In The Fall

  When I last checked in to describe the progress of my stock market forays using my self-directed 401k along with my Found Money Fund or FMF (money I get from secondary programming jobs, chess coaching, etc.…) it was just before Christmas and I was of the opinion that the stock market was primed for a fall that I didn’t know when and where it would occur. Since then the stock market reached record highs in late January before dropping 10% in 2 week stretch and settling around 4% off its previous highs.

  My Found Money Fund followed this same pattern, hitting an all-time high in profit and assets between January 26th and February 1st and then dropping 7% in the next week before retracing to a 3.7% loss over the rest of the month. Losing the 7% was especially sad as it represented a 44% drop in my FMF profit which happily did not turn into a loss. All in all the FMF is back where it was in the beginning of January with heavy investments in the three pillars AT&T (T), Phillip Morris (PM)), and Coca-Cola (KO)) with a minor position in real estate trust KO). What all four stocks have in common is dividends ranging from 3.5% to 11% a share with the three pillars having raised their dividends every year for the past 10 (PM) to 50 (KO) years. Fidelity automatically reinvests the dividends for me and when the market is down those dividends are able to purchase more shares. The FMF uses the classic ‘buy and hold’ strategy with minimal option plays. When my pillar stocks were at year highs I used my excess cash to play my option game with Intel through most of 2017, netting $600 and 3.5 shares from reinvested dividends in profit from November 2016 to November 2017.

  Once Intel made its big jump to over $50 a share it became less attractive to me. My attention turned to AT&T whose stock price has trended downwards primarily due to a delay in getting permission from the government to complete its merger with Time-Warner. In my last FMF post I displayed how I netted 2.5% over 5 weeks buying 200 shares of T along with an accompanying option sell. When that option expired I turned around and bought 200 more shares of T at 38.54 on December 18th with a $150 discount for selling an option to sell the shares on January 23rd for $38.50. My ace in the hole was that T was issuing a 50 cent dividend on January 9th so if the shares held their price my option would be called after 3 weeks and if the price fell I would get the dividend for myself. T rose over 39 a share at the beginning of 2018 but dropped under $38.50 by January 9th and I collected the $100 dividend. The stock then dropped to $37 and I was able to buy my options back for $3 and sell a new set of options expiring on February 23rd but this time I was only able to get an extra $87. Since then T has dropped even further to a little over $35 and I was again able to buy my options back for a fraction of the cost. At this point I am ‘stuck’ with 200 shares of T showing a paper loss of $33 at last Friday’s close of 36.72. I used the ‘air quotes’ around the word stuck because as soon as T rebounded over 37 I made $44 by selling the option to sell these shares at $39 up to April 6th. In this case I am leaving some option money on the table in the hopes of selling the stock for an extra 50 cents a share with the higher strike price. If the stock drops again I will buy the option back for a dollar or two and be ready to collect another dividend on April 9th, when I expect to be able to sell an option for $38.5 to further lower my break-even point and until then I can collect the 50 cent dividend every three months.

  

12/18/2017	Buy 200 T @ 38.5452	-7713.99
12/18/2017	Sell 2 T Option @38.5 (.84) Expiring 1/26/2018	161.66
1/19/2018	.50 dividend payable 2/1/2018	100
1/23/2018	Buy 1 T Option @38.5 (.02) Expiring 1/26/2018	-2.04
1/24/2018	Buy 1 T Option @38.5 (.01) Expiring 1/26/2018	-1.04
1/25/2018	Sell 2 T Option @38.5 (.46) Expiring 2/23/2018	89.96
2/20/2018	Buy 2 T Option @38.5 (.02) Expiring 1/26/2018	-4.08
2/26/2018	Sell 2 T Option @39 (.25) Expiring 4/6/2018	44.96
	Total (If option is exercised)	467.32	6.06%
	Break even price	36.69

  My self-directed Fidelity 401k saw a wider swing hitting an 8% drop but rebounding to with a half percent of its peak at the close last Friday. The drop and rebound were more pronounced because my largest holding is Apple (AAPL)which went from a peak of $180 to $150 in the two week correction span. I bought 100 shares of AAPL on December 26th and on January 24th. The December buy has been an exercise in buying back my options to sell them again at a higher strike price but with the stock tanking there was no longer a market for these options. The January buy was meant to collect a quick three day profit on an option but the timing was awful being right before the correction. This was a test of me and my system of grabbing small amounts of cash from short term covered calls. I didn’t panic but instead bought my options back for pennies on the dollar, collected a small dividend (63 cents or a third of a percent) on February 9th, and waited. When the Apple rebounded to 165 I sold the option to sell the stock at 177.50 five weeks in advance for $1.50 a share which sounds impressive but was a fraction of what I was collecting before. Since then, Apple has caught an updraft and is over $179 and has yet again set an all-time high this week. I used the updraft to collect an extra $77 by extending the options an extra week. My patience seems to have been rewarded but my decisions will look silly if the stock tanks before April 6th. It is a fact that I would have collected way more for the option by being even more patient and waiting an extra week.

