Month: November 2020

When will Ford resume its dividend? I’m creating my own while I wait

Almost immediately after the COVID-19 pandemic struck, Ford announced that it suspended its dividend. This was unfortunate news for me since I had been accumulating shares over the previous 6 months, having been allured by the 6%+ yield Ford was providing at the time in this yield-starved world we continue to find ourselves in. After wetting my lips with a couple tasty quarterly dividend payments (which I reinvested), the stock tanked from the $12 range to a 52-week low of $3.96 on March 23. I accumulated a few more shares here and there to lower my cost-basis, but without the promise of a dividend, my thesis on the company was broken. I wasn’t in it for the growth potential after all (most car companies that don’t end in “ESLA” have limited growth potential, in my opinion), I just wanted that dividend!

But then the stock started creeping back up as car sales proved to not go to zero as many feared during the varying levels of shutdowns we have seen throughout the US. Around this time I began trading options and immediately found an opportunity here with Ford. I began writing cash-secured puts below the market, using premiums earned to purchase shares and continue to lower my cost-basis, following the stock steady move up past $6, $7 and now $8. With my cost-basis now at $8.86, I’m nearly back to even with the stock closing at $8.75 at the close on Tuesday, November 17. I now find myself at a point where I can’t lower my cost-basis further by buying shares at the market price and I’m not interested in investing more capital, especially while there is still no dividend on offer. I still think there is a bit more upside to the stock, however, so I’m also not interested in selling at this point.

Creating my own dividend

I read this article on Seeking Alpha and was inspired to write this post. Rather than sitting on my hands while I hope that Ford resumes their dividend, I will be selling covered calls instead, essentially creating my own dividend. With my cost-basis at $8.86, I can now sell covered-calls at any strike price from $9 and above and still guarantee a profit in the event the shares get called away. I plan to sell the calls at least one strike price above the current trading price, as long as the premium I receive is above that 6% annual yield I was initially after. I would also like the credit I receive, less fees, to be more than the current trading price so that I can reinvest the credit just like I would with a standard DRIP.

Below is a table of credits I could receive for selling calls at various strike prices and expiration dates. These credits are subject to market conditions, so they change constantly. However, they generally move up or down in unison, so I find this to be helpful in comparing my different covered call options.

With these data points known, I’m leaning towards selling the December 11 $9.50 call.

Downsides

Like any options trading strategy, there are risks and downsides associated. I’m going to briefly review some of them.

Stock drops

If the share price drops, I get to keep the credit I received up front, but my underlying shares of $F will have gone down. I got a return on my investment, but my principal is now diminished. I get to sell another call after expiration, hopefully at a still-attractive strike price/credit. This is still a risk even if I had not sold a call option and I was just waiting patiently for my dividend.

Shares get called away

If the shares go above my strike price, the shares will get called away at the strike price. Again I get to keep the credit I received up front AND I sell the shares for a profit since I picked a strike price above my cost-basis. If $F rips several dollars higher than my strike price, then I will have some FOMO for not getting to participate in the full upside. Such is the plight of option sellers.

Taxes

Besides losing some of the potential upside by writing a covered call, I am also increasing my taxable income with every option contract sold. I am doing these trades in a taxable account. If Ford was still paying a dividend, I would be collecting qualified dividends and therefore only being taxed as a capital gain (which 15% for my income bracket). Credits from option trading, however, are taxed as ordinary income (over 30%). While this is a factor to consider, I would rather pay taxes on income that I wouldn’t have had otherwise.

October 2020 Trading Review

Recently I have become an avid reader over at Seeking Alpha. I find the analysis to be good, varied, and I like the more personal takes by the individual contributors than what you typically see on an investing website. It is my current go-to for analyzing stocks. My favorite types of posts at Seeking Alpha are the monthly or quarterly portfolio updates (Dividend Derek’s are one of my favorites). It’s great to see what actions people are taking with their investments and how they are performing. While I am not going to go over each and every options trade I made this month, I plan to go over some of my performance metrics and my strategies.

