 10 contracts (1 contract = 100 shares) and would receive $1, 180 in additional income. In general, the higher the dividend yield the lower the option income yield. Verizon, having a 4.4% yield as of April 13, 2021 would offer a lower option yield, since you as the option seller generally get to keep the dividend, unless the buyer prematurely exercises his option, which generally only occurs near the end of the term of the option contract and if the then current price of shares is above the agreed upon sales price, also known as the “strike price.”

The action taken is “Sell to Open 10 January 21, 2022 Verizon $62.50 call contracts.”

Still, at the current price of $57.65, a $1.18 premium for a 9 month option will annualize to a 2.7% option yield in addition to the 4.4% dividend yield.


(Click image to enlarge)

The net result of those sales on the average portfolio stock would likely be an additional 3-5% of income, or $300-500 for every $10,000 of stock per year.

Plus, there is the possibility of up to 10% gain in share appreciation.

The spreadsheet has a section for “What If?” scenarios where you can see the impact of changing the investment yield, such as may occur if you sell call options on portfolio positions. You can also see the impact of changing your annual withdrawal amount or the number of years of expected withdrawal and how much will remain for heirs when withdrawals are no longer being made.

As an example, at a 3.3% yield from dividends alone on a $1,000,000 portfolio, you can remove $50,000 per year for 20 years and your heirs will get $433,000 before taxes

However, if the yield is 7% because you sold options in addition to the dividends received, your heirs would receive $1,626,000 even as you removed $1,000,000 over 20 years. That’s because if your rate of withdrawal is 5% and your income yield is 7% the accrual of income exceeds the withdrawal. Of course, inflation may become a factor and asset value can go downward and dividends may be cut.

The net result of those adverse events in the short term, a year or two, would really be inconsequential. In the longer term the consequence would reflect itself in the amount left for heirs.

If shares are transferred to the holder of the option you sold, I would try to replace those shares with a company from the same sector,  unless that sector already is worth substantially more than 12% of the total portfolio., in which case consider adding a position to a relatively under-weighted sector

Examples of such replacement stocks are:

INDUSTRIALS: Caterpillar (CAT) and Honeywell (HON)

TECHNOLOGY: Microsoft (MSFT) and Apple (AAPL)

CONSUMER: Pepsico (PEP), Kraft Heinz (KHC) and Mondelez (MDLZ)

COMMUNICATION: AT&T (T)

ENERGY: Conoco Phillips (COP)

RETAIL: Target (TGT)

FINANCE: Bank of America* (BAC) and Visa (V)

HEALTH CARE: Pfizer* (PFE) and United Healthcare (UHC)

All pay reasonable dividends and are blue chip companies (although not all are Dow Jones components) that in the long term would be expected to maintain value and dividend payments.

*  In portfolio (as of 4/19/2021)

Updated 6/29/2021

Visits: 29

So, What’s the 2020 Strategy?

Good question.

I’ve been staring at a “what if” spreadsheet for about 4 months

With now just 2 weeks to go until most of the LEAPtoProfit positions are set to see their options expire, there’s a lot to be done.

Of course, given the very recent uncertainty injected into the market and world economies, who knows how things will unfold, but that’s pretty much true any day of the week.

First, let’s start with some of my priorities.

The major priority I have for 2020 is to develop an income stream of 10%, which would be comprised of option premiums and dividends.

At the moment, to be able to do that, most positions in the portfolio could have January 2021 call options sold at strike prices that are 5-10% above their current prices.

What that means is that I would be perfectly happy to end 2021 with an increase in portfolio value of 15%.

Ecstatic, actually, even if the S&P 500 has a repeat of 2019.

In reality, however, I expect an overall decline in 2020 in the index.

Looking at the current LEAPtoProfit (and the legacy OptiontoProfit portfolio for old subscribers), that means some positions will be assigned in 2 weeks, some will expire, some will be rolled over and perhaps some currently un-optioned positions will  find a reasonable strike price and premium.

What all of this means is that some positions may have options sold upon them at strike prices below their purchase price and perhaps below their break-even price after option premiums and dividends are factored in.

