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Friday Fixed Income

Another edition of Friday Fixed Income

music selection:  “New Sensation” — INXS

Each Friday, I present three possibilities in the closed end fund fixed income space that are yield rich and offer attractive pricing.  This is a sector where I personally keep a large allocation to ensure my annual budget can be met without trading.  I gain peace of mind and lower volatility this way.

This month, I’m changing the presentation format to include the expense ratio and a link to more information.  Shout out to Mr. Tako for the idea.

Brookfield Real Assets Income (RA) is a closed end fund that seeks to achieve its investment objective by investing primarily in Real Asset Companies and Issuers.  It pays managed distribution on a monthly basis.

  • Discount to NAV – 10.25%
  • Yield – 10.90%
  • Effective leverage – 21.08%
  • Expense ratio – 0.13%
  • Learn more

Eaton Vance Tax-Advantaged Bond & Option (EXD) is a closed end fund that seeks to provide tax-advantaged current income and gains through the use of a tax-advantaged short-term, high quality bond strategy and a rules-based option overlay strategy.  It pays managed distribution on a quarterly basis.

  • Discount to NAV – 8.55%
  • Yield – 12.05%
  • Effective leverage – none
  • Expense ratio – 1.43%
  • Learn more

Virtus Global Multi Sector (VGI) is a closed end fund that seeks to maximize current income while preserving capital by investing in a portfolio of fixed income securities of U.S. and non-U.S.issuers.  It pays managed distribution on a monthly basis.

  • Discount to NAV – 8.37%
  • Yield – 13.46%
  • Effective leverage – 26.05%
  • Expense ratio – N/A
  • Learn more
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Is The Correction Making You Nervous?

Time to talk about risk.

music selection:  “New Girl Now” — Honeymoon Suite

weigh-in:  204.2 (3.4)

Corrections of 10% are normal in the market. They happen about once every 735 days.  If you are shaken up by this action it points to being unprepared for normal volatility.  The first thing and probably the most important is have a proper asset allocation.  One hundred percent equity is hotly debated and probably a bad idea for most investors.  A case of the nerves during normal volatility events suggests too low an allocation to fixed income.  I personally like 60/40 equity/bonds.  This produces enough income to cover my annual budget.  I will never have to ‘sell at the bottom’.  Personally, I like closed end funds for the bond/fixed income allocation and you can see some suggested funds each Friday here at the raptor.

Another strong action you can take to protect yourself from volatility is to follow a strict stop loss policy.  Note that you should track your stops offline rather than enter them in the market.  The market maker can’t ‘pick you off’ early that way.  Stop losses can be set at a fixed price at the time of purchase.  I like to use trailing stop losses where you adjust your sell point upward as the price rises.  This allows me to lock in some upside and allow my winners to run while protecting me from ruinous losses.  Predetermining your pain point at purchase time takes emotion out of the process for you and ensures you act rationally.

It makes a lot of sense to buy primarily stocks that offer a distribution yield.  When you buy something that pays no cash, your profits are limited to your ability to sell at price above your cost basis.  Since the market can remain irrational longer than you can stay solvent, it offers a lot of relief to collect cash payments.  I adjust my trailing stop losses to reflect distribution income.  This effectively tightens the stop as time goes on.

The final thing you can do to protect yourself from market volatility is selling options for income.  Options income lowers your effective cost basis in equity.  You actually have less risk than owning stock outright when you sell an option.  This is because the option income is yours to keep no matter what happens to the price of the underlying.  I adjust my trailing stop loss to reflect all options premiums collected.

Devour your prey raptors!

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Friday Fixed Income

Every Friday, I present three fixed income options.

music selection:  “The Wasp” — The Doors

We are experiencing an official 10% or greater “correction” in the markets.  At times like these, fixed income investments really shine.  Now is a good time ask yourself if the current market action is making you feel ill.  If so, the most likely reason is your allocation to equity is too high and your allocation to income is too low.

On paper, I’m taking a beating in the correction.  I continue to sleep well at night however as I know more than my entire budget is met by dividends, distributions, and interest income that I earn passively.  The market could go a decade or more with a recovery and I’d be just fine.  That peace of mind is worth have a small drag on portfolio performance.

Below are three new ideas in the Closed End Fund debt space that are yield rich and offer attractive pricing.

Advent Claymore Convertible Securities (AGC) is a closed end fund that seeks total return through investing in convertible and non-convertible securities as well as following an options writing strategy.

