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.

A Tale of Two Apples

  When I last wrote about my adventures using my self-directed 401K to buy stocks and write covered calls against them it was the end of September and my purchases of Exxon (XOM) and Apple (AAPL) were stuck in limbo as their stock prices had dipped so far below the purchase price and option stock price that I felt compelled to sell an option for Exxon with an expiration date four months into the future to generate cash flow while my 100 shares of Apple was showing a loss of over $400 despite my having collected over $400 in selling options on the stock over a 5 week period.

  In the intervening three months the stock market has risen upwards. The Dow Jones Industrial Average has gained 10% and most of my favorite stocks have gone along for the ride. Exxon burst past my option strike price of $82.50 in October and flirted with $84 days before the dividend date of November 10th. I was expecting my January 2018 option to be called in order for the buyer to collect the dividend but to my surprise the option was not exercised and I received a bonus of $154 on December 10th. With a month to go before the option expires, Exxon is in a band between $82 and $84 and it seems to be a close call as to whether the option gets exercised. Whether it gets called or not I only consider this a minor win since being stuck with the stock for an extra 4 months my ROI is 9% on an annualized basis which is good but not great and could be considered downright poor considering the length of time I had to hold the stock.

  

6/19/2017	Buy 200 XOM @83.005	-16605.95
6/19/2017	Sell 2 XOM Option @82.5 (2.06) Expiring 8/18/2017	405.65
8/2/2017	Buy 2 XOM Option @82.5 (.05) Expiring 8/18/2017	-10.08
8/18/2017	Sell 2 XOM Option @82.5 (.85) Expiring 10/20/2017	+163.66
8/10/2017	.77 dividend payable 9/11/2017	+154.00
8/28/2017	Buy 2 XOM Option @82.5 (.10) Expiring 10/20/2017	-20.08
9/5/2017	Sell 2 XOM Option @82.5 (.80) Expiring 1/1/2018	+153.65
11/10/2017	.77 dividend payable 12/11/2017	+154.00
	Total (If option is exercised)	+889.60	5.36%

  I has a much happier time with Apple. A week after my post the stock crept over $155 and I took the opportunity to collect $170 by selling another option to sell the stock for $162.50 on November 3rd. I could have done much better by waiting a week or two since Apple continued to gain momentum throughout the month and broke over $168 on October 30th. I knew that AAPL’s dividend date was on November 3rd and the risk of the stock sliding back under $162.50 was minimal so I bought my option back on October 30th at a high price and sold the same option only expiring on November 17th, picking up $60 in the exchange. The new option was exercised a week early on the dividend date of November 10th so I was happy to have an extra $60 in return for a weeks worth of patience and overall the investment gained $750 over three months for an annual return of 19.45% which I consider very good.

  

8/15/2017	Buy 100 AAPL @161.7053	-16175.48
8/15/2017	Sell 1 AAPL Option @162.5 (.88) Expiring 8/18/2017	+83.00
8/17/2017	Buy 1 AAPL Option @162.5 (.10) Expiring 8/18/2017	-10.04
8/17/2017	Sell 1 AAPL Option @162.5 (.84) Expiring 8/25/2017	+79.00
8/257/2017	Buy 1 AAPL Option @162.5 (.04) Expiring 8/25/2017	-4.04
8/25/2017	Sell 1 AAPL Option @162.5 (.90) Expiring 9/1/2017	+85.00
8/30/2017	Buy 1 AAPL Option @162.5 (1.86) Expiring 9/1/2017	-191.64
8/30/2017	Sell 1 AAPL Option @162.5 (3.65) Expiring 9/15/2017	+359.35
9/14/2017	Buy 1 AAPL Option @162.5 (.03) Expiring 9/15/2017	-3.04
9/15/2017	Sell 1 AAPL Option @162.5 (.70) Expiring 9/22/2017	+65.00
9/20/2017	Buy 1 AAPL Option @162.5 (.10) Expiring 9/15/2017	-10.04
10/3/2017	Sell 1 AAPL Option @162.5 (1.75) Expiring 11/3/2017	+169.35
10/30/2017	Buy 1 AAPL Option @162.5 (6.05) Expiring 11/3/2017	-610.64
10/30/2017	Sell 1 AAPL Option @162.5 (6.75) Expiring 11/17/2017	+669.34
11/10/2017	Sell 100 AAPL @162.50 (option was exercised)	+16244.67
	Total	+749.79	4.64%

  A few days before the Apple option was due to be exercised my 401k had become cash rich because my favorite stock Intel (INTC) had jumped from a multi-year high of $40 a share to over $47 a share from October 20th to November 3rd. I decided to cash out much of my Intel holdings because while I like the company and believe I understand the company I think that the price has grown too much too fast and I’d rather not be left holding the bag when their price once again drops because all stocks rise and fall. I kept my profit in the form of Intel stock but had the initial capital and went looking for new covered call option opportunities.

  My first purchase was with Apple which is becoming one of my new favorite option stocks because of its volatility and the seemingly eternal optimism of its stockholders. On November 7th I bought 100 shares of APPL near its all-time high of 174.70 and sold the option to sell the stock for 172.50 on November 10th for $258. My thought was that I would make $30+ for a three day investment and if the stock dropped below 172.50 I would collect a $63 dividend on the 10th. The stock stayed well over 172.50 and on the 9th I traded options, buying back my November 10th option and selling the same option for November 17th. The trade netted me an extra $64 and as a bonus the option was not exercised on the 10th which gave me $63 in dividends for a total of $159 in profit if the option was exercised the next Friday.

  IF. Unfortunately, Apple took a tumble the next week and dropped past $172.50 on its way to $169.64 a share by November 17th. I bought back my option for $4. I could have sold a new option for $50 for the next week but since I had at this point collected almost $400 on this particular stock purchase I decided to gamble a little and sold an option expiring in 2 weeks on December 1st but at a strike price of $175 instead of $172.50. I collected $70 for the option and there was the promise of another $250 if the option was exercised. Apple rose over $175 on the 27th and 28th before dropping below $170 once again on November 30th and December 1st. I bought back my option for $10 on the 30th and when AAPL jumped over $171 on the 1st I sold another option to sell the stock for $175 in two more weeks (on the 15th) and collected another $120.

