I guess it’s at least a little exciting.
That is, making the first official trade on LEAPtoProfit
The only problem is that it’s more of an “OTP Legacy” kind of trade.
That is, it was a trade, in this case the sale of calls on a position that was opened during the days of “Option to Profit.”
Still, let’s dissect out what the thought process was behind this trade.
If you go to “How Does it All Work,” you will see the basic thought processes that are involved in making a LEAP trade.
In this case, Newmont Mining (NEM) was trading at about $38.45.
I looked at the January 2020 options, which expire in about 18 months.
That’s longer than I would generally look, but Newmont Mining is already an old position, going back about 5 years, so what’s another 18 months?
For me, i has clearly been a “Buy and Hold” position that has, to this date, exceeded the S&P performance by about 20% (about 10% when considering dividends).
I looked for a strike price about 10% higher than the current price.
What I received was a premium of $3.85/share, or approximately 10% of the current share price.
To that, I add the imputed dividends of $0.84 over the next 6 quarters, or about another 2%
That means, if the shares are assigned, the return for this trade would be approximately 22% or about 14% annualized.
Maybe that’s not much for some people, but it lets me sleep.
And it just gave me a fair amount of cash.
I can use that cash as cash or I can use it as part of PRIP Strategy if I was still in that asset accumulation phase of life.
The trade looked like this:
To Trade Alert Subscribers it came through as:
OTP LEGACY – STO Newmont Mining (NEM) 1/17/20 $42 calls $3.85 bid
Hopefully, there will be some more trades coming, particularly some new positions either going directly into LEAPS or working our way there through Leapfrogging.
After a hiatus of a year from writing articles for anyone, I recently had the good fortune of getting re-acquainted with some long time readers of these pages.
A new reader was less than welcoming and had some serious questions about performance, which included the use of non-standard metrics, with a particular emphasis on the impact of tax rates.
I’m all about non-traditional, but I bristled a bit when considering the thought of being compared to a standard that no one else was using or to try and normalize individual considerations, such as trading in a tax deferred account versus a taxable account or using a discount brokerage versus a more costly one.
Over the years, I’ve been far more interested in the generation of a return in excess of what the market could offer and was always happy to pay taxes on any good fortune or to take advantage of existing tax laws and benefit from the use of strategic losses.
For me, having retired from a pretty lucrative profession at a relatively early age, “return” was a very tangible concept and not a paper construct.
I wanted and I needed cash. I also wanted and needed it in a reasonably reliable stream.
One’s definition of “loss” or “gain” may be a very personal one.
In business courses I had taken while in public health school, there was always an emphasis on “opportunity costs,” and some than 30 years later that concept constantly inserts itself as I look at and measure outcomes.
The “opportunity cost” is a simple concept. It basically asks the question “What did it cost you by not investing in an alternative?” Often, to standardize that question, the alternative investment is selected to represent something of low risk and high liquidity.
You generally don’t prove your point or disprove someone else’s point by selecting a non-standard, or little known alternative or an outlier.
Additionally, you don’t prove your point by selecting a specific or narrow period of time, which itself, may be an outlier.
What prompts my thoughts this week is a disagreement with a reader over a number of tenets of investing in which I believe, had incessantly practiced and had expressed in an article last week, “Re-Thinking Buy and Hold.”
But also, another reader had shared his own experiences with early assignment of “In The Money” call options just prior to the ex-dividend date and that prompted my response in general about dividends and early exercise, but then with specific details of a trade that same week in shares of General Motors (GM).
That purchase of General Motors turned out to be very timely for telling a story.
I had been a classical “Buy and Hold” investor for years.
Part of it had to do with what used to be the exorbitant costs of trading back in the days when either you listened to what E.F. Hutton had to say or you took the advice of one of his competitors.
You surely couldn’t do it on your own.
Needing to achieve a 10% price rise just to cover your round-trip trading costs made frequent trading basically impossible for most, especially early in their careers.
But I did listen to E.F. Hutton and I happened to have been one of the lucky ones who took a cold call from a young stockbroker, as they were called back then, who turned out to be a wonderful ally in support of my financial interests and those of my parents.
He was “Buy and Hold” all the way, even when it was an entirely commission based relationship. He traded more often when we went to a managed account and trading costs weren’t directly my costs.
I never micro-managed my accounts with him, but I always kept an eye on them from day to day and used to wonder why we didn’t trade more often, as noting the frequent ups and downs and all of the lost opportunities.
It was sort of like holding that perfect banana.
How long do you hold it before the rotting process kicks in?
Hindsight is great.
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