Financial Velociraptor

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!

Getting into vice.

music selection:  “One Headlight” — The Wallflowers

I have a rare move in my tIRA account today.  I’ve accumulated 10,000 in cash so its time for a new buy.  I mostly hold insurance companies with strong underwriting history in this account.  I’m diversifying a little bit with a very strong Dividend Aristocrat.  This is a buy and hold position rather than an options play.

Altria Group sells tobacco products and wine within the United States.  It yields about 3-1/4% and has raised its distribution for 47 consecutive years.  The company also buys back about a billion dollars of its own stock each year.  The P/E is very attractive at only 10.37.  Revenue is steady but gross margins are ticking higher with the most year coming in at a hair over 45% GM.  About half of pre tax operating income shows up as free cash flow indicating conservative accounting.

The underlying products are addictive and the brand identity of the products is strong.  This is a wide moat company.  The company is a 148 Billion market cap behemoth with a very low Beta of 0.50.  In the event of a market pullback, this one should hold up nicely.  The growing shareholder yield (dividends plus buy-backs) should result in strong financial performance for decades.  The balance sheet is also strong.  While there is 13.8 billion in long term debt, there are offsetting long term investments of 18.8 billion.  With a 15% return on assets, this one looks very strong.

I bought (tIRA) 130 shares at 76.59 for a total investment of 9,957.  This represents 6.64% of the tIRA account.

Devour your prey raptors!

Four new options positions.

music selection:  “For You” — Staind

weigh-in:  212.4 (0.8)

Prospect Capital Corporation (PSEC) is a range bound stock that offers opportunities to buy around 8 and sell around 9.  Price has fallen back to close to 8 so I’m writing puts to try to get assigned.  Assignment will result in a yield of 12.5% while I write covered calls at 9 waiting for a profitable exit.  I sold PSEC170721P00008000 for 20 cents a share.  The trade will be in force for 40 days and yields 22.81% on an annualized basis while enjoying 3.23% downside protection.

With Oracle (ORCL) I’m getting back to my roots of writing puts on Big Cheap Tech.  There are several dominate businesses in the tech space that are quite a lot like digital utilities in that they sell an essential service and have stable mature businesses.  They tend to have options premiums that reflect their early go-go growth days though so offer an excellent balance between safety and return.  I sold ORCL170721P00044000 for 1.42 a share.  The trade will be in force for 40 days and yields 29.45% on an annualized basis while enjoying 3.27% downside protection.

I was assigned shares of Archer Daniels Midland (ADM) over the weekend.  My thesis here is that Big Corn is here to stay and has a strong tailwind in the form of a growing middle class in India and China.  I sold ADM170721C00045000 for 29 cents a share.  The trade will be in force for 40 days and yields 5.88% annually.  Until shares are called away, I stay eligible to collect the 3% dividend yield.

EOG Resources (EOG) was assigned to me in a prior month.  A covered call expired out of the money over the weekend so I am writing a new one.  I sold EOG170721C00095000 for 1.35 a share.  The trade will be in force for 40 days and yields 12.97% on an annualized basis.  I have collected 5.65 in options premiums on EOG to date or almost 6% of my cost basis.   All since just mid March.

The four positions have a simple average annualized return of 17.78%.  After adjusting for a 25% marginal tax rate, my return is 13.33% on an annualized basis which far outstrips the long term average of buy and hold S&P indexing.  At the same time, I have reduced my risk and lowered my Beta.  That is the goal of selling options for income.

Devour your prey raptors!

Hertz (HTZ) continues to steadily fall.

music selection:  “Two Princes” — Spin Doctors

Whenever one of my short positions declines by more than 300 dollars, I top up the position.  I’m currently maintaining a 5,000 dollar position in HTZ, CAR, GM, F, and CNQ.  Today, I sold 42 shares of HTZ short at 9.02.  I now hold 554 shares short and have accumulated 3,003 in unrealized capital gains on HTZ.

Across all short positions, I am up 4,043.  CAR is up 1,088,  CNQ is up 478, and GM and F are both down.  The traditional shorts provide 23,972 in leverage that is negatively correlated to the market.  This could significantly boost returns for the portfolio while reducing volatility.

In other news, four options positions expire today.  EOG and MU will expire out of the money.  NVDA will be called away and ADM will be assigned.  I will continue to write covered calls on EOG and ADM.  But will seek new opportunities for MU and NVDA.  I’m currently leaning to getting back to my roots with put writing on Big Cheap Tech names.

Devour your prey raptors!

My previous put in BX expired out of the money over the weekend.

music selection:  “Crumbling Down” — Go Betty Go

weigh-in:  213.2 (2.0)

Blackstone (BX) is an asset management company.  It is a little different that say T. Rowe Price or similar companies in that most of its clients are “accredited investors”.  They compete more with hedge funds than retail money managers.  They have access to large pools of capital that have long lock up periods so they can invest long term without fear of paying redemptions.  They have several highly profitable real estate funds that return over 18% a year.  Most retail investors can’t invest with them and enjoy these returns.  But you can invest in the parent company.  That’s what I’m doing today.

I sold BX170714P00033500 for 70 cents a share.  The trade will be in force for 40 days and yields 19.07% on an annualized basis while enjoying 2.64% downside protection.  If assigned, the underlying shares will yield 10.39% annually while allowing bonus income in the form of covered calls.  I sold 3 contracts and collected 210 in instant income.

Devour your prey raptors!

One more month in the bag.

music selection:  “Runaway” — Ladytron

ASSETS:

Wells Fargo (taxable): This gained 60 dollars to reach 31,286.  A trivial 0.19% move for the month.  Year to date this account is up 7.39%.