  In the succeeding two weeks Apple’s share price never got to $174 a share much less the 175 strike price. I bought my option back on the 14th for $10 and got $79 for the option to sell the stock at $175 on December 22nd. This week Apple set a new all-time high stock price and climbed over $177 on Monday before settling in between $174.50 and $175.50 on Tuesday and Wednesday. At this point it is a coin flip as to whether my option will get called or not. If the option does get called I will have collected a profit of over 3.7% on my 45 day investment which works out to over 30% annually. If the price stays below 175 and I still own the stock come Monday I think I will start selling the option at a strike price of $177.50. While the stock may crash in the next week or so I consider this a big win so far.

  

11/7/2017	Buy 100 AAPL @174.655	-17470.45
11/7/2017	Sell 1 AAPL Option @172.5 (2.65) Expiring 11/10/2017	+258.35
11/9/2017	Buy 1 AAPL Option @172.5 (2.25) Expiring 11/10/2017	-230.64
11/9/2017	Sell 1 AAPL Option @172.5 (3.00) Expiring 11/17/2017	+294.65
11/10/2017	.63 dividend payable 11/16/2017	+63.00
11/17/2017	Buy 1 AAPL Option @172.5 (.04) Expiring 11/17/2017	-4.04
11/17/2017	Sell 1 AAPL Option @175 (.80) Expiring 12/1/2017	+75.00
11/29/2017	Buy 1 AAPL Option @175 (.10) Expiring 12/1/2017	-10.04
11/30/2017	Sell 1 AAPL Option @175 (1.25) Expiring 12/15/2017	+119.35
12/14/2017	Buy 1 AAPL Option @175 (.10) Expiring 12/15/2017	-10.04
12/14/2017	Sell 1 AAPL Option @175 (.84) Expiring 12/22/2017	+79.00
	Total (If option is exercised)	+658.89	3.77%

  I made two other option plays with my Intel capital as well as the cash I am accumulating from the covered call options. Both were incredibly successful thanks to an email from a blog reader suggesting that I could increase my profit by playing this option game with stocks on the low end of their yearly cycle and selling the option at a strike price close to or over the purchase price instead of looking for a small profit by selling the covered calls below the current selling price. The idea made sense to me. Buying quality stocks at yearly lows is normally a good policy anyway and collecting option money and profiting by a stock price increase is a win-win while getting stuck holding a quality stock purchased at a low price isn't an awful situation. AT&T (T) seemed like a likely candidate for me. It is a mainstay of my FMF (Found Money Fund) and has increased their now 50 cent a share dividend for 34 consecutive years. The stock was also near its 52 week low due to the uncertainty over whether the government will challenge or stop its purchase of Time-Warner. On November 9th I bought 200 shares of T for 33.87 and collected $157 for the option to sell the stock at $34 a share on December 15th. After bouncing between $33 and $34 for most of November, AT&T went over $36 a share on November 29th and over $38 a share on December 12th. My option was exercised and I sold the stock on December 15th for $34 as agreed upon for a total profit of $172.20 for a 36 day investment which works out to a return of 2.5% and 25.75% annually. Yes, I could have made more money by holding the stock and not selling the option but that was not apparent on November 9th and I am happy to have made a great return with little risk of a big loss.

  

11/9/2017	Buy 200 T @33.877	-6780.35
11/9/2017	Sell 2 T Option @34 (.82) Expiring 12/15/2017	+157.66
12/15/2017	Sell 200 T @34 (option was exercised)	+6794.89
	Total	+172.20	2.54%

  My other play in November was with another FMF standout, Phillip Morris (PM). PM is the foreign tobacco and cigarette arm of Marlboro and has provided a steadily increasing dividend for the last 10 years since it spun-off from its parent company Altria. PM was over $120 a share earlier this year but a strong dollar had depressed its earnings and was sitting at a 6 month low of 103 when I made move on November 10th, buying 100 shares at 103 and collecting $95 for the option to sell the stock at the same $103 a week later on November 17th. This ride was similar to my apple adventure. PM bounced between 101 and 103 a share for the next week and on the 17th I was able to buy back my option for $9. I immediately sold an option to sell the shares for $104 expiring 2 weeks later on December 1st for $70. I was leaving some money on the table in the expectation that if PM went over $104 a share I would collect a better profit when the option was exercised. PM never got to 104 and on November 28th I was able to buy back my option for $10 and sell another $104 option expiring on December 15th for an additional $81. On December 4th PM went over 104 and didn’t look back. It hit $110 on December 15th and my option was exercised, leaving me with a $316 profit which works out to 3% (32% annually) over 35 days. Again I could have made more by holding the stock once again I am happy to take a outstanding return with for a low risk.

  

11/10/2017	Buy 100 PM @103.005	-10305.45
11/10/2017	Sell 1 PM Option @103 (1.00) Expiring 11/17/2017	+94.95
11/17/2017	Buy 1 PM Option @103 (.09) Expiring 11/17/2017	-9.04
11/17/2017	Sell 1 PM Option @104 (.75) Expiring 12/1/2017	+70.00
11/28/2017	Buy 1 PM Option @104 (.10) Expiring 12/1/2017	-10.04
11/28/2017	Sell 1 PM Option @104 (.86) Expiring 12/15/2017	+81.00
12/15/2017	Sell 100 PM @104 (option was exercised)	+10394.80
	Total	+316.22	3.07%

  As pleased as I am with my recent option results, I can't help but think that the stock market is so high right now that it is primed for a big fall. When? No one knows and certainly not me. That is why I continue to stick with solid companies that have a decades-long history of paying and raising dividends. Even when I get stuck with XOM and APPL like I did in September I am stuck with a top quality stock that makes money and pays dividends. The higher this market goes the more inclined I am to keep my option plays of a shorter term so I can hopefully get out before the bubble breaks but in the meantime I am riding the ups and downs like a surfer and enjoying the ride.

