It’s been two months since my last update on my covered call strategy on $F while I wait for a dividend to be reinstated. As outlined in my first post, the ~6% dividend Ford was offering in 2019 was the primary reason I started accumulating shares. With the COVID “crash” in March the dividends were “suspended” while the company stabilized. That was probably the correct move for the company’s longterm future, but that doesn’t mean I didn’t miss those quarterly payments!
With that in mind, I started selling covered calls at strike prices above my average price to generate some income on that tied up capital I had in Ford. As the share price has rebounded, I have found myself in the money on my positions, but I have still been able to roll them out for an acceptable rate of return.
As of my last update, I had two February 19 covered calls, one at $9 strike and $10 strike. I had taken in $67 in credits before commissions. $F is now trading in the mid-$11s. Since then, I have been able to roll both of those out to March for another credit.
On January 22, I rolled the $9 covered call out to March 19 for a net credit of $16.68. This is a 1.9% return over 57 days, which is 11.9% annualized. With that credit, I bought one additional share for $11.47. This is similar to a DRIP (Dividend Reinvestment Program) with a traditional dividend.
On February 2, I was able to roll the $10 covered call out to March 19 expiration for a net credit of $31.68. This is a 3.2% return of 46 days, which is 25.1% annualized! As of now, I haven’t reinvested that credit and have just kept the cash.
This brings the total net credits from selling covered calls to over $115. At a current share price of $11.58, that’s a return of 5% over the course of about 3 months.
These positions, especially the $9 strike, are sitting pretty far in the money at this point. This means that there is very little extrinsic value remaining in these contracts, which means sooner or later I will choose to let it expire at have the shares called away. Fortunately, I have more than 200 shares of $F that I’ve own for more than 1 year, so my gains on those shares will be taxed at longterm capital gains if I’m forced to sell when they’re called away (to be clear: all the credits I’m receiving for selling the covered calls are taxed as ordinary income, unfortunately). If the stock price sees a pullback down below $11 again, I will look at rolling these out again as it’s likely there will be some more extrinsic value again. As long as I can get a 1% net credit for rolling out between 1 to 2 months, I think it will still be worthwhile as that’s a 6-12% annual return that, I feel, is pretty low risk.
I do expect Ford to resume the dividend at some point, so it would be nice if I could continue to roll out until then. But if Ford continues to climb higher and I get further and further in the money, that becomes increasingly unlikely. Either way, I will continue to update the blog with what happens.
The market in January had a strong start before Game Stop mania threw a wrench into things. I actually participated in the craziness in a very small way. I sold a call credit spread that was WAY in the money for a few days (like… $300 in the money!) Since it was a defined risk trade I had no problem waiting it out. In the end I was probably the only person on that $GME trade that ended up with a $10 profit. I think most were were up or down 100x, 1000x or more than that. As the dust began to settle, $SPY retreated a bit and closed the month down 1.0%.
My total profits from trading were $2,623.63, another best ever month by 13%! That was a 1.5% total portfolio return from options trading. Not bad for a month where the markets were in the red. My total portfolio value across all accounts – which includes options trading profits, current stock & options positions, contributions & withdrawals for extra mortgage principal payments – was up 0.6%. I did contribute $6,000 into my ROTH IRA in January, but that isn’t included in the returns for the month. In January I closed 71 trades with a win rate of 96%*.
(* That win rate is a bit misleading because it doesn’t count positions that were assigned as losses. The only way I get a loss according to my tracking is if I close a position with a negative net credit. I took assignment on 3 trades. If those 3 are counted as losses, my win rate comes down to 92%.)
I continue to split my accounts between two strategies. One is to trade mostly credit spreads and naked puts 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. As I wrote in my January update of my mortgage pay off, I am starting to do some “poor man’s covered calls” as well. The goal for the margin accounts continues to be to 1) raise cash to increase trading capital and 2) run through my mortgage pay off strategy. The other accounts are reinvesting the profits into stock positions for future growth or passive income via dividend stocks.
My favorite part about writing these monthly reviews is looking back at what was my biggest winner and loser. Since I am doing so many trades in a month, each trade is closed and put behind me quickly. It’s only because I keep detailed records of each trade that I can look back and learn what’s working and what isn’t.
