≡ Menu

New written puts for Monday 27.46% annualized

I have three new trades today.

music selection:  “Kodo (Hishou Version) — Yoshida Brothers

weigh-in:  208.2 (1.0)

First up is a return to the theme of Big Cheap Tech.  I’m going back to Oracle (ORCL) for its healthy cash and reasonable pricing.  If I get assigned and can’t exit gracefully for a long period, I should still do well as this is a company that rewards shareholders.  I sold ORCL180119P00050000 for 1.43 a share.  The trade will be in force for 40 days and yields a projected 26.10% annualized while enjoying 3.29% downside protection.

Next up is a much smaller tech company but one with great prospects and even better cash flow: ON Semiconductor Corporation (ON).  ON provides electronics components to consumer goods manufacturers such as car companies.  It has stable growth to go along with its strong cash performance.  I sold ON180119P00019000 for 50 cents a share.  The trade will be in force for 40 days and yields a projected 24.97% while enjoying 4.88% downside protection.

Finally, I’m going back to Target (TGT) for its strong balance sheet, stable sales, and outstanding cash flow.  The retail sector has taken a beating over the last year.  We’ve reached the point where Wikipedia has a page for “retail apocalypse”.  To me, this signals shorting retail is no longer a contrarian trade.  The retail hate has gone mainstream so the sector should be poised for a short term rally.  I sold TGT180126P00062000 for 2.50 a share. The trade will be in force for 47 days and yields a projected 31.31% annualized while enjoying 4.20% downside protection.

The three trades average a projected annualized return of 27.46% while generating 1,046 in cash income for the month of January.  Three more positions due to be rolled after expiring this Friday should add another 1,000 or so to the January total.  2018 looks to be a strong year at the raptor.

Devour your prey raptors!

{ 2 comments }

I was staring down a dividend driven early exercise event in CNQ puts.

music selection:  “In Bloom” — Nirvana

Back on 9NOV2016, I opened a synthetic short in Canadian Natural Resources (CNQ).  This is an oil and gas upstream company that is heavily invested in Canadian Oil Sands projects.  The oil sands are expensive to operate and produce what is probably the lowest quality crude oil on the planet.  They made sense in a Peak Oil environment and are an albatross  in the new shale drilling paradigm. I expect this company to eventually trade much lower as not only do they have low quality assets, they have a long history of executing the mining process inefficiently.  But oil prices have been resilient and the position keeps moving against me after several brief forays into the black.

The stock goes ex-dividend on Monday and my long puts were showing less time value remaining than the value of the dividend.  That is a sure recipe for early assignment of shares. The borrow rate to short CNQ is punitive so I don’t want to be short the underlying.  Instead, I’m closing the position.  I bought to close 30 strike short calls at the January expiry for 4.75 a share.  These were originally sold for 4.58 a share resulting in a 17 cents a share loss.  Times two contracts, that is a loss of 34 dollars.

I also sold to close a long put originally purchased for 4.35 a share for a paltry 10 cents a share.  The 4.25 a share loss times two contracts comes to an 850 Long Term Capital Loss.  My total loss across the position is 884 dollars realized over 394 days.  I may revisit this trade after the wash sale lockout period expires.  In the meantime, I’m glad to no longer have capital tied up in a trade that was moving sideways at its best.  I’ll have new options trades to report on Monday.

Devour your prey raptors!

{ 0 comments }

Financial Transparency as of 30NOV2017

Despite the roaring bull market, I had a down month.

music selection:  “It’s Tricky” — Run-D.M.C.

weigh-in:  209.2 (0.4)

ASSETS:

Wells Fargo (taxable): Down 595 dollars on the month.  I’m up here 1,578 on the year.  Performance is about as expected as it is mostly debt instruments held for yield instead of capital appreciation.

Interactive Brokers (taxable): This is down 3,269 on the month.  As I’ve noted in previous posts, I’ve been pruning the portfolio of losers to harvest tax losses and deploy capital more productively.  The new mark is 308,429.

Interactive Brokers (tIRA):  This account is up 2,152 on the month.  A large part of that was my final UVXY put in this account as partnerships are no longer allowed in tax advantaged accounts at IB.  Except for Facebook, Altria and MORL, the tIRA account is now entirely in property and casualty insurance companies.  Month end closing balance was 162,565.

Checking:  I took a big hit paying for year end real estate taxes and home insurance.  This account is down 2,035 on the month and now sits at 10,583.