That means a loss, if assigned.

All in all, though, I don’t really care about that as long as my overall portfolio value increases by the objective I set at the beginning of the year.

If you were paying attention, this year that’s 15%

So, for example, take a real horrible loser like US Steel (X).

It’s currently trading at $10.79, a far cry from its purchase price and its $28.86 break-even price.

But with a combined income of $1.25 for a January 2021 $15 option, that’s an 11.5% income stream for a strike price that represents an additional 39% advance from its current price.

Still a loser, but for 1,000 shares that would add nearly $5,500 to portfolio value.

It’s a team effort. I don’t care about individual glory.

In some cases I may look to rollover in the money positions, perhaps at the same strike, if I want to retain the position because of desiring a portfolio with better balance.

For example, I’m under-weighted in Healthcare.

You might recall that I recently rolled over the Bristol Myers Squib (BMY) position in order to secure the January dividend.

In that case I did so for only a month, but when that February 2020 contract is coming up on expiration, there may be reason to roll that over rather than looking for a new replacement position, even as my eyes are on Pfizer (PFE).

For OptiontoProfit subscribers, I may have changed my mind on Newmont Mining (NEM) this morning as it announced a nice dividend increase.

In both of those cases, using the same strike price would basically mean that I was willing to accept a return based only upon income generation, but also would enjoy about 5% downside protection in price, as both are currently in the money.

That’s fine if you think the market or an individual stock may not have as robust of a year.

Again, if listening, you know that’s one of my underlying premises.

Iran, elections and who knows what else; like maybe an old and tired bull?

Anyway, stay tuned

Visits: 53

Still Need to Make Sense of Dow-DuPont?

The answer to that question, at least for some people is a resounding “YES.”

As we approach the expiration of the $65 January 17, 2020 LEAP that was originally purchased on shares of Dow-DuPont some people are confused as shares of DuPont, one of the successor companies is trading at around $65.

The question is whether those shares are likely to be assigned as they pull within a dollar of that strike price.

The simple answer is a resounding “NO” unless the shares of DuPont or Dow Chemical or Corteva skyrocket within the next 2 weeks.

That’s because that DuPont contract that you are short actually reflects a combination of the shares of those 3 companies, in addition to some cash that was spun off, as well.

If you look at the weekly postings of price and performance that appear each Friday after the close of weekly trading, you’ll see that the reported price of DuPont is not the same as the stock market’s price. That’s because the price that I provide is based upon what your shares are actually worth and that is tied into the adjustments that are already made in the options market.

When we sold Dow-DuPont calls, following all of the spin-offs, what was left for each 100 shares of Dow-DuPont were 33 shares of DuPont, 33 shares of Dow Chemical and 33 shares of Corteva, in addition to $51.22 in cash.

The effective price of the new DuPont is based on all of the above, so for example when DuPont closed at $63.57 and Dow Chemical closed at $54.59, while Corteva closed at $28.15, the shares of the new DuPont were really worth $48.80.

If you were to look at the options table, you would see that the adjusted strike portion of the table has the $50 January 17, 2020 option as the nearest out of the money strike, reflecting the December 27, 2019 close of the underlying shares.

So what this all means is that the greatest likelihood is that by the close of trading on January 17, 2020 you will see your portfolio include 33 shares of each DuPont, Dow Chemical and Corteva for every 100 shares of the old Dow DuPont that you owned.

If you were like me you may have bumped up holdings of any or all of those positions to leave you with an even number of shares so that options could be sold. That opens up additional opportunities for holders as the next LEAP cycle approaches.

Or some may elect to re-balance a portfolio, as I am likely to do.

I will strongly consider selling my shares of DuPont and Corteva and increasing my Dow Chemical position.

Although I like the liquidity of the DuPont options more than those of Dow Chemical, I much prefer the dividend of the latter.

I know very little about Coteva and have no compelling reason to hold or add to my position.

At the very least the confusion can end in 2 weeks or so, unless you care about the confusion that will ensue as I try to figure out how to most accurately reflect all of this in performance reports.

