Wednesday, April 18, 2018

IBM covered call

I have been away due to a death in the family but I am back and trading again.  Consider this IBM trade.  
  • Revenue Beat $19.1 billion versus $18.8 billion estimate
  • Cloud growth 14%
  • EPS up 4%
  • Dividend Yield 3.8%

IBM is getting crushed today and I decided to take a chance on Big Blue.  I remember a mentor of mine talking about IBM never really creating anything new.  His view was they used their big blue boots to take over new ideas.   Today's IBM is doing the same thing and it takes a while.  

With the positive points listed above what is the problem you might ask.  Well, cloud growth in 2017 was 24% so that suggests cloud growth is slowing.  Forward guidance on profit remained flat at $13.80 per share.  And the balance sheet is not exactly pristine.  D/E (debt to equity ratio) of 2.26 is well above industry standard which is 1.30.   

I can justify all the negatives with the positives noted above. And one theory of using cheap debt is that when invested wisely, it can be the catalyst for growth.   Here is the trade I made today and the call I wrote on it.

Note that I actually think IBM will increase the dividend.  Their latest dividend increase from $1.40 to $1.50 or seven percent was four quarters ago.  I expect a similar increase to about $1.60.  I used the $1.50 dividend in my calculator for total return.  Also note that these calls are volatile and you may get more or less of a premium if you make a similar trade.

My bet on this stock is not for the long term.  Long term to me is over three years.  Rather, I think with the positive news noted in the bullets above, IBM's stock price will rebound.  I will pocket the dividend and the call premium.  If it the stock price does not reach $160 by the time the call expires, I don't expect the price to plunge again.   You never know but that is my strategy on IBM.   If it gets called away, I will be happy.  If it does not, I will probably exit this position.

M* MoneyMadam

Disclosure:  Long IBM with calls

Friday, April 6, 2018

Twitter - 16% iin just 11 days

A high risk trade.   How about 16% increase in just 11 days.   Nice money if you can get it.  Remember however, your upside potential is capped at 16%.  Your downside is you are stuck with Twitter for 11 days and when you can sell it, it could be lower than when you bought.

M* MoneyMadam

Wednesday, April 4, 2018

Risking QCOM loss with call option

I have updated my 2018 Calls.   To remind you, the point of this account is to employ the capital to create income using covered calls.  This strategy varies from my dividend machine strategy.  My dividend machine stocks have to pay a dividend that is greater than the 10 year U.S. Treasury (2.75%.)   I also use other criteria to pick those stocks.

My call portfolio is designed to create income through short term calls.  So far the shortest term call I sold was 4 days on Twitter, symbol TWTR.   The longest duration call so far is a call I sold on Apple, symbol AAPL.  I bought AAPL on January 22 and sold a call with a duration of April 20 or 88 days.  My strike price is $195.  With AAPL trading at about $176 right about where I bought this lot, I think I will be selling more calls on AAPL once this call expires.

Although the overall market is down again today, a number of calls are enticing.  Only one applies to my call portfolio and that is Qualcomm, symbol, QCOM.

I am taking a risk on a Qualcomm by selling a call with a strike price that is below my basis.  I have already sold one call on QCOM that expired.  My basis on that call was $64.87.  QCOM has corrected by over 16% to $54.00  I added 100 shares today at $54.00 which will bring down my basis to just under $60.00.   That makes the strike price of $60.00 more palatable.

I sold two  June 15, 2018 $60 call for $1.31 today.   If I retain ownership of these shares, I should also receive the dividend before the call expires.

I don't particularly like this new call but I am willing to lose my QCOM and move it into another stock with more calls.     I will be nervous until this call expires or is assigned.  If these calls on QCOM are exercised here is my return adjusted for my new cost basis and including both dividends and the call premiums.

One of the interesting sides to publishing my ideas, is I have to face the music when I am wrong or my strategy does not work.  Honest reporting here.

The table below represents all trades made in the 2018 covered call portfolio.  Overall I have a positive view of the economy but I know external influence will keep the market volatile.  Depending on when the volatility affects stock prices will determine how well I do on these trades.

M* MoneyMadam

Disclosure:  Long all stocks with calls listed

Sunday, April 1, 2018

LaSalle Hotel Properties my strategy to exit this position

I am more than a bit frustrated with LHO particularly in regard to their dividend policy.   LHO has announced it will reduce the quarterly dividend.  
  • LHO reduces dividend from $.45 to $.225
  • Income Investors should consider an exit LHO
  • Will call options imply LHO has upside potential
  • Exit strategy is to try to break even

Knowing that a REIT has to pay out most of its earnings,  I think LHO wants to husband its cash to (1) prepare for lower earnings or (2)  defend further acquisition threats.  

