Wednesday, February 29, 2012

LOCKHEED MARTIN Conundrum

It doesn't happen too often, but yesterday, the buyer of one of my covered calls, Lockheed Martin (LMT) executed the call and my stock was assigned well before the call expiration.

LMT was a 2011 dividend machine that I owned.  LMT's fundamentals have changed and as I noted in my review of 2011 dividend machines, I cannot consider LMT for 2012's dividend machine list because the debt to equity ratio has gone way up.


When I reviewed all my personal holdings as well as those on the 2011 dividend list, I was faced with the LOCKHEED MARTIN conundrum.  Should I just sell it?   Here is what I decided to do.

I separated my holdings into two categories.   First,  I set a stop on one half.  Luckily, LMT still pays a healthy dividend and the stock price was increasing so I felt that if LMT cut the dividend or had some terrible news, that I would get my profit from setting the stop.   You have no guarantee to get your stop price but since LMT is so a large company, I did not feel that it would go below my cost basis or "heaven forbid" go to zero before someone would buy it.    Note that you can guarantee your price through an options technique called buying a put.  That strategy is beyond the scope of this blog but those of you who are interested can research the concept.

Second, I sold calls on the other half.  The calls generated more income for me and provided a capital gain on my cost basis.   My risk was that the stock would implode while I was obligated to hold it because my shares were under contract from the call obligation.

When I sold the call, I selected a strike price that would pretty much assure me that the stock would be purchased by the call buyer and indeed it was.

Here are the details:

Bought LMT @ $69.50 November, 2011
Bought LMT @ $78.25 January, 2011  In July, 2011  I wrote a December 2011 $85.00 call for $1.15 which expired.
Bought LMT @ $71.20 September, 2011 and simultaneously sold a December covered call of $77.50 strike price with income of $1.80.  This too expired.

December 2012 Set Stop of $78 on the $78.25 shares,  I still own it and have increased the stop to $82.50
December 2012 Sold  March $82.50 covered calls for $1.15 on all remaining shares and those calls were assigned yesterday.

The point of this post is to make you aware of how you can use covered calls to not only increase income but to squeeze a little more income from a stock that you would really rather not own anymore.

Very Truly Yours,

TheMoneyMadam

See the original post when LMT was added as a 2011 Dividend Machinehttp://www.themoneymadam.com/2011/02/dividend-machine-12-of-52-lockheed.html.

See post on review of 2011 Dividend Machines
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