Showing posts with label COP. Show all posts
Showing posts with label COP. Show all posts

Wednesday, June 3, 2020

Rolling Covered Calls - Seniors should stop saving for a rainy day

Investors are either retired or not.  When you're retired, there are stages that guide how you employ your money.  In the latter stages a fresh approach is appropriate. Let's look at income from your brokerage accounts.
  • It's time to stop saving for a rainy day and take some risk.  Equities are the only place to get income from your brokerage accounts.
  • Remove emotion related to owning your favorite stock and view your stocks as blocks of money to invest to create income.  
  • Rolling calls depend on the investor realizing when you are called away, there is always another stock for income opportunity.
  • In order to roll your calls you need concentration in a stock. It is better to sell five calls on one stock than one call on five stocks.  
  • Call selling on dividend stocks provides for income during periods when the options market is weak.
This entire strategy is based on the thesis that adequate current income must come from equities as every other tool in your brokerage account delivers very little income. 

Many seniors who were self employed or had professional careers do not have a traditional pension.  Even corporate retirees may have to manage their own pension money after the corporation gives them the sum of their retirement savings such as 401k's.  This post targets seniors who are managing all or some of their brokerage accounts to create income.  I hope you will embrace using rolling covered calls to create income.

Image result for free photos "saving for a rainy day"

Saving for a rainy day is prudent behavior for most of your life.  But when you enter the very mature years, you need to realize the rainy days are here.    Pursue your constitutional right of the pursuit of happiness. Quality of life when one ages depends upon spending money on stuff and experiences and help . You need  income to fund those expenditures.  And because those of you who have saved for rainy days are by nature conservative, you don't want to sell stocks just to have fun. You can use your money to create income and a lot of income.

Rolling covered calls uses options on stocks.  Building the inventory of stocks is as fundamental as pouring the foundation for your home.  Look for stocks that pay dividends, have solid balance sheets, and have some upside potential, and  an active options market.  

Which stocks to put into this basket.

The number of stocks in a portfolio of about $1,000,000 should be about 30 - 35 names.  But the universe of stocks you use for your strategy will not be the same 30 - 35 stocks all the time.  The common elements among these stocks are:

  • Solid Balance Sheet - I use D/E ratio when I write posts.  If you understand how to read a balance sheet and can evaluate interest coverage ratios and other metrics, you have an advantage when picking a stock with a solid balance sheet.
  • Dividend Yield - Every stock in this basket pays a dividend.  Should you get stuck in a down market trend and there are no buyers of your options, you want to make sure you are collecting a dividend to pay for some of your fun.  Icing on the cake is to find a stock with reliable dividend growth over time.  This will help to offset the cost of inflation over the next 10 years.  We are old but we expect to live 10-20 more years and the cost of everything doubles every 20 years. Yet we are committed to take more risk and buying a stock like COP referenced below, we can compromise on dividend aristocrat status.
  • EPS or Free Cash Flow has to be greater than the dividend paid out.  How much above the dividend will determine how safe that dividend is.  You may go through periods of time when a stock's EPS looks less than the dividend payout and you have to determine if that is a passing event when the company took a charge for something special versus a complete change in the company's out making the dividend in jeopardy.  We are not always right in our picks.  I have and you will be wrong once in a while. 
  • P/E (price earnings) ratio should be reasonable for the stock.  Lower yielding stocks with growth potential may carry a higher P/E ratio than you find palatable and you have to weigh that against the value of the income you can get from selling a call.

Concentrate on 30-35 names

When you have concentration in a given stock such as owning 500 shares, you can sell rolling calls.  These calls can be spread out over weeks or even months and over several strike prices.

For instance, in May I had 44 calls working on 24 different names.  Seven of the calls were assigned. One stock, Las Vegas Sands $LVS, suspended the dividend prior to expiration and one stock, Royal Dutch Shell $RDS reduced the dividend.  

 May 13 calls    all expired
 May 86 calls  2 assigned
 May 1527 calls  17 stocks 2 assigned
 May 225 calls 4 stocks 3 assigned
 May 29 3 calls  all expired

When you buy a stock for the first time, you determine your exit strategy.  If the stock price increases, you can often times find call buyers.  I like to make sure I pick a strike price above my basis.  It is important to realize that I may add to my position and the new lot will have a different cost basis.  If that basis is lower than my original buy, I do not fret provided the fundamentals of the stock stay solid.  

When you sell a call on the new lot that has a lower basis, you  may pick a strike price above that basis but below the basis of your original buy.   I do not use "average" cost basis.  I sell calls on specific lots.

