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Friday Expiries 17FEB2017

Six positions expired with the bell.

music selection:  “Fake It” — Seether

Five positions, two of which are puts and three of which are calls, expired out of the money today.  Those are: NAP, PMT, SXCP, GEL, MAA.  Average return across the five positions was 21.35% annualized and 1,070 in premiums were earned.  I plan to roll all these positions on Monday.

A cash secured put in AMLP finished in the money by two cents and will be assigned.  I’ll be buying 1,100 shares at 13 dollars.  My yield on basis will be 18.31% annually.  That is pretty good and I may be able to get a few hundred basis points more with an out of the money covered call at the 14 strike.  It will depend on if I can get enough premium to make the commission worthwhile.  This position yielded 35.5% annualized and generated 550 in premium income.

Total options income for the month of February is thus 1,620 from short options and 1,365 in long options on the long dated UVXY puts closed this week.  That is total options income of 2,985, more than covering my monthly budget needs.  Pretty nifty.

Devour your prey raptors!

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Update UVXY

I rolled UVXY puts today.

music selection:  “The Rest For The Wicked” — Sohodolls

On 17JAN2017 I bought 20 strike puts with the 18JAN2019 expiry for UVXY for 12.95 a share.  Today, I was able to sell those puts for 13.60 a share.  The trade was in force for 28 days and yields 65.43% annualized.

I have moved down to the 13 strike with UVXY190118P00013000 at 8.20 a share.  I bought 20 shares in my tIRA account and 35 in my taxable account.  Target holding period is 30 days but that may be shorter if the puts move into the money sooner than that.

The average return for the two closed UVXY positions so far this year is 46.17% annualized.  Since I target 10% of my portfolio in UVXY puts, I’m on track to add 462 basis points to my annual return.

This trade remains my highest conviction idea.  The ETF is constructed to buy the 14 and 40 day futures and roll them daily.  Contango in the futures markets ensures they will typically sell a “cheap” asset to buy an “expensive” one.  Decay of 90% of the fund value a year is virtually certain.

Devour your prey raptors!

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The 8 percent safe withdrawal rate

Aspiring to a 4% withdrawal rate means you will work too long!

music selection:  “Drones” — Rise Against

weigh-in:  211.4 (1.8)

It is very possible to double the normal withdrawal rate of the Trinity study with active portfolio management.  This trick can add several years to an early retirement.  I’m going to review my approach to a high income early retirement.

There is an asset class that can be purchased below its market value and typically yields over 10% a year.  This is the Closed End Fun (CEF).  These funds have a fixed number of shares and trade freely on the market.  Market sentiment can send them to a premium to the underlying net asset value but often sends them to a discount.  You want to buy when they sell at a discount.  I sometimes sell if a holding later trades for a premium.  A couple examples are Virtus Global Multi Sector (VGI) and Calamos Global Dynamic Income (CHW).  VGI sells for a discount to NAV of 7.73% and yields 11.88%.  CHW trades for a discount to NAV of 10.07% and yields 11.07%.  With yields over 11%, you can withdraw 8% annually and still have some wiggle room to buy more shares to stay ahead of inflation.

There is a second asset class, when bought right, leads to long term gains in the 15% range.  This is insurance companies with long histories of profitable underwriting.  Underwriting is measured by the “combined ratio” with a ratio below 100 indicating profitable underwriting.  Since cash is collected upfront and claims are (sometimes) paid later, the insurance companies can invest this money in the interim for bonus return.  This “float” is a source of leverage with a negative interest rate when underwritten profitably.  There are several elite insurance companies that regularly produce a combined ratio around 90.  AFG, WRB, TRV, and AXS are good examples of insurance companies with at least 40 quarters of profitable underwriting.  These can be powerful wealth compounders when bought at fair valuation.  Don’t pay more than 1.3 times book value.  Long term returns in the 15% range give you a big edge over the long term return of the broad US market which historically around 9%.  A good book about the power of this strategy is “The Davis Dynasty.

A third asset class that can provide income in retirement is high yield stocks.  I like MLPs, REITs, and BDCs for this part of my portfolio.  Each of these use a legal organization that exempts them from federal taxes if they pay out substantially all of their cash profits as distributions to shareholders.  The result is sectors that yield over 10% in many cases.  You can live on the distributions at an 8% rate and still have some left over to grow your wealth for future years.

