≡ Menu

Update Short Position Capital One Financial (COF)

Capital One reported earnings and the markets are cheering.

music selection:  “Sign of the Gypsy Queen” — April Wine

I hold 61 shares short of COF in my main investment account.  The basis is a little over 5,000 dollars.  Yesterday after close, Capital One reported quarterly earnings and surprised to the upside.  Shares are up over 8% on the day.  I am now 328 dollars to the red.  I will continue to hold the short until 102.70 (a 25% hard stop).  I think I am still right about deteriorating credit quality in the auto loan and credit card loan books and that I am just “early” to the party.

Zacks had this to say: “increasing expenses continue to hurt Capital One’s profitability. Also, deteriorating credit quality remains a major near-term concern. In fact, asset quality is likely to continue to remain under pressure due to losses in the auto portfolio and U.S. card business.”  It should be noted that COF actually increased its provision for loan losses in response to growing default rates.  Net charge offs have increased 66 basis points year over year.  All this while deposits held at the bank fell 1%.  If this trend continues, Capital One could face a liquidity crisis that will reward shorts well.

Devour your prey raptors!

{ 0 comments }

Upgrading my MLP ETF from AMLP to AMZA

I sold AMLP.

music selection:  “Whiskey River” — Willie Nelson

I like the MLP space for high yields and steady growth.  This is a sector that is poised for long term growth as hydraulic fracturing continues to revolutionize domestic oil production.  All of that oil and gas has to be transported and stored.  The MLP companies serve that role and get a tax advantage as well.  For more than a year, I have been invested with twice my normal allocation size in AMLP.  AMLP is a diversified basket of MLP companies currently yielding a little more than 7%.  I sold today at 12.07 booking a 413 dollar capital loss that was more than covered by past distributions and options premiums.

Today, I upgraded to AMZA.  It is a similar basket of diversified MLP companies but it is actively managed and uses up to 33% leverage to boost returns.  I bought 2,039 shares at 9.80 a piece for a total investment of 19,982.20.  The new ETF boasts a yield of 21.22% or about three times what I was earning with a similar 20k or so investment in the MLP space.  My 12 month distributions were below my annual budget as of this morning but is now at 107.83% of budget.  I will sleep well tonight.

Devour your prey raptors!

{ 3 comments }

Written Put Blackstone Group (BX)

BX puts expired on Saturday.  I wrote new ones.

music selection:  “Suite Sister Mary” — Queensryche

weigh-in:  209.2 +0.4 – Too much BBQ!

Blackstone Group is quite a lot like a publicly traded hedge fund.  They take in funds from accredited investors and deploy it primarily in real estate investments.  We can participate in the fees they charge by buying the stock.  It is a high yielder but we can do better with options.

I sold BX170825P00034500 for 90 cents a share.  The trade will be in force for 40 days and yields 23.80% annualized.  It also enjoys 2.67% downside protection against a drop in share price.  Assignment will result in a yield over 10% plus the opportunity to profit again with covered calls.

In other news, UVXY split 1:4 today.  Long puts are well in the green but I think I can do better by holding a little longer.

Devour your prey raptors!

 

 

 

 

{ 2 comments }

PennyMac Mortgage Investment Trust (PMT)

Today is ex-div day for PMT and my shares were called away.

music selection:  “Good Times” — Chic

One of the risks you take with writing a covered call is that shares can be called away early on or before the ex-div date to allow the counterparty to collect the distribution.  Whenever the dividend rate is higher than the remaining time value on the contract, it makes sense for the counterparty to exercise.  I came away with a capital gain but missed collecting a second distribution.  I was well compensated for taking this risk however.

The shares were originally purchased on 9JAN2017 at 16.69 a share.  They sold today for 17.50.  Along the way, I collected covered call premiums of 25 cents, 10 cents, and 35 cents.  I also collected one 47 cent distribution.  That is a total of 1.98 a share over 183 or 23.66% annualized.  I did quite a lot better than regular holders of PMT over the period and had lower risk at the same time thanks to my premium income.  That is exactly the way covered calls are supposed to work.

