Friday, April 21, 2017

FMF – Go With What You Know

  It has been a tumultuous seven months since I last reported on the Found Money Fund (or FMF). The FMF was started in 2015 as the dropping off point in a Fidelity stock brokerage account for the extra money I get from giving chess lessons, supporting the shoe store software I stopped writing a decade ago, tax returns, side programming jobs, money I find on the ground walking my dogs, and any other unanticipated income. I started using my found money to buy four stocks: Phillip Morris (PM), AT&T (T), Coca-Cola (KO), and mortgage real estate trust company American Capital Agency Corp. (AGNC). All four stocks pay dividends which I reinvest back into the stocks commission free. In September the AGNC stock lowered its dividend from 20 cents a share to 18 cents a share and I was considering selling the stock because I expected the stock price to go from $19.50 a share to $18 a share since I remembered the stock price going from $22 to $20 a share when the dividend was cut from 22 cents a share to 20 cents a share.

  I had placed a sell order for 102 shares of AGNC stock with a stop limit of 50 cents, meaning that the sale would be executed when the price went down 50 cents from the peak price AFTER I placed the sell order. The stock drifted a little over $19.50, reached $19.81 and then took a severe downturn whereupon my sell order was executed for $19.31 on September 9th. The stock drifted between 18.50 and 19.50 over the next couple of months and hit a low of $17.53 on December 15th, leaving me feeling very smart indeed about my decision to sell this mortgage real estate investment trust (mREIT) that I really don’t understand. I am feeling a lot less smart about my decision in the last two months since a rise in interest rates with the prospect of more to come has given the stock a second wind to currently trade over $20.50 a share. I kept 11.443 shares of the stock as my profit and still receive $2 a month in dividends so it’s not a financial disaster but more of an opportunity cost due to not understanding this stock since by simply doing nothing I would have made an extra $300 in profits.

  Aside from the AGNC misfire, the other three pillars of the FMF have been performing nicely with Phillip-Morris my top performer, Coca-Cola bringing up the rear, and AT&T solidly in the middle with massive fluctuations depending on how the investment public views the prospects of their upcoming merger with Time-Warner. At the time of my last post, the FMF had shown an all-time profit of $1347, down from the high of $1615 on July 6th, 2016. The uncertainty surrounding the election and the surprise election of President Trump sent my stocks into a tailspin and the profits had dwindled to under $500 on November 14th. Then stocks took a dramatic turnaround. My profits went back over $1000 on December 9th, again reached the $1500 mark on February 3rd, and hit a new all-time profit of $1659 five days later. In the next two months I hit 18 new profit records with the latest high of $2377 set on April 18th. Meanwhile I had a decent time getting found money and was able to make 8 buys in my preferred purchase amount of $500.

DateTransactionDJIAStock +/-FMF +/-
September 9, 2016SELL 102 AGNC @19.3218,085216.631,037.16
December 5, 2016Buy 12 T @38.806219,216308.56629.82
January 17, 2017Buy 12 KO @41.13619,826-18.081,247.29
February 23, 2017Buy 5 PM @105.466120,810779.431,916.70
February 23, 2017Buy 12 T @41.676120,810629.271,916.70
March 6, 2017Buy 5 PM @110.041920,954912.272,011.67
March 6, 2017Buy 12 KO @42.24520,95482.872,011.67
March 6, 2017Buy 12 T @41.7920,954640.822,011.67
March 17, 2017Buy 12 KO @42.2620,91467.072,242.58

  You may have noticed that even though I sold 100 shares of AGNC on September 9th there were no buys until December and if you did you may have wondered what I did with the proceeds of the sale. I held onto the money and even held out the next three scheduled buys until I had enough cash saved to introduce the FMF to my favorite stock – Intel (INTC) and my favorite strategy of buying 100 shares of a stock and selling a covered call option to sell the stock at a future date for an agreed on price. This is a strategy I’ve been using for three years on my 401k plan and it is a plan that I understand even though it may not be the preferred method of the experts whose strategies I read about every so often.

