Monday, July 9, 2018

GILD - Laddered calls

Gilead Pharmaceuticals has been the subject of many posts in this blog because it is a very good Dividend Machine stock.  The best Dividend Machine stocks deliver dividends, dividend increases, and provide covered call opportunities.


  • The best Dividend Machines deliver increasing dividends plus call opportunities
  • Covered calls limit upside potential
  • Laddered call expirations and strike prices provide for some upside opportunity
  • Covered calls do nothing to limit downside risk
  • Covered calls on dividend stocks can provide 5% and more for income investors
  • Conservative income investors will make sure the underlying stock like GILD has solid fundamentals as well as a history of dividend increases.

Listed below are three calls I sold on some of the GILD in one of the retirement portfolio accounts I manage.   You have all read about selling calls in a retirement portfolio.  The strategy is considered a safe one.  Even the series 7 exam (required to be a stock broker) has many questions on this strategy. If you are about to take that test and the question asks if covered calls are appropriate for retirees, the answer is yes.

Laddering calls, like laddering bonds, means you spread out the expiration dates and the strike prices.  This way you can work the upside potential at the same time as working for income.

Covered calls do limit upside potential.  


When you have a growth stock with call option opportunity, you can often times get very large premiums.  Yet, those very stocks can soar and you feel like an idiot missing out on the opportunity.  But we are income investors and just take those gains and plow them into another stock, preferably one with a solid dividend.

Laddering the expiration dates and strike prices can help capture some of the upside potential.  I still like to make sure the lowered strike price generates an 8 to 10% capital gain should my shares be called away.

Covered calls also do nothing to protect you from down side risk.  


You would have to buy a put option for  protection.   I very rarely buy puts to protect a position and almost never on an income stock.  I would rather just get rid of a loser and not pay anyone to do that.

You see, when you sell calls on your shares, you cannot sell your shares should the stock price crater and therefore, you are stuck with the holding until the call expires.

Therefore, for very conservative income investors who like me have to make 5% or more selling calls on good dividend stock is the safer of all the moves.   Dividend Machines can soar at times and act like growth stocks.  

Interestingly, in the Wall Street Journal today, I read about the fact that growth stocks and value stocks have similar betas.  WSJ Link:  https://www.wsj.com/articles/value-stocks-may-not-be-the-bear-market-cure-after-all-1531102200?mod=searchresults&page=1&pos=1


If you need a review of beta here is a resource:  From Investopedia


A beta of 1 indicates that the security's price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Conversely, if an ETF's beta is 0.65, it is theoretically 35% less volatile than the market. Therefore, the fund's excess return is expected to underperform the benchmark by 35% in up markets and outperform by 35% during down markets.


Read more: Beta https://www.investopedia.com/terms/b/beta.asp#ixzz5Km7Igabr
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Laddering Calls to capture the dividend, call premiums and increasing capital gain potential


Three laddered calls are illustrated below:







Select a stock with good fundamentals.


Gilead is in between it's 52 week high of $89.54 and low of $64.27.  Today it is trading at $76.67.  My average basis is $73.98.   GILD pays a quarterly dividend of $.57 for an annual yield of 2.97%.
Their most recent dividend increase, two quarters ago, was 9.6%.  Average dividend increase over the past three years has been 10.85%.   Folks this is a lovely income machine.  Just on these actions, I get the 3% dividend and a total of 4.31% call premiums.   Now I can rest for the day.

Each of these calls has an expiration date that provided for capture of the dividend as well as the call premium.

I won't like losing GILD if it soars but I am not committing all my shares to the calls.  I am simply using these laddered calls to render GILD a 5% producer at a minimum.

M* MoneyMadam
Disclosure: long GILD with calls

Monday, June 25, 2018

Intel worries

Intel has been part of my life for a long time.  Their company culture was always top line.  While they face technology challenges with their new chips, I am not worried that INTC will go out of business.  However, the stock has had a nice run and the summer doldrums are here.

However, as an income investor INTC's dividend of just over 2.3% is not exactly compelling.  Before the news of Krzanich's resignation, I added to INTC on what I thought was weakness.  June 21, I bought 128 shares at $52.25.    I reinvest INTC's dividend and I wanted to fill out a "lot" so that I could sell calls on 2 lots.  

While it seems counter-intuitive to sell calls when the market is selling off (right now the DOW is down over 400 points,) I wan to try to get my money back on that most recent buy.