I wrote a new cash secured put on PMT this morning.  I sold PMT170818P00017500 for 38 cents a share.  That trade will be in force for 39 days and yields 20.32% annualized while enjoying 4.04% downside protection against a downward move in the underlying.  Twenty percent is an excellent return and well outpaces the long term average of buy and hold S&P investors.  I’m happy with this risk-reward profile.

Devour your prey raptors!

{ 5 comments }

I’m going back to the theme of shorting subprime lenders.

music selection:  “If You Don’t Start Drinking (I’m Gonna Leave) — George Thorogood

weigh-in:  208.8 (4.2) – back on pace!

Total consumer debt fell rapidly after the 2008 financial crisis.  It has since crept back up to the level seen just before the last blow up.  Worse, even more of the consumer debt out there is to subprime borrowers this time.  I’m putting on two shorts.  One to target subprime credit card lending and one to target subprime auto lending.

First up is Capital One Financial Corporation (COF).  I shorted them before and was early to the party.  I booked a small loss after capitulating.  I’m ready to try again.  Back in 2007, Capital One’s loan losses totaled around $2.6 billion.  In 2008, losses nearly doubled to $5.1 billion, wiping out the company’s entire profits.  The stock plunged from around $83 a share to $8 a share by March 2009.  The weak link with COF is they issue a lot of subprime credit cards.  There is no collateral and the borrowers already have a history of late and non-payment.  Curiously, subprime credit card lending is their core business.  By my estimates every 1% increase in default rates wipes out around 700 million in net income.  A 2% increase wipes out their tangible equity and sends them into panic mode to raise new capital, probably by  heavily diluting existing shareholders.  I sold short 61 shares at 82.161 this morning.

Next up is Santander Consumer USA Holdings (SC).  This is a big auto lending company that is heavily dependent on making subprime loans and unloading them as bundles in the Asset Backed Security (ABS) market.  Here’s a statistic that should leave long investors alarmed.  At the end of last year, SC reported 83% of its 27 billion in auto loans was subprime (FICO score less than 640).  Santander has increasingly bet its future on creative lending to borrowers who cannot afford to repay.  They have collateral but that collateral is likely to be worth less than what is on the books when a large default cycle starts.  (Credit moves in cycles.)  Millions of used cars on the market as fresh supply will suppress prices.  This is the core of my thesis on shorts of GM, F, CAR, and HTZ.  With Santander, when the price of used cars begins to fall; the market’s appetite for ABS backed by used cars dries up.  Santander will find itself in a liquidity crisis and be forced to reach even farther with even more questionable underwriting to generate revenue.  It is a death spiral.  I sold short 380 shares at 13.1107.

These short positions were entered into with the intent of turning a profit.  They also have a side benefit of acting as a hedge against a general downturn in the market and lower my Beta by introducing negatively correlated assets.  There is also almost 10,000 dollars in cash deposited in my account serving as low cost leverage.  Either way, this should boost and smooth out returns.

Devour your prey raptors!

{ 4 comments }

Cash Secured Put Sirius XM (SIRI)

Shares of SIRI were called away over the weekend so I am re-establishing a position.

music selection:  “Rammlied” — Rammstein

weigh-in:  213.0 +2.4 – over indulged at the China Buffet.

Shares of SIRI rallied to almost 5.50 during my holding period and shares were called away.  I still believe in this company and am re-establishing my put at a higher strike.  I sold SIRI170818P00005500 for 28 cents a share.  The trade will be in force for 47 days and yields 39.54% annualized while enjoying 4.92% downside protection from a drop in share price.

Making almost 40% annualized on a trade; especially one that actually lowers your risk versus just owning the underlying, is remarkable.  I sold 18 contracts putting 9,900 at risk and collected instant income of 504 dollars that is mine to keep win, lose, or draw.

There probably wont be any new trades for a weeks until my Blackstone (BX) puts expire.  That one is in the money by 15 cents and looks like it might go down to the wire for assignment.  I’d be glad to own shares at the 33.5 strike and begin collecting the fat dividend distribution while writing calls for bonus income.

