Thursday, November 14, 2019

TGT sell call on WMT earnings

I like Target, symbol TGT.   Presented below is another example of how to use a rival's earnings to take a short term position before your company reports.   Walmart had good earnings but in the after market it is only o.k.  But WMT's business is perceived as being positive and that helps it's closest competitor Target.

Income investors are looking for a position that provides call premium income from selling (a.k.a. writing) a call; and we want the quarterly dividend; and we want a capital gain should we have our stock called away.

An eight day call that meets a number of an income investor's goals.

What happens if in the next 10 days or so the stock tanks on it's own earnings and you are stuck with it?  That is when you want to make sure you can stomach holding a dividend stock over a longer period of time than 10 days.  TGT is an okay hold by me at this time.  - Goal met:  conservative income investment.

I will risk losing it and I will risk keeping it.   It is all about income.  Goal met:  income with out without the call being assigned.  If it is assigned, capital gain is realized;  Goal met; capital gains.

TGT COVERED CALL

Usually posts about calls are yesterday's news.  Call buyers and sellers know there are few values more volatile than call premiums.   I am writing up a call that I will try for tomorrow.  November 15, 2019.























M* MoneyMadam

Good income investing.   Disclosure no position but expect to add if the conditions warrant.

8 Day trade NVDA

I recently wrote a post about using short term calls in an effort to earn 8% a year from a combination of the call premiums and the dividends.

One stock I mentioned in my previous post was NVDA.  I have a $200 call expiring this Friday.  Based on today's reaction to their earnings, I think that trade will provide all benefits I had hoped for in a very short term.   In this market short term is appropriate.

I did it again today.  I bought at just over $208 and immediately sold the $220 call that expires a week from Friday, 11/22/2019.

So the point is, I wanted 3 calls per year on NVDA that generate at $4.50 per contract.  But in just two weeks, I have cashed a $3.44 call today and $ 2.30 call a week ago.  I am on track!



November 22, 2019 $220 call on NVDA


























Will the positive effect of NVDA's earnings carry it for another 8 days? Let's see what happens.

M* MoneyMadam

Disclosure:  Long NVDA with calls

Monday, November 4, 2019

Maximize yield with capital gain potential MPC CVX or XOM

The goal of every income investor is income followed closely by capital preservation.  Next on our list of goals is to maximize income and retain the opportunity for capital gains.

  • The goal of the trades discussed in this post are to achieve 8% annualized cash flow from a combination of dividends and covered call premiums and to keep an opportunity for capital gains.
  • My analysis illustrates how to determine how much premium from a covered call you need to meet your goal.
  • In this article I present three stocks to consider with only one of these stocks that meets my 8% hurdle. 
In reality this is just a math exercise.  You start with either your basis on a stock or the target price at which you want to buy a stock.  For me I want 8% annual income yield on these stocks.  I will discuss why I set 8% for these stocks later in the post.   Once you have that number in hand, subtract the annual dividend.   After subtracting the dividend from the desired total income, you can determine how much you want in call premiums.

Since you want to capture the dividend with each call expiration date, you can expect to sell no more than 3 calls per year.    Assuming you actually can sell three calls per year, you simply divide the total income you want from the call premiums by three and that determines the premium you need per call to meet your goal.  Let's look at an example then we can apply this theory to real trades.

EXAMPLE XYZ STOCK











For XYZ stock we need $2.50 of additional income from premiums on covered calls.  If we get lucky you might get the whole $2.50 on the first call.  However, it is more highly likely that you will end up selling, also known as writing, calls three times during a year at an average of $.83 per contract.  One contract is 100 shares.

SCREEN BY PREMIUM FIRST

In this situation, once I target a stock, I start by looking for premiums rather than strike price.  In most of my covered call trades, I look for a strike price no less than 8% above my basis and usually, I like 10% or more.  I want a strike price high enough that it is not likely to be called away.

On a potful of stocks, however, I will start by looking for a premium and then determine which expiration date is after the next ex-dividend date.  In other words you do not want to sell a call with an expiration date before an upcoming ex-dividend date.  The last value I look at is strike price.

These are good stocks and I know I risk losing my shares if the strike price is too low.  If the best premium comes from an expiration date in fewer than 30 days, I am more willing to risk losing the shares to the call buyer but never, ever at below my basis.   I always want a capital gain if the shares are assigned to the call buyer.

How much capital gain I want is different with each and every stock.  Stocks like Broadcom, symbol AVGO, are very volatile.  Tweet, tariff and headline news can hammer these stocks providing an entry point and these same factors can send it soaring which makes the calls create more income for us.  Picking a high strike price is appropriate.  If you get hit, you'll likely have another chance to get in.

Other stocks are not so volatile and you are at less risk of losing your shares even when you pick a strike price only 5% or so above your basis. Let's get to specifics.

CVX (Chevron), MPC (Marathon Petroleum) and XOM (Exxon Mobil)

Below are tables of the calls available when I did my search today. November 4, 2019.

Remember, I want to add one or more of these stocks and am looking for an annual combined (dividend plus call premium) yield of 8%.

The eight percent comes from the idea that this group of stocks needs to create enough income to fund a specific project.  For me it is an annual charitable contribution but you might think of the idea when you are trying to create the income you need for your required minimal distribution from an IRA.    You don't have to use 8%.  If your hurdle is 5% simply change the parameters in the calculation.

Chevron CVX


All three stocks have good balance sheets.  Chevron carries a D/E (debt to equity ratio of only .20.)    They all have good dividend yields, Chevron's is over 4%.  And they all have revenue growth.  They earn more than they pay out in dividends as measured by EPS and free cash flow.









You can see from the table above, the concept that I can get 8% annual return on this stock by using dividends and calls is not encouraging.  I will pass on the single call available with the premium I
need.

Marathon Petroleum MPC


MPC has the highest D/E ratio at .91 and that it is still acceptable.  It has the lowest dividend yield of 3.19% but that too is acceptable because MPC has the most robust revenue growth.  Revenue growth stimulates the juices of the call buyers.  Moreover, there has been speculation that MPC may split up to provide more shareholder value.















You can see from the table above, we have more than one option to consider.  Note the first call after the ex dividend date is November 22, 2019.    You cannot go out too long on the expiration date or you will not be able to sell three calls in a year.   Within 90 days, MPC provides two calls worth consideration.

December 20, 2019 $72.50 call for a premium of $1.18 and the January 17, 2020 calls for a premium of $1.32.

Exxon Mobil XOM


XOM pays the best dividend of the group with a yield of 5%.  XOM also has a good balance sheet with a D/E ratio of .24.  Revenue growth is the slowest of the group.  XOM calls are interesting.












Notice the only call for me that has interest is the January 17, 2020.  You could sell this call and receive two of the three call premiums you need to receive an 8% combined income yield.  However, the capital gain opportunity is weak at only 1.16%.    You could very easily lose your shares to the call buyer.

END RESULT

Today I added MPC and sold two calls.  I sold the December 20, 2019 $72.50 call and the January 17, 2020 $75.00 call.

We will just have to see what happens.  This is an exercise in working calls in a market with an upside bias.  It is a conservative approach because in the end if the market tanks 'ala 2009, we will still have a stock with steady income and a solid balance sheet.

Good income investing.

M* MoneyMadam
Disclosure:  Long CVX, MPC, XOM with calls on MPC