INTC is selling just above $50 today.  I am selling a call on the reinvested shares and the 128 shares I added.  This means I sold 2 contracts.

I selected an expiration date after the next expected ex-dividend date of August 3, 2018.  The best call I could find was  $52.50 strike, with an expiration on 8/17/2018 and a premium of $1.42.  The table below shows how it worked out.



I don't really want to unload all my INTC.  My cost basis on my other shares is under $20.  If I have to keep the 200 shares with a cost basis of about $52, I will be getting the dividend.  If they take my shares, I got a quick 3.77% gain in under a month.   I can live with that.

M* MoneyMadam
Disclosure:  Long INTC with calls

Sunday, June 24, 2018

2018 Call Portfolio


In 2018 I am tracking a portfolio that is designed to deliver income mostly through call options.

It is a limited portfolio with a basis of just over $68,000.

This $68,000 has already created over $4,000 of income.   I like this kind of income.




This is not a growth portfolio and the stock price of the stocks is almost irrelevant.  I made a big mistake buying RIOT.  I have been able to sell a couple of calls on it.  I don't sell holdings in this portfolio especially at such a loss so I am holding my mistake RIOT.

GILD is underwater but I am collecting a nice dividend and have sold one call.  I look everyday for the next call.  My strike price on GILD will not be lower than my basis.

Today I sold calls on the 200 shares of QCOM.  I need to keep working this limited portfolio and I will post my trades as they are executed.


2018 CALL PORTFOLIO TABLE







I always tell people, you can really only expect to generate about 5% pure income for spending on a retirement portfolio.   However, if you can master using covered calls, this portfolio proves that more income is possible.  Over 7% in yield so far.


M* MoneyMadam
Disclosure:  Long all positions with the calls noted

Thursday, June 21, 2018

Three calls three different reasons

Calls are the oddest things.  Sometimes you need an up market to get good premiums.  Other times, like this week, you can get good premiums during a down trend.    You should not sell calls on your coveted income stock willy nilly.  You need a reason.

  • Sell calls on stocks when fundamentals such as D/E (debt to equity ratio) change.
  • Sell calls on stocks when EPS (earnings per share) are less than the dividend even when the dividend increases are substantial.
  • Sell calls on stocks that pay yield less than you can get from a 10 year U.S. Treasury.

Below are three calls I sold today.  Each one for a different reason.

Home Depot (HD) - high debt


I think Home Depot is a much better product than Lowes.   However, Home Depot carries a high debt load.  The balance sheet hawks will argue that HD has the cash flow to service the debt and they are correct. HD has an interest coverage ratio of 13.51 according to MSN Money and verified by Gurufocus.  

For those of you new to terms like interest coverage ratio, see the link below which explains it well.

https://www.investopedia.com/terms/i/interestcoverageratio.asp
The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.

My readers know, I just don't like stocks with big debt.   All you need a precipitous drop in free cash flow to render the company a troubled asset.    I am cautiously holding HD.  I have no reason to think they will suffer a major disruption of business that would make them lose significant value or even go belly up.

With a yield of only 2.07% and a P/E (price earnings) ratio over 25, I am not afraid of losing HD.  I see selling a call on this stock an opportunity to boost my income.   This is not a risk free move.  I am contractually obligated to hold the shares on which I sell a call.   I could get stuck with a stock that goes down, but again, I do not expect this to happen during the 57 days before the call expires.




In summary, I am selling calls on HD hoping the call buyer will take my shares.  I will have booked good income from the call, the dividends, and then I can reinvest the capital into a higher yielding stock with better fundamentals.

Amgen (AMGN) - Low earnings


Amgen is another stock with a D/E ratio (debt to equity) the is a bit high at 2.27.  However, it is not uncommon for a bio tech stock to carry high debt.  It costs a lot to develop new drugs.

Amgen's yield is almost 3%.   That is marginal.  Yet they increase the dividend vigorously.   Too vigorously for my taste.  Over the past three years dividend increases have averaged over 22%.  The problem is earnings.



Again my readers know I need a stock to create more earnings per share than they pay out in dividends.    Is AMGN using their debt to increase the dividend or to develop drugs?   Earnings are $3.03 with dividends paid out $5.28.

