Financial Velociraptor

I opened 10 positions today.

music selection:  “Bring Me To Heaven” — Unsun

weigh-in:  212.4 +1.2 – too much football and pizza.

A little housekeeping first.  I didn’t get to post Friday or over the weekend about my expiring positions.  AAPL, PMT, SXCP, BSM, and GEL all expired out of the money.  I am establishing new positions in all today.  AXP, PSEC, and MAA all resulted in assignment of shares.  I wrote covered calls on all today.

I sold PMT161021P00015000 for 35 cents a share today.  The trade will be in force for 33 days and yields 25.81% annualized.  The trade also enjoys 3.43% downside protection.  I’m hopeful to get assigned again as this one also has a strong dividend yield.

I also sold BSM161021P00017500 for 55 cents a share.  The trade will be in force for 33 days and yields 34.76% annualized.  Downside protection is 2.70%.  I am indifferent to assignment here.  The yield isn’t that high and the options pay very well.

Next I went one strike out of the money to leave some room for capital appreciation on GEL161021C00037500.  I sold the contracts for 15 cents a share.  The trade will be in force for 33 days and yields 4.42% annualized.  I’m near certain to collect on the 8+% yield holding this one as well.

I also sold MAA161021C00095000 for 1.00 a share.  This trade will be in force for 33 days and yields 11.64% annually.  If I don’t get called, the underlying yields another 3.5% annually.

I went a little out of the money for AAPL puts to get some downside protection.  I sold AAPL161028P00109000 for 1.72 a share.  The trade will be in force for 40 days and  yields 14.40 on an annualized basis.  I enjoy 6.54% downside protection here.  I like to keep my exposure to individual equities down to the 10,000 dollar range so I’m reaching a little bit overweight here.  That is one of the reasons I’m going out of the money to defend myself here.

I also sold AXP161028C00065500 for 1.18 a share.  This one is a little bit out of the money.  I’m trying to capture up to 50 cents in upside capital appreciation before selling.  This trade will be in force for 40 days and yields 16.57% against my cost basis.  If shares are called, the yield with capital gains included will be 23.58% annualized.

I’m already in the money on PSEC161118C00008000.  I’d like to hold on to this one and collect distributions but I’ll do fine with just options premiums as you’ll see.  The trade will be in force for 61 days and yields 18.70% on an annualized basis.

Last of the group that expired Friday is SXCP.  I’m in the money here as well because I’m eager to get reassigned.  I sold SXCP161118P00015000 for 1.40 a share.  The trade will be in force for 61 days and yields 55.85% (wow!) on an annualized basis.  The trade comes with 7.98% downside protection.

A little different than the above trades are two trades where I’m trying to exit positions at a loss to engage in some tax loss harvesting.  Each of these two names has just one expiry left before year end.  If I can’t get called away, I’ll sell the underlying in late December.

I sold HCLP161021C00015000 for 1.10 a share.  The implied yield is 81.11% annualized over 33 days.  This will result in a 15.00 per share capital loss though.

I also sold CLNE161216C00005000 for 10 cents a share.  The implied yield is 8.20% annualized over 89 days.  This would result in a capital loss of 5 dollars a share.

Devour your prey raptors!

Another limit order cleared for a discounted bond.

music selection:  “You” — Candlebox

I just got from running errands and saw an email that a limit order triggered for Rent A Center (RCII) bonds.  The street seems to think Rent A Center has a shaky balance sheet but I see a business with fat margins that can make interest payments.  I purchased two units of the 4.750 coupon, 01MAY2021 maturity bonds for 85 cents on the dollar.  I paid seven dollars in commissions and 36.68 in accrued interest.  Now, I get paid to wait.

Devour your prey raptors!

Another buy limit order cleared today.

music selection:  “L-O-V-E” — Nat King Cole

Today, I bought the iHeartMedia 10.000 coupon, 15JAN2018 maturity bond for 63.000 cents on the dollar.  This is a “C” rated bond with a historical average recovery rate of 83.89 cents on the dollar.  I should do well.  I paid 7 dollars in commissions and 33.89 in accrued interest.

iHeart carries a lot of debt but I think they should have no problem rolling forward the 2018s as they have trophy assets.  They can also sell some radio properties to raise funds in an emergency.  I wouldn’t want to be in anything with a maturity greater than five years out for them as the economics of the business appear to be in a long term decline.  But this near term bond strikes me as a good buy.

Devour your prey raptors!

No trades today.

music selection:  “AC/DC” — Joan Jett & The Blackhearts

weigh-in:  211.2 (1.6) – Progress!

One of the most things that determines the success of an investor is asset allocation.  Putting all your eggs in one basket can result in a ruinous loss that leaves you are ‘start over’.  My asset allocation probably looks a lot different than the typical investor.  This is by design as I am in early retirement and my income needs outweigh my future growth needs.

