Financial Planning Weekend Update - August 29, 2015

Well! That was quite a week. And everything turned out pretty well for my portfolio.  ED weathered the threat of higher interest rates pretty well, HCP a little less well. MRK got caught in the biotech meltdown and although it recovered some of its losses it's still in the red. My nibble at F seems to be working out, so there's that. I still have about $1200 in cash. All in all the portfolio stands as follows:

In other Financial planning news, I increased my 401(k) contributions to include "catch-up" money and increased my monthly contribution to my Roth IRA so it will be maxed out by the end of the year. At this point I'm just a little less than 9 months from retirement so I want to get all the tax advantage accounts plumped up as much as possible.

Later this week I'll have a post about emergency room visits, medical costs and what catastrophe it would have been without insurance.

Rollover IRA Purchase: 400 F @ $12.88

Yesterday afternoon I decided to take a nibble of Ford while options premiums were inflated due to the volatility spike. As with earlier purchases F is intended to be a permanent part of my portfolio. This purchase represents about 20% of a full position.

After yesterday's wild ride all of my option positions are safely out of the money though this morning's futures indicate that might not be the case for long.

Financial Planning Weekend Update - August 23, 2015

That was something eh? The correction arrived in force on Thursday and Friday and the S&P 500 slammed right through every recent support level bounced a little and then crashed through 2000 on the way to 1970. But you know what? Even with the horrible performance of the market as a whole during this little experiment here's where the model portfolio has ended up:

Yep. Down 0.84% and sitting on more than $25K in cash. When I shifted into this model on April 20, the S&P 500 closed at 2100. That's a drop of roughly 130 points or about 6.2%. So at least I "beat the market". And you know what? If this were real money and Beth asked how we were doing, I'd have to say "darn good!". And remember - every one of those companies is still pumping out dividends ($1186 for September) and I'd be writing a fresh batch of calls including a roll out of ED.

And that's it for the model portfolio!

From now on we'll be looking at the real positions I have in my Rollover IRA:

Equity Positions

As of today the IRA holds the three positions shown above along with a small amount of cash.

The options look like this right as of Friday. MRK has obviously taken the brunt of the correction. Not surprisingly ED has held up very well, as utilities usually do in situations like the one we're in. HCP is also holding up nicely. I suspect that's principally because people now see a Federal Reserve interest rate increase in September as increasingly unlikely.

Finally, the current value of the IRA is up fractionally. If only I'd waited another week to make my move! I'd have even lower underlying prices and could have sold much more expensive calls due to the increase in volatility.

Rollover IRA Purchase: 800 HCP @ $39.25

This trade wraps up my current activity in the Rollover IRA. As with ED and MRK, I used a Buy/Write to create a conservative entry point.

I've invested the money I transferred from my 401(k) as fully as I intend to, though there's still a  small cash position of about 5.9%. From now until I actually retire all have to do is monitor the calls to prevent any position from being assigned prematurely.

Financial Planning Weekend Update - August 15, 2015

Yet another weak week. Even so, the portfolio is actually up an annualized 2.64%, so it's not as bad as it looks on the spreadsheet. And of course regardless of the unrealized capital losses the portfolio is still bringing in an average of more than $4,000 a month in dividends and option premiums:

As I mentioned last week, this model portfolio has just another week to live at which time it will be replaced with my live, real money portfolio:

For this first month I'm using Buy/Writes to establish each position so I'm not breaking out the individual option premiums since they're reflected in my cost basis. For now I have a placeholder for VTR. I decided to wait until Tuesday to see how the spin off goes and what the new dividend will be. I'm also considering HCP for that spot in the portfolio.

As always comments and questions are welcome.

Rollover IRA Roll Out: Avoiding Early Exercise

Probably the #1 reason that covered calls are exercised early is to capture a dividend. This happens when an equity nears its ex-dividend date and the time value of an in the money call is less than the value of the dividend. This week my position in ED/Sept 18 65 Call was in just that situation.

Using the "Ask" price we have:

With a $0.65 dividend coming up and only $0.53 worth of time value you can be pretty sure that these options are going to be exercised. So what can I do?

The obvious answer is "buy to close". That would have cost $1,100.00 (plus commission). And we'd end up like this:

That's not too bad. We end up with a theoretical $110 gain, collect the dividend September 15 and all is well, right? Well, maybe not. On the ex-dividend date we can expect the equity to trade lower by the amount of the dividend. In our case that's 500 shares times $0.65 for $325.00. I do want to keep the stock in my account so let's look at another possibility: Roll Out.

Thursday I executed the order you see above. I simultaneously bought the 9/18 65 to close and sold the 11/20 65 to open for a net $0.75 credit or $375.00 (less $16.74 in commissions) and preserved my September 15 dividend of $325.00. The ex-dividend date for the December dividend will be the sometime about the first week of November so I'll need to keep an eye on this position when November rolls around. 