My biggest winner for January came from a poor man’s covered call on $AAPL. On January 26th I opened a $100 strike June 2022 Call LEAP contract for $49.50 ($4,950 total). I’m bullish on Apple going higher. This contract gives me almost 18 months to be right and gives me a break-even of $149.50. I then sold a covered call at $152.5 strike for the January 29 expiration for $1.85 per contract ($185 total). Due to the frenzy around earnings (which Apple killed by the way with quarterly revenues topping $100 billion!) the premiums were pretty rich even for such a short dated contract. I closed it two days later (one day before expiration) for a net credit of $178.34. This was all in an IRA, so it’s all mine to keep!
I will continue to sell covered calls at $150 or above to generate income from that LEAP contract and hope I don’t get assigned. If I do, however, I know I will make a profit because my break-even is at $149.50. I may occasionally sell credit spreads if I think there is a chance the stock price could blow past my covered call. Selling a spread is more likely to allow me to roll the position up when I move it out because of the long call as extra “protection” allows me to widen my spread.
You can see my LEAP is in the red at this point. With 16 months remaining in the contract, however, I’m still feeling pretty good about it.
I’m going to consider a cash-secured put that I was assigned at expiration on as my biggest loser for January. It was a January 29 short Put on $SBUX at the $99 strike that I sold on January 7th. I collected a $1.25 credit ($124.34 net commissions), but was assigned while the shares were trading at $96.79. Therefore, at assignment, I was down a net $96.66 ($1.2434 – $99 + $96.79). Looking at the chart below you can see I had a comfortable margin of safety until it really dragged down just before expiration.
Fortunately, I happen to think Starbucks is a fantastic business and was not worried at all by the assignment. I immediately sold a covered call that, as you might expect from looking at the rebound at the beginning of February, is now in the money and looking like I will get assigned in the other direction now! This one was also in an IRA so no tax-man to collect on all these trades.
Another great thing about writing these blogs is that they hold me accountable. In my December review I posted some goals for the year. Here’s a look at how they are going so far:
Contribute $6,000 to my ROTH IRA. CHECK! I already funded my ROTH IRA in the first few days of the new year. Now the trick is to put those dollars to work!
Build $100/month in passive income, primarily from dividends. I want to finish 2021 with a forward looking $100/month in 2022. I am now tracking my dividends separately from my options trading. I collected $55.97 in January. The biggest contributor to that was a quarterly dividend from $SPY.
$10,000 in non-W2 income. It will take $833 per month on average to hit this. Adding the $55.97 from dividends and $751.86 from my taxable accounts puts me at $807.83. Very happy to be at 97% of the monthly goal in January!
Increase our 401k contributions. I have increased my contributions to hit the maximum $19,500 by the end of the year. My wife’s contribution has remained the same so far. We’ll see if we are able to maintain that throughout the whole year, but we are off to a great start.
Increase net worth by 30%. A 30% net worth increase for the year will take a 2.21% compounded monthly return. For the month of January our net worth was up 2.51%. So we’re on track! As I wrote in my post where I set this goal, an increased savings rate, at this point in our accumulation phase of growing our wealth, has a dramatic impact on our net worth. As we grow our net worth we will be more subject to market conditions (assuming we have a decent amount of our wealth in the stock market, for example).
That’s a wrap on January. We are off to a slightly slower start than January so we’ll see if I can close the gap for another record breaking month. If not, no sweat. I’m trying to stay on a consistent path of progress and not looking for home runs.
Disclaimer: I am long $AAPL, $SBUX and $SPY. I am not a financial advisor. This is not investment advice. Please do your own research before investing in anything discussed herein.
Recapping from last month, I had put a total of $220 towards my mortgage principal from options trading profits, saving a total of $338 in interest over the life of the loan. I started to diversify away from putting all my profits straight into my mortgage by beginning to split it three ways: mortgage principal, preferred stock, and Hedgefundie’s Excellent Adventure. With everything included, my $3,328.42 invested in this strategy had returned $470.38 (14.1% ROI/69.7% CAGR!). Surely those returns aren’t sustainable, right?!
In my fourth month, my options trading returns set another record-high of $188, a 5.2% return on capital. My principal barely grew from $3,498.35 to $3,515.08 however, thanks to a big stumble in the markets in the last trading day of January.