Interactive Brokers (taxable): I gained 5,602 here to finish at 296,143.  That is a 1.93% gain for the month and 9.98% for the year.

Interactive Brokers (tIRA): I added 940 dollars here to finish at 149,406.  The monthly gain was 0.63% and the annual gain is 6.55%.

Checking: Cash on hand continues to climb.  I gained another 208 dollars to bring the total to 11,746.  Monthly gain was 1.80% and the annual gain is 39.12%

Total investable assets finished at 488,851 up 1.41% from last month.  Year to date, I am up 9.28%.

LIABILITIES:

Home – paid.

Car – paid.

Income tax liability: I added 500 dollars to my prepaid tax liability to bring the total to 9,010.  I expect to make at least three more 500 dollar payments as each quarter wraps up.  Maybe more if trading goes well.

WITHDRAWAL RATE:

I continue to assume 25,000 in annual withdrawals.  Actual amount varies by a few dollars from month to month based on cash distributions for Wells Fargo brokerage to checking.  Current estimate is 5.11% withdrawal rate.  Another couple of good months could see me pass the half a million mark and hit a sub 5% rate.

Forward twelve month distributions come to 25,786 or just over budget.  I pulled in 1,336 in options premiums in the month as well.  Annualizing year to date options trading results yields 27,006 in annual option premiums.  So my budget is covered twice over.  Strong trading results will result in a slightly higher withdrawal requirement to fund income tax liability.

SPENDING:

Core spending was low at 1,393 for the month.  Total spending was 1,893 after applying 500 extra dollars to income tax prepayments.  Spending for the year to date comes to 7,979 which annualizes to only 19,150.  It looks like I am in good shape but my expenses are always back loaded with an extra 4,000 or so coming due at year end for real estate taxes and insurance.  All in all, I’m on track for the year.

Devour your prey raptors!

Happy Memorial Day!

music selection:  “Runaway” — Ladytron

weigh-in:  215.2 +1.0 – too much BBQ!

I recently covered my love for closed end funds (trading at a discount to NAV!) that are focused on the debt space.  Another major part of my strategy is selling options for income.  A lot of people come to options and first try to BUY options.  They see an opportunity for doubling or tripling their investment and grow blind to the very real possibility of losing their entire investment.  I’ve learned the odds are more in your favor when SELLING options.

All option pricing includes what is known as “time value”.  This time value is a wasting asset.  It declines to zero as expiry approaches.  If you purchased the option, you must overcoming this wasting effect to make money.  Even if you are right about the direction of the stock, you might lose money if the move isn’t large enough or soon enough.  When selling time value, you are guaranteed to collect the full value as an upfront cash payment by holding to expiry.

Selling options also is a great way to lower risk.  If you buy a stock outright and it declines 5%, you have an unrealized loss of 5%.  If you instead sell a put, your loss is reduced by the upfront premium received as well as any amount the put was written out of the money.  This risk reduction is a powerful but often overlooked part of selling options.

Yields get fat when the market is in distress.  This can be a great source of comfort.  When the market is taking a 50% beating, you have lost a little less and are recovering ground by the way of new positions that pay more than average as the premium written includes a volatility bonus.

Finally, the returns are repeatable and often exceed the long term average of being a buy and hold index investor.  The long term return of the S&P with dividends reinvested is between 7-9%.  Even in the current abysmal interest rate environment, I find it easy to get 12% annualized on a written put or covered call.  I often get much more.  If all you do is break even against the index, you still have win because you did it with less risk that holding the underlying equity.

Unless I roll UVXY puts, it is unlikely I will have any trades this week.  Blackstone (BX) looks to expire out of the money over the weekend.  I’ll be looking to roll it on Monday.

Devour your prey raptors!

I am doubling my exposure to the rental car shorts.

music selection:  “Same Old Song And Dance” — Aerosmith

Originally, I set up my rental car shorts as a paired trade, each half a normal short position at 2,500 each.  Today, I am making each a full position at 5,000 each.

I sold short 125 shares of CAR at 22.40.  Avis currently has 1,017 in accumulated unrealized short term capital gains.  The initial trade is down 34.04%.  I expect more pain in the future for this company.

I also sold short 286 shares of HTZ at 9.66.  Hertz currently has 2,655 in accumulated unrealized short term capital gains.  The initial trade is down 73.75%.  Hertz could be going to near zero and Avis might not be too far behind.

I would also short Enterprise Rent A Car but they are privately held. Because of industry consolidation, there are no more material players left.

Devour your prey raptors!

I had three positions expire and Friday.

music selection:  “Love Removal Machine” — The Cult

weigh-in:  214.2 (1.2)

AFSI was originally assigned on 24APR2017.  I have already written covered calls against the position twice.  Today, I wrote a third covered call.  Shares are down 31% so I had to go pretty far out to find liquidity at the original 17.5 strike.  I sold AFSI170915C00017500 for 25 cents a share.  The trade will be in force for 117 days and yields 4.46% annualized.  I’m using a larger than normal 35% trailing stop loss which would trigger at 9.67.

SM Energy (SM) was assigned over the weekend at the 22.5 strike. Oil is creeping up again so I see a good chance of this one getting called away on the new position.  I sold SM170616C00022500 for 60 cents a share.  The trade will be in force for 26 days and yields 37.44% annualized.

Sirius XM (SIRI) was also assigned over the weekend at the 5 strike.  I sold SIRI170630C00005000 for 12 cents a share.  The trade will be in force for 40 days and  yields 21.90% annualized.  I expect to play SIRI for a long time rolling in and out of puts and calls as appropriate to collect premium.

The three positions have a simple average annualized return of 21.26%.  Even after 25% short term capital gains tax, this return is highly likely to beat the long term results of indexing to the S&P.

Devour your prey raptors!