Saturday, April 25, 2015

Financial Planning: Weekend Update - April 25, 2015

The first week of the revised portfolio is in the books and we're doing pretty well. As you can see, only three positions are "in the money" (ITM). Of those Verizon only by $0.03 and ED closed exactly at $62.50. We've also got some paper losses totaling $1520.00 or 0.44% of the portfolio value. That's not too bad, but it is a little annoying for a week as "up" as this one was.

F, as expected, expired "out of the money". For now I have no plans to try to squeeze any more premium from that position; with the 3.8% dividend I don't mind being patient.

Now, this portfolio is one I want to hang on to (unlike last month). So that gives me the opoportunity to mention a strategy for just that situation: the "roll out". If, for example, VZ were to be trading at $50.03 on May 15, the price of the May 15 $50 call will be very close to that 3 cents (as a retail customer I'll be lucky to get it for a nickle). The June $50 will be about $0.80. Since I don't want my VZ to be assigned (and it will be even if it's only a penny in ITM) I can simultaneously buy back the May $50 and sell the June $50, earning that $0.80 in fresh premium or $560.00.

The strategy will cost me some commissions: $8.95 plus $0.75 per contract each way for a total of $28.40. If I let the 700 shares of VZ be assigned I'd pay $8.95 on the sale of the underlying VZ, $8.95 to repurchase the stock for at least $0.92 more than I paid when I opened the position and then another $14.20 to write the calls for a total of $32.10 in commissions plus whatever the new price of VZ happens to be on that Monday. By rolling out I preserve my original cost basis and save a little bit in commissions.

This strategy can be applied to any ITM position but it's particularly effective when the underlying is barely ITM - the cost to buy back your calls is minimal compared to the new premium. And of course there's no need to sell those "at the money" new calls - you can "roll up" to a higher strike and simultaneously collect premium as well as additional capital appreciation.

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