  • Discount to NAV – 10.05%
  • Yield – 9.84%
  • Effective leverage – 40.91%

Wells Fargo ADV Multi-Sec (ERC) is a closed end fund that seeks high current income while reducing exposure to domestic interest rate risk by investing in foreign debt securities and preferred shares.

  • Discount to NAV – 8.57%
  • Yield – 9.95%
  • Effective leverage – 23.94%

Next Point Credit Strategies (NHF) is a closed end fund that seeks current income with capital appreciation through investment in floating and fixed rate loans, bonds, debt obligations, mortgage backed and asset backed securities, collateralized debt obligations and equities.

  • Discount to NAV – 7.72%
  • Yield – 10.14%
  • Effective leverage – 14.77%

Devour your prey raptors!

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Early Assignment ON Semiconductor (ON)

I have been assigned on my puts in ON.

music selection:  “How Could I Forget” — The Faint

Back on 22JAN2018, I sold puts in ON Semiconductor (ON).  It looked like a good trade before the broad market correction began.  Shares have tanked since that and now trade around 20 a share.  I was assigned today at the 25 strike.

I have not triggered a stop loss in this trade so I’m writing covered calls to earn a little income on what would otherwise be ‘dead money’ for me while I wait for the market to shake off the correction.  I sold ON180316C0002500 for 10 cents a share.  The trade will be in force for 36 days and yields 4.06% annualized.  It doesn’t look like much compared to recent options returns but it beats being parked in 10 year Treasurys by a mile.

On just the underlying, I’m down about 20%.   However, after accounting for options premiums collected on ON so far, I’m only down 11.76%.  My stop loss is currently at 17.61 a share.  I will close the trade if the stock finishes a day below that mark.  Never enter your stops into the market.  You wouldn’t play poker with your cards showing.

Devour your prey raptors!

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Top up AMCX short

I modified my short position in AMC Networks (AMCX).

music selection:  “Wake Up” — Three Days Grace

On 4DEC2017, I shorted 93 shares of AMCX at 53.93 a share.  Shares are down modestly since then.  I have sold short an additional 7 shares at 50.91, bringing total exposure to 5,371.86.  Now that I have 100 shares, I am juicing the trade with a covered put.  This is much like a covered call position in reverse.  If shares trade below the strike at expiration, I will be assigned 100 shares which will cancel out the 100 I hold short, leaving me with no position.

I sold AMCX180316P00045000 for 60 cents a share.  The trade will be in force for 37 days and yields an expected 13.15% annualized.  I have room for about 5 dollars in additional capital gains available from continued declines share price.  And my stop loss moves to 66.96 per share.  I will close the position if AMCX closes ABOVE 66.96 per share at the end of any trading day.  I currently am 367 dollars up in the trade.

Devour your prey raptors!

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Three Assignments and Three Trades 44.70%

Three positions were assigned over the weekend.

music selection:  “Son Of A Poor Man” — REO Speedwagon

weigh-in:  207.6 +2.0 – Excessive Superbowl eating…

I had a strangle open in BX.  The shares were called away and the put expired worthless.  I remain high on the prospects for Blackstone and love the rich options premiums on offer so I’m writing fresh puts.  I sold BX180316P00035000 for 1.48 a share.  The trade will be in force for 40 days and yields an expected 38.59% annualized while enjoying 4.47% downside protection.

Shares in Micron (MU) were assigned to me over the weekend.  I am writing covered calls for more income.  I sold MU180316C00042000 for 2.08 a share.  The trade will be in force for 40 days and yields an expected 45.19% annualized.  Despite the downward move in price, the position is up 7.88% thanks to options premiums collected.  The premiums are so rich here, I expect to keep coming back for a long time.

Shares in Grubhub (GRUB) were also assigned to me over the weekend.  Like with MU, I’m writing covered calls against the shares for more income.  I sold GRUB180323C00071000 for 4.60 a share.  The trade will be in force for 47 days and yields an expected 50.31% annualized.  As with Micron, shares are down since entering the position but thanks to fat option premiums collected, I am up 8.82% on the position.  This is a great company with strong scalability and a powerful network effect.  I hope to continue using this for income in the future.

Devour your prey raptors!

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Friday Fixed Income

Every Friday I present three fixed income options.

music selection:  “Show Me How To Live” — Audioslave

A huge part of my success as an early retiree is dependent on a stable stream of income, largely from closed end funds purchased at a discount to their Net Asset Value.  This is an easy and safe way to gain access to cheap leverage without taking a margin loan.

Having enough income to cover your budget without trading is a key component towards being able to trade profitably.  You see, if you are compelled to make trades by your budget, you will make a lot of bad trades you otherwise would have left on the table.

