Three positions expired over the weekend.

music selection:  “Break Our Hearts Down” — Bullet Height

weigh-in:  198.0 +0.4

One position finished in the money over the weekend (CVS) and was called away.  Two more finished out of the money and I retain shares (BX & EPD).  I’m letting CVS go without initiating a new position.  I like the company and its move to integrate vertically in the healthcare space.  I’m just over exposed in general and would like to raise cash, especially after recent volatility rattled me just a little bit.  It is always a good move to raise cash.

I run an income centric portfolio here at the raptor.  Important to that effort is a 40% allocation to fixed asset and debt like securities.  I am currently running at a pace of 30,301 in expected forward 12 month dividends, distributions, and interest.  This comes to 121.20% of my 25,000 spending target for the year.  I have made it an essential part of my strategy that I will never have to “sell low” into  a bear market.

I also invest the residual in equity that has options.  This allows me to sell options, either calls or puts, for immediate income. I think of this like being able to create my own on demand dividend payment.  This has been a good year for that strategy with my expected total for 2018 coming to about 36,000.  Quite a lot better than my expected spending for the year.  This is where my portfolio growth comes from and is my interest rate and inflation hedge as rising interest or inflation will show up as increasingly plump premium payments.

CVS was good for 313 dollars in profits since 17SEP2018.  The two trades were in force for 67 days.  My all in annualized return on 7,750 capital at risk was thus 22.00%.  This was a low risk trade that significantly beat the long term average of the S&P 500 (I benchmark against the S&P as it is what I recommend to investors who fear options and would rather index).  I think similar returns would be available in CVS in the future.  But I need to raise cash so will let the fact shares were called away plump up my cash balance by 7,750.

Blackstone (BX) has given me a little trouble since initially entering the trade but is recovering nicely of late.  I am writing a covered call that has a strike 50 cents higher than my entry price.  As you’ll see, the trade still offers a very good expected annualized return while making room for some capital gains to boost returns.  I sold BX190111C00036000 for 63 cents a share.  This trade will be in force for 40 days and yields an expected annualized return of 16.19%.  That is quite a lot better than the long term average of the S&P (about 9%) and still leaves room for capital gains upside.  Should shares be called away at expiry, the annualized return will improve to 29.05%.

Finally, there is Enterprise Products Partners (EPD).  I originally purchased shares at 28.69 on 04SEP2018.  The underlying has a nice 6.36% annual distribution.  Management has provided strong guidance for its future operations due to expanded capacity.  The company has been able to grow (mostly) organically without the need for a lot of debt or secondary offerings.  The result is a company with a solid balance sheet and great prospects for distribution growth.  I’m glad to make a few percent from options while waiting for this company to fulfill its destiny as a cash flow machine.

I have already collected 204 dollars in premiums from writing covered calls above my entry price.  I was not able to complete a covered call trade today in EPD at an attractive price.  I will content myself with the underlying (growing!) distribution and continue scanning the horizon for opportunities to write covered calls for bonus income.

It is just noise to look at daily returns but I was pleased to see my combined Interactive Broker holdings up by almost 12,000 today.   “Good” days in the market can really drive your returns long term.

Devour your prey raptors!

Rolling positions BX, EPD

Never miss another opportunity to devour prey!

8 thoughts on “Rolling positions BX, EPD

  • December 4, 2018 at 3:17 am
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    I wonder if current conditions have violated the assumption that fixed income is a safe bet. Debt instruments of any significant duration will plummet if/when inflation/rates increase, and many companies do not have a ROA high enough to cover significantly higher interest rates (example, Ferrelgas – BTW thanks for the sell advice on that dog! Made me take a 2nd look.). If there is a debt bubble, it is unlikely that careful picking will spare anyone. It’s now a defensive game, but the old plays might not work.

    Reply
    • December 4, 2018 at 3:31 am
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      Corporate debt is in a weird place right now. 40% of “Investment grade” corporate debt is BBB or one grade above junk. When the credit cycle turns, there will be more speculative grade debt than ever before. And most institutional money managers will be forbidden to touch it. There are going to be some great bargains out there for the bold and the informed. I hope to raise cash for the opportunity.

      Reply
      • December 5, 2018 at 8:44 pm
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        It’ll be hard to go all in junk bonds during the recession. Defaults could become common enough that even diversified portfolios suffer huge losses (similar to how mortgage-backed securities were hit by a wave of defaults a decade ago, those BBB bonds could get hit by a wave of downgrades and bankruptcies). Many of these companies riding on the edge of investment grade can’t break even at a percent or two higher interest, which they will likely face either through recession/downgrade or rising rates.

        Perhaps income-producing short/hedged exposure, such as bear call spreads or a tight collar on a dividend fund, would be a safer bet than trying to grab a falling bond knife at the right price? The goal, of course, is to survive or profit through the carnage and pivot into equities or investment-grade debt at some point 10-20% down from here.*

        *and if the carnage never happens, not to have lost one’s money betting on it.

        Reply
          • December 5, 2018 at 11:33 pm
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            Great articles. Not all “junk” debt is the same. Sometimes companies are dinging for being boring or not having a prestige brand name but are still solid businesses. You have to be selective.

        • December 5, 2018 at 11:32 pm
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          Chris,

          I think it is good you appreciate your own appetite for risk. Certainly, it looks like 40% of investment grade debt right now is rated one spot above speculative grade. When the credit cycle turns, the pricing for “junk” is going to be very low as there just around enough buyers for all those additional billions. Institutions usually can’t buy speculative grades of debt. I’m expecting pricing to go below 40. Historical recovery during bankruptcy is 40-45 percent depending on your source. At a low enough price, you are effectively hedged by your entry price (if you can wait out bankruptcy proceedings).

          Your approach makes a lot of sense too! Hungry raptors can always do a little of both if that is what they like.

          Reply
  • December 5, 2018 at 4:00 am
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    Raptor,

    What do you think of Micron (MU), excellent company with big fat premiums, most analysts consider it should be valued 3x higher than the price it is trading today, … The price is aprox 38usd so even 1 contract can bring in substantial premium

    Reply
    • December 5, 2018 at 11:25 pm
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      I like the company but have not dug deeply into financials. Might be on my watch list in the future.

      Reply

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