The final asset class that lets you manage a higher than conventional withdrawal rate is, of course, options.  A lot of people think options investing is risky (and it can be when done wrong).  At the raptor, we SELL options.   Usually I write puts on companies I’d be happy to own at the strike price so I have limited downside when a trade goes against me.  Lately, I’ve done very well by writing options on the third asset class above.  Assignment means taking on a high yield underlying that can be held for a long period of time without being a drag on returns.  Covered calls can juice returns.  I target a minimum of 12% annualized for written puts but frequently do much better.  The average for written puts I currently have open at the 17FEB2017 expiry is 28%.  This is clearly a larger number than 8% and especially more than the conventional 4% number that is generally considered safe for retirees.

I hope there is someone out there that finds this useful and is able to retire sooner.

Devour your prey raptors!

 

CEFS

OPTIONS

INSURANCE

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I found this amusing

Props to Zach Weinersmith at Saturday Morning Breakfast Cereal:

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Financial Transparency 31JAN2017

Financial Transparency for first month of 2017.

music selection:  “Give Me All Your Love” — Whitesnake

weigh-in: 213.2 +3.4 – Superbowl eating!

ASSETS:

Wells Fargo (taxable): I’m up 613 here to 29,747.  A monthly gain of 2.10%.

Interactive Brokers (taxable): Strong gains of 10,221 for the month up to 279,747.  That is a gain of 3.79% – smoking!

Interactive Brokers (tIRA): A more pedestrian gain of 2,108 to 142,325.  That is good for a monthly gain of 1.50%.

Checking:  Not much action here with cash balance up 685 to 9,128 or a 8.11% gain.

Total Assets: Total assets increased 13,924 to 461,244, which is good for a 3.11% gain on the month.  I’m more than happy with that result.

LIABILITIES:

House: Paid

Car: Paid

Taxes: I should qualify for the full Obamacare subsidy for 2016 thanks to tax loss harvesting.  That will not be an option in 2017 so I’m going to start converting my tIRA to Roth.  I’ll need to send Uncle Sugar 1,250 a quarter to reach 5,000 by year end to support 20,000 in conversions.

WITHDRAWAL RATE:

My projected 12 month withdrawal is now 24,000.  I’m budgeted at an even 2,000 a month to make the  math easy.  It’s going to be tight with the extra income tax burden.  Against an asset base of 461,244 that is a projected withdrawal rate of 5.20%.  Current forward twelve month estimate for distributions, dividends, and interest is 25,263 or 105.26% of budget.  I also clocked 3,805 in options income for the month.  That is a record and not likely to be duplicated again this year.  Overall, I’m happy to have budget met by distributions with options premium serving as gravy.

SPENDING:

Spending for the month came in at 1,757.  I’ve done better but its good to just be under budget.  I need to get a little further under budget to meet my tax burden without needing to increase withdrawals.  I have some additional expense hitting the credit cards next month as I registered for FinCon in Dallas and booked a hotel room.

Devour your prey raptors!

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Buy The Traveler’s Companies (TRV)

I’m making a long term cash deployment.

music selection:  “Down To Earth” — Jem

weigh-in:  209.8 (2.0) – new low!

I often say that insurance is the best business in America.  The reason is simple.  Insurance companies have “float”.  Money that is not theirs that they can invest on their own behalf.  Good insurance companies have profitable underwriting which is the same as having access to a negative cost of capital.  One insurance company that has been on my radar for some time due to its history of solid underwriting is Traveler’s (TRV).  I finally hit the right combination of valuation and available cash to make a deployment.  This is a non-options position intended as a buy and hold investment.

Traveler’s sports a 12.5% return on equity (trailing twelve months) and regularly posts a ‘combined ratio’ of 90 or less.  For those of you who don’t speak insurance, combined ratio is a measure of underwriting success with 100 being breakeven and 90 being a very strong score indicating 10% margins on underwriting.  Anything the company makes above this from investment of float is gravy for investors.  I expect long term growth in book value per share from this company over 15% a year.  Shares also yield 2.27% annually.

Action taken: Bought 85 shares of TRV at 117.62.  I’ll be holding with a 25% trailing stop and otherwise hope to let it run forever.

Devour your prey raptors!