For the most part I have continued the same strategies from the past few months. I did add a couple synthetic covered calls (aka “poor man’s covered call” or “PMCC”). I will share those positions and strategy below.
My positions & trades
$AAL, 100 shares at $13.98 average ($1,398 total principal). Principal is currently up 22.8% ($319), however I currently have a $16 covered call position expiring on February 19, limiting my capital gains to $202 total. I closed two positions for the month and for a profit of $34. Similar to last month, I collected a net credit of $12 after rolling up from a $15.50 strike position to the current $16 position.
Last month I mentioned I may continue to sell at the $15.50 strike even if it stays in the money. I opted to roll up to the $16 instead. American Airlines continues to have some very high implied volatility and I think some longterm upside. In the short term I’m really limiting my monthly returns by continuing to roll up, but I think it will pay off over the next few months in terms of total return.
As a sneak peak to February’s update, I’ve actually already rolled up to $17. This time with a very respectable credit due to the reddit frenzy over stocks like $AAL. I also sold another put credit spread at the $14.5/$13.5 strikes.
$APHA, no open stock positions. I continued selling cash-secured puts on Aphria this month for some modest profits. I closed two trades for a combined $23 profit from a maximum collateral of $700, which is a 3.2% return.
In recent days $APHA has really taken off. If I choose to sell more puts I will most likely switch to credit spreads to limit my downside and give me more flexibility with rolling positions down and out when challenged. Currently I have a $13/$12 put credit spread for the February 26th expiration.
$CLSD, no open positions. I sold one cash-secured put on Clearside Biomedical at $2.50 for a credit of $41. I came across this one after reading this “breakout” post over on Seeking Alpha. The article was compelling enough for me to make a speculative trade on it. It worked out, and I closed the trade with a $21 profit a few days later, leaving me with an 8.4% return.
$GE, 1 LEAP January 21, 2022 $5 Strike at a cost of $6.55. GE and MRO (below) are my first attempts at synthetic covered calls (aka “poor man’s covered call” or PMCC). I’ve had good success in the past few months using typical covered calls on stocks like $AAL, $GPRO & $FCEL. Rather than purchasing 100 shares of a stock, I am buying a deep in the money LEAP contract to use as collateral for selling my covered calls. So instead of paying $1,140 for 100 shares of $GE, I bought 1 LEAP contract for $655. When I sold a $12 strike covered call for a $.38 credit, I got a return of 5.8% (38/655) vs. 3.3% (38/1140).
So the obvious benefit is you are putting up (and risking) less capital. There are two main drawbacks to using this method vs. using typical covered calls to consider. The first is that this is a leveraged position. So when $GE goes up by 5%, the price of my LEAP goes up by ~8%, and when it goes down by 5%, I’m losing ~8%. So this drawback actually goes both ways. The other major drawback is my collateral now has an expiration date! This means that if $GE closes below $5 next January, I lose all of my principal. However, I know I will be selling lots of premium before then and feel confident that I will have plenty of opportunities to get out for a profit or sell for a more manageable loss before then.
I am currently selling $12 strike covered calls and look forward to showing those results in the next month.
$GPRO, no open stock positions. In January I had some good results with selling put credit spreads on Go Pro. I closed a total of two trades for a total profit of $39. The largest spread I had for the month was $200, so that’s a 19.5% return. It’s really tough to beat the ROI of credit spreads.
I adjusted one contract by moving the long Put leg down from $7 to $6 strike when the price started challenging the $8 strike. I had decided that I would be OK with taking assignment at $8 if it came to it, so I was willing to increase the spread to $2, increasing my max loss for the trade but not effecting the likelihood of the position getting assigned. In the end the stock moved up dramatically about a week later so I decided to close it when there wasn’t much extrinsic value remaining. I then opened a similar position that same day with an expiration of one week later for a high probability “easy” profit.
$M, no open stock positions. Macy’s is now trading in the mid teens. Crazy that I was selling covered calls in the $6 range when I started. Here is an example of where I could have made a lot more money just buying and holding. But who knew the stock would nearly triple in a few months? For this month I closed 3 positions for a total profit of $32. I ended the month with another credit spread with a potential profit of $20.