Fingers in the Cookie Jar

  When I last wrote about my adventures using my self-directed 401K to buy stocks and write covered calls at a lower price than I paid for the stock to grab a short term 1 or 2 percent return on my investment I was going to experiment further with selling options that expired shortly after the dividend declaration date of early August with the thought that I would either pick up an extra dividend if the stock tanked or have the option picked up early in case the stock stayed above the strike price. I tried this with my two old favorites Exxon (XOM) and Emerson Process Management (EMR) with decidedly mixed results.

  I bought 200 shares of Exxon on June 19th and for $83 and collected $400 by selling an option to buy the shares on August 18th for $82.50. I expected the stock to stay somewhere close to $82.50 and was hoping the option would get called on the dividend date of August 10th and give me a 1.77% profit in less than two months. Unfortunately the day I bought the stock for $83 was the day it took a steep descent and bounced between $79 and $81 for the next five weeks. On August 2nd I bought back my option for $10 and collected $160 for selling the option to buy my 200 shares at $82.50 but with an expiration of October 20th. The quarterly dividend of $154 in dividends was mine on August 10th (payable September 11th) so I was then looking at a 3.63% return over four months. The XOM tanked even further and dropped to $76.05 on August 31st. I was able to once again buy the option back for $20 and waited for a small uptick before getting $160 for selling the option to buy my 200 shares at $82.50 but now the expiration date is January 19th, 2018. This would be very alarming if I was using my rent money for these investments instead of a 401k that I can’t touch in any case or if I wasn’t invested in a top quality stock like Exxon that has paid an ever increasing dividend for decades. Exxon has since rebounded to start touching $80 a share and I will get another dividend in November if the option isn’t called away but for the moment my XOM option investment is stuck in the mud.

  

6/19/2017	Buy 200 XOM @83.005	-16605.95
6/19/2017	Sell 2 XOM Option @82.5 (2.06) Expiring 8/18/2017	405.65
8/2/2017	Buy 2 XOM Option @82.5 (.05) Expiring 8/18/2017	-10.08
8/18/2017	Sell 2 XOM Option @82.5 (.85) Expiring 10/20/2017	+163.66
8/10/2017	.77 dividend payable 9/11/2017	+154.00
8/28/2017	Buy 2 XOM Option @82.5 (.10) Expiring 10/20/2017	-20.08
9/5/2017	Sell 2 XOM Option @82.5 (.80) Expiring 1/1/2018	+153.65
	P&L as of 9/25/2017 price of $80.98	+431.60	2.26%
	Total (If option is exercised)	+735.60	4.43%

  My other June option play was with Emerson Process Management (EMR). Emerson has provided a steadily increasing dividend for the past 60 years and I can personally attest to their frugality since I worked for them in their Marshalltown facility in 2008-2010. For example, Emerson is the only company I’ve worked for in the past 25 years that didn’t offer free coffee for their employees, instead having a vending machine dispense some sort of coffee-like swill for 55 cents a cup. I’ve made over $1,300 over the last two years playing the option game with this company and on June 26th I bought 300 shares of the stock for 59.41 and pocketed $887 for the obligation to sell the stock at $57.5 on August 18th (9 days after Emerson’s dividend date). This play went just the way I wanted. The stock never dipped below $58 a share and never went over $61 until a few days before the dividend was declared. On August 8th, Emerson closed at $60.43 and the next morning the option was called which meant I didn’t get the dividend but I did collect $299.75 for a 44 day investment which worked out to a 13% annual return. I could have made the same money by not selling the option, keeping the stock, and selling it on August 8th but that would have entailed short term risk and I am trying to use the options to guarantee a profit even of the stock goes down.

  

6/26/2017	Buy 300 EMR @59.395	-17823.45
6/26/2017	Sell 3 EMR Option @57.5 (2.95) Expiring 8/18/2017	+877.95
8/9/2017	Sell 300 EMR @57.50 (option was exercised)	+17244.65
	Total	+299.15	1.68%

  With my cash back in hand from my EMR option play I decided to try something new. I noticed that Apple (AAPL) had risen from around 145 a share to over 160 a share over the previous four weeks. I bought 15 shares of AAPL in 2011 and sold 11 shares in 2012 keeping 4 shares as my profit. Since then the stock split 7 ways and started paying dividends so my 4 shares that were worth $1200 when I bought them are now 29.3 shares worth between $4000 and $5000 depending on the stock price. That was a big win (which could have been bigger if I hadn’t sold the 11 shares in 2012) and has always made me think kindly of Apple. Not to mention that my Apple iPod is my favorite toy and helps me understand why the company has such amazing brand loyalty. So on August 15th I bought 100 shares of AAPL at $161.75 and collected $83 for the option to sell the stock for $162.50 on August 17th. I thought I would either make a quick $160 over three days or I would keep the $83 and the stock and start all over the next week. I was feeling very good on August 16th when the AAPL jumped over $162.50 but less so the next day when the stock fell under $158. Making lemonade out of lemons I bought back my option for $10 and made $79 more by selling the option to sell the stock for $162.50 by the next Friday, August 25th.

  Over the next week Apple’s stock price rebounded past 160 but never threatened the 162.50 mark so on the 25th I bought back my obligation for $4 (as the expiration date of the option approaches the option becomes worth less and less if the stock price is less than the option (or strike) price. I then made another $85 for selling another option to sell the same 100 shares at the same $162.50 price but a week later on September 1st.

  This seemed like free money. I was collecting $70 to $80 every week for offering to sell this 100 shares of Apple for more than I paid for it in the first place. Over the next week AAPL’s price went straight up and by August 30th was well over $163. With my option ready to be called the next day I could have banked a cool $300 for a three week investment. Could have if I hadn’t gotten greedy. I decided I wanted to stretch this out a little further and bought my option back for the high price of $191 but collected $359 for selling the obligation to sell the stock for $162.50 with an expiration date of September 15th which was two weeks in the future. This seemed like a good play but after Labor Day AAPL began a descent, dropping under $162.50 on September 12th and under $159 on the 15th. I turned around and bought back my option for $3 and sold a new option to sell the 100 shares at $162.50 by the next Friday which is the 22nd but I only collected $65 since $162.50 was much further away.

