Friday, October 4, 2019

Simple conservative income investing: Call opportunities on CAT and WSO

Today, the market is up and I take advantage of those moves by looking for additional income from covered calls.  I am not an options trader.  I use call options to boost my income because there are few sources of good yield at a reasonable price.

WSO is a good dividend stock that moves up and down with international news, tariff news, exchange rate news.  The company likes to share income with investors through dividends.  And they increase the dividend routinely.

You may not want to risk selling a call on WSO but I do sell calls on some of my position and have benefited from that strategy.   Here is a call I sold today on shares I added in February



















I like to keep things simple and you can clearly see how using calls can boost income.  The call premium is equal to the quarterly dividend.  It is like getting five dividends this year.


Caterpillar is even more volatile than WSO.  Lately it is an unloved stock.  I buy and sell calls on it and I do not worry about losing it because it seems CAT's price always goes down after it is called away and I buy it back, cash the dividend check and sell a call to someone who thinks the price will go up.  Quite often they are right but I do not care as I do this for income.  



















Again you can see the advantage of selling a call that pays you a juicy premium but also captures the next dividend.  In this case the call premium is greater than the quarter dividend.

This post documents how simple, conservative income investing can work for the ordinary investor.

M* MoneyMadam

Disclosure:  Long WSO and CAT with calls

Tuesday, September 24, 2019

Discount Bonds a tale of woe.

High Yield Bonds were enticing for income investors, including me, while we were in a low interest rate environment.  Safe bonds just didn't pay enough.

  • High Yield Bonds are not for beginners
  • Pay a steep discount
  • Risk is high

Since I started writing this blog about income investing,  I invested $81,670 in high yield bonds.  Each buy was for 10 bonds.  Eight different bonds make up the portfolio.

TheMoneyMadam's High Yield Bond Portfolio


The table below lists the bonds I bought with CUSIP, coupon rate, and maturity date.  The portfolio holds only one of the eight bonds.  The others defaulted, were redeemed or tendered.




It was a rocky and mostly unsuccessful venture.  My $81,670 turned into $72,949 not including income.  That is a 12% loss.  When adjusted for income the loss is cut to 4% but I don't like losing money.

The most painful rub is that quality bonds continued on a bull run during this time.  Those quality bonds gained more than my high yield bonds.  

If you read the dividend ideas on this blog you will see over the same time frame, I bought $875,687 worth of stocks.  The high yield bonds make up about 9% of the investments that I track in my portfolios. That alone is a good lesson. If you are going to take risk, you must keep it to a minimum.

It is a tricky business that requires even more due diligence than buying a dividend stock. Bonds are distressed for a reason and that is risk.

When will be enter a Bond Bear?


As we continue the 35 year bond bull market and enter what I had hoped to be a 20 year bond bear market, high yield bonds would not be as necessary even though they can be very rewarding (see Noble Energy Bond above.).

In 2019 the turning tide of interest rates has not yet revealed itself. 

I intend to ride the new cycle of increasing interest rates should it ever come true.  For average risk bonds I would like 5% for five years.  When bond prices decrease enough that I can get 5% for five years, I may change my mind and want more.  We will see.

As I find bonds I like, I will write them up.  

M* MoneyMadam

Disclosure:  Long Cinemark Bond However since the price is above par, I am tempted to sell soon.


HCI Exceptional Call


HCI Group, symbol HCI is a dividend stock I have owned for about two years.  I bought it based on the yield and dividend growth.  It also has reasonable debt, but revenues are not growing.  



The stock price has ranged between $36.72 and $59.32.  I would like to get rid of HCI through calls.  I sell calls and they have never been assigned.  



Today, I sold a call that does not capture the next dividend but the total return for me if they take my shares by exercising their right to buy is quite good – 13.8%. 



HCI $45 call expires October 18, 2019.





With this call I have income in mind.  The premium I received is over 1%.  I like that.  Moreover, the duration of the call is very short.  If HCI is assigned that is okay with me and if I keep it, I will continue to sell calls.   If the fundamentals deteriorate such as no longer increasing the dividend, I will sell it all.



M* MoneyMadam

Monday, September 23, 2019

Best call today was WHR Whirlpool

Last Friday, September 20, 2019 was quarterly expiration of stock options.  As an active income investor, I use covered calls to create income.  I certainly cannot get adequate income from the usual sources for safe money like bonds.