Not that that’s your problem.

 

Visits: 88

Getting Ready for 2020

As we start the final full week of 2019. having been fully invested for quite a while, as cash has been building up from dividend payments, tomorrow may bring a little bit of new cash.

That new cash may be coming from the assignment of shares of Cypress Semiconductor (CY), which will be ex-dividend tomorrow.

It should be closing on a buy out offer sometime in 2020, and has barely moved a dime since the offer was first made. I had tried on a number of occasions to close out the position but was never willing to overpay to close out the option position.

With an $0.11/share dividend and with shares being nearly $6.50 in the money, it would be hard to understand how someone would not exercise and grab the dividend.

At $23.44 the option holder of a $17 strike would simply then sell the shares and probably pocket an extra penny or two on the transaction.

However, with open interest of only 600 contracts, no one is going to make a killing on the dividend arbitrage, so who knows, maybe those shares will still be in accounts tomorrow morning. It just may not be worth the cash outlay for someone to exercise their position right now.

If not, however, my eye is on shares of Cisco (CSCO), which not entirely coincidentally,  goes ex-dividend on January 2, 2020. which means that shares would need to be purchased by December 31, 2019.

At this point, Cisco’s 2.9% dividend is actually better than that of Cypress Semiconductor, but that sort of thing happens when shares go up by about 40% and the dividend goes nowhere.

With there also being a chance that Intel (INTC) shares get assigned at the end of the January 2020 cycle, I will be in the market for replacement technology positions.

Cisco is a start, but there may be need for something else, with an eye toward a position with at least a 2.5% annual dividend, which right now eliminates Microsoft (MSFT) and might even mean reluctance to rollover or re-purchase Intel shares when the time for reckoning is here.

With some trepidation about overall market return for 2020, as the bull market is really long in the tooth and with election uncertainties looming, I also plan to stick with real blue chips in the coming year, so there’s not much interest in speculating when it comes to looking for new positions, especially in the technology sector.

POSTSCRIPT: OK, that was still a surprise, despite the small open interest.

This morning all of my Cypress Semiconductor shares are still there and the dividend is mine.

With the dividend now out of the way there may be a better opportunity to close out the position, perhaps at a cost of just a couple of cents, thereby opening up opportunity to invest that money into something else that will pay a dividend soon, like Cisco.

That would be a good Christmas present.

 

 

Visits: 68

Keeping Your Hard Earned Dividend

One of the really nice things about having settled, more or less, into a life of LEAPS, is that I don’t write very much anymore.

There’s just not that much to write about.

I suspect that will change as we head into the end of the LEAP cycle with many positions expiring in just a month from now. There may be a flurry of writing activity as new positions are being established or old positions are being rolled over.

One of the issues that does arise is what to do about positions that are going to expire, but are going ex-dividend just a few weeks before that expiration?

That’s really not an issue if there’s a lot of time remaining on the contract. For the most part if there is time, even deep in the money positions will likely not get assigned in order to have the dividend captured.

Part of my ROI projection is based on capturing all of the dividends for the term of the LEAP contract and in some cases that fourth dividend is put at risk, as it is these coming weeks.

I fully expect my shares of Cypress Semiconductor (CY) to get assigned early as it goes ex-dividend on December 24, 2019.

It has basically traded flat these past few months as it awaits its buyout.

I’d have liked to have closed that position, but couldn’t get a satisfactory price on the combination of sale of shares and buying back the short call options. So it has been dead money for the past few months other than the most recent dividend payment.

But in the case of the Van Eck Vectors Gold Miners ETF (GDX) which goes ex-dividend on Monday, December 23, 2019 and Bristol Myers Squibb (BMY), which goes ex-dividend on January 3, 2020, both are reasonably in the money and both are at risk of being assigned early.

In the case of GDX, it pays only a single dividend for the year. It’s not much this year, but $0.195/share is something and I would rather capture it than not.

Bristol Myers Squibb, on the other hand, has a decent 2.85% dividend of $0.41/share.