  I wasn’t kicking myself over not letting the 9-1 option get called until this past week when AAPL lost $8 a share to close at $151.88 on Friday the 22nd. I bought my option back for $10 on the 20th but there was no late week rebound and no market for AAPL options at $162.50. I have made $450 in options over the 7 weeks I’ve owned this stock but the entire transaction was underwater by $400 as of Tuesday night.

  

8/15/2017	Buy 100 AAPL @161.7053	-16175.48
8/15/2017	Sell 1 AAPL Option @162.5 (.88) Expiring 8/18/2017	+83.00
8/17/2017	Sell 1 AAPL Option @162.5 (.10) Expiring 8/18/2017	-10.04
8/17/2017	Sell 1 AAPL Option @162.5 (.84) Expiring 8/25/2017	+79.00
8/257/2017	Sell 1 AAPL Option @162.5 (.04) Expiring 8/25/2017	-4.04
8/25/2017	Sell 1 AAPL Option @162.5 (.90) Expiring 9/1/2017	+85.00
8/30/2017	Sell 1 AAPL Option @162.5 (1.86) Expiring 9/1/2017	-191.64
8/30/2017	Sell 1 AAPL Option @162.5 (3.65) Expiring 9/15/2017	+359.35
9/14/2017	Sell 1 AAPL Option @162.5 (.03) Expiring 9/15/2017	-3.04
9/15/2017	Sell 1 AAPL Option @162.5 (.70) Expiring 9/22/2017	+65.00
9/20/2017	Sell 1 AAPL Option @162.5 (.10) Expiring 9/15/2017	-10.04
	P&L as of 9/26/2017 price of $153.14	-414.18	-2.56%

  Not a pretty picture but it looked a lot worse when Apple dipped under $150 a share earlier this week before bouncing back up. I could always sell the stock and take the loss but there seems no reason to since this is 401k money that I can’t touch and Apple remains an incredibly profitable company that will explode if the government decided to give them a discounted tax rate on their billions and billions of dollars stashed offshore instead of being brought to the U.S. at a higher tax rate or when the sales from their new iPhoneX come rolling in. At the moment I’ve been caught with my fingers in the cookie jar with both Exxon and AAPL and there is nothing much for me to do except wait until the inevitable rebound which is sure to happen. I could have not written about these two decidedly non-winning ventures but it helps illustrate my point that my option strategy is best employed with super solid stocks with a proven track records. Both Exxon and Apple make tons of money and provide dividends so I will still be paid while I’m on the sidelines and when they rebound I will have a happier blog post to write!

Buy High, Sell Low

  When I last wrote about my adventures in the stock market using my self-directed 401K and cash I get from side jobs (the Found Money Fund or FMF) I focused on buying stocks and collecting an immediate return by selling the option to sell the stock at a lower price than I paid for it. This strategy is called an ‘In-The-Money Covered Call’. My last post mentioned that in the case of Emerson (EMR) the stock price rose just before the date stockholders would receive a dividend which caused the option I sold to be exercised the day before I was due to receive the dividend.

  Companies that declare dividends usually issue them like clockwork each quarter. Emerson and Exxon issue the dividend to stockholders on the second week of February, May, August, and November with the dividends paid the second week of the next month. Intel uses the same months and issues the dividends on the first week of the month payable on the first day of the next month. The day the dividend is issued the stock goes down by the same amount as the dividend. Meanwhile options are sold that expire each week but the bulk of options expire on the third Friday of every month.

  The timing of the dividend date and the monthly options date got me thinking that if I timed my options sells to expire just after the dividend issue date I would either get my option covered early and received an increased yield because I wasn’t holding the ‘in the money stock’ as long or I would pick up the dividend and still have a couple of weeks for the stock price to rebound so the option would be picked up and I would get my agreed-on profit with the bonus of a dividend.

  My first attempt came in early May. A week before Emerson was going to issue their 48 cent per share dividend I scooped up 200 shares at $58.14 a share including commission and took $303 by selling the option to purchase these shares at $57.50 on June 16th. The stock climbed over $59 a share over the next week and closed at $58.85 on May 9th. I fully expected my option to be called in the next day before the dividend was issued and leave me a $170 profit for a six-day investment (1.45% or 88.1% annual). To my dismay the option wasn’t called and I picked up the $96 dividend. Over the next five weeks Emerson bounced between $57.25 and $61.30 and was at $60.68 on June 16th when my option was called and I sold my 200 shares as agreed upon for $57.50. So, I bought a stock on May 4th at $58.14 and sold it for $57.50 when its market price was $60.68. This sounds like idiocy but when the option price and dividend are factored in I made $264 for a 43-day investment which comes to 2.27% or 19.3% annually.

  

5/4/2017	Buy 200 EMR @58.1251	-11629.97
5/4/2017	Sell 2 EMR Option @57.5 (1.55) Expiring 6/16/2017	+303.65
5/10/2017	.48 dividend payable 6/10/2017	+96.00
6/16/2017	Sell 200 EMR @57.50 (option was exercised)	11494.79
	Total	+264.47	2.27%

  A wise guy friend of mine pointed out that if I had just bought the EMR stock at $58.14 on May 4th and sold it on June 16th for $60.68 I would have still collected the dividend and made $606 or more than double what I made. This is true but I am not trying to buy low and sell high – I am buying high and selling low in order to maximize my chances of grabbing a percent or two in return. In baseball terms I’m choking up on the bat to hit singles and keep the ball in play instead of taking big swings which can either be home runs or strikeouts.

  In my April post I wrote how I had bought 100 shares of Exxon (XOM) stock for $83 a share on February 15th and sold and bought back and re-sold options to sell the stock at $82.5, always taking a small profit on the buyback of the option and then reselling the option with a later expiration date. On May 3rd, I was showing a profit of $282, the stock was safely below the $82.50 option price, and the Exxon dividend was going to be issued on May 10th. I bought the May option I had sold for $95 less than I sold it for at the end of March and sold a new option expiring on June 16th for $135. My idea was that if the Exxon price skyrocketed in the next week I would have my option called before the dividend was issued but the stock price stayed stubbornly below $82.50 and I collected the dividend on May 10th (payable June 9th). On the option expiration date of June 16th, XOM jumped from $82.26 to $83.49 and again my option was called. To recap I bought 100 shares of XOM for $83 on Feb 15th and sold it for $82.50 on June 16th even though the market price was $83.49. Just like my EMR adventure it looks like lunacy in action until we factor in the $77 dividend and the profit I made from selling and reselling the options which shows a profit for my 4-month investment of $360 which is 4.3% and 13% annually! And to my wise guy friend who pointed out I could have doubled my profit on EMR by buying and holding I would point out that the same strategy with XOM would have left me with a profit of $127 or almost two thirds less than I managed with a little care and effort.