  

12/26/2017	Buy 100 AAPL @ 170.0457	-17009.52
12/26/2017	Sell 1 AAPL Option @170 (1.62) Expired 12/29/2017	156.36
1/2/2018	Sell 1 AAPL Option @172.5 (1.06) Expiring 1/12/2018	100.65
1/11/2018	Buy 1 AAPL Option @172.5 (2.69) Expiring 1/12/2018	-274.64
1/11/2018	Sell 1 AAPL Option @177.5 (1.12) Expiring 1/26/2018	106.35
1/22/2018	Buy 1 AAPL Option @177.5 (1.49) Expiring 1/26/2018	-154.64
1/22/2018	Sell 1 AAPL Option @177.5 (4.03) Expiring 2/2/2018	397.35
2/2/2018	Buy 1 AAPL Option @177.5 (.04) Expiring 2/2/2018	-4.04
2/9/2018	.63 dividend payable 2/15/2018	63
2/14/2018	Sell 1 AAPL Option @177.5 (1.50) Expiring 3/29/2018	146.83
2/27/2018	Buy 1 AAPL Option @177.5 (5.4) Expiring 3/29/2018	-543.17
2/27/2018	Sell 1 AAPL Option @177.5 (5.85) Expiring 4/6/2018	581.82
	Total (If option is exercised)	1311.15	7.71%
	Break Even Price	164.39

  

1/24/2018	Buy 100 AAPL @ 175.145	-17519.45
1/24/2018	Sell 1 AAPL Option @175 (1.62) Expiring 2/2/2018	423.35
2/2/2018	Buy 1 AAPL Option @175 (.06) Expiring 2/2/2018	-6.04
2/9/2018	.63 dividend payable 2/15/2018	63
2/14/2018	Sell 1 AAPL Option @177.5 1.5) Expiring 3/29/2018	146.83
2/27/2018	Buy 1 AAPL Option @177.5 (5.4) Expiring 3/29/2018	-543.16
2/27/2018	Sell 1 AAPL Option @177.5 (5.85) Expiring 4/6/2018	581.82
	Total (If option is exercised)	891.15	5.09%
	Break Even Price	168.59

  With the sudden selloff one of my favorite stocks Exxon (XOM) dropped under $77 a share for the first time in over a year. $77 is a magic number for me because Exxon pays a 77 cent dividend every quarter and a share price of $77 means a healthy 4% return from the dividend alone not even counting the yearly dividend increase that Exxon has provided the past 35 years. On Wednesday February 14th I bought 200 shares of Exxon for 75.62 a share and collected $207 for the option to sell the stock at $75 by Friday February 16th. It was a defensive play designed to give me either a quick half percent profit or have 200 shares of Exxon at an effective price of $74.63 with plenty of upside. Exxon burst over 77 on the 16th and the option was exercised leaving me with a profit of $74.41 for a three day investment.

  

2/14/2018	Buy 200 XOM @ 75.615	-15127.95
2/14/2018	Sell 2 XOM Option @75 (1.07) Expiring 2/16/2018	207.66
2/16/2018	Sell 200 XOM @ 75 (option was exercised)	14994.7
	Total	74.41	.49%

  I was so pleased with this result that I decided to try it again the next week. On Tuesday February 20th I bought 200 more shares of Exxon at $76.62 and made $133 for the option to sell the stock for $76.50 on Friday the 23rd. The very next day the stock market had a bad day and Exxon dropped under $75. I had an automated sell to buy back my option for $20 and it executed leaving me with $113 and 200 shares of devalued Exxon stock. This did not bother me because Exxon is a money making machine that would still pay better than a 4% dividend for me to hold onto it. I didn’t have to wait long. The next day (the 22nd) Exxon rebounded to over $76 and I made another $96 for option to sell the stock for $76.50 by March 2nd. Since then Exxon has stayed mostly above $76.50 and has even flirted with $80 so once again my profit could have been bigger by waiting an extra day or two. Nothing is certain but it appears that my options will be exercised on Friday leaving me with a profit of $180 (1.18%) for an 11 day investment or in a worst case scenario (aside from a bankruptcy or zombie apocalypse) holding a 4%+ dividend paying stock.

  

2/20/2018	Buy 200 XOM @ 76.5967	-15324.29
2/20/2018	Sell 2 XOM Option @76.5 (.70) Expiring 2/23/2018	133.66
2/21/2018	Buy 2 XOM Option @76.5 (.10) Expiring 2/23/2018	-20.08
2/22/2018	Sell 2 XOM Option @76.5 (.51) Expiring 3/2/2018	96.81
	Total (If option is exercised)	180.8	1.18%
	Break Even Price	75.60

  The ups and downs of the stock market have become exacerbated by programmed trades that tend to create spirals of activity driving prices up and down. This seems to play in well to my generally conservative strategy of buying stocks for short term gains through the use of covered calls. I seem to have passed the test of the first correction in a couple of years by not panicking and even had plenty of cash on hand to take advantage of the situation by purchasing Exxon on sale to make a quick profit through options of holding at a reasonable price. This events of the last month only underscores to me the importance of sticking with solid companies that have a history of paying and raising dividends. If I was investing in shaky companies that didn’t offer dividends I’d have probably bitten off my fingernails and fingers also this last month.