My biggest allocation is to high yield equities.  I put REITs, MLPs, and BDCs in this category.  There are limited growth opportunities in the space.  You go here for current yield at the cost of maybe not keeping up with inflation.  Other allocation areas must take up the growth slack.  I am currently about 38% in these type of stocks although the definition is a little fuzzy because are also used as options plays.  I hope over time to grow the portfolio into broader use of fixed income and discounted bonds for more security and lower volatility.

My next biggest allocation is to options.  This is mostly what I post about on the blog even though it isn’t my most important allocation.  This is mostly a matter of volume.  I roll these trades roughly every six weeks.  My high yield equity allocation tends to sit without being churned for months or years at a time.  There just isn’t much to talk about there.  I target around a third of my portfolio in options but am currently a little over allocated at 35%.  The core of the strategy here is to write (sell) options on equities that are already attractively priced and hopefully somewhat defensive.  I love to work with Big Cheap Tech names like MSFT, QCOM, AAPL, and CSCO.  The other leg of this strategy is long dated, out of the money UVXY puts.  I target about 10% of my portfolio there (or about a third of my options).  It has been the most important position to allow me to retire early.  I have easily cleared six figures in profits on UVXY.

One of my favorite areas to allocate funds to is what I think of as Fixed Income.  I’m a little less than 22% in this area and it is my focus for deploying trading profits as I grow the portfolio.  In this area, I have mostly closed end funds.  I have CEFs in municipals, international bonds, preferred securities, and senior variable debt.  The yield isn’t as good as my high yield equity allocation but the security is much higher.  I think it is important to have some low beta allocation when you have a large options allocation as my options strategy could be thought of as “short volatility”.  The fixed income thus acts as a hedge to that while still providing an acceptable level of income.

I want to get up to 15% in Discounted Bonds.  This is a very lucrative area of the market and the actions of the Fed have created a once in a lifetime opportunity to really earn superior returns with limited downside risk.  I have been as high as 8% here but am currently below 5% due to early profit taking.

Lastly, I make room from some speculations.  This is currently up to about 2% after some gains.  I have this split between a few thousand each in Fannie Mae (FNMA) and the Junior Gold Miners ETF (GDXJ).  I expect to do well but recognize a high level of risk and keep my exposure light.

Finally, all of the above applies to the accounts I rely on to pay the bills.  I need an income centric approach there.  For my tIRA, I’m more concerned about growth and staying ahead of inflation.  As a result, I have 10% of the tIRA in UVXY puts and substantially all the rest in insurance.   Insurance is America’s best business and where you should put money you want to compound long term.  It is important to go with Property and Casualty insurers of Life Insurance ones as the latter have no competitive moat.  They all use the same actuarial tables.  It is also important to focus on insurance companies with a combined ratio less than 100 (there are many good ones in the high 80s and low 90s).  Finally, you want to pay less than 1.1 times book value.  If you can do these three things, it is very reasonable to expect long term compounding upwards of 15% a year.  I have done very well with AFL, AXS, FRFH, and MKL this way.

Devour your prey raptors!

I sold a bond and bought a bond today.

music selection:  “Santa Monica” — Everclear

First the sale.  Breitburn Energy has been in default and operating as ‘debtor in possession’ for some time.  I’ve been waiting patiently for the company to come out with a reorganization plan and see what I might recover.  Recently, there was talk of putting representatives from the bondholder class on the revised board of directors and the bond price rallied and set off my limit order.

I originally purchased the BBEP 15OCT2020 maturity 8.625 coupon bonds (2) for 28.263 cents on the dollar on 8DEC2015.  I paid 12 dollars in commissions and 26.35 in accrued interest for total out of pocket of 603.60.  Today, I sold the bonds for 45.50 cents on the dollar and paid 2.75 in commissions.  During the holding period, I collected one coupon for 86.24.  Subsequent coupons were not paid as the bond went into default.

The trade was in force for 276 days and yields 85.42% on an annualized basis.  This goes to show good things can happen, even with a bankruptcy when you buy a bond at the right price.  Price is what you pay, value is what you get.

I also bought two units of Alliance One International’s 15JUL2021 maturity 9.875 coupon bonds for 88 cents on the dollar.  I paid four dollars in commissions and 32.37 in accrued interest.  This is an upstream tobacco company that buys and cures raw tobacco for sell to cigarette manufacturers.  It got beaten up by an SEC probe into its inventory accounting practices.  That seems to be blowing over and the bond and stock are in an uptrend.  I’ll earn a 11.22% adjusted coupon yield (yield on cost) while I wait for the final 12 cents of price appreciation.  I see little chance of bankruptcy as the balance sheet is solid and the underlying product is addictive.  If this starts trading at par due to roll forward of the current period due debt, I’ll cash out for a quick profit.

Devour your prey raptors!