The expiration date is important.  When possible you want to capture the next quarterly dividend.  However, some times the call premiums are big enough to sell a call without capturing the dividend.  If your new shares are called away.  There is always another stock to buy or perhaps you add again to this position at a higher basis.  Again these new shares will be a chunk of money to invest for income.  Look for a call that provides at least a 1% yield and some capital gain.  Some days you will find nothing.  On other days you may be amazed at how many calls you can sell.

May was a pretty typical month for me.  The stocks I still own from this basket are:

SYMBOL Div Yld D/e Ratio P/e Ratio
CAT 3.34% 2.61 12.7
MS 3.07% 2.52 9.2
VZ 4.36% 2.31 12.6
LVS - 2.74 17.4
MSFT 1.10% 0.65 30.5
INTC 2.12% 0.52 12
CVS 2.99% 1.42 11.9
BAC 2.90% 1.19 10.1
GILD 3.71% 1.09 19.3
QCOM 3.07% 5.24 23.6
UL 3.29% 2.11 22.3
WSO 3.99% 0.27 28.3
WHR 3.94% 2.54 9.1
WMT 1.74% 1.11 23.6
IBM 5.17% 3.47 12.4
BCE 5.73% 1.56 16.5
AEP 3.26% 1.69 23.2
EXC 3.93% 1.23 14.3
SWKS 1.48% 0.04 25.7
PRU 7.22% 0.4 8.4
UPS 3.99% 7.3 20.1
COP 3.80% 0.48 13.5
IP 5.82% 2.45 20.9

This is an interesting list.  Of the dividend paying stocks, the yield range is 1.10% from MSFT and 7.22% from PRU.  The only worrisome D/E ratio is UPS.  In this basket the highest P/E ratio is SWKS at 25.7.  These are not all the stocks in my basket, just those that were on call in May but are now available to sell more calls.  

And indeed in June I have sold calls on twelve of these names.

Rolling Call Guidelines

Selling multiple calls with multiple expiration dates allows you to stay in the game with a block of money in a given security that is increasing in value.  When the stock is below the stock option strike price, your call will expire and if you still like the position, you can sell more calls on that lot.

When that stock is valued above the call option strike price, you will lose it.  If you follow the rules of selling calls for income you will have booked a capital gain, the call premium and hopefully the most recent quarterly dividend.  Touche.  Well done.

When your stock is called away you have to find a replacement.  Put your blocks of money to work. Your first choice is buy a name already in your portfolio so you can build a base in that stock.  It has to pay a dividend and it may be a laggard.  Check the balance sheet and other fundamentals, news, earnings announcements then look at call potential.  

Rolling Calls and time value of money

I calculate the standard outcomes from selling a call.  If I can sell a call for a capital gain and an amount equal to the quarterly dividend or 1% of the stock price, in one day of course I would do that.  I have never had that experience.  I do not trade options.  I only sell covered calls on dividend stocks.  Note that I have a covered call calculator on this blog to help you determine the potential outcome.

Below are two calls on COP that demonstrate rolling calls by both expiration date and strike price.  One expires and one is called away.

This call expired and I have more calls working on this lot.  This equates to receiving both a $.42 dividend plus the call premium of $1.05.  On about $3900.00 I received a net 3.77% in 2 weeks.  

    Call Expiration 
COP Call sold on 5/1/2020 5/15/2020
Cost Basis:   5/1/2020 $38.98
Strike Price:   $41.00
Call Premium:    $1.05
Dividend  Ex-Div 5/8/2020 $0.420
Call Yield on Basis   2.69%
Call + Dividend Yield on Basis   3.77%
$ Gain if Assigned   $3.49
Max Return if Assigned   8.95%

This call sold on the same day but with an expiration date two weeks later and a strike price $.50 more was called away.  Now I have $4,150 to put to use after having netted over 11% in 30 days. That buys a lot of pursuit of happiness. 

    Call Expiration 
COP Call sold on 5/1/2020 5/29/2020
Cost Basis:   5/1/2020 $38.98
Strike Price:   $41.50
Call Premium:    $1.50
Dividend  Ex-Div 5/8/2020 $0.420
Call Yield on Basis   3.85%
Call + Dividend Yield on Basis   4.93%
$ Gain if Assigned   $4.44
Max Return if Assigned   11.39%

Where do I put the proceeds.  Here is the trade I made on June 2, 2020.