$MAC, no open positions. I just had one trade on $MAC for the month for an $8 profit (5.3% return). I found $MAC on a Seeking Alpha comment. Liquidity wasn’t great so I decided to not continue trading it. It looks like it was caught up in some $GME short-squeeze mania at the end of the month that I wasn’t aware of until looking at the chart just now. It has more that 50% short interest, so it was an easy target for the short-squeeze crowd.
$MRO, 1 LEAP January 21, 2022 $5 Strike at a cost of $3.80. As I wrote above regarding $GE, I am going long with a LEAP contract on Marathon Oil Corporation. I think as things begin to open up we will see an increased demand in oil, raising oil price and profits for many of the oil corporations. I closed two trades earlier in the month for a profit of $31. At the end of the month I had a covered call at the $9 strike with a credit of $34, a 9% potential return.
Extra Mortgage Principal Paid
As I explained in last month’s post, I am no longer putting all profits (less taxes) into the mortgage principal. I think I can do better with other fairly passive, and more risky, investing. Those profits, which will beat the 3.125% return that I get by paying down my mortgage, will then go towards the mortgage. My new minimum goal for the mortgage is 1% of the beginning portfolio value each month. January began with a value of $3,498, so I rounded it up to $35. With a combined $255 put towards my mortgage principal in three months, I will save $392 in interest over the life of the loan.
My first passive alternative to directly paying off my mortgage principal is preferred stock. At the end of January, my preferred stock portfolio for this mortgage pay off strategy was worth $116.97 and consisted of five different positions. I purchased three preferred stocks for the month, totaling $69.27. I do plan to write a bit more about my strategy with these, but for now, here are my current holdings (1 share of each):
SCE-J, 5.375% coupon with a yield on cost of 5.55%
I haven’t received any dividends on these positions yet, but they will go toward the mortgage when they come in. I hope to buy at least one new preferred stock each month.
Hedgefundie’s Excellent Adventure
This strategy is purely for capital growth. The target allocation is 55% UPRO/45% TMF, which are both 3x leveraged ETFs. Once their value is enough to reduce my mortgage term by one month, I will put it all towards the mortgage and start over. I have yet to rebalance this because the total value is still so small, but rebalancing is critical to this strategy’s success. For January, $13 was put into $UPRO and $12 into TMF. At the end of the month, the value in these funds was $60.51. To reduce my mortgage by one month I would need to make a $610 payment, so still a long way to grow.
Of the $188 earned from options trading in January, $58 was set aside into the ULP for taxes, $35 was put towards the mortgage principal, $69.27 was invested into preferred stocks and $25 was invested into Hedgefundie’s Excellent Adventure. The remaining $.73 will stay in my trading account. The trading account’s value ended January at $3,515.08, preferred stock was at $116.97 (with a forward yield of 7.4%) and Hedgefundie was at $60.51.
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 twice down to 0.3%. Benchmark #2 is putting all of those savings straight into extra monthly payments to the mortgage principal. Finally, Benchmark #3 is simply buying $SPY.
After 4 months I have invested $3,492.63 (initial $3,000 + $164.21 per month). Benchmark #1 is at $3,497.02, Benchmark #2 is at $3,517.41, Benchmark #3 is at $3,643.84. My actual total has just passed the $4k mark at $4,005.76. This is a total return of $513.12, or 14.7% (50.9% CAGR). My returns include the value of my principal in my trading account + the monthly contribution of $64.21 and interest into my savings + the difference between the original loan and what is actually remaining this month. My results are beating Benchmark #1 by 14.6%, #2 by 13.9% and #3 by 8.6%.
Obviously I am very pleased with the results so far and can only hope things continue to grow at a similar rate. What’s especially cool about all of this is that it all came from refinancing my home loan. The 3.125% rate I ended up with is pretty mediocre relative to what the averages are at right now, but because it allowed us to skip 1 month of mortgage payments and allows us to save $164.21, and because I am aggressively investing it rather than sticking it in a “high yield” savings account or, worse, spending it, I am slowly turning that opportunity into wealth.
Disclaimer: I am long $AAL, $MRO, $GE, $CDR-C, $NRZ-A, $NRZ-B, $PMT-B, $SCE-J, $SPY, $UPRO and $TMF. I am not a financial advisor. This is not investment advice. Please do your own research before investing in anything discussed herein.