Total Liquid Networth: The entire portfolio was down 3,747 on the month or 0.73%.  Annualized year to date return was 15.84% including the 25,000 a year drag from paying for living expenses.  Without the withdrawals, the annualized gain would have been 21.94%.  That is a Warren Buffet like return.  If I can keep it up for 60 years like the master, you will all be calling me Lizard King, the Hot Shot of Houston.

 

LIABILITIES:

No real changes here.

Home – Paid

Car – Paid

I have a tax liability of about 9,500.  That is offset by a prepaid tax asset of 10,000.  I plan to put another 500 towards prepayment in January to cover additional gains in case of a strong Santa Claus rally.

 

WITHDRAWAL RATE:

I am budgeting 25,000 for annual spending.  Against a liquid networth of 512,289 that is a withdrawal rate of 4.88%.  Projected 12 month distributions, dividends, and interest come to 28,600 or 114.4% of budget.  Options income for the month was 5,744, driven largely by UVXY profits.  On the year, I’m on pace to collect 35,212 in annual options income or 141% of budget.  This is the last year I have significant tax losses to capture so my withdrawal rate will increase next year due to needing to put more away for tax liability.  I’m a lizard with a First World Problem.

 

SPENDING:

I really blew past the budget this month by spending 4,165.  I didn’t go wild.  I just had lots of non-discretionary expenses such as real estate taxes and insurance come due all at once.  My modest bill for FinCon17 also came due.  Total spending for the year is 22,600 which annualizes to 24,655.  I look to be coming in just under budget.  Next year probably has a 35,000 budget to cover tax liability.  I’m still trying to wrap my head around what the new budget looks like.

Devour your prey raptors!

{ 7 comments }

Reducing exposure to Oil and Gas MLPs

I sold a couple holdings to harvest some tax losses among other reasons.

music selection:  “Shine” — Collective Soul

A large part of my core strategy, after holding a healthy allocation to closed end bond funds is to have equity holdings that pay fat dividends to ensure there is steady income coming in.  Historically, this has included a lot of oil and gas MLPs especially in the pipeline space.  With my double normal size investment in the double leveraged AMZA, holding onto individual company MLPs makes less sense especially when they are underperforming.

I sold two holdings today and am left with about 20,000 of AMZA plus about 10k in exposure to SDLP (which is attractively priced around 3.50 a share).  I am making a long term strategic decision to have less oil and gas exposure for the foreseeable future.  This is going out on a limb a little maybe but I think the long run picture for oil and gas is dark.  Shale oil fracturing has brought enormous new supplies online that suppress pricing. At the same time, I think the electric car revolution, which is still in its infancy, is going to strike a mighty blow to demand.

Early reports from ride sharing services in California that run Teslas are that battery efficiency after 200,000 miles is a loss of only 6% capacity.  There are people who believe electric car batteries will soon have an effective 1,000,000 mile lifetime.  The economic proposition for the lifetime cost of owning and operating an electric vehicle will soon eclipse that for an internal combustion engine vehicle.  I expect we will in the next few years see the mass adoption point where sales of the old technology falls off a cliff.  When the mix of ICE vehicles in operation becomes trivial, demand for crude will fall about 30%.  Many O&G operators will find themselves with stranded assets.  The time to get out may be a few years ahead but I want to be too early instead of too late.

To that end I sold CNNX for 16.43 a share.  The position was initially entered at 20 dollars a share on 22JULY2017.  I book a short term capital loss of 1,785.  The net return on the position after all distributions and options premiums is a smaller loss of 437.65.  I recover 8,215 in cash for redeployment into more attractive opportunities.  I also sold GEL for 20.69 a share.  The position was entered on 19AUG2016 at 37.50 a share.  I book a long term capital loss of 3,362.  The return after all distributions and options premiums is a loss of 2,327.  I recover 4,138 in capital for redeployment.  Both positions are left with naked calls on them that expire on the 15th.  Neither is likely to be exercised.

I hope to raise some more capital by exiting ADM with an options trade.  Sirius XM is also near the money and could see cash returned.  Cash on hand with my main broker is up to 36,064.  That should provide some wiggle room for writing  puts in the new year.

Devour your prey raptors!

{ 10 comments }

Update UVXY (tIRA)

Time was running out.

music selection:  “Airplanes, Part II” — B.o.B

A deadline was approaching.  Interactive Brokers is no longer going to allow partnerships in tax advantaged accounts as of the 30th meaning I had to exit my UVXY put trade there early.  I still have 10 strikes in my taxable account that I’m going to hold a little longer.

On 1NOV2017, I purchased 28 contracts of UVXY190118P00010000 for 5.60 a share.  It is somewhat disappointing but I was only able to get 5.65 a share for the same contract today.  The trade was in force for 28 days and yields 11.64% annualized.