  

2/15/2017	Buy 100 XOM @82.925	-8300.45
2/15/2017	Sell 1 XOM Option @82.5 (2.32) Expiring 4/21/2017	223.25
3/30/2017	Buy 1 XOM Option @82.5 (1.10) Expiring 4/21/2017	-115.54
3/30/2017	Sell 1 XOM Option @82.5 (1.80) Expiring 5/19/2017	174.35
5/3/2017	Buy 1 XOM Option @82.5 (.75) Expiring 5/19/2017	-79.99
5/3/2017	Sell 1 XOM Option @82.5 (1.41) Expiring 6/16/2017	135.35
5/10/2017	.77 dividend payable 6/9/2017	+77.00
6/16/2017	Sell 100 XOM @82.50 (option was exercised)	8244.87
	Total	+358.84	4.32%

  I played this game with XOM with a different price point in May. On May 5th (5 days before the dividend issue date) I bought 200 shares of XOM for $81.81 and collected $1.81 a share for the option to sell the stock at $81 on June 23rd. I expected the option to be called the next week and leave me with a $200 profit for a 5 day investment but the option wasn’t called on May 10th even though the stock was above the $81 strike price at $81.54 so I was issued the dividend. As I mentioned above XOM skyrocketed to $83.49 on June 16th but the option on the $81 sell still wasn’t called. Exxon plummeted the next week and on June 23rd closed at $81.61 when the option was exercised. This was the happiest ending yet – I bought 200 shares on May 5th at $81.81, sold it 49 days later for $81 and pocketed a $341 profit which is 2.1% and 15.5% annually. If I had done a buy and hold like my wise guy friend has suggested I would have shown a profit of $99 which was again two thirds less than I received with some active management.

  

5/5/2017	Buy 200 XOM @81.79	-16362.95
5/5/2017	Sell 2 XOM Option @81.00 (1.81) Expiring 6/23/2017	+355.65
5/10/2017	.77 dividend payable 6/9/2017	+154.00
6/23/2017	Sell 200 XOM @81.00 (option was exercised)	16194.90
	Total	+341.60	2.09%

  When my options were called the stocks were sold and I had all my cash back plus my profit. So what did I do with my money now that it was back in the form of cash? I turned around and did the same thing all over again but this time using the expiration date of August 18th which is a week after XOM and EMR again issue dividends. I’ll report on the outcome in a few weeks. I think my buy high and sell low strategy is a low risk way to get sizable returns. I believe my strategy is better in a down or sideways market than the current bull run since I am limiting my upside in the case of a stock skyrocketing. I am also limiting my down side in case of a crash since even if my chosen stocks go down a percent or more I have a good chance of getting the option called and my cash back along with my profit and even if I get caught having to hold a stock that is in a downtrend I only do this with top shelf stocks that pay a solid dividend so I am paid for my ‘patience’ while I wait for the stock to go back up again. Buying and holding seems like more of a gamble to me since I simply do not know enough about the stock market, the effects various world events will have on stock prices, the impact of electric cars and sugar taxes on stock prices, etc...., etc.… Playing my option games and locking in my profit seems like more of a sure thing to me.

Another Tool in the Box

  In last week’s post about the progress of the Found Money Fund (FMF) I mentioned that I had dipped into the waters of buying my favorite Intel stock (INTC) and selling options to give someone the right to purchase the stock at an agreed upon price (the strike price) up to an agreed upon time (the expiration date). I also mentioned that since the FMF had finally accumulated 100 shares of one of its pillar stocks AT&T (T) I had sold an option to sell the stock at a price of $46 up to October 21st of this year. In January I wrote a post called 'Born To Lose' about my penchant for using the funds rolled over from previous employer’s 401k plans in my self-directed Fidelity account to purchase stocks and make sell options for less money than the stock was currently worth with the premium received for the option more than compensating for the loss in selling a stock for less than I paid (plus commissions). The idea behind this strategy is to make a quick percent or two on my investment and hopefully have the option exercised so I can execute the same strategy with the same money over and over.

  No one I talk to about investing had heard of this strategy of planning to sell stock at a loss and I knew that I wasn’t the first person to think of this so I went on the internet and found that a related strategy exists called In-The-Money Covered Call’. It is listed in “theoptionsguide” website as “a good strategy to use if the options trader is looking to earn a consistent moderate rate of return.” which certainly fits me to the letter although it doesn't quite fit in that I am buying the stocks specifically to sell the In-The-Money covered call. In ‘Born to Lose’ I wrote about three covered calls (2 for INTC and 1 for EMR that were likely to be exercised in the days after the post was published. All three options were exercised and I immediately went about looking for new buying opportunities. When my January 6th option for 300 shares of Intel was called I bought 300 more shares at 36.70 and sold the option at a strike price of $36 expiring on February 17th. The premium of 1.46 per share I received on the option would leave me a profit of over $200 if the option was exercised five weeks later. The option was exercised on February 17th and as a bonus I got an extra $78 when Intel declared their quarterly dividend of 26 cents a share for stockholders as of February 3rd. The entire transaction netted me $280.76 or 2.55% over 38 days (23.85% annually) which to me was much better than a ‘moderate rate of return’.

