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  




Monday, August 12, 2019

A case for Selling Calls for the Income Investor

Call income seems to accompany dividends as the best income tools for August.  Bond interest is so low and quality dividend stocks are so expensive.  Therefore, I sell covered calls on existing positions hoping I do not lose too much opportunity by having my stocks called away.

August is a pretty typical month for call expirations.  History tells us 90 percent of calls expire without action and 10 percent are assigned.   In the table below, I have 18 calls with August expiration dates.

As of today, I have 4 in the money which means the current stock price is above the strike price and 14 out of the money where the current stock price is below the strike price of the call. See the table below.



Only one of these stocks does not pay a dividend and that is YELP.  When I realized YELP was not going to perform quickly, I sold a call very close to the current price and my basis and am hoping it is called away which means the call buyer not only paid me a premium for the option but will also pay me the strike price.  That makes me even on the stock and the call premium in my pocket.

Three other stocks have low dividend yields, MSFT, NVDA and SWKS.  I consider a yield low if it is below the 2 year U.S. Treasury yield so SWKS with a yield of 1.99% may not be considered a low yield stock for some.

I like MSFT but with such a low dividend, as an income investor, I am willing to lose part of my position to the call buyer.  I am underwater on NVDA and will hope the China situation improves at some point.  I will continue to sell calls that are close to my basis so that I can unload NVDA in a similar fashion to YELP.

FOUR IN THE MONEY CALLS

The four income money calls are:   MSFT $135, WDC (Western Digital Corp.) $52.50, CVS $57.50, and YELP $34.   Expiration dates are August 16, 2019 except where noted.  My reasons for risking losing these stocks to the call buyer are:

  • MSFT - yield is too low
  • WDC - yield is good but not growing, EPS are less then dividend paid out but growing
  • CVS - (August 23 expiration)stock price is weak, I added to my shares that are underwater, and sold calls against the low buys
  • YELP - no dividend and stock price is not performing as hoped 

The downside of selling covered calls is two fold. one is lost opportunity.  The call buyer was right to pay you the money for the option to buy, they execute the call and then the stock soars and you miss out on the growth.    If you always look back and are cannot afford to lose a favorite stock, don't sell calls against your beloved stock.

The second risk is your shares are on call, the stock price tanks, you would like to get rid of the stock but cannot unless you pay money to buy back the call.   This risk is untenable for an income investor.  We don't pay out, we deposit funds.  The moral is to pick the underlying stock carefully.

FOURTEEN CALLS OUT OF THE MONEY

The 14 out of the money calls are listed below.  Each stock pays a decent dividend and I am willing to keep them.  I am hoping for additional volatility that may allow additional call selling.  But I am not in such a hurry to lose these stocks so I pick strike prices that I think are harder for the stock to attain before the call expires.  Expiration dates are 8/16/2019 except where noted.

  • MSFT - $145 low yield but upside potential for this very well run company 52 week high $141.68
  • COP - $67.50 nice dividend increases of 7+% recently  
  • LVS - $62, $65, $67.50 High yield with enough volatility that strike prices well above my basis are available.
  • M - $23 High yield with an improving balance sheet and very low P/E (price earnings ratio)
  • WSO - $180 Nice yield, with good fundamentals, headline risk due to global exposure provides strike prices well above my basis
  • SWKS - $82.50, $85 Decent yield, good balance sheet, nice volatility, I have been able to sell calls two - three times per year
  • WMT- $115 Walmart does not raise the dividend much and the yield is mediocre, strike prices near the 52 week high of $115.42 pay enough premium to make WMT a hold.
  • WDC - $55 High yield and improving fundamentals
  • SWKS- $81 (August 23 expiration) Decent yield but enough volatility to enjoy call premiums more than once a year
  • RDS.A - $63.50 (August 23 expiration) Very Good Yield, calls available only about once a year and I sell calls on only part of my position always above my basis and hopefully pick a strike price high enough that I am not called away.
  • NVDA- $185 (August 30 expiration) my worst performing stock of the group.  Not enough dividend to care if it is called away.   
In my case 22.22% of the calls are likely to be exercised versus the historical average of 10% but we still have to see what happens the rest of August.  This post illustrates how conservative income investors can use call options to boost their income during a time when quality dividend stocks are expensive and quality bonds are outrageously expensive.