The market was closed Monday for Labor Day so I rolled my positions Tuesday.

music selection:  “For You” — Staind

weigh-in:  212.8 (0.6)

First I rolled Qualcomm (QCOM).  I sold QCOM161014P00063000 for 1.70 a share.  The trade will be in force for 39 days and yields 25.25% on an annualized basis.  The trade also enjoys 2.94% downside protection.

Next I rolled Microsoft (MSFT).  I sold MSFT161014P00057500 for 1.12 a share.  This trade will also be in force for 39 days and yields 18.23% annually.  The trade enjoys 1.93% downside protection.

I also rolled Cheneire Energy (LNG).  I sold LNG161014C00052000 for 0.14 a share.  This one is quite a bit out of the money as I want to leave room for capital appreciation.  The trade will be in force for 39 days and yields 3.99% annualized.

Finally, I rolled Disney (DIS).  I sold DIS161014C00100000 for 0.12 a share.  This trade is also in force for 39 days and  yields 1.12% annualized.  I’ve been a little disappointed by Disney but I think it will be back.

Devour your prey raptors!

Four positions expired this afternoon.

music selection:  “Champagne Supernova” — Oasis

All four positions expiring today are out of the money.  First, Qualcomm (QCOM) finished at 63.35, over three dollars above the strike.  I earned a 22.05% annualized return on the written put.  I’ll write a new put on Monday.

Microsoft (MSFT) cut it close.  Big softy finished at 57.67, just 1.67 out of the money.  I earned 18.90% annualized return on the written put.  I will open a new put on this one Monday as well.

Cheneire Energy (LNG) finished well out of the money.  This is a covered call play that will be written at the further available from the money strike on a rolling basis until called.  I’m making less than 5% annualized but I’m picking up great capital gains on the way from this steady gainer.

Finally, Disney (DIS) has been a little disappointing.  It finished at 94.42, well down from the 97.67 it was at when I wrote my covered call.  I made 11.13% annualized and will write a new call at the 100 strike on Monday.  The yield will be much lower but at least I stay eligible to earn dividends while I wait for price recovery.

Devour your prey raptors!

Another month has passed.

music selection:  “Holy Wars…The Punishment Due” — Megadeath

ASSETS:

Wells Fargo (taxable): This is up 1,013 to 29,400.  There is a 10.71% yield on this account.  Sitting pretty.

Interactive Brokers (taxable): This up a trivial amount from 252,944 to 253,646.  Nothing noteworthy going on.

Interactive Brokers (tIRA): This is up 1.13% from 127,329 to 128,770.  Except for UVXY puts, this is in low Beta insurance stocks and is a slow and steady performer.

Checking: Cash on hand is up 595 dollars to 9,556.

Total Liquid Networth: This is up from 417,621 to 421,372.  That is a 0.90% monthly increase, which annualizes to over 10% a year.  Not too shabby.

LIABILITIES:

House: Paid

Car: Paid

Taxes: I currently have about 500 dollars in estimated tax liability unfunded.  I’ll top up the account with the service in early January.  Cash on hand is sufficient to meet the need.

WITHDRAWAL RATE:

Projected twelve month withdrawals come to 24,863.  Against a net worth of 421,372, that is an annual withdrawal rate of 5.90%.  Offsetting the drain was 1,335 in short options premiums for the month plus a short term capital gain on long UVXY puts of 4,920.  This 6,225 greatly exceeds the monthly draw.  In addition, my forward 12 months dividends, distributions, and interest currently come to 24,341 or 97.90% of the need.  I think I am well positioned for a 50% crash.

SPENDING:

This is down from a yearly high of 2,080 last month to 1,320 this month.  My average monthly spending so far this year has been 1,550.  If I continue that pace, I will be about 6,300 dollars under budget.  Looked at another way, my withdrawal rate could be as low as 4.41%

Devour your prey raptors!

Today, I’m joining Einhorn and other hedge funds in Fannie Mae speculation.

music selection:  “Garbage” — Blaze ya Dead Homie

weigh-in:  213.4 +2.0 – Too much pizza!

Fannie Mae (Federal National Mortgage Association) is the subject of a great deal of controversy.  After the bailout, the agency was still struggling to pay its preferred dividend to the government.  Just before the agency returned to profitability, the government changed the rules of the deal to a sweep of all profits.  The government is now reaping a massive distribution while shareholders are completely shut out.  There are numerous lawsuits underway challenging this scenario.  This article at WSJ explains it well.

FNMA is now profiting a couple billion dollars every quarter.  It has paid over 10 billion in dividend payments to the government in the prior four quarters.  If these dividends had been paid to investors instead, the imputed yield would be a little over 95%!  If the lawsuits are successful, the stock could easily gain 1000%.

This one isn’t for the rent money or anything you might want to return to cash in the next three years.  But for my money, it is a safe speculation that could pay off big.  I am committing 5,000 to stock.

Devour your prey raptors!