Three positions closed, three new ones opened.

music selection:  “Turn to Stone” — Joe Walsh

weigh-in:  200.8 +0.8

I say goodbye for now to three positions.  CSX was called away at expiry.  I am not going to continue to chase it higher.  MO was called away early, boosting my annualized return to 28.09% on the covered call.  My MSFT diagonal call started to run away from me with the short call well into the money.  Rather than put more money into the trade (increase my risk), closed out both legs and took my profits.  I earned 931 dollars over 62 days on 5,685 capital at risk which is 16.38% or 96.41% annualized.

With the inversion of the yield curve on Friday, I am officially less sanguine about the go forward prospects of this already long in the tooth bull market.  I’ll be de-risking and raising cash to take advantage of the high yield bond market as the credit cycle rolls over.  To that end, my three new covered calls are written at about half my normal position size.  I will also be writing the short call closer to the entry price of the underlying, even if that means taking a small capital loss on being called.  That seems counter-intuitive but it is actually the safer way to write a covered call.  The amount the call is in the money will be reflected in the premium as intrinsic value so it is recovered.  At the same time, the intrinsic value lowers your effective cost basis and thus your risk.  This is where I am going to want to be for the next few months.  I may turn bullish again if the yield curve reverts to mean.

My first covered call is in Uranium miner Cameco (CCJ).  Commodities as a whole have been in a brutal bear market for a long time.  New nuclear plants are finally being built and the ones taken offline in Japan after the Fukashima incident are starting to come back online.  At the same time, there is some capitulation by miners with mines closing.  Falling supply and rising demand are a recipe for improved commodity prices.  I may be early to this party but the price is so depressed already that I feel this is a value play at this level.

I bought 400 shares of CCJ at 12.00.  At the same time (combo order), I sold CCJ190503C00012000 for 51 and a half cents.  The trade will be in force for 40 days and yields an expected 39.03% on an annualized basis.

Next is a covered call in Southwest Airlines (LUV).  Southwest has the best occupancy rate for seats on its flights. The airline has strong brand loyalty and great management that does a fantastic job hedging commodity price risk for its jet fuel needs.  The company may be buyout target by Berkshire Hathaway.

I bought 100 shares of LUV at 48.92.  By using a combo order, I sold LUV190503C00049000 for 2.12 a share.  The trade will be in force for 40 days and yields an expected 39.54% on an annualized basis. If shares are called at expiry, I earn an additional 8 cents in short term capital gains, boosting the annualized return to 41.04%.

Finally, there is timber REIT Weyerhaueser (WY).  Timber is a great business.  It is somewhat insulated from commodity pricing because in low price environments, the product can be “banked on the stump”.  That is the product is growing more valuable over time because it is still growing so it pays to wait for pricing to recover.  I feel WY offers great value and an attractive yield (5.32%) a today’s price

I bought 200 shares of WY at 25.52.  At the same time (combo order), I sold WY190503C00025500 for 82 cents a share.  The trade will be in force for 40 days and yields an expected 29.32% on an annualized basis.  If shares are called at expiry, I will book two cents in short term capital losses reducing my annualized return to 28.61%.  That is still a very strong return and is a price I am willing to “pay” for added immediate income coupled with enhanced safety.  Also, If shares are not called I remain eligible for the underlying distribution of 5.32% which I expect to grow safely over time.

Devour your prey raptors!

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Monday Options Trades With Yields Up To 96.41%

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