    Call Expiration 
RTX Call sold on 6/2/2020 8/21/2020
Cost Basis:   6/2/2020 $62.74
Strike Price:   $75.00
Call Premium:    $1.05
Dividend  Expected 8/14/2020 $0.475
Call Yield on Basis   1.67%
Call + Dividend Yield on Basis   2.43%
$ Gain if Assigned   $13.79
Max Return if Assigned   21.97%

I elected to add to RTX which is the newly combined Raytheon and United Technologies.  I started in RTX when the merger was complete and got very lucky to buy in the low $50's.  That first lot will be called away as I sold a $55 call.  This call is very different from the COP call and illustrates the how time, duration of the call, can provide a juicy income if the stock performs.  If not, we have to live with what I believe is a solid income stock just by virtue of the dividend.

Time to live, make money and take more risk.


* Long all positions

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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.


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.


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

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Sunday, March 31, 2019

Ten Dividend Failures over 8 years

Thinking as an income investor, would you be happy if ninety percent of your stocks increased their dividend since you bought them?

I have the luxury of being able to go through the stock picks I published  over the past 8 years and report on their dividend growth.

  • Dividend Growth is critical to income investors who no longer work
  • We expect 90% of our stock picks to deliver safe dividends and dividends that grow
  • Overall portfolio performance is positive when using dividend machine criteria to select dividend stocks

The rule of 90 and 10 is similar to the my rule of threes.

*Rule of threes: When two similar, unexpected  events happen, look out for the third.   I just went through this scenario with the sprinkler system in my condo building.    Rule of 90/10: I always believed in picking stocks that meet my dividend machine criteria and over all, 90 to 10, I will be able to count on a safe and increasing income.  You can find the criteria I used to pick stocks by clicking here:


I started publishing my annual portfolios after I retired from managing other people's money.  These portfolios are buy and hold only portfolios.  If a stock is bought out, we took the money. If there was a merger, that is reflected as are spin offs.

Cash from buyouts is held in the portfolio as cash.  One could think of it as an emergency fund.    Retirees who bought these stocks in a qualified retirement plan, could use this cash as a cushion or to fund part of the required minimum distribution.   The savvy investor will buy short term rolling certificates of deposit.


The table below presents the dividend increase data from my 2011 - 2018 portfolios.  Note that in 2016 I published only a covered call portfolio which I sold in February 2017; that portfolio is not included in this analysis.

2014 was the worst portfolio, on every level.  Not only did 4 of 18 stocks reduce their dividend, 2014 stocks have not appreciated as much as the other portfolios.  When you look at all seven portfolios, you can see in 5 of the 7 years, less than 10% of stocks picked reduced their dividend.  If you consider all the stocks which number nearly 100 names, you will see only 9 have reduced the dividend, pretty close to 90 and 10.


One stock, Conoco Phillips, symbol COP, affected four portfolios.  In COP's defense, in the 2011 and 2012 portfolios investors received 50 shares of Phillips 66, symbol PSX, when combined the dividend stayed about the same until COP made a huge dividend cut in 2016.  Since then, the dividend increases have resumed but are not yet back up to the pre split amount.  The PSX spin off has been very good with dividend increases averaging 23% per year.

MHLD, Maiden Holdings, is a re-insurer that got pummeled with the natural disasters of recent years and with their alliance with another insurer with questionable fundamentals.  MHLD reduced the dividend in September, 2018 and have since suspended the dividend.  Moreover, I fear that MHLD will be the first stock of these portfolios to go "belly up."

WPZ, Williams Partners, was a master limited partnership bought by its master.  Holders of WPZ stock received 1.494 shares of WMB for each share of WPZ.  Fractional shares were paid in cash.  Even with that increase in shares the dividend reduction is about 33%.

PBI, a stock with a good history when it was purchased just could not keep up with modern technology.  A bad pick on my part which shows you might want to use more than just my minimal criteria when picking a stock.

NTR, Nutrien, is the new company made from the merger of Agrium and Potash.  The dividend increase since the merger is a substantial 72% over the past 6 quarters but still not up the dividend paid by POT (Potash.)

JCS is a very small ethernet and communications equipment company with no debt but declining and revenues and negative earnings per share, ARLP, a coal provider split the stock early but could not keep up with the pressure of reducing coal production.  Then there is SJR, a communications company who pays their dividend every month rather than quarterly, but the dividend is down slightly recently.  DBD, Diebold is now Diebold Nixdof , it still trades under DBD, has negative earnings.  The last dividend DBD paid was February of 2018.  Finally WDR, Waddell and Reed, has suffered mightily due to the competition from low cost wealth managers.  Their mutual funds just do not cut it anymore.

10 stocks out of the 100 symbols picked over time is a pretty good track record.   We don't yet know what will happen to the 2017 and 2018 portfolios over time.  Hopefully, I learned how to pick better than earlier and these stocks will do even better than 90/10.