  On November 30th I bought 100 shares on Intel at the market price of 35.16 and immediately collected $55 to sell someone the right to buy the shares for $35.5 on January 6th 2017. Intel dipped to 33.56 the very next day but rebounded in spectacular fashion, breaking $35 on December 7th, $36 on December 12th, and $37 on December 20th before settling between $36 and $36.5 until January 6th at which time my option was called and I sold the stock as agreed upon for $35.5. My profit for the 37-day investment was $72.42 or 2.05%. The next Monday I bought 101 (using some of my profit for the extra share) shares of Intel at $36.70 and made $132 by selling the option to buy the shares at $36 on February 10th. If the option was exercised I would sell the 100 shares and my profit would be $54 after commissions. In The ensuing 32 days Intel went over $37 again on January 20th and reached $38.45 on January 27th before settling back under $37 on January 31st. On February 2nd the stock closed at $36.68 and I was sure my option would be called early since owners of the stock as of February 3rd receive a dividend of 26 cents a share. I was surprised when my option wasn’t called but maybe the experts know more than me since on February 9th Intel went from $36.50 to $35.46 and stayed well below $36 on the expiration day of February 10th.

  On February 10th I could have let my option expire but I decided to spend $1.04 to buy back the option to sell another option at $36 that would expire on May 19th. I could have saved the $1.04 by letting the option expire but I wanted to get my next option play in the books before the weekend. I didn’t like going three months out on the new option but that seemed to be the best deal at the time. I could have waited for the option prices to go up on Intel’s next big move up but to me that seemed like gambling (there could also have been a big move down) and I don’t want to gamble – I want to ensure a solid return. I received $97 to sell the option which brought my proceeds on this 100 shares of Intel to $219 in options and $26 in dividends for a grand total of $245 or 6.9% of the purchase price and I still own the stock. If the option is called I will mark up a loss of $70 but I may get another dividend of $27.25 (Intel raised their quarterly dividend from 26 cents a share to 27.25 cents) if the option isn’t called before May 3rd. Here is the complete accounting:

  
DateTransactionsAmountShares
November 30, 2016Buy 100 INTC @35.166-3524.55+100
November 30, 2016Sell 1 INTC Option @35.55 (.63)
Expiring 1/6/2017
+55.00
January 6, 2017Sell 100 INTC @35.50
(Option was exercised)
+3541.97-100
January 9, 2017Buy 101 INTC @36.695-3714.15+101
January 9, 2017Sell 1 INTC Option @36.00 (1.40)
Expiring 2/10/2017
+132.00
February 3, 2017Dividend INTC (Payable 3/1/2017)+26.00
February 10, 2017Buy 1 INTC Option @36.00 (.01)
Expiring 2/10/2017
-1.04
February 10, 2017Sell 1 INTC Option @36.00 (1.05)
Expiring 5/19/2017
+97.00
March 1, 2017Reinvested Dividend -26.00+.722
May 19th, 2017Sell 100 INTC @36.00
(if option is exercised)
3594.97-100
Total (If option is exercised)+181.211.722

  So if the option is exercised and I sell 100 shares of Intel at $36 on or before May 19th I will show a profit of $181 which is 4.8% AND I would still own 1.722 shares. If the option is not exercised I will own the 101.722 shares of Intel at a net cost of $3,413 or $33.80 a share which is far less than I paid. Currently Intel is hovering between $35 and $36 a share. I have no idea if the option will be called or not. My best case scenario is that the stock stays right around $36 so if the option is exercised I can start the process all over again and if the option is not exercised I will just sell the option all over again and bank more profit. Practically speaking I would have had better results sticking with AGNC but I just don’t understand why the stock price is so high after the company has reduced its dividend from 22 cents to 20 cents to 18 cents a share. I much prefer to stick with Intel and playing the options carousel since it is something I understand even if I must take a much more active role than I like. For completeness sake I will include the status of the FMF as of April 18th.

StockAverage
Purchase
Price
Profit on
April 18th
Purchased
Shares
Reinvested
Shares
DividendQuarterly
Dividend
PM92.531156.71392.3021.0443.03
KO42.67206.00933.0140.3735.52
AGNC-.01250.38012.0990.186.54
T37.36540.201035.2850.4953.06
INTC33.80224.321010.7720.272527.71
Total
Quarterly
Dividends
165.87
Monthly
Dividends
55.29

  Profits do not include options that are in the money For example when I sell an option to trade Intel at $36 and Intel is trading at $36.25 I have to subtract $25 from the Intel profit since that will belong to the buyer if the option is exercised. My monthly dividend has only gone from $48.60 a month in September to $55.29 a month despite adding 8 buys and every stock except AGNC raising their dividend. This is a consequence of trading out $20 a month of AGNC dividends for $9 a month of Intel. The upside is that I am accumulating cash by playing the options game with Intel (reflecting in the reduced purchase price of the stock) that I am using to make buys of the other three pillars of the FMF. I hit a milestone when I accumulated 100 shares of AT&T. Options trade in lots of 100 shares and I jumped in by trading an option to sell 100 shares of T at a price of $46 on October 21st. Why so far out in the future? That will be the subject of my next post.