M* MoneyMadam



Thursday, August 8, 2019

Novocure NVCR

This stock idea is totally out of range for TheMoneyMadam except for one metric and that is call option potential; that potential allows you to generate income on a non dividend stock.   If you believe in your pick you can concentrate on reaping gains from a growth stock while you work the calls.

This stock is in my portfolio because Alfred Ferol alerted me to the science behind their products.  It is my own analysis of the stock’s potential for growth and income that makes me agree that this stock is worth the risk for me.

Let’s begin with the underlying stock and then I will present several call options that make sense to me.

NOVOCURE, symbol NVCR


Novocure is actually a medical device company operating as a bio technology stock.  The company describes it this way.



treating cancer
with electric fields

Tumor Treating Fields uses alternating electric fields specifically tuned to target cancer cells. Once the electric fields enter the cancer cell, they attract and repel charged proteins during cancer cell division.



By using physics to influence biology, Novocure discovered another way to treat cancer.  Their mechanism of action is broadly applicable across a variety of solid tumors.  As you read through their clinical studies, you can see their therapy is used in conjunction with chemotherapy to extend survival.

REVENUE GROWTH Catalyst

Large market growth catalyst from improving life expectancy when used in common with chemotherapy is real.  Optune is the brand name of their tumor treating fields device for glioblastoma.  Use of tumor treating fields with Optune for Glioblastoma and mesothelioma is  FDA approved.  

Sales of FDA approved products are growing.  And, Medicare will start paying for the treatment effective September 1, 2019.  That alone should be a catalyst for growth.

FUTURE Growth Opportunities

From Novocure’s website:


The science of Tumor Treating Fields extends beyond glioblastoma. Novocure has ongoing or completed clinical trials investigating Tumor Treating Fields in mesothelioma, brain metastases, non-small cell lung cancer, pancreatic cancer, ovarian cancer and liver cancer.
2018 New Diagnoses that Novocure may be able to help treat.


























If this treatment is successful, it is truly a gift for these patients. 
Novocure Fundamentals 

Novocure, like many biotech companies is in the developmental stage and that requires money.   Novocure raised money through their public offering and they have used debt.    

Novocure, unlike many biotech companies has a product approved by the FDA (Federal Drug Administration) and is approved by Medicare.  That means they have revenues.   

Novocure continues to burn cash but is improving cash flow.  With Medicare payment approval cash flow should increase.  The table below clearly presents revenue growth over the past 2 and 1/2 years.  This is without the benefit of Medicare payment approval.

  Revenue / EPS Summary *  
 
 Fiscal Quarter 2019
(Fiscal Year)
2018
(Fiscal Year)
2017
(Fiscal Year)
March      
   Revenue $73,309(t) $52,125(t) $34,880(t)
   EPS -0.13 (3/31/2019) -0.23 (3/31/2018) -0.21 (3/31/2017)
   Dividends N/A N/A N/A
June      
   Revenue $86,713(t) $61,514(t) $38,376(t)
   EPS -0.01 (6/30/2019) -0.17 (6/30/2018) -0.24 (6/30/2017)
   Dividends N/A N/A N/A
September      
   Revenue   $64,756(t) $50,109(t)
   EPS   -0.12 (9/30/2018) -0.12 (9/30/2017)
   Dividends   N/A N/A
December  (FYE)      
   Revenue   $69,674(t) $53,661(t)
   EPS   -0.17 (12/31/2018) -0.13 (12/31/2017)
   Dividends   N/A N/A
Totals      
   Revenue $160,022(t) $248,069(t) $177,026(t)
   EPS -0.14 -0.69 -0.7
   Dividends N/A N/A N/A
   Previous 3 Years
 
 
©2019, EDGAR®Online, a division of Donnelley Financial Solutions. EDGAR® is a federally registered trademark of the U.S. Securities and Exchange Commission. EDGAR Online is not affiliated with or approved by the U.S. Securities and Exchange Commission.


Novocure is a developing biotechnology company and medical device manufacturer that has revenues but is burning cash as it continues the clinical trials to measure the effectiveness of their science in more cancers. 
This table presents Novocure's current fundamentals.