Devour your prey raptors!

{ 0 comments }

Financial Transparency as of 30JUN2017

A lack luster month for returns.

music selection:  “You Better Run” — Pat Benatar

ASSETS:

Wells Fargo (taxable): This finished the month at 30,941, down from 31,286 last month.  The account is up 1,807 on the year or 6.20%.

Interactive Brokers (taxable): This finished the month up 1.54% at 300,974.  The account is up 31,447 on the year or 11.67%.

Interactive Brokers (tIRA): This one was up 281 dollars to 149,687.  Gains for the year come to 9,470 or 6.75%.

Checking: Cash on hand is down 163 dollars to 11,583.  The change in cash since the beginning of the year is 3,140 or up 37.19%.

Total Liquid Networth is up 4,333 on the month to 493,184.  Total gains for the year are 45,864 or 10.25%.

 

LIABILITIES:

No real changes here.

Home – Paid

Car – Paid

Income tax liability is tracking to come in around 11,000 for 2017.  I made another 500 dollar prepayment bringing my total prepayments to 9,510.  I will make two more 500 dollar payments at each quarter end to bring my prepayment up to around 10,500.  Should be sufficient to avoid underpayment penalties.

 

WITHDRAWAL RATE:

I am budgeting 25,000 for annual spending.  Against a liquid networth of 493,184, that is a withdrawal rate of 5.07%.  Projected 12 month dividends, distributions, and interest are 25,797 or enough to cover my needs without needing to make trades.  I picked up 2,491 in additional trading income for the month.  I am on pace to earn 26,254 in trading income for the year or 105% of budget.  Total cash inflows should exceed 50,000 for the  year, easily meeting my budgetary needs.

 

SPENDING:

This was the spendiest month of the year so far.  I spent 2,305 from checking, far above the 1,700 dollar average so far this year.  There will be a couple of high spend months at year end when real estate taxes and insurance bills come due.  But so far, I’m tracking to be about four thousand dollars under budget.

 

OTHER:

I collected a payment of 101.57 from Google AdSense for blog advertising.  This was my second check since starting the blog.  As an hourly rate, that comes out [embarrassing].  This remains a labor of love.  At least I’m covering domain registration fees.

I’ll be back Monday with an update on options trades in Sirius XM (SIRI).

Devour your prey raptors!

 

{ 2 comments }

What I’ve Learned In Early Retirement

No trades are likely this week.

music selection:  “I Know It’s You” — Crystal Method

weigh-in:  210.6 (1.0) – four consecutive weeks of progress.

Mondays are suddenly great.  It used to be Monday was about the worst thing ever.  Now, I look forward to the trading week starting back and being able to go places without crowds.  Walmart is a joy at 10:00 AM on a weekday.  No one blocking the progress of your cart through the aisle, shelves are not picked over, and checkout lines are speedy.

People still ask when I’m going back to work.  It is so far out of the ordinary that even after almost 5 years of early retirement, people still think its just a temporary phase.  Seriously, I don’t plan to ever go back to the old way of living.  I might take paid work again.  But it would be a low stress, part time, and fun job.  Like for example being an usher at a live music venue.  Minimum wage and free concerts?  Yes, please.

Health improves when you remove a major stressor and time suck from your life.   My weight and blood pressure are both down.  I sleep like the dead.  This is maybe TMI but even my bowel movements have improved.  Smoother and more vigorous.  I honestly think work stress releases hormones that are binding agents.

Casual clothes for the win!  Short pants or blue jeans all the time for me.  And more importantly, comfortable tennis type shoes.  I did an MBA and never once did I attend a lecture where the professor presented empirical evidence that comfortable clothing was a major driver of lost productivity in the office.  Work dress codes are a little absurd in that respect.

Family relationships improve when you have time to put into them.  Dad still drives me crazy.  But I cherish the time we spend together now.  We have lunch three or four times a week now and just chit chat about trivialities.  I help him cope with his smartphone and home PC.  He makes sure I keep two rolls of paper towels in every room.  I don’t understand that obsession but it is harmless, I guess.