I had 25 calls on 12 different stocks expire last Friday.  Five calls on two stocks were taken.  Four of the calls that were exercised were on Novocure, symbol NVCR.  Novocure does not qualify as an income stock.  I do not want to risk losing the rest of my position on NVCR.  Therefore, I did not even tempt myself by looking at potential calls on this growth stock.

The other call that was taken, also known as exercised, or assigned was J.P Morgan, symbol JPM.  All the other calls expired.  I got to keep the premium paid and now I am looking for additional calls on those stocks.

Listed below are the calls I sold today:

IBM:  $150 strike expired on 9/20/19







You will notice, I am underwater on IBM.  But I like the dividend yield of over 4.5% and I have sold 4 calls on IBM since I bought eighteen months ago.   I don't like it enough to buy more shares but I do like the call premiums.

In this call I created an additional 1.1% on my basis.  I am willing to live with the unrealized loss as long as I cash those dividend and call premium checks.







Whirlpool (WHR): $160 strike expired on 9/20/2019


Whirlpool is quite volatile.  It responds to a lot of "headline risk."  Tariffs and international sales of washing machines is more exciting than you think.  



Again I like the yield of 3.19% but I would like more than 3.19% and calls are a way to boost the income.  I have sold calls many times on WHR that have been exercised.  This time my calls expired and I was able to sell more calls today.

In this call alone, I was able to capture a yield of 4.53% just from the premium.  






Without a doubt Whirlpool was the covered call of the day.  This is good income investing.  If any other calls come available, I will write them up.  Stay tuned.

M* MoneyMadam

Disclosure:  Long IBM and WHR with calls 

Wednesday, August 28, 2019

YELP - Are call buyers right?

A reader pointed out this call and I can see it could be compelling.  Are the call buyers, who are willing to pay $1.10 for the right to buy YELP at $39, which is quite a high price, correct that YELP will go up that high? .  The call details are below.




Many users of calls to boost income could buy into this trade but caution is important.  I cannot tell you how many people get sucked into this type of trade and the stock tanks and you are stuck.

YELP's price may or may not tank, and you may be called away for a juicy over 20% gain after all YELP's 52 week high is $52.50  Then again, if YELP does tank, you have only the premium which will probably not make up for the capital loss.

Traders be careful.

M* MoneyMadam

Monday, August 26, 2019

MSFT calls and capital gains

This cat and mouse game is not about the Apple invention, the mouse, it is about Microsoft.  Tomorrow I am going to go after another MSFT call; here's why.

  • MSFT has growing revenues which are hard to find in the group of stocks in which I invest; stocks that pay a dividend.
  • Microsoft's P/E (price earnings ratio) of 30.5 reflects that growth.
  • MSFT's dividend yield is low not even beating the 2 year US Treasury.
  • Microsoft's ex-dividend date tends to fall one day before quarterly options expire

I like Microsoft but it is not one of the stocks I cannot afford to lose.  While I am basically an income investor, I do use growth in the portfolios I manage; Microsoft is evidence of that. But income is king and covered calls have provided a nice income.  

I will not add to MSFT tomorrow just to execute this trade.  I will use shares from my existing cost basis.  Below are the potential results of the a $150 strike, November 15, 2019 expiration.  























The above table illustrates your potential return if you bought at the close on Monday.  You can use my call calculator to change the basis and premium to determine your potential return when trading commences on Tuesday, August 27, 2019.

The next  table illustrates my potential return using the cost basis of the shares I will use to cover the call.   I may get to keep MSFT or  I could lose it.  If I lose it to the call buyer, I will have taken enormous profit.  And, should MSFT have a price correction that does not make it a poor fundamental play, I could add again and sell more calls on the new cost basis.





















The Cat and Mouse game.  I have been using this MSFT covered call strategy for the past 8 quarters and when the stock is at or above the strike price, the call buyer exercises the option to buy early.  This allows the buyer, who paid me the premium, to cash the dividend.   Therefore, a better measure of this call option would be to not include the dividend and see how it works out.






In the case of MSFT, the dividend is comforting but not consequential.  Capital gains and call premium income are good for ordinary income investors and sometimes you can find growth as well.

M*  MoneyMadam
Disclosure:  Long MSFT,  intending to sell calls

8/27/2019 Update to Post

Here is the actual trade executed this morning:  Sold $150 strike 11/15/2019 expiration for a premium of $1.60