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Update Discounted Bonds (IHRT)

First some unfinished business from yesterday, then bonds.

music selection:  “Summertime Sadness” — Lana Del Rey

Yesterday, I was unable to sell a covered call in PSEC.  I went further out today and finally got filled about 8 minutes before market close.  I sold PSEC170519C00009000 for 9 cents a share.  The trade will be in force for 117 days (long for  me!) and yields a paltry 3.15% annualized.  It’s all bonus yield over the underlying distribution of 11.5% though.

A long open limit order for the 10.000 coupon 15JAN2018 maturity IHRT bond finally cleared today.  Originally, I purchased the bond on 13SEP2016 for 63 cents on the dollar.  I paid seven dollars in commissions and 33.89 in accrued interest.  Today, I sold for 78.25 cents on the dollar.  I paid 7.75 in commissions and collected 6.67 in accrued interest.  I also collected 50 dollars in coupons during the holding period.  The trade was in force for 133 days and  yielded 76.58% on an annualized basis.

This trade leaves me with just 6 outstanding bonds, half of which are in bankruptcy/debtor in possession status.  I’ll be waiting for a crack in the credit cycle to give existing bonds some weakness to buy into before topping up again.

Devour your prey raptors!

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Monday trades: SXCP, SDLP, MAA, GEL, GE

Five trades made this morning.

music selection:  “Dream Ridiculous Implausible” — Jane Jensen

weigh-in:  211.8 (0.2)

Shares of Suncoke (SXCP) were assigned over the weekend.  I’m delighted to collect the 13.37% distribution yield.  I’m enhancing yield with a covered call.  I sold SXCP170217C00020000 for 20 cents a share.  The trade will be in force for 26 days and  yields 14.04% annualized.  The five contracts add 100 dollars in premium income for the month of February.

Also expiring in February is a new covered call in Genesis Energy (GEL).  I sold GEL170217C00037500 for a nickle a share.  The trade will be in force for 26.  It only yields 1.87% annualized but that is all bonus yield on top of the underlying distribution, yielding 8%.

Rounding out February expiries is Mid America Apartments (MAA).  This is a mezzanine level apartment provider operating as a REIT.  It has a low yield but a lot of potential for price appreciation.  I sold MAA170217P0009500 for 3.10 a share.  This trade will be in force for 26 days.  It yields an impressive 45.81% while enjoying 4.45% downside protection.  I’m very happy with the extra 310 dollars in premium income that will be earning in February.

A covered call in Seadrill Partners (SDLP) expired out of the money over the weekend.  I opened a new one to earn more premium income.  I was able to sell SDLP170317C00005000 for fifteen cents a share.  This trade will be in force for 54 days and yields 20.28% on an annualized basis.  I expect to continue collecting the underlying distribution yielding 9.48%, as well.  I sold 13 contracts here and accumulated 195 dollars in premium income for March.

I did my best to sell a covered call at the February and March expiries in Prospect Capital (PSEC) but couldn’t find any liquidity.  I’ll try again tomorrow with an expiry further out.

Finally, I initiated a new position with a written put in General Electric (GE).  GE has been on my radar for some time.  I’ve primarily been waiting for them to finish divesting themselves of the disastrous GE Capital and also to shed the Systemically Important Financial Institution regulatory designation.  Both of those goals are now substantially complete.  The company has a much better balance sheet now and should enjoy higher margins across its remaining businesses.  I also remain bullish on the prospects for their new industrial product operating system Predix.  This new software could do for industrial machinery (and GE) what iOS did for cellphones and Apple.

I sold GE170303P00030000 for 87 cents a share.   The trade will be in force for 40 days and yields 26.46% on an annualized basis.  The trade also sports 1.85% downside protection against a fall in share price.  I went slightly in the money with the intent of getting assigned and writing out of the money covered calls to generate a small amount of income while I wait on long term price appreciation.

Devour your prey raptors!

 

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Friday Expiries

It’s expiration Friday.  And I’m moderately inebriated.

music selection: “Rain” — The Cult

I have nine positions expiring today.  Six expire out of the money.  One results in shares being called away and two result in shares being assigned.

Suncoke (SXCP) results in shares being assigned at 20.   This is as planned as the put was written in the money with hopes of acquiring shares.  Shares fell 7.75% today making this a less attractive position but the underlying still yields 12.15% and will allow for covered calls to be written for bonus yield.

