Using Options to Pay Off My Mortgage Early: Month 5

Recap: In my fourth month (January) I had a record-high option trading profits of $188 in my mortgage pay off strategy, however my principal in the trading account barely grew and sat at $3,515.08. In total, I had paid a total of $256 extra principal towards the mortgage, which will equal a total savings of $393 over the life of the loan. In total across my four diversified strategies, I had earned a return of $513.33 on my $3,492.63 total investment, which is 14.7% or a CAGR of 50.9%. Impressive numbers, and way beyond my initial goals. And most certainly not sustainable! (If it were sustainable, I will be opening my own hedge fund by the end of this.)

Thanks in large part to beginning to implement some synthetic covered calls (aka “poor man’s covered call” or “PMCC”) and some luck in timing the market, February was another record-setting month. I earned $199 in options trading profits, a 5.5% return on capital and another record! I was able to grow my principal up to $3,964.77 which is 13.3% more than the previous month. More details on the breakdown of profits across the four strategies below, but first my positions and trades…

My positions & trades

$AAL, 100 shares at $13.98 average ($1,398 total principal). Principal is now currently up an astounding 51% ($713.08), however I am capped at $17 due to a $17 strike covered call position expiring March 19. Therefore, my capital gains are limited to just $302 total. I closed two positions for the month and for a profit of $39 (one put credit spread and one covered call). Similar to last month, I collected a net credit of $16 after rolling up from a $16 strike position to the current $17 position.

I have yet to decide whether I will try to roll up again or just out to April, assuming I can get an acceptable return. American Airlines is now getting to a point where I think it doesn’t have that much more upside from the county reopening. Basically, I think all of that is already priced in. For that reason, I am leaning toward rolling to another $17 strike. Implied Volatility remains high, so I should be able to get a decent return for that.

$APHA, no open positions. This month I traded two put credit spreads on Aphria. It’s had quite a run up, so was able to close both out for profit. Downside of selling puts is that the maximum profit is capped. When you have incredible run-ups like $APHA did it’s hard not to have FOMO. Still, ROI on these was nothing to complain about. The two trades totaled $43 in profits. With $100 at risk over the course of 14 days is an annualized ROI of 112%!

$GE, 1 LEAP January 21, 2022 $5 Strike Call at a cost of $6.55; 1 March 26 $12.50 Covered Call. As I wrote last month, I am trying synthetic covered calls (aka “poor man’s covered call” or PMCC) for the first time. Both of my trades are going really well. With $GE trading at $12.54 now, that $5 strike LEAP is now worth $7.55, which is a $100 profit right now. In addition, I closed two covered call positions during February for $45 total profit. Those covered call positions were at the $12 strike. I rolled the second one up to the current March 26 $12.50 strike covered call for a net credit of $5.

If my covered call gets assigned at $12.50, my $5 LEAP will be forced to be exercised and the spread will be what I take home. So $750 here. For that reason, when calculating my total principal, I cap this position at $750 (unless I roll it up to a higher strike).

$GPRO, no open stock positions. I only had one trade on Go Pro in February, a $1 wide put credit spread. I opened the $8/$7 strike position after the stock had dropped considerably. I actually was wrong on the direction of this trade, as the stock continued to go below my short strike, as shown in the chart below. Thanks to theta (time decay) and vega (reduction in volatility), this one was on the side of the option seller. I closed the position for a small, $6 profit. This month I have sold some cash-secured puts at $7.50 strike.

$M, no open positions. I continued from last month selling put credit spreads on Macy’s. The premiums were good and the volume was also good making spreads more attractive. I find it hard to get orders filled for spreads on the less liquid stocks sometimes. I closed two trades for a total profit of $37.

$MRO, 1 LEAP January 21, 2022 $5 Strike at a cost of $3.80; 1 March 12, 2021 $9 Covered Call. Last month I said I was going long on Marathon Oil Corporation because I thought demand for oil would increase as the World begins to open up from COVID-19. Well, I was right. Gas prices are up and $MRO has blown past my $9 strike! At over $12 it is now basically at pre-pandemic levels.

