Category: Strategies

Update 2: Creating my own Ford dividend

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.

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Disclaimer: I am long $F. I am not a financial advisor. This is not investment advice. Please do your own research before investing in anything discussed herein.

Picking Up Pennies In Front of a Steamroller: Covered Call on $FCEL

According to this article (which I found via googling, “picking up pennies in front of a steamroller”, so take it with a grain of asphalt…), “The term `picking up pennies in front of a steamroller’ is linked to Nassim Taleb, an acclaimed author on randomness and risk, whose books describe an investment strategy that has a high probability to yield a small return (pennies), and a small probability of a very large loss (steamroller).”

I didn’t look further into what specific types of investments Taleb wrote about, but one clear example, at least through the lens of this blog, is writing puts and calls in options trading. We are collecting “pennies” at high probabilities, but once in a blue moon the “steamroller” is going to sneak up on us. Will all the pennies be worth it? Well, that of course depends on how shiny those pennies are and how many you pick up.

Let me tell you about how I just got steamrolled by over $1,100 while picking up $55 worth of pennies. The steamroller was $FCEL. I opened a position on FuelCell Energy on October 8 by purchasing 100 shares at $2.34. I then went on to sell multiple covered calls over the next couple of months at the $2 and $2.50 strikes, proudly picking up $10 to $15 at a time. With a $234 initial investment, each of those premiums represented a 4-7% return!

Things were looking just fine until mid November when the stock price shot up, way past my strike price. The price eventually reached over $10 (and over $13 today)! Had I not had that covered call position at $2.50 strike expiring December 18, I would have been up almost $800. A 336% return! Instead, I got my $55 worth of premiums and $16 in capital gains… a ~30% return.

Lesson Learned?

Well, the short answer is no, I didn’t learn a lesson here. I am still selling covered calls on positions. There is one thing I might do differently with these types of positions in the future.

$FCEL was a pretty speculative play. In fact, my original covered call was an in the money call at the $2 strike. I expected to make about a 6% return after selling for a capital loss and be done with it. I didn’t know if it was going to go up, down or sideways.

In the future, if I’m in a similar speculative play, I could potentially participate in the upside by buying “protection”: buying a cheap, long call at a strike price way out of the money. This would make my covered call a call credit spread. For example, if I had bought a call at the $4 strike, it probably would have only cost me a couple bucks. Sure, my return if the contract expires out of the money would have been those couple dollars less, but I could then have participated in the upside a bit. In this case, if I had a long $4 Call position, that would have been worth over $600 when the stock rocketed up past $10!

Remember, as an option seller you are playing the part of the insurance company selling insurance (put writing), or in this case, the casino (call writing). Sometimes, the gambler is going to win big. That’s OK. In the end, however, the house always wins.

Disclaimer: I am not a financial advisor. This is not investment advice. Please do your own research before investing in anything discussed herein.

Update: Creating my own Ford dividend

Here’s my update on Ford’s dividend: they’re still not giving one!

Since writing my post about creating my own dividend while I wait for Ford to resume theirs, I’ve done just that by selling covered calls on the position I already have in Ford. I have more than 200 shares currently, so I’ve been able to sell two contracts at a time.

Since writing that post, $F price went from $8.80s to almost $9.50 and now has pulled back down to nearly $9 again. We all know volatility is great for options sellers!

Here are the trades I’ve made and the current positions I have open:

Prior to writing that post, I actually had two open covered call positions on $F, one that was right at the money at $9 due to expire on November 20. Rather than risking the shares being called away, I closed that position and sold the December 24 $9.50 Call for a net credit of $.11. $.11 may not sound like a lot, but if that was a dividend payment, it would be the equivalent of an 11.5% yield! I used that credit to buy 1 share of $F for $9.00.

I had another $9 Covered Call position for December 18. I rolled that one out to January 15, this time keeping the $9 strike price. I took in a net credit of $.16 that time (11.9% annualized yield). Again, I reinvested that net credit by purchasing one share of $F at $9.10.

On December 3, I rolled the December 24 $9.50 out again to January 8 for a net credit of $.11 (10.7% annualized yield). I purchased one more $F at $9.26 with the credit.

On December 9, I rolled the January 15 $9 Covered Call (which is now pretty well in the money at this point), out to February 19 for a net credit of $.21 (11.3% annualized yield). I then purchased two $F at $9.43 with the credit. It’s unlikely $F will come down below $9 by February, but I will continue to roll this one out for as long as possible.

As the price of $F continued to tick up, I decided I wanted to try to roll out and up this time. I took that $9.50 January 15 covered call and rolled it out to February 19 for a net credit of $.08 (7.9% annualized yield). Since I didn’t get enough in credit for this one to buy another share of $F, I just pocketed the cash. However, it puts me in a great position to start selling covered calls at the $10 or higher strike price in the future.

Overall, I have taken in $67 of credits, less commissions, by doing this strategy over a fairly short time period. Let’s say that $67 was the quarterly yield amount for holding 200 shares of $F at the current trading price of $9.03, that would be equivalent to a dividend rate of 14.8% ($67 * 4 / (200 * $9.03) = 14.8%)!

Risks

I always want to be mindful of what risks I am taking. 14.8% yield sounds pretty good for a savings account, but of course, this isn’t in an FDIC account. This is real money that could be lost. With that said, before beginning options trading, I was OK with the risk of holding $F, at that point, because I thought the reward of the dividend payments and maybe some modest growth was worth it. In that case, I have no more risk than I had prior to selling these covered calls.

On the other hand, I have limited my upside potential. This isn’t a risk per se, but may make the risk I am taking less worth it. Some argue that option selling is the wrong kind of asymmetric risk… limited upside and unlimited downside (although in this case, the downside actually is limited because the stock can’t go below $0, but you get the point). To that, I would ask them would you rather be casino or the gambler? I’ll pick playing the casino every time. In addition, I’ve demonstrated that sometimes you are able to roll positions up to allow for even more upside from the stock. This is often an option so long as the stock hasn’t had an incredible run up in a short amount of time. And if it has, since I have been reinvesting my credits back into the stock, I still get to participate somewhat in that upside.

Conclusion

I do hope that Ford chooses to reinstate its dividend in 2021. There is still lots of chatter over at SeekingAlpha on when that might occur. However, as long as I am able to continue to roll out and, hopefully, up, I won’t be missing it much!

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.