I’ve become a morning person.  I used to need an alarm to get up and I resented the klaxon every time it went off.  My greatest joy was in rolling over for five minutes more.  Now I get up naturally with the sun.  I look forward to day (even Mondays!)  Sure, I still sleep in once every couple months or so just because I can.  But usually I spring right out of the bed and get the day started without even needing coffee.

Pandora has a monthly listening limit.  Somewhere upwards of 400 hours in a month and Pandora insists you pay to keep listening.  It is great to be able to consume as much music as my heart desires.  But Pandora should rethink their policy because it is acclimatizing me to Spotify during the last few days of the month.

Boredom is not a problem.  It was at first, but after about six months of breaking in to FIRE; you discover you enjoy having some void time.  It is meditative.  Most early retirees I’ve talked to are more busy than ever.  It never happened to me.  There is maybe a little Peter Gibbons in me.

Devour your prey raptors!

{ 20 comments }

Stopped Out of Energy XXI Gulf Coast (EXXI)

A 50% trailing stop loss triggered for me in EXXI.

music selection: “Lovefool” — The Cardigans

I originally entered this position via purchasing two Energy XXI bonds at 25 cents on the dollar.  I paid seven dollars in commission and 58.67 in accrued interest.  I collected 247.50 in coupon payments before the company declared bankruptcy.

After bankruptcy, I was granted 12 shares in the new company.  I sold today at 19.20.  I also hold seven warrants with a December 2021 expiry and 43.66 strike.  I was not able to find a buyer for the warrants.  I expect them to expire worthless but will watch them as a lottery ticket item in case the price of oil is once again “high” in five years time.

All together, I lost 87.77 on the trade or (10.25%) annualized.  I could still turn the trade to a winner with the warrants but I don’t think it is likely.

Devour your prey raptors!

{ 2 comments }

Monday Trades SM, CNNX, SDLP, YINN

Four new trades to start the week.

music selection:  “Stairway To Heaven” — Led Zeppelin

weigh-in:  211.6 (0.8) – three consecutive weeks of progress!

SM energy is doing quite poorly for me.  I wrote a covered call on my shares to earn a few pennies while I wait for recovery. I sold SM170721C00022500 for 5 cents a share.  The trade will be in force for 33 days and yields a paltry 2.46% annualized.  It is more than I’d make by sitting on my hands though.

I am getting back into CONE Midstream LP (CNNX) after some price weakness.  This one seems to fall with the price of oil even though it is backed by midstream assets that process mostly natural gas.  I sold CNNX170721P00020000 for 1.30 a share.  The trade will be in force for 33 days and yields 71.89% on an annualized basis while enjoying 0.74% downside protection.  This one was written well into the money to ensure assignment and access to a 6% and growing distribution.

My written puts in SDLP expired out of the money and I have written more to keep the strangle position open.  I sold SDLP170915P00002500 for 15 cents a share.  The trade will be in force for 89 days and yields 24.61% annualized while enjoying 29.64% downside protection.  This one may look a little risky as offshore drilling assets aren’t fetching the huge premiums they once did with oil at 100 dollars a barrel.  But the lowest this one got with oil much lower than today was 2.70.  Assignment at 2.50 would result in a 16% annualized distribution yield while allowing additional income to be earned from covered calls.  I like my chances here.

The simple average of these three positions is an annualized return of 32.99%.  Even after deducting short term capital gains tax, this is likely to well outpace buying and holding a broad index.  That is the magic of selling options for income.  Higher returns with lowered risk.

I am also making a special situations play with a synthetic long at the 22 strike for YINN.  That is a triple levered  instrument invested in Chinese equity.  The MSCI votes tomorrow on whether to finally include Chinese equities in its global indexes.  Literally trillions of dollars follow the MSCI global indexes.  With China deserving a roughly 25% weight, this would mean hundreds of billions of dollars would have to flow into Chinese equity over the next 18 months.  I’m taking a small chance on what could be some easy gains driven by a structural inefficiency in the market that will pay off regardless of the strength of the underlying Chinese economy.

Devour your prey raptors!

{ 3 comments }