  

1/19/2017	Buy 300 INTC @36.6959	-11016.72
1/19/2017	Sell 3 INTC Option @36 (1.46) Expiring 2/17/2017	+427.67
2/3/2017	.26 dividend payable 3/1/2017	+78.00
2/17/2017	Sell 300 INTC @36.00 (option was exercised)	+10791.81
	Total	+280.76	2.55%

  My next option buys was another favorite Emerson (EMR) who I worked for and can personally attest to their commitment to their bottom line. On January 12th I bought 100 shares at 57.15 and received $3.25 a share to sell the option at a strike of $55 expiring March 17th. Two weeks later I made a similar play and on January 26th I bought 100 shares at $60 per share, and collected $3.10 a share to sell the option at a strike of $57.5 also expiring on March 17th. I was counting on collecting the .48 cent dividend on February 15th but the stock hit a huge upswing and with a price of 64.14 both options were exercised the day before the dividend would be mine, leaving me with smallish profits of $85.23 (1.49%) and $37.61 (.63%) over 34 and 20 days respectively which could be described as moderate.

  

1/12/2017	Buy 100 EMR @57.15	-5722.952
1/12/2017	Sell 1 EMR Option @55 (3.25) Expiring 3/17/2017	316.25
2/15/2017	Sell 100 EMR @55.00 (option was exercised)	5491.93
	Total	+85.23	1.49%

  

1/26/2017	Buy 100 EMR @57.9761	-6005.56
1/26/2017	Sell 1 EMR Option @57.5 (3.10) Expiring 3/17/2017	301.25
2/15/2017	Sell 100 EMR @57.50 (option was exercised)	5741.92
	Total	+37.61	0.63%

  My third option purchase was for Exxon (XOM),another old favorite which has wild fluctuations in prices depending on the various states of unrest in oil producing nations. On February 15th I bought 100 shares of Exxon at $82.925 and collected $223 for the option at a stike of $82.50 expiring April 21st. On March 30th, Exxon had taken a roller coaster dip from $83.87 to $81.84 in one day and the price of my option plummeted so I bought the option back for $1.10 a share and immediately sold another option at the same strike price of $82.50 only expiring a month later on May 19th for $1.80 a share. Less commissions I collected an extra $60 or .71% to extend the option out an extra month and there is the possibility of collecting a 75 cent a share dividend for Exxon in early May.

  

2/15/2017	Buy 100 XOM @82.925	-8300.45
2/15/2017	Sell 1 XOM Option @82.5 (2.32) Expiring 4/21/2017	223.25
3/30/2017	Buy 1 XOM Option @82.5 (1.10) Expiring 4/21/2017	-115.54
3/30/2017	Sell 1 XOM Option @82.5 (1.80) Expiring 5/19/2017	174.35
5/19/2017	Sell 100 XOM @82.5 (if option is exercised)	8244.75
	Total	+226.36	2.73%

  All three of the options have something in common – they were for stocks I just bought and the option strike price was less than I paid for the stock with the expectation that the option would be exercised and I will sell the stock and get my money back along with a 1 to 3 percent return over a month or two. I wouldn’t feel awful if the price of Intel, Exxon, or Emerson tanked and I got stuck with the stock because these companies have been around for years, pay healthy dividends, and are bound to be back up at some point but I want the options to be exercised to I can keep cycling through my strategy for a percent or two return.

  There are some stocks that I feel like I have as investments and would like to boost my earnings by selling options but I would rather not have these options exercised. The 100 shares I have in AT&T in the Found Money Fund is an example. When I went looking to sell an option for AT&T I had to think about a) what kind of return I wanted and b) what kind of price would make me OK with selling the stock. I decided that I would want the quarterly dividend payout (.49 cents a share) as a return and I would feel comfortable selling AT&T if they were at their year high. AT&T’s 52 week high was 43.89 on July 5th 2016 and I saw that I could sell an option at a strike of $44 expiring in August and get $40 but I decided to go a little longer in time and a little higher in stike price so I went for an October 21st option for a strike of $46 and collected $45 after commissions for the option. I’m only getting an annual return on the option of a little more than 2% but that’s fine because this time I’m definitely going for a ‘moderate’ return. If AT&T breaks above their year high I’ll sell the stock for $46 and be pretty happy to grab a great profit. In the month since I sold this option AT&T has gone from almost $42 to under $40 and I can buy this option back for $12, banking a profit of $28 after commissions. I am waiting until the price of the option goes to $10 so I can buy it back commission free.

  I felt pretty good about this idea of collecting an extra dividend payment and possibly selling a stock at a year high so I did it again with the 100 shares of EMR stock I’ve owned since late 2014. The initial purchase price was 61.44 and the stock has gone between $50 and $65 in the interim but by collecting a healthy dividend and selling options I currently show a profit of over 13.3% (5.6% annually) on a stock whose price is virtually unchanged (61.22 on April 25th) over the 2 and a half years I’ve owned it. I’m pretty attached to these particular shares so when I decided to make a little extra money on them I went for the same strategy. Emerson’s 52 week high is 64.37 on February 10th. On March 6th I collected $58 to sell an option to sell Emerson for a $65 strike expiring June 16th. At the time Emerson was trading at $60 and last Friday it is selling at $59 with the price of the option dropping to $14. I am following the same strategy as T and will buy the option back if the price goes down to $10 so I can save the $5 commission.

  Since I've brought up the commission a few times I should mention that earlier this year Fidelity lowered their commission for trading stocks on their site from $7.95 a trade to $4.95 a trade. The $3 savings per trade is a significant factor in options as the payouts are smaller and the commission percentage is larger and it is a nice bonus for a small fish like me that only trades an option or two at a time. If I was trading 10 or 20 options at a time the commission would be no issue since it would be less than a penny a share.

  My new option strategy of having some keeper stocks that I am only willing to sell high and will accept less in options premiums along with stocks that I buy in order to collect more money for options that I expect to be exercised makes it seem like I have a bit of a split personality disorder as I read this post a day after writing it. I see it as a process of getting familiar enough with options to use them in different ways. I started out by selling short term options that would guarantee me a profit if exercised as a way of making extra profit on a stock transaction. Then I discovered a way to make a short term profit on cash by buying a stock and selling the option at a lower price than I paid in order to again make a short term profit. Now I am playing more of a long game by squeezing an extra percent or two out of stocks I have as long term investments by selling options for high prices way out in the future. All three strategies have their place in my toolbox and all three fit my profile of wanting to maximize my profits without taking undue risks.