In both cases, I was prepared to see them assigned at January expiration and was expected to replace the latter with Pfizer (PFE) or AbbVie (ABBV).

In the case of the Gold Miners ETF I was not really interested in rolling it over at the $26 level and wouldn’t have minded closing the position.

But, I wanted those dividends.

So yesterday I did the only thing that made sense to me.

I rolled over each of those positions, but not into new LEAPS.

What I looked for was the nearest expiring position at either the same strike or a higher strike that would, even if assigned early, still give me a premium that was at least as large as the dividend that I would lose.

In these cases, I rolled over the GDX to the same $26 strike, by an additional month for an extra $0.34/share option premium.

I’m OK with losing it at the end of trading today if it gets assigned early.

I did the same for the BMY, rolling it over one additional month to the same strike, but for a $0.75 option premium.

So I’ll find out soon enough whether that strategy will work, but unless shares plummet between now and February, no matter what, it is a winner.

At this point, with additional option premiums in hand and in excess of the dividends, I wouldn’t mind if the two positions were now assigned early.

If they were, I would consider getting an early start on some replacement positions and could get an additional month of option premium and perhaps even find a worthy new position going ex-dividend within the next month, potentially squeezing 5 ex-dividends dates over the course of the coming year.

For those who were still paying attention, I did the same with Las Vegas Sands (LVS) last week, but decided to roll over for an additional year.

What you may have noticed with that is that I elected to use the same strike price on the LVS, as well.

This year, instead of selecting strike prices that are in the 10% to 20% range above share price, I’m looking to maximize income and downside protection and plan to use strikes that are in the 0-5% range.

Some of that is related to uncertainty with regard to the political climate.

But regardless, the idea continues to be to get some combination of downside protection, added income and some capital appreciation.

I hope your 2019 was a good one and I’m looking forward to a good 2020, as well.

Not too much trading. Not too much writing. Just a good year.

 

 

Visits: 55

Dow Dupont and the new Dow



The last time we had a stock that had a merger become part of the equation it was pretty easy to make heads and tails out of the situation.

That was for General Electric and Wabtech.

This time around, it’s not as simple.

Even the names are confusing and somewhere down the line it may get even more confusing as we approach the end point of the original merger between Dow Chemical and DuPont.

When those two first merged, part of the understanding, in order to get regulatory approval for the merger of those two behemoths was that the new entity, Dow Dupont, would break up.

Merge and then break up.

The break up, though was to be into 3 separate companies.

What we just witnessed this week was the first step of that break up into two companies.

So if you owned Dow DuPont, you now own both Dow DuPont and (the new) Dow.

The formula is pretty simple.

If you owned 100 shares of Dow DuPont, you now own 100 shares of Dow DuPont (at a much lower price) and 33 shares of (the new) Dow, plus you received cash for the equivalent of 0.3333 shares of (the new) Dow.

Simple, right?

So, at Dow DuPont’s closing on Monday, ahead of the spin off, those shares were trading at $54.42.

Shares of (the new) Dow, from this point on referred to simply as “Dow,” were priced at $53.50.

That means shareholders should also have received $17.83 in cash regardless of the number of shares of Dow Du Pont that they owned.

If you had 100 shares of Dow DuPont, you woke up this morning to 33 shares of Dow and 100 shares of Dow DuPont, plus that cash.

If you had 1000 shares of Dow DuPont, you now have 1000 shares of a cheaper  Dow DuPont, 330 shares of Dow and the same $17.83 in cash.

The shares of Dow Du Pont, though, were adjusted downward to reflect the new shares of Dow and the cash.

Each one of those shares went from the previous closing of $54.42 to $36.59, representing a downward adjustment of $17.83 per share.

Here’s the math in a nutshell:

100 shares of old Dow Du Pont  was worth $5,442.00

100 shares of new Dow DuPont was worth $3,659.00

33 shares of Dow was worth $1,765.50

Put those two together and you have $5,424.50

Add to that $17.83 and you have $5,442.33

Now comes the complicated part.