Below are three new ideas in the Closed End Fund debt space that are yield rich and offer attractive pricing.

Neuberger Berman Real Estate Sec (NRO) is a closed end fund that is invested in various income producing securities in the real estate sector.  It pays an income only distribution on a monthly basis.

  • Discount to NAV – 8.17%
  • Yield – 11.18%
  • Effective leverage – 2.07%

EV Tax Advantaged Bond & Option (EXD) is a closed end fund that is invested tax advantage short term bonds with an options overlay strategy.  It pays a managed distribution on a quarterly basis.

  • Discount to NAV – 11.57%
  • Yield – 12.34%
  • Effective leverage – none

Virtus Global Multi-Sector (VGI) is a closed end fund that is invested in various bonds domestically and globally.  It pays a managed distribution on a monthly basis.

  • Discount to NAV – 8.37%
  • Yield – 12.48%
  • Effective leverage – 26.05%

Devour your prey raptors!

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Early assignment Tractor Supply (TSCO)

I was  assigned today shares of TSCO.

music selection:  “Love is Alive” — Gary Wright

Back on 16JAN2018, I sold puts on Tractor Supply (TSCO).  The company has since released earnings with a beat and upgraded guidance.  It wasn’t enough for Wall Street as the price declined several percent on the “good news”.  Today, I was assigned early 200 shares at the 80 strike.  Shares trade currently at 69.93 and my stop loss is currently at 57.50.

I will remain eligible to collect the 1.38% distribution and am writing covered calls for more income while I wait for price recovery.  I expect eventually see a great deal of share growth as this is a great company that is bucking the death of retail trend.  I sold TSCO180316C00080000 for 20 cents a share.  The trade will be in force for 43 days and yields an expected 2.12% annualized.

It is unfortunate when shares move against me but it is part of the price you pay for a strong and reliable income stream when writing puts.

Devour your prey raptors!

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Financial Transparency 31JAN2018

Another month in the bag.

music selection:  “Can’t Get Enough” — Bad Company

ASSETS:

Wells Fargo (taxable): This is down 696 dollars, a 2.27% loss versus last month. The new mark is at 29,985.

Interactive Brokers (taxable): This is up 16,125 to 339,962 a gain of 4.98% versus last month. It has been two really strong months in a row with things set up for two more strong months based on options premiums to be fully earned by that time.

Interactive Brokers (tIRA): I show 2,817 in gains here this month to 165,862 which is good for a 1.73% monthly gain.  Pretty good for a stodgy portfolio of mostly insurance stocks.

Checking: I’m up here to 13,092, a gain of 8.98% on the month. A withdrawal of 3,450 will be made in the next few days to fund my first HSA account after changing my Obamacare provider to a compliant plan.

Total Assets: Good news over all as I’m up to 548,901 at the end of January. That is good for an overall monthly gain of 3.65%.  This is a little better than the monthly performance from December.  This unlikely to be sustainable rate is a pace of 43.79% annualized return.  I should be so lucky.

 

LIABILITIES:

House: Paid

Car: Paid

Taxes: I expect to have a “refund” of about 5,000 for 2017.  I will apply that forward to 2018 and need to make quarterly payments of about 1,250 to meet the current year’s liability.

 

WITHDRAWAL RATE:

The budget is again set at 25,000.  Against a liquid networth of 548,901, that is a withdrawal rate of 4.55%.  Current annualized distributions, dividends, and interest come to 30,450 or 121.80% of budget.  I also earned 6,472 in options income during January which puts me well ahead of pace to generate an additional 25,000 for safety factor.

 

SPENDING:

It was a good month.  Spending was only 1,309 dollars for the month of January.  I have a largish electric bill due in February due to the unusual long cold spell (I have electric heat, yuck!)  I should still be able to come in under 2,000 for the month, keeping on track to meet budget even with quarter tax payments.

Devour your prey raptors!

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Write Puts Target (TGT)

Last week’s puts in TGT expired out of the money.

music selection:  “Bezerk” — Eminem

weigh-in:  205.6 (0.8)

Target has been bucking the death of retail theme.  Cash flow and same store sales are up.  But shares have a long way to go to get back to a normal valuation.  I’m using the opportunity of mispricing and fat volatility premiums to write puts.

I sold TGT180309P00077000 for 3.60 a share.  The trade will be in force for 40 days and yields an expected 42.66% annualized while enjoying 4.48% downside protection.  February and March are on pace to be record months for me for writing options for premium income.  The 720 I picked up here certainly helps.

Devour your prey raptors!

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