Financial Planning Weekend Update - May 31, 2015

Sorry for the delay in posting. We spent Friday and Saturday staying up way too late at the First Annual Philadelphia Burlesque Festival. 

Well, that was another blah week. Markets were closed on Monday, the S&P flopped to 2100 on Tuesday, closing at about 2104. Wednesday was OK with a pop to 2125, but Thursday and Friday drifted down, down, down to close at 2107.

So for the period to date the portfolio is showing a loss on cost of just $536 - not bad considering how miserable the week was. The only real bright spot was MRK which announced some good results involving their Keytruda drug at the ASCO conference on Friday.

So all in all, the week was pretty much a wash. And that is pretty much what I'd like to see as an income investor. True, I'd like to see more positions closer to  "in the money" and  who knows when F, PG, and COP will come back to life...

Those three are great illustrations of the danger of just slamming into "full" positions all at once. I have to learn to look more deeply into current valuations and look ahead when companies I'm interested in might be subject to as stronger dollar or other market forces.

More on that next week!

Financial Planning Weekend Update - May 23, 2015

This has been a pretty much nothing week. After a nice pop on Monday The S&P 500 simply bounced up and down in a range between 2124 to 2132 (with a brief peak at 2134 mid-afternoon Wednesday). The biggest excitement occurred Thursday morning when a rumor circulated that Trian Partners might have taken a position in EMR causing the price to spike to $62.15. Even with that bump, the portfolio is sagging and Friday saw declines in every position. That's not too surprising with a long weekend coming up (USA Memorial Day on May 25) nobody really wants to be too long and get surprised Tuesday morning.

There was some Fed interest rate non-news pretty much confirming that "lift off" would begin late this year. Fortunately there was no "taper tantrum" this time.

Even with the declines in most of my positions the portfolio as a whole is generating an annualized return of 24.95%, I've increased my holdings of MO and GE by 100 shares each and as you saw on Monday my cash position is just over $13,000, about a third of the way to my $40,000 goal. Once that goal is reached monthly premium and dividends will be used to expand positions or start new ones.

Who Will Change My Light Bulbs? - Thoughts About Quality of Life

The other day I came across an article from the MIT AgeLab titled "Three Questions That Can Predict Future Quality of Life". I've been thinking about things like this a lot so I decided to use the Three Questions to organize my thoughts.

Who Will Change My Light Bulbs?

From the Osram Sylvania Catalog

Superficially a silly question but also easily answered: We've already switched all our lights (except that one in the oven) to CFLs and are migrating those to LEDs as they start to change color and/or hum. The LED bulbs should outlast me and Beth by quite a stretch.

The deeper version of the question really refers to long term home maintenance. Our current house was built about 1920 so it has plenty of maintenance issues. Our present plan is to spend the next 4-5 years fixing anything that might make it hard to sell. We did the kitchen about 4 years ago and have started work on the bathroom.

Somewhere around 2020 we plan to sell and move to a row house in South Philly. Ideally that house will have been recently remodeled, but we should have enough money to take care of almost anything before we move in. Any appliances more than 10 years old will be replaced, and of course we'll fill the light sockets with high efficiency LEDs.

As for outdoor maintenance, our plans will make things like mowing the lawn a thing of the past. At most we'll have 25 feet or so of sidewalk to shovel on the few days it actually snows here anymore.

How Will I Get an Ice Cream Cone?

The Italian Market

This is where the move into the city really pays off. All the areas we're considering have nearby markets (walking distance or easily reached by public transit), vibrant restaurant scenes, and are generally really nice places to live. Obviously, with no need for a car we'll also be saving thousands of dollars each year in fuel, maintenance, and insurance costs.

Who Will I have Lunch With?

Well, there's always Beth! We don't plan to move until neither of us must work.

It will come as no surprise to anyone who knows me that I have plans to take courses again at Penn (though much re-study of Greek and Latin will come first). I'll almost certainly volunteer at the University of Pennsylvania Museum of Archaeology and Anthropology and I suspect Beth has some ideas as well. Center City Philadelphia is packed with theaters and various supporting groups that should supply plenty of good company.

When, as is inevitable, one of us dies we hope the remaining spouse will be able to move near our son and his family and come to a reasonably comfortable end.