The options are still priced the same.

For LEAPto Profit subscribers, that means your January 2020 $65 options are still January 2020 $65 options.

The difference is all in the deliverable.

That means that if Dow DuPont goes beyond $65 in the sum of its aggregate parts, you will be assigned.

What are the sum of its aggregate parts, you ask?

Dow DuPont, Dow and the cash.

For each contract of Dow Du Pont you are short, you have to look at the price of Dow Du Pont and add to that approximately 1/3 the price of Dow shares.

At today’s mid-day price, that would mean $37.63 for Dow Du Pont and $18.91 (one third of $56.73)

If you really want precision, it would be the price of Dow Du Pont plus the price of Dow divided by 3.3 plus $0.1783

It may get more confusing when the next spin off happens.

That means that if you have more than 100 shares of Dow after this spin off you may want to think twice about selling options on them too cheaply, because you would in essence be putting yourself on the line doubly in the event the underlying Dow DuPont got called away from you and if the Dow contracts were also at risk of their own assignment.

In essence, it would be like being short Dow shares.

So beware.

 

 

 

Visits: 45

General Electric and WabTech



 

Just a quick note for those past Option to Profit subscribers who may still be holding shares of General Electric and also may have written call options on those shares.

Yesterday, GE completed its merger of its GE Transportation services with WabTech (WAB) and you may have noticed those new WabTech shares in your account.

The spin-off was 1 share of WabTech for each 186 shares of GE owned, at a price of $77.20 for each new WabTech share.

That means that unless you owned 18,600 or more shares of GE, you will not have received enough WabTech shares to sell calls upon.

I have decided to liquidate my WabTech shares, as I know nothing about the company and it offers a puny dividend and not much open interest on its monthly option offerings.

For book-keeping purposes I have treated the spin-off as a dividend of $0.415 per GE share and included that in the ROI calculations

In the event that you had sold options contracts, as I had sold January 2020 $13 contracts recently, the new deliverable, if assigned, will be:

1) 100 General Electric Company (GE) Common Shares
2) Cash in lieu of approximately 0.5403 fractional WAB shares

That means that if the GE shares are assigned at $13 dollars, you will have to deliver 100 shares of GE per contract, as well as the cash value of 0.5403 shares of WabTech as of the date of the assignment.

At its current price of $77.20, that would mean a cash payment of $41.71 for each contract assigned.

Visits: 48

So How’s It Been Going?

 

Good question, although it’s a little self-serving to both ask and answer the question.

LEAPtoProfit has now been available to subscribers for 4 full months.

Previous subscribers to OptiontoProfit will notice one immediate difference. That being that I hardly write anymore.

You’re welcome.

Instead of twice daily and weekly blatherings, there’s not much else going on besides posting trades as they are being made.

Oh, and there are far fewer trades than ever before.

If you read carefully, or maybe not even so carefully, neither of those should come as a surprise.

The idea has been to create a diversified portfolio that settles into the use of LEAPS to generate additional income and to do so without much fanfare or trading activity.

I’m older. I’m tired. I want to do things other than write and be glued to my computer and the ticker.

But I do still want cash flow and I don’t want mediocrity.

I could also do with less excitement, even as I welcome the return of volatility.

So while I’ve been settling in to a more subdued lifestyle, along the way there were some articles written regarding the actual process of doing just that, and as I now look at the LEAPtoProfit portfolio I see that every position still open is with short options written against those positions has a January 2019 time frame.

Well, that part of the mission is accomplished.

That means that the remaining open and covered positions are going to be pretty low maintenance for the next 3 months, at a time that we might expect continued volatility, as has been the case over the past 6 weeks.

That suits me just fine.

Option premiums, upside potential with strike prices and dividends while I wait.

Here is what the summary since July 1, 2018 looks like (click image to enlarge):

So a quick glance shows that there are 9 open positions and 6 that have been closed.

After 4 months I am closing in on the total number of open positions that I would like to have, which is in the 10-15 range.