Rollover IRA Purchase: 600 MRK @ $57.45

As with ED I'll need to keep an eye on this position as expiration approaches. That's because I used the September 11 weekly call rather than my usual monthly approach. I did that because the weeklies have tighter strike prices so I was able to snag a pretty good entry point for what amounts time-wise to a "normal" monthly position.

However, September 11 happens to be the ex-dividend date for MRK so if the position is in the money on the 10th by more than option premium (which will include the dividend amount at that point) I'm likely to get exercised. Since the dividend will be $0.45 I'll be watching for a price higher than $58.95.

Commission shown is for buy only

As with ED, MRK is intended to be a permanent position in my Rollover IRA.

Rollover IRA Purchase: 500 ED @ $64.25

This morning I opened the first of my Rollover IRA positions with a Buy/Write of Consolidated Edison (ED) against September 18 $65 Calls (ED 09/18/2015 65.00 C). This results in a conservative entry price of $64.25 ahead of the September 16-17 FOMC meeting. Nearly everyone expects that meeting to be the first interest rate increase in years, likely 0.25%. Although the talking heads seem to believe that this rate increase is "baked in" I believe that rate sensitive stocks (like ED) are likely to take a small hit. As a result I'm hopeful I won't need to roll out on the 18th.

So what's my potential in this position?

Commissions $12.70 each way, dividend payable 9/15

That's if the position is assigned at expiration (i.e. ED is above $65.00 at the close on 9/18).

Now, the September dividend's ex date is Monday 8/17. Ex dates are 2 days before the record date, so there's a possibility I'll get hit with an early exercise on Friday 8/14. If that happens, I'll take the 1.16% profit in 4 days and open another position. It'll be a bummer to miss the dividend, but that's just one of the factors you need to be aware of when writing covered calls.

ED is intended to be a permanent member of my IRA portfolio. The equity leg of the trade is set to reinvest dividends and will remain so until I need the dividends for income.

Financial Planning Weekend Update - August 8, 2015

Eeeek!

Well, that week sucked for the model portfolio. The final blow was Friday's jobs report showing fewer than expected but still decent 215,000 new jobs. That pretty much green-lights a 0.25% interest rate increase in September.

As it stands the model portfolio has done measurably better than the S&P 500. That index closed at 2100 on April 20 when I swapped into the current version of the portfolio. With the S&P dropping to 2077 the index is showing a loss of 1.38%. My portfolio is up 0.07% over the same period.

What's that mean? This portfolio covers a little over three months during which the S&P has traded in a very tight range (2040-2130ish). I happened to start things off in the upper part of that range. What's worse, one position, COP has gotten hammered by continued low oil prices, both GE and PG are plagued by re-organization issues (though GE seems to be handling things better), who the heck knows what's going on with EMR, and everyone has problems with the strong dollar.

So what's held up? KO is actually positive by $1.35 (3.33%) and ED has done even better, up $3.90 or 6.36%, mostly in the last couple days. VTR is up as well, on a good 2nd quarter and the impending spin off of its skilled care properties.

Even given the short time period this is just about the best possible example of using covered calls as part of a conservative income portfolio. The lesson:

• Covered Calls, properly used, can provide significant downside protection.

This model has, however, only a few weeks to live. As I mentioned last post I've moved a chunk of money from my 401(k) to a rollover IRA. That transfer is complete and this blog will be operating with real money. I'll drop the model portfolio after August expiration.

My immediate plans are:

• Watch for the S&P to bounce off 2040 or so.
• Look to buy VTR after the spinoff (August 17)
• Watch XOM - it goes ex 8/11 so I'd have to buy on 8/10 to capture the dividend
• Watch F after an S&P bounce.

Financial Planning Weekend Update - August 1, 2015

About the best that can be said for this week is "losses were reduced". At least football is right around the corner.

As you can see, three positions are in the money. The most interesting one is Ventas. The company had a good quarterly report which boosted it a bit. I believe the current driver however is the spin off of their skilled nursing facilities into Care Capital Properties (CCP) after the close on August 17. Expiration is August 21 and the position is more than $2.00 in the money. So what will happen?

On the morning of the 18th the current $50 strike calls will be adjusted to include both VTR and CCP and new calls will be created for both companies that reflect only stock. Because I "own" 400 shares of VTR, after the spinoff I'll also own 100 shares of CCP. It's expected that the combined dividend will be about 10% higher than the current VTR only dividend so it should make sense to hold both.

Because I expect to retire relatively soon (within the next ten months or so) this week I've started to move money from my 401(k) into a Rollover IRA. The reasons for this include:

• The 401(k) has reached a target value I set about 3 years ago
• I want to start "dripping" dividends before I need them for income
• I want to do the same with income from covered calls 

The real world portfolio will be pretty similar to what I've been modeling here but it won' be implemented all at once. Some sectors (e.g. Oil) are likely to have additional downside and although the high yields are tempting an extended period of low oil prices certainly puts them in danger. If or when I do move into oil I'll probably go with an integrated company like XOM rather than an E&P like COP.

More next week!