Since I am unable to roll the position forward into more UVXY puts, I have chosen to buy insurance companies with the proceeds.  I’ve written before about insurance being arguably the best business in America.  When a company is underwriting profitability and investing its float, they essentially are investing on margin with a negative interest rate.  Even when investing very conservatively, the companies can compound wealth at an enormous rate for decades.

First up is Arch Capital (ACGL).  This is a property and casualty insurer with a 10 year average combined ratio of 91.  A combined ratio under 100 denotes profitable underwriting.  Their ten year growth in book value per share comes to 527% which gives a glimpse into the kind of wealth compounding I expect in the future from them.  Shares are trading for approximately 1.54 times net book value.  This is a good price for a company with strong growth in book value per share.

My other insurance buy today is HCI Group (HCI).  I’m excited about the enormously strong 10 year average underwriting performance here with a combined ratio of 75.  That is outstanding.  The company grows book value per share even faster than ACGL with a 10 year return of 839%.  Despite being a much stronger performer than Arch Capital, HCI trades for a small premium at 1.61 times net book value.  HCI also yields 4.63% through its quarterly distribution.  Importantly, HCI is a small insurer that should be an attractive buy out target by larger firms looking to add market share that comes with strong underwriting discipline.  This one could yield a quick homerun.

In other news, I want to point readers towards a resource produced by Joshua at Finance Footing.  If you are interested in the Oil and Gas sector (which is HOT right now), he details 51 O&G ETF and ETNs at http://financefooting.com/crude-oil-etfs-etns/  He includes a link to a free resource that analyses the performance of these 51 tickers and finds they are not all created equal.  Some are total dogs while others are rockstar performers.  This resource could give you and edge if you are looking for exposure to Oil and Gas.

Devour your prey raptors!

{ 2 comments }

Covered Call Archer Daniels Midland (ADM)

ADM expired out of the money over the weekend.

music selection:  “Nightmare” — Avenged Sevenfold

weigh-in:  209.6 +2.8 – way too much turkey dinner!

ADM has been badly underperforming for me.  I feel like I have stranded capital so I’m looking to exit the position gracefully.  I am selling a near the money covered call that will result in a short term capital loss if exercised.  I still believe in the long term prospects for this company as roughly a billion people will enter the global middle class in India and China over the next decade and they will surely use more grains.  But I have to look after today too.

I sold ADM180105C00040000 for 48 cents a share.  The expected return is 10.95% over 40 days.  I will take a short term loss of 5 dollars a share if exercised.  That will bring the cumulative loss on the trade including all premiums and distributions collected to 4.62%.  It is unfortunate but I hope to get this capital back to performing shortly.  I can also use the capital loss for tax purposes next year as I expect to have a much higher budgetary burden to provide for income tax provision.

There are no other trades today and I am following UVXY closely as I have until the 30th to exit the trade in my tIRA account.  I should be able to eek out a small profit.

Devour your prey raptors!

{ 5 comments }

New trades in GRUB and NAP

Three positions expired over the weekend.

music selection:  “Do You Love Me” — The Contours

weigh-in:  206.8 +2.0 – doh!

GRUB and SXCP expired out of the money on Saturday.  NAP ended with shares being assigned.  Performance of SXCP was as expected but GRUB ran away a little while NAP languished.  None of the three really offer knock it out of the park risk/reward setups any longer.  I’m sticking with the trades to see how they play out.  I was not able to get a fill at an attractive price for SXCP covered calls and may try again tomorrow at a longer dated expiry.

Navios (NAP) shares were assigned at 10.00 a share.  The price promptly fell all the way to 7.82 and actually threatens to stop out of the trade.  I sold NAP180216C00010000 for 10 cents a share.  The trade will be in force for 89 days and yields 4.10% annualized as a target.  This isn’t as bad as it looks as the underlying yields about 21% at today’s price.  After all option premiums collected are considered, my 25% trailing stop is set at 6.60.  Today’s closing price is 7.94 so I have 1.34 or 16.88% breathing room before I need an upturn to stay in the trade.

GrubHub (GRUB) moved up from about 50 to 64.50 during the holding period.  I was hesitant to write a new put at an elevated strike but the premium offered is still fairly fat.  I sold GRUB171229P00064500 for 2.40 a share.  The trade will be in force for a 40 days and has a target yield of 33.95% while enjoying 4.02% downside protection.  This is another stock like Ten Cent or Market Axess that benefits from Metcalf’s Law.  They have a network that gains value as it adds nodes.  It should be a wild ride.