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.

Date	Transaction	DJIA	Stock +/-	FMF +/-
September 9, 2016	SELL 102 AGNC @19.32	18,085	216.63	1,037.16
December 5, 2016	Buy 12 T @38.8062	19,216	308.56	629.82
January 17, 2017	Buy 12 KO @41.136	19,826	-18.08	1,247.29
February 23, 2017	Buy 5 PM @105.4661	20,810	779.43	1,916.70
February 23, 2017	Buy 12 T @41.6761	20,810	629.27	1,916.70
March 6, 2017	Buy 5 PM @110.0419	20,954	912.27	2,011.67
March 6, 2017	Buy 12 KO @42.245	20,954	82.87	2,011.67
March 6, 2017	Buy 12 T @41.79	20,954	640.82	2,011.67
March 17, 2017	Buy 12 KO @42.26	20,914	67.07	2,242.58

  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:

  

Date	Transactions	Amount	Shares
November 30, 2016	Buy 100 INTC @35.166	-3524.55	+100
November 30, 2016	Sell 1 INTC Option @35.55 (.63) Expiring 1/6/2017	+55.00
January 6, 2017	Sell 100 INTC @35.50 (Option was exercised)	+3541.97	-100
January 9, 2017	Buy 101 INTC @36.695	-3714.15	+101
January 9, 2017	Sell 1 INTC Option @36.00 (1.40) Expiring 2/10/2017	+132.00
February 3, 2017	Dividend INTC (Payable 3/1/2017)	+26.00
February 10, 2017	Buy 1 INTC Option @36.00 (.01) Expiring 2/10/2017	-1.04
February 10, 2017	Sell 1 INTC Option @36.00 (1.05) Expiring 5/19/2017	+97.00
March 1, 2017	Reinvested Dividend	-26.00	+.722
May 19th, 2017	Sell 100 INTC @36.00 (if option is exercised)	3594.97	-100
	Total (If option is exercised)	+181.21	1.722

  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.

Stock	Average Purchase Price	Profit on April 18th	Purchased Shares	Reinvested Shares	Dividend	Quarterly Dividend
PM	92.53	1156.71	39	2.302	1.04	43.03
KO	42.67	206.00	93	3.014	0.37	35.52
AGNC	-.01	250.38	0	12.099	0.18	6.54
T	37.36	540.20	103	5.285	0.49	53.06
INTC	33.80	224.32	101	0.772	0.2725	27.71
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.

Born To Lose

  Last September I wrote about using my self-directed 401k to dip my toe into the waters of buying Intel stock and immediately selling an option to another party to buy the same stock for less than I paid for it at a future date with the price I collect for the option netting me anywhere from 1% to 3% on my original investment after covering the loss from the sale of the stock. In my September article I told how I had bought 200 shares of my favorite Intel stock at $35.07 on August 19th, collected $1.89 a share to allow another party the option to purchase the 200 shares at $34.00 any time before October 21st and said I’d see how it all worked out on October 21st. The day I wrote that post the price of Intel went over $36 a share and on September 19th went to $38 a share. I was pretty pleased at this turn of events since it meant that it was almost a sure thing that my option would be picked up on October and I would have succeeded in getting a 2% profit for a 2 month investment.

  Intel remained between $36 and $38 a share through the rest of September the first part of October until October 18th when their quarterly earnings announcements met with the displeasure of the investing public and the stock plummeted from a high of $38.05 to $35.15 at the close of the trading on October 21st. Since the stock was trading above $34 a share, my option was exercised on the 21st and I closed this trade with a profit of $139.90 or 70 cents a share for owning a stock for 2 months that had risen by the grand sum of 8 cents!

  

8/19/2016	Buy 200 INTC @35.0758	-7023.11
8/19/2016	Sell 2 INTC Option @34 (.95) Expiring 10/21/2016	+386.46
10/21/2016	Sell 200 INTC @34.00 (option was exercised)	+6794.55
	Total	+139.90	1.99%

  On Monday October 24th I again went looking for another stock to buy, sell at a loss, and still make a profit by selling the option to sell at a loss. I didn’t have to look much further than the INTC page on the fidelity app on my amazing iPod. I bought 300 shares of Intel at $35.395 a share and sold an option to sell the stock for $33 a share on January 21st, 2017. I collected $2.84 a share on the option which means that if my option was exercised in January I would have a profit of $115.21 or 1.08% on my 88 day investment. It would be fair to compare this with my August-October buy/sell and notice that I was investing my money for an extra month for half the percentage. I did this for two reasons. The 8% drop of Intel in the previous week lowered the option prices and made me a little skittish myself which is why I decided to sell at $33 instead of $34 (also known as the strike price). The other reason is that Intel issues a dividend on December 1st payable to stockholders on November 3rd. This means that my profit (assuming the option isn’t called early which it was not) increased on December 1st by $78 (300 shares x a .26 dividend) to make a grand total of $193.21 or 1.82% which to me is a reasonable if not spectacular profit on a very low risk proposition that Intel will sell at or above $33 on January 21st or at least the break-even mark of $32.41.

  

10/24/2016	Buy 300 INTC @35.395	-10626.45
10/24/2016	Sell 3 INTC Option @33 (2.84) Expiring 1/20/2017	+841.66
11/3/2016	Dividend INTC (Payable 12/1/2016)	+78.00
1/20/2017	Sell 300 INTC @33.00 (if option is exercised)	+9900.00
	Total (If option is exercised)	+193.21	1.82%

  Intel stayed between 34 and 36 for the rest of October, dipped below 34 the week of the election but quickly rebounded over 35 once everyone realized the world wouldn’t end just because Donald Trump was elected president. After flirting with 36 on early December I decided to make another move into losing territory. On December 12th I bought 300 more shares of Intel at 35.965 and sold the option to sell the shares at $35.5 on January 6th for a premium of 98 cents a share. This is a much riskier proposition than the other option plays because the stock could easily drop under 35.5 in one day much less 4 weeks and the reward is a smallish 1.26% which looks a lot better when taking into account the short time frame. In the last 3 weeks Intel has stayed well above $35.5 so I think I will get away with this play. When I review this I’m of the opinion that it was too risky a move. Intel is a great stock to own under any circumstances but the chances of the stock finishing below the break even point of $35.07 doesn’t seem worth the 1.26% reward. The experience has given me a better handle on my risk tolerance and even if I do get away with the play I won’t be too likely to repeat this particular short term scenario.

