I was assigned shares of DCP Midstream Partners LP (DPM) from puts that expired in the money on Saturday.

music selection: “No More Lies” Iron Maiden

Yesterday’s trade was to sell covered calls on DPM to continue the stream of income flowing in.  This is a pure income play, not a growth play so the call is written at the money to maximize current income.  On Tuesday, I sold DPM151120C00030000 for 53 cents.  The trade will be open for 32 days and yields 20.15% annualized.  There will be no capital gains if shares are called away.  However, there should be a dividend of 78 cents in early November.  If shares are not called away prematurely, that is a bonus 29.66% annualized yield (.78 / 30 / 32 * 365 = .2966).  If shares are called away early, the annualized yield will rise.

When shares fell below the strike price last month, I felt they offered such a great value I doubled down with more puts at the 25 strike.  Both trades are still open (covered calls at 30 and cash secured puts at 25).  Both trades expire 20NOV2015.  Shares presumably fell in sympathy with the rest of the oilfield on weak oil pricing.  This is unfair punishment to DPM which derives its revenue primarily from midstream assets in natural gas and ‘drip.’  They are largely insulated from commodity price pressures as they are using more of a toll road business model.  I will display a wide grin if shares get beaten up again – opportunity!

I’ll beat the 4% rule drum some more today.  Saving 25 times annual expenses to retire is overkill in the extreme.  An income centric portfolio with healthy allocations to high yield stocks, bonds in closed end funds, and cash used to secure put writing can consistently yield cash return far in excess of 4 with greater safety as you will experience no pressure to sell shares.  My current withdrawal rate is 8.87% (assuming yesterday’s closing prices) and the portfolio kicks off income in excess of that allowing it to grow and stay ahead of inflation.  Why work longer than necessary?

Devour your prey raptors!

 

 

 

Write covered calls DCP Midstream Partners LP (DPM)

Never miss another opportunity to devour prey!

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4 thoughts on “Write covered calls DCP Midstream Partners LP (DPM)

  • October 21, 2015 at 9:29 pm
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    Hi Lizard King,

    Busy writing puts, was assigned, called away on PM for around 7 dollar profit per share, felt bad initially, also called on GE, but got over it. Booked over 1500 dollars in unassigned calls.

    Could you please write a detailed strategy for selling puts, ie strike prices , possibility of success, etc which you use . Also the same for covered calls. Have not written any Bull Put spreads or Bear call spreads yet, no Iron condors yet…
    But In A Gadda Vida, iron butterflies etc, will come in due course..

    StockOptioncchannel.com is a great resource for me, still not on IB’s webtrader platform, trying to get into Thinkorswim, i hear its the best .
    Do you do any weeklies, if so, what ? Puts/Calls/Credit Spreads /

    Could you lay out , again, your minimal expectations for ROI ?
    Do you trade the Index ETFs, other sector ETfs ala SPDRs etc ?
    Also what is your exit strategy ?
    I followed right behind you into JNJ trade , but exited at 80% profit, which is my standard trade exit, especially in first half of contract. I place GTC Limit Order to buy back as soon as trade settles.

    Thanks , again, for showing me the way….

    Vish

    Reply
    • October 21, 2015 at 10:30 pm
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      Vish. Welcome back! You have a lot of questions and I’ll try to do a general approach type of post in a couple weeks when I run out of trades to report. Short version is I demand at least 12% annualized to write a near the money put. If assigned, I might either go out of the money to allow for capital gains on something I would like to hold a long time (any premium is a gift, I’ve accepted as low as 1/4% annualized); OR if it purely an income play I write at the money or at my entry price whichever is higher. Here I take what the market is offering which is usually similar to what was earned on the entry put – 12% or greater is very common.

      I don’t use the front week weeklies but I do use the ones further out. Research confirmed by a number of university finance departments finds that the sweet spot for maximum time value decay is around 6 to 8 weeks out from expiry. So I often write the 6 week out weekly.

      I used to do spreads and iron condors but find they aren’t worth the trouble and extra trading commissions. When you can make 12% or greater from a simple cash secured put or buy/write strategy, why bother? What I do know is if you get greedy, you will step in brontosaurus dung. Twelve+ is good money. Take it and run.

      I don’t often trade etf’s, spdrs, etc for options income because the diversified nature leads to lower volatility and thus lower option premiums. I find it is difficult to get my minimum 12% annualized return so I look individual companies that are bargains rather than sectors. The exception is buy to hold Closed End Funds for long term income. There are many good CEFs that hold bonds or debt like instruments and pay good monthly distributions. This makes budgeting easier for raptors in early retirement like me while reducing volatility in the overall portfolio.

      Many options traders exit at 80% premium earned. This is a fine strategy. I’m a lazy lizard and prefer to log into my brokerage only once per trade. I’d rather spend my time researching my next target than scalping a few pennies off existing trades. That is just a preference.

      Grats on getting called away for a profit. When you wrote the contract you had already decided the strike was a fair price. No one ever went broke by locking in gains.

      I’ve never seen StockOptioncchannel.com, I’ll have to put it on my reading list.

      Reply
  • October 23, 2015 at 12:51 pm
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    Thanks for the detailed response. Down on ABBV put yesterday, will get assigned early likely, but ok with my breakeven point.

    Do you avoid earnings report months on stocks you wnat to keep while writing covered calls. TROW popped yesterday, might get called away, at a slight profit, but not very attached to TROW due to lower <3% yield.

    Vish

    Reply
    • October 23, 2015 at 2:00 pm
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      I don’t give much though to earnings month. The market is kind of weird about earnings. A company can beat expectations but still fall because it wasn’t by “enough”. It’s kind of a crap shoot.

      Reply

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