Over all, these portfolios all are doing pretty well.  Again, 2014 is a relative laggard.  Duration of time is important with the early portfolios 2011 and 2012 doing better than the others.  That could be that the market was low when I started publishing my picks.

You can click to go to the portfolios tab to see the holdings of each portfolio.    The table below is a summary of these portfolios.   If you were building up to retirement and invested regularly over time, you would probably reinvest the dividend and you might have been tempted to sell some of the dividend losers as I did.   For the sake of ease of reporting.  These portfolios are long only with no active management.


Over time, I added a review of revenues to my stock picking screen.  I thought that perhaps if I paid a little more attention to revenue growth, I would have a better chance of avoiding the stocks with shaky dividends.    I took a look back at these ten stock and see their revenue trends are revealing.

The final table shows the change in revenue over the past three years.  Provided that a stock meets all the other criteria for a quality dividend stocks, this metric will determine what to do with the stock.

Symbol Current Rev Revenue 3 years ago Change from 3 years ago
DBD $4,578 $2,419 89.25%
COP $36,417 $29,456 23.63%
WPZ/WB $8,686 $7,360 18.02%
PBI $3,522 $3,578 -1.57%
SJR $5,239 $5,488 -4.54%
ARLP $2,002 $2,273 -11.92%
WDR $1,153 $1,516 -23.94%
JCS $65,762 $107,669 -38.92%
MHLD $2,164 $5,488 -60.57%

In reality, what did I do:  what should we do?  In summary, I have one buy, and one hold, and the rest avoid.

In my personal portfolio I can move in and out of stocks.  Listed below are the actions I took with these losers as well as my current recommendation.

Conoco Phillips, symbol COP - Buy

I sold COP but bought it back and continue to sell calls against my position.  I like the revenue growth and I like the return of dividend growth.  But, because the yield is so low, I don't care if my shares are assigned to a call buyer.  I can find someplace else to put the money.

I call this a Buy - except for the puny yield, their dividend machine fundamentals are solid.

COP E.P.S. Dividend Yield 3 Yr Div Growth D/E Ratio
$66.74 $5.32 $1.22 1.83% 7.33% 0.47

WIlliams Companies WPZ/WMB - Hold

I sold when the merger occurred.  Looking at recent revenue growth and a yield of 5.4% makes WMB a hold for sure and with more investigation perhaps a buy.  However, E.P.S. is less than the dividend.

WMB E.P.S. Dividend Yield 3 Yr Div Growth D/E Ratio
$28.72 -$0.16 $1.52 5.29% 8.89% 1.53

Pitney Bowes PBI

Dividend cuts are hard to take and when they reduced the dividend I sold.  Revenue is holding its own lately but not worth the effort to own this company that is trying to get up to date

JCS Communications

Sold when dividend was cut.  Not worth the effort.

ARLP Partnership

Sold when dividend was cut.  Only for non qualified money as the tax complications make holding in an IRA not recommended.

Nutrien NTR

I suffered through the Potash merger and did not like having my income reduced.  I was able to sell calls on all shares and sold through being assigned at a profit.   Too much drama for a conservative investor's portfolio.  

Shaw Communications SJR

The monthly payout was nice but once they cut the dividend, the weakness of their business was exposed.  Stick with larger, solid stocks.

Maiden Holdings MHLD

Most painful buy here. I chased yield and got hurt.  I did sell after cashing their juicy dividend and selling some calls.  All in all I am even.  They still have a business but their entire structure is a mess.  Stay away.

Waddell and Reed WDR

My very first investment was in a WDR fund that my collage roommate's dad sold me.  They are no longer relevant.  Again I chased yield.  Sold. In that field, I still like Westwood Holdings which has been hammered but is solid.


This is the strangest stock of the group.  Diebold is into security and one would think that would have been a foolproof area of business.  Through partnerships Diebold is international.  I sold this shortly after I bought it because it seemed to have little direction.  They no longer pay a dividend, but among these stocks it is only one of three with dividend growth over the past 3 years.


My conclusion is I remain comfortable picking stocks using the dividend machine basic criteria. I will stick with larger stocks to provide income from dividends.  I will stick with a mix of higher yielding stocks and those with more modest yields but on which covered call income is available. 

Readers of my blog know I do more active managing of my money.  These portfolios are buy and hold so I could measure the results easily and quickly.  In my own portfolios, I tend to sell calls on stocks with price momentum and therefore, have some stocks called away.  I use those gains to buy other dividend stocks.  This works out for me.

I hope the analysis of the past 8 years will help you become a better income investor.  You can use a disciplined income investing approach and expect 90% of your picks to continue to pay and grow your dividend income.

M* MoneyMadam

*Rule of Threes is a writing principle

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