I am not afraid of losing AMGN.   I have a solid gain and have booked the dividends and multiple call premiums.  I would like the call buyer to take my shares.  Look at the price chart, AMGN could very well go above my strike price and the call buyer may take it.  I hope so.

Source:  Schwab, Inc


Apple (AAPL) - Low yield


Apple is a very good company.  It does not have any of the trouble noted above with HD or AMGN.  Apple is stuck in a trading range that has not broken above $200 at least during the last 5 years.  See the price chart.

Source:  Schwab, Inc



I am selling calls on AAPL because I own a lot of apple and the yield is low.  I need to get 5% or more of income on my invested capital.   Calls provide that income.  If I lose these shares, I have more in my pocket.



Basically, I am selling calls on Apple because I can.

Folks, this is good income investing.

M* MoneyMadam
Disclosure:  Long HD, AMGN, AAPL with calls

Tuesday, June 19, 2018

Down market Tuesday 6/19/18

Remember that your dividend stocks with great balance sheets are still a strong hold.

Do not be scared.  If your good stocks drop a lot add to them.

If a good stock with a solid balance sheet that you have always wanted to own over shoots on the down side, buy it.

This is what I am doing.

M* MoneyMadam

Friday, June 15, 2018

Implications of June 15, 2018 Call expirations

Readers of this blog know I use calls, mostly on dividend stocks, to boost my income.  I have summarized the calls expected to expire and those expected to be assigned.  Every call expiration date comes with some uncertainty yet these ten calls are pretty straight forward.

  • Call premiums can be booked as income or as reduction of cost basis but not both.
  • When current price is greater than the strike price, you have lost opportunity.
  • Sell calls on only part of your position to preserve upside potential
  • Carefully selected strike prices makes selling covered calls an income strategy that works for income investors.

Let's first look at those calls that are outside my comfort zone.  


I wrote about taking a flyer on RIOT a block chain stock.   This trade is totally outside of my comfort zone.  I am an income investor.  I like dividends plus call premium income.  If my stock gets called away (assigned,) I expect to receive a capital gain.

Yet, even a disciplined investor like me occasionally makes stupid mistakes.   I was so successful with Twitter (TWTR) and Nvidia (NVDA) that I thought I could pull a fast one and make money on RIOT.

This did not work out well.  I still hold RIOT.  I have not lost everything.  I have received two call premiums and that helps salve some of my pain.   I want to make a point here about using call premiums for income.  You cannot both use the premium for income that you spend to pay your expenses and consider it a reduction of your basis.  Either you keep the money from your call premium in your account or you invest it in another security, but you cannot book the income twice once for spending and the second for cost reduction.  

The table below show how my RIOT trade has worked out so far.  Since I spend my income, I do not lower the cost basis.




Note that in the next section, I have included another trade on a stock that does not pay a dividend.  That stock is Novocure, symbol NVCR.   This stock was picked by my husband who is my biotech analyst.  You will notice, this trade worked out so far.

Calls I expect to be assigned.


Three calls should be assigned; they are CVX, NTR, and the above mentioned NVCR.  CVX is a bit iffy as the current price is just a bit above the strike price.  When you add in the call premium of $1.64 per share paid to me by the call buyer, they are not in the money if they take the CVX shares.

In my experience, they usually take these stocks.  Energy demand continues to grow with the overall economy and I would expect CVX's price to increase.   If they take these shares, I will be happy to book the gain and I have more shares on which I did not sell calls.

Nutrient symbol NTR is the successor to Potash.  This call and the NVCR call are examples of lost opportunity by selling calls.    If I really wanted to sell these two stocks, I would make more money selling in the open market rather than writing (selling) calls with a defined strike price.  This is because their current price is higher than the strike.  




The lesson here is to sell calls on only part of your position.  You get the call premium, dividends during the holding periods, and capital gain when the stock is called away.  If you continue to hold additional shares, you can participate in upside potential as well.

Calls I expect to expire.


These are the stocks I love.  They pay good dividends and those dividends tend to go up.  I sell calls above my basis so if they are called away (exercised or assigned,) I get a capital gain as well.  If they expire, I just keep working the calls to boost my income.

The table below illustrates the results of my favorite strategy for covered calls.  I love it when calls expire.  I just keep working them over and over again.



It is difficult to sell new calls right around the upcoming expiration date.  Wait until next week and start working those calls again.   This is an excellent strategy for income investors.

M* MoneyMadam
Disclosure:  Long all names with calls