What Could Derail Us:

• A serious injury or illness to either of us while we're still working.
• Very high interest rates when we want to sell our house
• Death

You might think that I should include an economic downturn/market crash, but in fact we've cut our living expenses to the point that we should be able to wait out anything comparable to the last three corrections (1987, 2000, 2007-9) as long as one of us is still working or we both have Social Security coming in. The IRA portfolio I'm working on (what most of this blog has been about so far) is designed to both minimize the effects of a major correction by using low Beta stocks while still providing income from dividends when writing calls is not possible.

Conclusions

Many of the issues mentioned in the linked article are related to senior isolation (due to living in suburbs and rural areas) and lack of any serious planning. Having a wife who's a geriatric nurse has tended to make me (I think) somewhat more aware of the issues of old age and (I hope) able to make some plans to mitigate them.

Financial Planning: Options Monday - May 18, 2015

This morning I opened my MRK position of 600 shares at $60.27 and sold 6 June 61 calls at $0.61, I added 100 shares of GE and sold 14 June 27.50 calls at $0.32. In addition I sold 7 VZ June 50s at $0.53, 6 ED 62.50s at $0.45.

PG, COP, and of course F remain "uncovered". Even with 3 positions "idle" this month I still collected $3141.00 in options premium, at a cost of $162.15 in commission. I'll also collect $1182.00 in dividends for a net income of $4160.85. The portfolio now has an average monthly gain of 2.07% or 27.61% annualized.

Finally, my current cash position stands at $13,079.30, about a third of what I want it to be.

Note: This post is 12 hours late due to a Verizon internet outage in our area last night.

Financial Planning Weekend Update - May 16, 2015

Well, that was a wild month, even though it was tightly range bound.  Fortunately nothing really broke down and I ended with a net asset value gain of $4723.00. As you can see, 4 positions would have expired in the money and been assigned. As a result I used the roll-out strategy to preserve my underlying in three of them. Since this is paper trading I've set some rules for myself so my results will be consistent from month to month:

• Use prices as of 3:00 PM on Friday (time value has pretty much evaporated by 2:00-2:30)
• Use the "ask" price for buy-to-close
• Use the "bid" price for sell-to-open

As I mentioned last week I've decided to let ABBV be assigned because its beta is higher than I want to accept in my retirement portfolio. On Monday I'll use that $39,0000 to purchase 600 shares of MRK.

I wanted to hold on to EMR, KO, and MO so I did the following:

The EMR 60 was behaving strangely at 2:00. With the underlying at $60.27 the ask price had sat on $0.40 (it should have been something like $0.29) for some time while the other two were trading within a few cents of intrinsic as I would expect. But by 3:00 the ask came down to within $0.03 of the underlying as the others had.

Buy To Close 6 EMR May 60 @ $0.30
Commission: $13.45 ($8.95 + 6 * $0.75)
Cost: $180.00

Sell To Open 6 EMR June 60 @ $1.35
Commission: $13.45 ($8.95 + 6 * $0.75)
Premium: $810.00

Buy To Close 8 KO May 41 @ $0.54
Commission: $14.95 ($8.95 + 8 * $0.75)
Cost: $432.00

Sell To Open 8 KO June 41 @ $0.81
Commission: $14.95 ($8.95 + 8 * $0.75)
Premium: $648.00

Buy To Close 6 MO May 52.50 @ $0.25
Commission: $13.45 ($8.95 + 6 * $0.75)
Cost: $150.00

Sell To Open 6 Mo June 52.50 @ $1.04
Commission: $13.45 ($8.95 + 6 * $0.75)
Premium: $624.00

So, I spent $845.70 to make $2082.00 for a net gain of $1236.30 or a bit over 146% profit on the roll out.

Most trading systems let you to combine the buy/sell pairs into a single transaction that allows you to specify the net premium (or cost) you want to achieve. You still pay the same commissions but it makes things easier if you have a specific target you want to hit since the net price allows the specialist executing the trades to jigger the prices around. Since I'm paper trading I'm laying out both legs of the transaction separately.

The rest of the portfolio is doing pretty well. I ended up $4723 for the month with three positions underwater. F is the a weak link, but I'll continue to hang in there and collect the dividend ($150 in June) until I can write calls on it again.