October was my first full month of options trading. Overall, I was able to net $723.57 across my various portfolios that I am now trading options in. The market was down over the month, with S&P 500 pulling back 2.5%, so to generate that kind of “revenue” in my first month highlights one of the key advantages to being an options trader – there is money to be made regardless of the direction of the market, even if it doesn’t move at all!

I am currently splitting my strategies in two. One is to trade mostly credit spreads in margin accounts and the other is to sell cash-secured puts & covered calls (i.e. “the wheel” strategy) in non-margin and IRA accounts. The margin accounts are focused on building cash to increase my trading capital and the other accounts are focused on investing profits into stocks for future growth or passive income via dividend stocks. Almost half (46%) of my profits came from the margin accounts despite only representing 11% of all my portfolios combined. The profits from options trading in my margin accounts generated a 3.5% total portfolio return (41.4% annualized) and the other accounts generated 0.5% total portfolio return (5.4% annualized). It’s worth noting that the non-margin accounts have the majority of their funds invested in stocks and much less in cash than the margin accounts, making total portfolio return potential from options trading limited.

Going forward I am looking forward to continuing to learn new strategies as well as perfect the ones I am using. I am very happy with my performance thus far, especially in the margin accounts. I anticipate better performance in November in my non-margin accounts as I have more contracts expiring this month than last, allowing me to realize those gains. In the past few days we have seen a huge move up by the market, which is generally good for those accounts currently since I have more short Put positions (bullish trades) than Call positions (bearish trades) currently.

Using Options to Pay Off My Mortgage Early: Month 1

I have been looking forward to making this post since I wrote my introduction post earlier this month, stating my intention to pay down my mortgage principal early using extra monthly cashflow from recently refinancing our home to a lower interest rate. Rather than simply putting the money saved thanks to our new, reduced payment straight into the principal, I am investing the extra cash flow with options, and then using those profits to pay down the mortgage. You can read more about my general options trading strategy I will be using in this post.

I officially began this strategy on October 8. $SPY, the S&P 500 ETF, was trading at $350.10 at the time. It closed the month at $326.54, down 6.73%. Thanks to option trading, I was still able to generate premiums well in excess of my 1% monthly target. I was able to profit $152, representing a 4.9% return on my capital (that’s 78% annualized!).

As I wrote in my previous post, the difficult part of option trading is often preserving your capital. And my holdings were far from immune from the market pull-back. After taking my premiums out to pay down the loan and setting aside a portion for taxes, my portfolio value is actually down 12.9%. I am not concerned (yet, anyway) as my positions are still at a value that I can sell premiums (with covered calls) at strike prices that would still be profitable if I had to sell at expiration and still meet my 1% portfolio goal for the month. I actually already have open positions due to expire next month that will provide at least a 2% return. I will explain the details below.

My positions & trades

O.K., confession: I actually started this journey with an existing long position, rather than $3,000 in cash like I said I would. I had 68 shares of $AAL with an average price in the low $14.XX’s. Since I was already fairly close to a 100 share position (which is required to sell covered calls), I decided to just purchase the remaining 32 shares at $13.07. I actually bought another 9 shares later in the month at $12.31 per share, bringing my average price down to $13.98. Now I can sell covered calls at $14 knowing that if my option contract is exercised, I will get all of my principal back.

$AAL, 109 shares at $13.98 ($1,523.73 total principal). Principal is currently down 19.5% ($297.48). I closed a total of four positions for a profit of $63. I currently have a $14 covered call position that I opened for a $16 credit. After the big pullbacks last week I decided to open a put credit spread at $10.50/$10, taking in a $10 credit for a $50 risk.

After my $AAL position, I had about $1,500 in cash left to work with. I wanted to try to split this among at least two different positions for diversity sake. Rather than selling cash-secured puts to put my capital to work, I decided to purchase 100 shares of these stocks and then immediately sell covered calls on those positions. Honestly I’m not really sure why I decided to go this route. I must have been happy with the call premiums I could get at the time.