Rig Partners (RIGP) has an unclear result.  Shares were all bought by the general partner and converted to RIG.  I *think* I may see shares called away on a ratable basis except for 120 shares that were added to the buyout offer to sweeten the deal when shareholders revolted.  RIG currently has no yield but has a bright future.  I’ll reassess when I know precisely what I receive post expiry.

A covered call in Seadrill Partners (SDLP) expired out of the money.  I earned 7.16% annualized there in addition to the underlying yield and expect to do even better with a new covered call on Monday.

Prospect Capital (PSEC) will result in shares being assigned.  This is another example of a desired outcome.  Puts were written in the money with hopes of being assigned.  There has been some price appreciation so the time value on at the money covered calls should be even higher.  If I don’t get called away, the underlying has a nice dividend yield to reward me while I wait.

BP Prudhoe Bay Trust (BPT) is going to expire out of the money.  I would have liked to have gotten assigned or seen the share price stagnate so I could write puts again for almost 63% annualized gain but the price has run away from me with the recent rise in WTI spot price.  I’ll say goodbye to this one for now.

A written call in Genesis Energy (GEL) expired well out of the money.  There was very little price movement here over the duration of the contract and I will write a new covered call for an expected return similar to the 5% recently earned.  In the meantime, I remain eligible for a shot at the 7+% dividend yield.

Mid America Apartments (MAA) has traded flat (with some volatility in between).  I should be able to duplicate the 28% annualized return on puts with this one on Monday.

A put in Cone Midstream (CNNX) has run away from me.  I collect the full 16.78% annualized return but there will be no encore performance.  I wave goodbye to this one for now.  Maybe there will be a pullback to allow me to take another swipe.

It’s the same story with Digital Realty (DLR).  The written put has run away from me.  The 23.85% annualized return will not be duplicated.   I’ll replace this one with a new position to be revealed on Monday.

All told, the above positions provided 2,905 in options premiums for the month of January.  I also picked up 900 from selling UVXY puts in the month and have had a record month.  February won’t look as tasty but I expect a solid month nonetheless.

Devour your prey raptors!

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Bought AWP, EFR, GLO, UVXY puts

The markets are open again after the holiday and I am putting capital to work.

music selection:  “Meant To Live” — Switchfoot

I moved to de-risk my portfolio before the election and raise cash.  Now, I have a lot of latent cash that needs to be deployed since it is evident the market is not going to do a post-election nosedive.  I’m going with three closed end funds for income.  And enough liquidity finally arrived to buy some UVXY puts at a reasonable strike.

First is Alpine Global Premier Property (AWP).  This is a closed end fund that is in global equity and a sliver of global debt.  The fund objective is high current income.  Perfect for an income hungry lizard like me.  The fund sells at  nearly 18% discount to net asset value.   A bargain!  It yields 11.43% annualized, paid out on a monthly basis.  This is a full position at 10k invested.

Next up, alphabetically, is Eaton Vance Senior Floating Rate Trust (EFR).  This is a closed end fund that is invested in senior variable interest rate notes.  I wanted to add more to JRO, which is another floating rate CEF I already hold but that one is trading at a significant premium to net asset value.  EFR is trading at a 2.38% discount to net asset value and represents a better value.  The fund yields 6.18% (paid monthly) and has upside in a rising interest rate environment.  This is a half position at 5k, as JRO is already a 1.5X size position.

I also bought Clough Global Opportunities (GLO).  The Fund seeks high total returns through investment in equity, corporate, sovereign global securities and through utilizing an options strategy.  It is another closed end fund that represents a great value as it trades at a 16.21% discount to net asset value.  The fund yields 11.14% percent annually, paid out on a monthly basis.  This is another full position at 10k invested.  These three buys get my 12 month projected distributions back up 23,397 or 97.49% of my projected budget.  That’s sleep at night security.

I also bought some long dated UVXY puts now that liquidity has returned post-split.  I bought 21 contracts of UVXY190118P00020000 for 12.95 a share in my taxable account.  I added another 11 contracts in my tIRA account at the same price.  I’ll hold till around the time the contracts are at the money or around 30 days if things go as planned.  Longer holding periods could be necessary if there is a volatility spike, especially if it is long lasting.

Devour your prey raptors!

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