NVCR raised capital when they went public and have financed operations with debt.  If I have one concern it is the high D/E (debt to equity ratio.)  Even with established companies, I like to see D/E ratios of 1 or under.   Some argue that debt is cheap and there is some validity to that.  
I am forgiving that concern as I roll through the options calendar and take advantage of calls to create income.  See below

INCOME Potential through call options. 

I bought NVCR on Tuesday during the overall market swoon at $81.05.  Wednesday while NVCR was rebounding in sympathy with the overall market, I sold a September 20, $90 for $2.75.  That call options is presented first.  Today NVCR has even better calls and the second call option shows a call available today. 

August 7, 2019 Call
























August 8, 2019 Call
If you bought today here is what a $95.00 call would look like.





















But consider a more patient trade.  Buy last Tuesday at $81.05 and sell the $95 today and look at the gain.
























Over time, we have worked this stock.  You can see below a list of buys, sells, and calls.  Out of 3,400 shares we have 1,100 left.   So far we have invested around $134,000 and the value of that investment is about $187,000 of which about $92,000 is in the bank.   Call premiums represent a 3.58% yield.  



In summary, we have a company that has created a technology that helps patients on chemotherapy live longer.  They have growing revenues. It appears Novocure has been discovered by the investing community.    


M* MoneyMadam
Disclosure:  Long NVCR with calls


Wednesday, August 7, 2019

Telecom Ideas for yield in a down market

Listed below are four telecom companies to consider.   In this table you can see



China Mobile, symbol CHL, has no debt.  Verizon has the most debt.  BCE has highest P/E (price earnings ratio) and CHL jas the best revenue growth.   All have positive cash flow that exceeds dividends paid out.

All good considerations during this down market.


M* MoneyMadam

Long T, VZ, BCE adding CHT

Crazy Market

Some are suggesting KO and PG  (Coca Cola and Proctor and Gamble) are resilient.   I will not add KO due to the debt level where as PG has some interest.

Dividend Machine Fundamentals are in the table below.



I use these metrics to start my search.   Be in no hurry and pick your income stocks well.

M* MoneyMadam
Long PG

Tuesday, August 6, 2019

LEG for yield

I still like LEG.

https://seekingalpha.com/news/3487621-leggett-and-platt-declares-0_40-dividend#email_link

M* MoneyMadam

Wednesday, July 31, 2019

MDU a 2012 Dividend Machine

Good news on this 2012 Dividend Machine.


https://seekingalpha.com/news/3484327-mdu-resources-plus-2-percent-post-q2-results-raised-fy19-guidance#email_link

M* MoneyMadam

Tuesday, July 23, 2019

Nvidia chips for income

The chip sector is incredibly lucrative for selling covered calls.  You don't get paid much to wait with this chip stock, Nvidia symbol NVDA, less than a 1% dividend yield, but the calls allow you to roll them frequently.  Sell calls with short expirations is how I roll the calls on growth or low dividend yielding stocks.  I am an income investor.

NVDA $187.50 August 30 Covered Call


In this call, I bought NVDA today at $175.66 and immediately sold a $187.50 call that expires on 8/30/2019.

If I am assigned on the expiration date, I should still get the dividend.  But the dividend is barely important.

The call premium alone yields 2.33% nearly as much as INTC 2.45% and if I am assigned, I realize a 9.17% total return on these shares in 6 weeks.






M* MoneyMadam

Disclosure:  Long NVDA

Monday, July 22, 2019

Broadcom Opportunity for income

I sure wish I owned a lot more Broadcom symbol AVGO.  While the stock price volatility can make you a bit squeamish, the dividend income and call option potential make this a stock to own in your income investing portfolio.   Want to retire with income that grows, then consider AVGO.

The knock on AVGO is the price earnings ratio which is in the high 30's.   My readers may find it odd that I own a stock with such a high P/E ratio but I am not so old that I do not need some growth in our portfolio.  When I can buy growth with a good dividend and call option potential, the fear that comes with volatility is easier to handle.  I get paid to wait.

AVGO Covered Call sold today


























The ex-dividend date has not yet been announced and the date could fall after the call expires.  Using their previous history of the ex-dividend date in Septembers, we anticipate the ex-dividend date to be September 18, 2019 (source dividend max.)