I closed my first covered call for a nice $23 profit. But then I should have moved the strike up to $9.50 so I could have had a little more appreciation. However, I was still able to make $17 on my next covered call when I rolled it out to my current contract. Unlikely that I will be able to continue collecting good premiums on this so I might have to let this one go in March.

Extra Mortgage Principal Paid

As I explained in January’s post, I don’t take my options trading profits and put all of it towards the mortgage anymore. Instead I spread it across a couple other investments that I think are very likely to beat my 3.125% mortgage APR in the long run. I now target just 1% of the beginning trading portfolio value each month. February started with a value of $3,514, so I rounded 1% up to $36.

In addition, my small but growing portfolio of preferred stocks paid out their first dividends, which totaled $1.33. So between the two, I put $37.33 towards the mortgage. I’ve now paid a total of $293.33 over the past five months, which will equal $450 in savings over the life of the loan.

Preferred Stock

My first passive alternative to directly paying off my mortgage principal is preferred stock. At the end of February, my preferred stock portfolio for this mortgage pay off strategy was worth $187.01 and consisted of seven different positions (8 shares total). I purchased three preferred stocks for the month, totaling $67.31. Here are my current holdings:

  1. CDR-C, 6.5% coupon with a yield on cost of 7.39%
  2. GLOP-A, 8.63% coupon with a yield on cost of 10.45%
  3. NRZ-A, 7.5% coupon with a yield on cost of 8.07%
  4. NRZ-B, 7.125% coupon with a yield on cost of 7.95%
  5. PEB-C, 6.5% coupon with a yield on cost of 6.95%
  6. PMT-B, 8% coupon with a yield on cost of 8.08%
  7. SCE-J (2 shares), 5.375% coupon with a yield on cost of 5.57%

February’s $1.33 in dividends came from $NRZ-A, $NRZ-B and $CDR-C.

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 February, $15 was put into $UPRO and $17 into TMF. At the end of the month, the value in these funds was $88.01, which is actually a negative return on the $93 I’ve invested. Nothing to sweat at this point, I will just continue to buy more at lower prices. To reduce my mortgage by one month I would need to make a $573 payment, so still a long way to grow.

Accounts Summary

Of the $199 earned from options trading in February, $62 was set aside into the ULP for taxes, $37.33 was put towards the mortgage principal, $67.31 was invested into preferred stocks and $32 was invested into Hedgefundie’s Excellent Adventure. The remaining $3.02 will stay in my trading account. The trading account’s value ended January at $3,964.77, preferred stock was at $187.01 (with a forward yield of 7.35%) and Hedgefundie was at $88.01.

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 twice down to just 0.3% now. 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 5 months I have invested $3,656.84 (initial $3,000 + $164.21 per month). Benchmark #1 is at $3,662.10, Benchmark #2 is at $3,690.78, Benchmark #3 is at $3,957.27. My actual total is at $4,656.27. I’m just shy of $1k total return at $999.43, or 27.3% (78.6% 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 27.2%, #2 by 26.2% and #3 by 17.7%.

The market has had plenty of ups and downs the past couple months. I will keep plugging away and hopefully will be able to continue to outpace all three benchmarks!

Disclaimer: I am long $AAL, $MRO, $GE, $CDR-C, $GLOP-A, $NRZ-A, $NRZ-B, $PEB-C, $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.

Using Options to Pay Off My Mortgage Early: Month 3

First off, HAPPY NEW YEAR! This is not a yearly recap post and since I just started this blog a couple months ago, I’m not sure I will be making one. I will likely have a forward looking 2021 post though. Now, onto the post…

After two months of this experiment, I had put a total of $187 towards my mortgage principal from options trading profits which will equal $288 of interest saved over the course of my 30-year 3.125% loan. In addition, my options trading account principal of $3,200 (which was/is funded from savings from refinancing) was up to $3,240.86. A great start and already ahead of my initial goal by 2.6%.