What is missing is some diversification, as this snapshot demonstrates (click image to enlarge):

But that may change as the next few positions are established, but let’s dissect the performance statistics, starting with the 2 stinkers that are both currently uncovered.

Those are Bed Bath and Beyond (BBBY) and US Steel (X).

As with most of the positions opened since LEAPtoProfit’s inception, the initial trade was with short term call option sale.

As has been the case with the 6 closed positions, the idea is to start somewhere and either add shares and migrate to a longer term option or get out of the position with some profit in hand.

Good intention, but so far, bad execution for those 2 positions, although it may soon be time to add shares to one or both of those positions and Leapfrog the way toward January 2019.

Not so elsewhere, though, where the things to look at include the actual return on investment (ROI %) and the relative return on investment.

That relative return is a comparison to the performance of the S&P 500 for the time period of holding. In other words, if a particular position has been open for 92 days, as has been a position in General Motors, I’m looking at the S&P 500’s return for those same 92 days.

Looking at that latter metric, both BBBY and X are still doing poorly, but for now, of the 15 positions opened, those are the only 2 laggards.

In total, assuming equal weighting of positions (and that is not a valid assumption), the various positions have had a 0.9% ROI.

Not great, but still actually 3.3% better than having deployed money into the S&P 500 on the same dates as the 15 trades.

On the other hand, if you just placed all of the money into the S&P 500 on July 1, 2018, then your rate of return would have been 0.2%.

If you added in dividends on that S&P 500 holding, the returns would be roughly equivalent, though, so that means more work needs to be done on the existing portfolio.

As I look at the portfolio, I do, however, feel pretty optimistic in terms of how it will hold its value in the event of further volatility, as well as the opportunities to take advantage of that volatility with higher priced options.

When I think back to the 2007 – 2011 period, which seems like an eternity ago, there was a great set of opportunities that began with lowering stock prices and higher volatility and then ending with capital appreciation.

At the moment, and who knows how long things will last, we are seeing what appear to be some bargain stock prices along with heightened option premiums.

I love that environment, even as capital appreciation may be harder to come by.

My guess, at this point, is that if there will be opportunities to roll over some of those positions with short calls expiring in January 2019, I will probably look at either 6 month or 12 month durations for the next trade.

In doing so, I will also likely look to try and attain a total annual return of 12% for each position, as a combination of dividends, premiums and capital appreciation.

If I were more optimistic about the market moving higher, I might set my sights on a higher return, placing more emphasis on capital gains, but for now, I would like to optimize premiums.

What that means is that if there are opportunities to roll positions over, I would look at strike prices that if the positions are exercised would end up offering that return objective. If volatility declines and price appreciation seems attainable, then I would settle for less premium cash flow.

No matter what the market’s rate of return, I could be very, very happy with a year in and year out return of 12%

So, it is early, but so far, even as the market has been net flat for the first 4 months, I’ve been pretty pleased.

I hope you have, as well.

Feel free to let me know your thoughts.

Feel even more free to subscribe, although the subscriptions are not free.

That’s clear, right?

ADDENDUM  November 5, 2018  11:00 AM

This morning was certainly not reflective of a typical morning, but here is an example (as subscribers would see it on the “Most Recent Trades” page), of the trades made in support of the LEAPtoProfit portfolio:

One trade, Hewlett Packard Enterprises (HPE) replaced shares that were assigned away the previous Friday at the same strike price. In this case, I once again purchased shares and sold short term in the money calls on the position.

In this case, I was willing to secure a 1.3% ROI for the week, even if shares fell as much as 1.6% during that time period.

This is now the third position in HPE since July 1, 2018. I am actually looking to possibly add new or additional shares prior to next month’s ex-dividend date, but after November’s earnings release.

Additionally, with some strength in US Steel (X), the previously reported “stinker,” I sold January 2019 calls, taking advantage of that price strength to move the strike price up to $35, whereas previously it had stood at $34.

(As a side note, the “Ex-Dividend” column includes legacy trades from Option to Profit positions for those past and continuing subscribers.)