Another way to look at this call is if you initiated a position today.

























AVGO Dividend Machine Fundamentals

AVGO is a dividend machine as far as yield and dividend growth.  You will notice an increase in D/E (debt to equity ratio.)  This increase would be troublesome to me if it was used only to inflate price with stock buy backs.  I interpret the increase in debt as using cheap money to fund future growth and to fund future dividend increases.

For those who prefer free cash flow to determine safety of the dividend, you can find comfort in looking at the fundamental details in the table below.


Dividend increases are very important to investors who want to retire on income that grows.  Here is a chart of AVGO's dividend increases over time.








AVGO Volatility



For the ordinary investor, AVGO is a bit expensive.  Today it trades around $297.  You have to own at least 100 shares to sell one contract.  If you want to sell calls on only part of your position to mitigate the lost opportunity if your shares are called away by the call buyer, you need over $60,000 to invest to buy at least 200 shares.

I will not add here.  However, I will add should AVGO's stock price retreats to the $250 range.

AVGO one year price range



Another idea for income investors who want to retire with income that grows.  You get paid to wait through volatility with the dividend and you have opportunities for both growth and additional income.

M* MoneyMadam

Disclosure:  Long AVGO with calls




Thursday, July 18, 2019

Bag Count - An interview with Alfred Ferol


Alfred Ferol called me, he said this is the first time in a long time nothing is going on.   What do you mean Alfred?   Well, have I heard anything from The Money Madam?  Why not? 

You are right Alfred; I am starving for ideas and have not written much lately.  I have only four call expirations this Friday.  Who can live on only four call expirations? 

Well Madam I see many cross currents in buying and selling today.  Buying and selling stocks of course, buying and selling 737 Max, buying and selling dresses and pants, buying and selling options. 

Cross currents?  The other day I saw high bag counts and indeed that is supported by the data.  (Bag counts are the number of packages shoppers carry after buying.)  Consumers are spending money.  Everywhere we go, there are construction projects.  Interest rates are consumer friendly and so is inflation. 

Is there anything negative?  Negatives?   Politics; the people we pay after we elect them are a big negative. Savings income from low interest rates is a big negative.  The unknown, unknowns are always of concern. 

Positives such as the high bag count are critical.  The most significant part of American business is a high bag count.  I would weight bag count as having a 66.5% level of significance because the consumer is 66.5% of the economy.   Everywhere we go there is a high bag count because for the last 10 years consumers didn’t have jobs.  They didn’t spend money.  Now they have jobs.  Now incomes on the entire spectrum of jobs are increasing and this leads to spending.  Is there anything Americans love to do more than to spend money? 

Will the bag count continue?  Data again are on our side.  Consumers are both spending and saving more. So, what do you suggest?  Follow unemployment trends, follow consumer trends, these are opportunities.  Of course, follow The MoneyMadam.  When these data points change, you will adjust. 

Thanks Alfred, I always enjoy your input.

M* MoneyMadam

Friday, July 12, 2019

Another CAT call

I like Caterpillar's volatility.  I just buy CAT, cash the dividend check, wait for some headline news, sell ad call, have CAT assigned and then start over.   At some point this may stop because CAT either goes up too high and I don't have the chance to add on dips, or CAT goes out of business.  I don't think going out of business will happened.  And while we wait for the global growth needed to spur growth at CAT, I will use this yellow machine as a piggy bank.



M* MoneyMadam

Tuesday, July 9, 2019

LVS Las Vegas Sands

While I am out of the office on vacation, I am still making some money.  Calls for dollars.  Here is a trade I made today.   Added a little LVS and sold this call.

         
  7/9/2019 Price on Open Call Expiration   
  LVS $63.00 9/20/2019  
  Cost Basis:   Price on Option Contract Open $63.00  
  Strike Price:   $70.00  
  Call Premium:    $0.85  
  Dividend  Exp ex-div 9/18/2019 $0.770  
       
  Call Yield on Basis   1.35%  
  Call + Dividend Yield on Basis   2.57%  
  $ Gain if Assigned   $8.62  
  Max Return  if Assigned   13.68%  
         




M* MoneyMadam

Disclosure:  Long LVS with calls