Finally SunCoke (SXCP) did not fill at 10 cents after patiently waiting.  Another trader got filled at 10 cents today but I couldn’t get the same benefit.  One possibility is to go down a strike and risk getting called away at a short term capital loss to earn some more income.  The next available strike is at 17.50 and the underlying is at 17.25.  Shares were last above 17.50 in August so that could be a risky move.  I’d need very attractive pricing to make the trade worthwhile.  It could however, be a graceful way to exit a trade that is merely performing instead of out performing.

Devour your prey raptors!

 

{ 4 comments }

Assigned shares of Sirius XM (SIRI)

My SIRI put expired in the money over the weekend and was assigned.

music selection:  “Black Sheep” — Metric

weigh-in:  204.8 (0.2)

I was assigned 1,800 shares of Sirius XM (SIRI) over the weekend with a cost basis of 5.50 a share.  Sirius is a fine company with great scalability and strong cash flow but I’m more interested in the fat options premiums it supports.  I sold this morning, 18 contracts of SIRI171222C00005500 for 14 cents a share.

The trade will be in force for 40 days and has an expected annualized yield of 23.23%.  I collect 252 in instant income that is mine to keep win, lose, or draw.  Importantly, the expected yield trounces the long term return of the S&P easily.  I’d much rather invest this way than to buy and hold the index.  My returns are better and because of the upfront income, my risk is actually lower.

I got a little bit of bad news from my broker.  Interactive Brokers is no longer going to allow any type of partnership holdings in its tax advantaged accounts after the 30th.  I will have to exit my UVXY long put trade by then and find a way to redeploy the funds.  With some excess cash I have on hand in that account, I expect to have about 20,000 to deploy.

I am currently leaning towards adding more insurance exposure with that 20k.  When they are underwriting properly, insurance companies are powerful compounders of wealth.  The float serves as a margin loan with a negative interest rate.  Even very conservative insurance companies that put most of their float in bonds can do very well.  I like Arch Capital Group (ACGL) and HCI group (HCI) for their long history of profitable underwriting and strong growth in book value per share.  Both appear to be attractively priced.  I’ll keep you posted on what I do once I exit the UVXY position held in the tIRA account.

Devour your prey raptors!

{ 10 comments }

Stopped Out AmTrust Financial (AFSI)

Honoring a stop loss.

music selection:  “Them Bones” — Alice In Chains

Back on 24APR2017, I bought AmTrust Financial Services (AFSI) for 17.50 a share via options assignment.  I had high hopes for this property and casualty insurer because it has a history of strong underwriting discipline.  I was impressed with its long history of growing book value for share at a rate that outpaces the S&P 500.

Shortly after opening the trade, the company was hit with an accounting scandal.  They were accused of pulling forward revenue from future quarters with improper accruals.  The accusation was limited to a non core part of the business (a call center for processing auto claims) and management quickly vowed to resolve the problem by selling the rogue unit.

I was satisfied the situation was contained and expected book value creation to resume.  The company has had a great deal of difficulty in selling the target unit and just lowered guidance for its final price for a third time.  Also, results in the primary business is faltering.  This has combined to drive the share price down even further.  Last night, AFSI closed below my 25% trailing stop loss.

I am disappointed to have to let this one go but I learned my lesson the hard way about honoring trailing stops.  Warren Buffet’s first rule of investing is “never lose money”.  Attentive raptors will recognize his second rule is “never forget rule number one.”  I intend to live to devour prey another day.

I sold this morning for 10.53 a share.  The trade was in force 200 days and books a painful 4,182 short term capital loss.  The annualized yield is -72.69% if you want to rub it in.

Devour your prey raptors!

{ 2 comments }

Sell Granite Point Mortgage Trust (GPMT)

Cleaning up after a corporate action.

music selection:  “Blame Me” — The Pretty Reckless

On 24FEB2014 I purchased 982 (split adjusted) shares of Two Harbors (TWO) for 20.36 a share.  Shares are down 24.61% since that time but I’m up nicely after considering the distributions I have received during the holding period.

On 1NOV2017, TWO issued a special dividend of shares of Granite Point Mortgage Trust (GPMT).  I received 186 shares with a cost basis of 17.83 a share.  Today, I sold those shares for 17.39 each.  I book a 82 dollar short term capital loss on the trade.  I am counting the proceeds as a 3.30 distribution of TWO for purposes of tracking total return and my trailing stop loss.

Granite Point may turn out to be a good investment in its own right but I didn’t like it as an opportunity cost at this time.

Devour your prey raptors!

{ 6 comments }