I have continued to outperform in December, my third month, with $170 in options trading profits which is a 5.1% return on capital! In addition, my principal has grown to $3,498.35, 6% more than the $3,300 added to the account thus far. Remember, that 6% is after deducting taxes and withdrawals from the account to make the extra mortgage principal payments.

This month I have made a dramatic tweak to how I am divvying up my options trading profits towards my extra mortgage principal payments. More on that after I review this month’s positions and trades.

My positions & trades

$AAL, 100 shares at $13.98 average ($1,398 total principal). Principal is currently up 15.4% ($215.08), however I currently have a $15.50 covered call position expiring on January 29, limiting my capital gains to $152 total. I closed two positions for the month and for a profit of $74. I collected a net credit of $12 after rolling up from a $15 strike position to the current $15.50 position.

Going forward I will most likely continue to sell the $15.50 strike even if it stays in the money. I should be able to collect a large credit at least one more time. I will consider moving up to the $16 strike if I can still collect a decent credit. My main objective here with this account is to generate income, with a secondary goal of capital preservation and tertiary is capital growth, however I don’t want to leave easy money on the table in the name of current income. Like so many things in life, it is a balance.

$FCEL, no open positions. This month I finally had my shares of FuelCell Energy called away. In the end, I made about 30% in profits from that position. BUT I missed out on a $1,000 profit! This was a classic case of picking up pennies in front of a steamroller. In my defense, the pennies were very shiny and no one could have seen that steamroller coming!

I only closed that final $2.50 covered call for a $10 profit. On to the next one!

$M, no open stock position. Last month I had my Macy’s position called away at $6.50. I had just about given up on the stock when I saw an easy trade by selling a $9 Put for January 15 for a credit of $15. This trade is a 1.7% return (26% annualized), so it meets my 1% goal.

If the stock drops suddenly to below $9 and I am assigned, I expect the premiums to go up and good potential for selling covered calls.

$GPRO, no open stock position. Similar to Macy’s, Go Pro was a stock that was called away from me in November. I decided to sell some puts this month, and that worked out well for me. I closed three positions for $34 profit. My highest strike price on those positions was $7.50, so that $34 was made using $750 as collateral, which is a 4.5% return.

I currently have a put credit spread at the $8/$7 strikes that I collected a credit of $27. In the past couple months I have had a lot more success with simply selling naked positions (cash-secured puts or covered calls, technically) than with credit spreads. However, more recently I’ve found some decent success with credit spreads as long as I’m willing to roll it out when I’m challenged. Contrary to a lot of advice, I am generally able to do this while collecting a credit if I widen the spread. So if I start with a $1 spread, I roll it out and down (for a Put) or up (for a Call). I’m therefore increasing my potential loss, which is why it generally isn’t advised, but it’s working for me right now so I’m going to go with it.

$APHA, no open stock position. I continued selling cash-secured puts on Aphria this month for some decent profits. I’ve thus far avoided getting assigned the stock. I closed three positions for a total profit of $33. Similar to the $GPRO puts, those $33 were earned with a maximum collateral used of $700, so a 4.7% return.

I currently have a $6.50 cash-secured put for January 15 open that I am watching closely. I collected a net credit of $18 after rolling down and out from December 31 $7 strike. That’s looking like a pretty smart move since it closed at $6.92 on New Year’s Eve and I would have been assigned. I may look to roll down and out to the $6 strike if I am able to for at least a 1% credit (i.e. $6).

$MRO, no open position. I had one trade on Marathon Oil Corporation this month, a credit spread from $5.50 to $4.50, with a profit of $9.

$MAC, no open stock position. I have an open credit spread on The Macerich Company (a REIT) from $9 to $7.50. I collected a credit of $13.

Extra Mortgage Principal Paid

As I said earlier in the post, I’ve changed how much of my profits I am putting straight into my mortgage principal. Perhaps this deserves its own lengthy post, but essentially I am wrestling with the opportunity cost of locking those profits up into the equity in my home. Now don’t read this as my giving up three months in.

