F and CTL have not performed as expected.
music selection: “Brealfast At Tiffany’s” — Deep Blue Something
weigh-in: 197.0 (0.4)
I get a lot of mail from excited readers who see really enticing options returns who want to learn how they too can earn an average of 35% a year annually. I hate to be the one who disappoints them. Sure, sometimes I hit a few out of the park. But there are lots of options trades where I have to accept less than the long term average of the S&P. Over the long term, I intend to at least match the index. But beating it is only my goal when we are talking about on a risk adjusted basis. I want to do well AND sleep well at night.
To that end, a healthy allocation to fixed income and debt like securities is essential (tune in every Friday for more on how to do that). In the meantime, I work hard to reduce my risk in equity by writing puts and calls. Today, I have two options written for less than stellar premiums on stocks that just are not exciting anyone at the moment.
First up is CenturyLink (CTL). CTL is a fiber optics communication company. They have a great future but have failed to sink their putts recently. The market has punished them. I hold shares with a cost basis of 23.50. Current pricing is 19.23. Clearly, I have an unrealized short term capital loss. I’ve previously collected 90 cents from this one, somewhat easing the pain. That is the risk reduction of options I was referring to earlier. Simple buy and hold investors are doing even worse.
I am looking to earn a little income while waiting for the price to recover. To that end, I sold CTL190118C00024000 for 6 cents a share. The trade will be in force for 68 days and yields an expected 1.34% annualized. In the unlikely event shares close over the strike at expiry and shares are called away, I will collect an extra 50 cents in short term capital gains. That will boost the annualized return to 12.52%.
I also have a conventional short position open in Ford (F). I see GM and F as soon to be victims of their own reckless lending policies. They have issued a ton of subprime debt to move inventory to people who can’t really afford it. Delinquencies are already rising and underwriting is tightening. The companies will lose money on financing and lose even more on declining volumes. I am short 500 shares at prices between 9.41 and 10.94. The current price sits at 9.49.
I am selling, once again, a covered put against the position to earn income. This income offsets the borrowing cost and the payments that must be made in lieu of dividend to the party I borrowed shares from. The net payout is just barely above break even, but it keeps me in the trade while I wait for the credit cycle to turn over and the thesis to play out. I sold F181228P00009000 for 16 cents a share. The trade will be in force for 47 days and yields an expected 13.81%. There is room for an additional 49 cents in capital gains if shares are called away. Total capital gain will vary by the lot as the entry prices are between 9.41 and 10.94.
These returns will probably not excite my readers. I do hope at least a few see the underlying point which is that risk matters more than absolute returns. By having a fixed income base that covers more than 100% of my annual budget, I am able to sit on the sidelines and wait a little longer. Days like today where nothing exciting is being offered by the market and the best I can do is pedestrian maintenance trades do not bother me. There will be fat pitches again soon enough. Patience while stalking prey is the raptor way.
Devour your prey raptors!