COP and PG are both pretty far off my purchase price so on Monday I'll decide what to do about them. Chances are I'll just not write calls until they move up a little.

Actions for Monday:

Buy 600 shares of MRK
Buy 100 shares of GE
Write covered calls on MRK, VZ, ED, GE
See if there's any I can write on PG and COP
Shake my head in resignation at F

Financial Planning: Weekend Update - May 9, 2015

This week began with a head fake to the upside on Monday followed by a breakdown on Tuesday all the way to S&P 2090. Wednesday moved down more but not disastrously, briefly passing through 2070 but holding 2080 at the close. Thursday saw about a bit under half a percent gain across all the indices. Friday's jobs report had been a concern - too good and it might portend an earlier interest rate hike by the Federal Reserve which might cause stock prices to decline. The report showed in increase of 223,000 non-farm jobs for April but the March number was revised down by 39,000. The result: by 9:00 AM futures were positive by nearly 1%. At lunch time the S&P had settled in up about 1.3% where it would stay for the rest of the day.

The portfolio is holding up well. The portfolio as a whole is still $4,813 in the green, though as you can see from the spreadsheet three positions are underwater at this point. I'm also still sitting on $9561 in cash so things are going about as well as can be expected given the last couple weeks. All told in the first two months of activity I'm seeing an average monthly gain of 2.63% which annualized comes to 36.54%.

On the annoying side of the ledger F has dropped to the point where it's beginning to make sense to average down.  I'll be watching for a dip to $15.50 or below to purchase another 500 shares. That would bring my cost basis down to $15.97 but also eat up a good chunk of my cash reserve. At this point I think building that reserve is more important than short term cost averaging so I'll watch carefully and think about it some more while collecting that 3.7% dividend.

Beta!

With regard to stocks, beta is a measure of how a specific stock behaves relative the market as a whole. By definition, "the market" has a beta of 1. If the market as a whole moves by 5% a stock with a beta of 0.5 will be expected to change 2.5% and a stock with a beta of 1.5 will be expected to move 7.5%. Pretty easy to understand, right?

As a retiree, I'm going to get nervous if my portfolio exhibits wild swings in value. So I want my portfolio's beta as a whole to be as low as possible. But low beta stocks also have low time value in their options which reduces the amount of income I can earn in a given month. Nevertheless, low beta is a reasonable goal so I'm starting to look into how to accomplish that.

Right now, the portfolio looks like this:

The portfolio as a whole has a beta of 0.89, so it should be a little more stable than the market, and indeed that's what we've seen the last three weeks. But I think I can do better. ABBV sticks out like the proverbial sore thumb with a beta of 1.63. Right now that position is in the money so I'm thinking of letting it be assigned rather than rolling out next week. At that point I'd have a net gain of $3.85 per share ($2.05 capital gain, $0.51 dividend, $1.30 premium) or 6.13% for holding it just one month. Not bad at all and because this is a simulated IRA I don't have to be concerned with any tax consequences.

I'd then replace ABBV with MRK which has a beta of 0.47. Replacing ABBV equal quantity of MRK will bring my portfolio beta down to 0.75 but it will also slightly decreases my portfolio yield percentage.

The next highest beta stock in the portfolio is GE. I'll talk a little about that next week.

Financial Planning: Weekend Update - May 2, 2015

Well, that was quite a week! After a nice start on Monday it was downhill to the tune of about 2% on the S&P over the course of the next three days. Lack luster earnings and weak economic growth were probably the main culprits. Friday the markets opened up about 0.5% and gradually drifted slightly higher until about 2:00 when they popped a little into the 1% range and held that for the day.

My positions are in decent shape. Two are in negative territory to the tune of $1290 or about 0.37%. My "biggest loser" is PG, down $2.84. It's pretty well blown through the rising trend line dating back to July 2012 and it's getting close to a 52 week low. Although I'd like to keep building up cash in the account, there's a good possibility I'll buy 100 shares of PG and bring my cost basis down a bit. Only one position is "in the money": VZ. As I mentioned last week this is the portfolio I want to keep so I'll be looking to roll out on the 15th.

So... a somewhat scary start to the week with a bit of a relief rally to wrap things up.