$M, 100 shares at $6.17 ($616.76 total principal). Principal is currently up 0.4% ($2.24). I closed one position for a profit of $26. I currently have a $6.50 covered call position that I opened for a $20 credit. Macy’s is pretty volatile right now, which is why I’m able to collect some solid premiums (that $20 credit is 3% of $6.50 for an 8-day long contract!).

$GPRO, 100 shares at $6.46 ($646 total principal). Principal is currently down 8.0% ($52). I closed a total of three positions for a profit of $33. I currently have a $7 covered call position that I opened for a $17 credit. Implied volatility is great on this stock as well, giving me an opportunity to likely sell another intra-month contract at a profitable level (strike price of $6.50+).

$FCEL, 100 shares at $2.34 ($233.78). Principal is currently down 14.4% ($33.78). I closed a total of two positions for a profit of $30. I currently have a $2.50 covered call position that I opened for a $15 credit. I had a couple hundred dollars left and decided to be a bit more risky. Fuel Cell is an alternative energy play from way back in the .COM days (it’s all-time high is almost $7,000 per share!). Both of the positions I closed were actually in-the-money calls ($2 strike price) that I closed because most of the value of the contract was gone once the stock price dipped. If this contract expires out of the money, I will probably look to sell another in-the-money call if I can guarantee a profit (e.g. if I sell a call at $2, it needs to be worth more than $34 to be a guaranteed profit at expiration).

Extra Mortgage Principal Paid

With $152 in net credits earned for the month, I am setting $47 aside for tax purposes. I am currently using $GNMA as my tax escrow account, so I bought $47 worth of it. $GNMA is an ETF that holds mortgage-back securities issued by the government and currently yields about 2%. It is a pretty stable ETF and I feel better about setting this cash aside for next year in something that will earn a bit of interest rather than sitting on the sidelines.

So after tax, I’m left with $105. I have decided to take $73 of that total to put directly toward my mortgage principal. That $73 puts me 254% ahead of my goal for the month and will amount to $113 savings in interest over the life of the loan. It’s a great start!

Why didn’t I use the entire $105? Since my principal had such large paper losses this month, I decided to keep a bit of that cash in my portfolio. I came up with $73 by balancing the difference between my starting principal, deposits, premiums earned, stocks purchased and the tax I’ve set aside.

Benchmark Comparisons

In my introduction post I identified three different benchmarks I will be comparing my performance to. Benchmark #1 is putting all of my savings from my refinance, plus a 1 month skipped mortgage payment, into a savings account. When I wrote that post I was actually getting 0.6% APY, but it has reduced to 0.5%. For comparison this month, I will stick to 0.6%. Benchmark #2 is putting all of those savings straight into extra monthly payments. This one will probably be the hardest to “beat”, but the funds are the most illiquid, which is important to me at this point in my life. Finally, Benchmark #3 is simply buying $SPY.

So how did I do this month? On paper, it doesn’t look so good. If you take my paper losses on my stock positions, add the extra principal payment I made, cash remaining in my portfolio, my $3,000 is actually down to $2,576.41. Had I put the $3,000 into my savings account, it would now be worth $3,001.50. If I had put the $3,000 into my mortgage principal, I actually wouldn’t have gained anything yet since it hasn’t compounded, so it would still only be worth $3,000. Had I bought $SPY, that $3,000 would now by just $2,798.11.

So I’m actually down 14.2% to Benchmark #1 (savings), 14.1% to Benchmark #2 (extra mortgage payments) and 7.9% to the S&P 500. Currently, putting everything into a savings account is the winner! But that will definitely change.

So here is where I rationalize my performance this month. First, a big portion of my paper losses come from those 68 shares of $AAL I had bought months ago that were already down more than 10% when I got started. That alone makes the difference in my performance deficit to the $SPY. The $73 I put towards my mortgage principal hasn’t had any time to compound yet, so that will start to grow and grow, quickly closing the gap to Benchmark #2.

Overall I am still quite optimistic and excited to see where I continue to stack up against these benchmarks. Looking forward to another month of options trading!