Visits: 43

Tracking Results

I’d like to think that investing in stocks is not really very akin to betting on horses.

I’d like to think that.

But really, the only way to know is to track your results.

While I’ve been using spreadsheets to do so for years, going all the way back to VisiCalc. I’ve never been very sophisticated in the manner that I track positions.

All I really want to know is how well each position performed relative to the default action, which for me, has always been the S&P 500.

Back in the days of “Option to Profit” I used to update spreadsheets for subscribers daily, but eventually went to weekly when it became pretty clear that no one was looking at the details of the trades.

That’s what they were paying me for, I suppose.

I also kept and still do, summaries of all of the trades in individual positions. Those can be found by clicking on the “Results” tab and then looking for an individual stock.

Starting today, I’ve added a very simple graphic that will be updated nihtly and am calling it the “Scorecard.”

Unlike the old weekly summary sheets of Option to Profit, there won’t be 60 stock lots to follow at any one time. By the time the portfolio matures, I expect to have 10-15 stocks and anticipate one or two new positions each month, with hopefully one of those maturing into a LEAP position each month.

Instead, the bare bones information will be summarized, including the “Relative ROI (%)” and the “Theoretical ROI (%).”

The Scorecard makes use of color coding in order that the end user can easily distinguish between open and closed positions. Additionally, color coding is utilized to indicate uncovered positions, as well as activity for the week, which may include outright purchases of shares, option premiums or dividend accumulation.

Those are the qualitative issues at hand.

The quantitative issues are relatively straightforward.

At this point, all I want to track is my share cost, my accumulated premiums and dividends and how the S&P 500 has been performing during the holding period for each position.

Just as the daily closing prices of positions may change and just as premiums and dividends may accumulate and change, so too, will the ROI calculations.

With a portfolio transitioning to longer term holdings, I don’t care too much about short term price gyrations, except as they may impact some new positions that only had short term options sold upon them and that may be at risk for becoming uncovered.

For those wondering, the Theoretical ROI (%) is based upon the strike price of any outstanding short positions. If none, then the strike price of the option nearest to the cost of the underlying shares will be used.

For positions that have been closed, the comparative S&P 500 level will be frozen in time, while all open positions will continually be compared to the week’s closing S&P 500 level.

Since everyone’s portfolio will be different, not only in the stocks included, but also in the relative amounts of each position, there is no attempt to “average” the returns, nor do they take into account trading costs, nor taxes.

To be totally fair in comparing results to the S&P 500, there should also be an adjustment made for the yield on the S&P 500, which has historically been about 2% each year. The Scorecard doesn’t include that adjustment, but in general, when and if I write about returns, I tend to work an estimate of that adjustment into the comparisons.

Definitions

Relative ROI (%)

Relative ROI (%) is the difference between the ROI (Return on Investment) of the underlying investment and the change in the S&P 500 for that same time period.

The ROI (%) is (Current Share Price – Cost per Share + Accumulated net premiums and dividends) divided by Cost per share

It is then compared to the S&P 500 performance.

The difference, is the “Relative ROI (%), which by convention is positive if there is superior performance of the investment as compared to the S&P 500.

Once a position is closed, it’s ROI (%) will still be given in relative terms, but it’s absolute ROI (%) will also be indicated in the Theoretical ROI (%) column.

Theoretical ROI (%)

The Theoretical ROI (%) is the anticipated ROI in the event that shares are assigned at the strike price of the current outstanding short call contract. In the event that a position is not covered by the sale of a short contract, the nearest strike level above the cost of shares is used.

As premiums and dividends may accumulate, the Theoretical ROI (%) will vary, as will it with daily price fluctuation.

Closed positions will also be listed under this column, but the color code will indicate that those gains (or losses) have been realized and are no longer theoretical.

At present, the Theoretical ROI (%) is given in absolute and not in relative terms. At some future iteration, an additional column may be added to also provide the relative performance, as compared to the S&P 500.

Additionally, while I have never been a fan or annualizing results, especially with short term trades, as the portfolio moves to a longer term, there will be greater validity to presenting such data.

 

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