As I listen to more finance podcasts and Youtube videos, I often hear about the velocity of money. When money is moving, it has velocity. Option trading is great because you are constantly moving money from one opportunity to the next. The money has velocity. When a dollar goes into my mortgage principal, it comes to a screeching 3.125%-halt. Remember my goal, which I am currently outperforming considerably, is 1% a month or 12% a year! Wouldn’t it be great if I could keep the velocity going before slowing it way down with my mortgage?

Of course it would be. However, the only reason anyone ever put extra principal into a mortgage was for that guaranteed rate of return. It’s essentially risk free! Compare that to a 0.4% APY “high yield” savings account and that 3.125% rate now looks pretty good! Based on my performance in the past three months, I should sell options with every dollar I have since my returns are so great, right?! Well, no. I’m not so naive to think that this will continue on forever without any losses.

All this to say that I will continue to remove my profits from my mortgage payoff trading account. I will continue to set aside the correct amount for taxes. Assuming I am left with more than my 1% goal for the month, I will take that 1% and put it towards my principal. The remaining balance is where I plan to… diversify.

Preferred Stock

I’m not going to take the time to explain the nuances of preferred stock here (Investopedia definition). It is often referred to as a hybrid of stocks and bonds. Anyway, I have been reading a book called Preferred Stock Investing and I believe there are some great opportunities for some fairly high yields. This month I actually bought two preferred stocks with dividends that yield an average of about 8%. I plan to take those dividends and put that money into the mortgage principal. Instead of taking my super high return from options trading and slowing it down immediately into my mortgage, these dollars will keep speed for a while longer.

While I expect (hope) to outperform even these high yields of 8% with my options trading, these income source has the benefit of being nearly completely passive. Options trading is one of the most active forms of trading, I am learning. Diversifying profits away from the options trading and into more passive income streams will help keep everything more sustainable as the account size grows.

Hedgefundie’s Excellent Adventure

Honestly, not really sure where to start with this. Think leverage. Think risk parity. That’s Hedgefundie’s Excellent Adventure. The strategy, specifically, is 55% in a 3X leveraged S&P 500 ETF $UPRO and 45% in a 3X leveraged long term bond ETF $TMF. Rebalance as required. There’s a great write up of the strategy here (it initially started from an epic thread on the “Bogleheads” forum).

After setting aside my portion straight towards the mortgage and purchasing any preferred stocks for the month, I will split my profits 55/45% into the Hedgefundie strategy. For now, my plan is to let this pile grow until I reach enough to reduce my mortgage term by one month. As of now, I need $643. This allows me to benefit from the great growth potential of leveraged ETFs while minimizing the risk since I won’t be letting it grow indefinitely.

So how did I slice this complicated pie this month?

After taxes ($53 into ULP), the $170 profits was $117 net. Instead of putting that $117 total into the mortgage as I would have in the previous two months, I put just $33, which is ~1% of my account’s starting principal of $3,240.86 for December. I bought two preferred stocks ($NRZ.A for $23.22 and $PMT.B for $24.75) for $48.15. Finally, I invested $36 into the Hedgefundie strategy, as $20 in $UPRO and $16 in $TMF.

With a combined $220 put towards my mortgage principal in three months, I will save $338 in interest over the life of the loan. In addition, my preferred stocks are now worth $49.55, a 4.2% return, and will yield ~8% going forward ($3.88 in dividends annually). Finally, the Hedgefundie’s Excellent Adventure is also up 4.2% to $37.53.

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 0.4%. Benchmark #2 is putting all of those savings straight into extra monthly payments to the mortgage principal. Finally, Benchmark #3 is simply buying $SPY.

I continued to make gains across all three benchmarks this month. When considering 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 total value is at $3,799 after the month of December, a 13.2% improvement over November. That beats Benchmark #1 (all savings) of $3,332 by 14.0%, Benchmark #2 (extra mortgage payments only) of $3,344 by 13.6% and Benchmark #3 ($SPY) of $3,561 by 6.7%. Below is a chart of my progress so far.

Thanks again for following along. Looking forward to more progress in 2021!

Disclaimer: I am long $AAL, $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. This post contains affiliate links.