Should earnings be high enough that they did  not distribute the required amount in dividends,  LHO reserves the right to pay a special dividend in 2019 to make up the difference.

Every year LHO pays out their undistributed earnings in January.  I do not think LHO is suggesting this would be a major event; one that would make up for the dividend reduction.    This makes me think LHO is worried about earnings.   Perhaps I am reading too much into this but I see no confidence in their own plan.

An Income Investor should exit LHO

As an income investor, I cannot stomach income cuts.  I need a strategy to get out of this stock.  Should I sell everything right now.  I will receive their last $.45 dividend as the stock was ex-dividend on 3/29/18 so I can sell on Monday and still get that dividend.

But what about the implications of the PEB buyout offer.  It was a weak offer valued at about $29.95 or where LHO stock is trading. Yet this offer could suggest PEB or another company might up the offer and the value of my shares could still go up.  Selling now could be foolish.

Covered Calls could suggest upside potential

After the dividend reduction, LHO will still yield about 3%.   I am getting paid while I further determine if there is upside potential for LHO.  I still want to exit this stock.  It is one of my rules, get rid of stocks that cut dividends.   But, my rules don't say sell the day after the news.

My first move will be to place an order to sell a call on Monday.  I am aware that these calls are thinly traded and  I may not get my price. Call options can dry up quickly.  However, if other investors think their is upside potential for LHO, they will create a market in call options for LHO.  A lack of options will be a factor in my decision to sell LHO outright.

The table below uses trading prices from Thursday, March 30.

I selected the $30 strike price carefully.  I hope to sell the above call on one half of my position.   My basis, adjusted for dividends, on this lot is $31.30.  With the call premium, I will basically break even.  I can never get back the time value of the money but I will be happy to get out of this position and move it into a dividend growth stock.

I will hold the other half of my shares which are at a cost basis $36.65.  I am hoping there is positive news about acquisition interest in LHO and I can sell a call that will make me whole.  

I won't wait too long.   If the stock price deteriorates, I will sell quickly, lick my wounds and move on.  I just hope the price deterioration does not occur during the time I have to hold LHO to keep my call "covered."

M* Money Madam
Disclosure: Long LHO with open order to sell calls

Wednesday, March 28, 2018

LHO hotel Reit rejects PEB buyout offer

Let's hope this merger rejection will do the trick for LHO, LaSalle Hotel Properties.

  • Dividend Growth does not always lead to future dividend growth
  • One or two underperforming properties in a small portfolio can cause significant financial impact
  • A strong balance sheet provides some safety to holding LHO

Dividend Growth

I bought LHO for the yield.  My basis is $33.45 above the $28.94 where LHO trades today.  Current yield is 7.22%.  Yield on my basis is 5.38%.   Look at this dividend growth chart.  This is the kind of dividend growth that makes an income investor salivate.

As soon as I bought LHO for both the yield and the dividend growth, they stopped the dividend growth.  Suspension of a dividend is devastating but holding the dividend steady is acceptable.

Small Number of Properties

This holding of the dividend is a result of reduced income which in the hotel industry is called "rev par" or revenue per available room.   Some of this is due to increased competition from a growing supply of upscale properties.  Some is due to their Key West Florida property damage from Hurricane Irma.

LHO is investing in their properties as they take on the competition.  During renovations, rev par can be affected negatively on a short term basis.  Will the renovations stimulate rev par in the future?

Solid Balance Sheet

I can live with the over 5% yield on my basis while there are few options to obtain that yield elsewhere. Moreover, I don't think the company is in jeopardy of going belly up.  D/E (debt to equity ratio) is .447 (source ycharts.)  Strength of the balance sheet allows me to continue to hold.

Pebblebrook, symbol PEB, another REIT in this space,  has made an offer for LHO at about $30 a share.   LHO rejected the buyout offer and for me I am happy about that as I would like to get back my basis.  Perhaps, PEB will up their offer or perhaps another acquirer will show up.  Or maybe LHO will stay independent and return to Rev Par growth that will feed dividend growth.

This is one holding I will watch carefully.  I am not interested in PEB with a yield of 4.53% and a much higher P/E ratio than LHO (PEB = 29 and LHO = 18.)  PEB also does not have particularly impressive revenue growth.

Clearly, in this case, dividend history was no predictor of future dividend growth.  With a solid balance sheet, risk is not huge, but I am underwater and will hope for a more robust buyout offer.  At least it is some encouraging news.

M* MoneyMadam
Disclosure:  Long LHO

Friday, March 23, 2018

APPL call in a down market

Take a look at this call for Monday?

M* MoneyMadam
Disclosure:  Long AAPL with calls