  

12/12/2016	Buy 300 INTC @35.9657	-10797.65
12/12/2016	Sell 3 INTC Option @35.5 (.98) Expiring 1/6/2017	+283.67
1/6/2017	Sell 300 INTC @35.50 (if option is exercised)	+10650.00
	Total (If option is exercised)	+136.02	1.26%

  Another of my favorite stocks is Emerson Process Management (EMR) and that company has proven to be a much more profitable play in the short term risk scenario. Long time blog readers may remember that I bought 100 shares of this company in December of 2014 at $61.44 and while the stock has drifted below 50 in 2015 and 2016 I was able to keep my losses manageable by collecting a 47 to 48 cent dividend and selling options at a strike price of $60 or higher when possible. My current break-even point on this stock is $54.50. The stock caught a second wind in the second half of this year and has drifted in the $48-$58 range with wild swings depending on current events and analysts opinions on the status of the company. On October 12th I noticed an anomaly between the stock price and the option price and made a move, buying 100 shares of EMR at $49.995 and collecting $142 for selling the option to buy the stock for $50 on or before November 18th. The stock drifted between $49 and $51 for a few weeks and closed at $50.38 on November 7th which is an important date because on November 8th Emerson gave a 48 cent dividend. My option wasn’t picked up so I collected an extra $48 (payable on December 10th). From November 8th to November 18th, Emerson leaped over 8% from 49.85 to 54.20 a share. On November 18th my option was exercised and I sold 100 shares of Emerson that was valued at $54.20 a share for $50. I didn’t feel like much of a loser since I made $178 (3.57%) on a five week investment.

  

10/12/2016	Buy 100 EMR @49.955	-5003.45
12/12/2016	Sell 1 EMR Option @50 (1.50) Expiring 11/18/2016	+142.00
11/8/2016	Dividend EMR (Payable 12/9/2016)	+48.00
11/18/2016	Sell 100 EMR @50.00 (option was exercised)	+4991.94
	Total	+178.49	3.57%

  On the Tuesday after my EMR option was exercised I used the same money to do it all over again. On November 22nd I bought 100 shares of EMR for $54.70 and made $141 by selling the option to buy the stock at 55 on or before January 20th, 2017. In the month and half since I executed this trade Emerson’s price has vacillated between $54.40 and $58.30. If the option is exercised in two weeks I’ll have made 2.68% for a two month investment which isn’t as good as my October buy but still worth the risk.

  

11/23/2016	Buy 100 EMR @49.955	-5478.06
11/23/2016	Sell 1 EMR Option @54.7011 (1.41) Expiring 1/20/2017	+133.00
11/18/2016	Sell 100 EMR @55.00 (if option is exercised)	+5491.94
	Total (if option is exercised)	+146.88	2.68%

  I don’t write about these adventures to brag – I write about them because it helps clarifies my thoughts, it may be of use for other people to read, and I get the occasional idea I hadn't thought of delivered to my email inbox. Keep in mind I am not gambling with my rent money – I am using 401k money that I can’t touch without paying taxes and penalties and there is always the real possibility that a stock will tank and I'll be stuck holding it for years (making it super important to play this game with solid dividend paying companies). I liken this playing with the stock market very much like my picking NBA basketball games in that I am trying to find a workable system. I don’t know how this selling at a loss idea will work in a down or sideways market but as long as I am betting on solid companies with a long history of paying dividends I suspect I won’t go too wrong.

FMF - A Change in Direction?

  Since I wrote about my further adventures in covered call options using my self-directed 401k I’ve been inundated with requests for financial advice. On Sunday the clerk at Casey’s General Store asked if I had anything smaller when I tried to pay for my coffee refill with a $5 bill and a few days before that one of the ‘Slappys’ I regularly see on my afternoon walks with Daisy and Baxter told me that he was drinking a giant can of ‘Steel Reserve’ beer because it was ‘f&@^ing cheap’ and asked what I thought about that. With that kind of feedback the thought crossed my mind that I should start my own financial services podcast but since I don’t have the time for that I decided I’d offer a 6 month update on the performance of my Found Money Fund (or FMF for short).

  The FMF was an outgrowth of my paying off my 2013 Chevrolet Spark in two years using extra money I occasionally get from giving chess lessons, helping users with the shoe store software I stopped writing almost a decade ago, collected spare change, tax returns, cash back rewards, mileage expenses from work, etc... Once my car was paid off 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 into the stocks commission free) and except for AGNC have been profitable companies for many years. When I last wrote about the FMF in March it had just hit an all-time profit of $583 or (9.6%) and was providing $33 a month in dividends that I reinvested in the stocks commission-free. In the intervening 6 months I’ve made 7 buys of $500 and now receive $48 in dividends that I reinvest.

March 1, 2016	Buy 11 KO @43.6264	16865.08	79.75	514.64
March 1, 2016	Buy 27 AGNC @17.995	16865.08	-40.26	514.64
March 1, 2016	Buy 13 T @ 37.3364	16865.08	211.47	514.64
March 1, 2016	Buy 5 PM @91.41	16865.08	263.68	514.63
April 18, 2016	Buy 5 PM @101.24	18004.16	502.24	1096.13
July 7, 2016	Buy 11 T @42.8	17895.88	555.14	1506.14
July 27, 2016	Buy 11 KO @43.5965	18472.17	87.68	1321.81

  The March 1st buys were mostly funded by my tax return and as you can see by the prices I paid in subsequent buys the stock market exploded in value and the prices of these stocks also exploded also. The FMF regularly hit new all-time profit highs with a peak of $1615 on July 6th (19.2%) before giving back 20% of those gains to sit at a $1347 profit on Labor Day. Why has the stock market in general and my stocks in particular exploded this year? There are lots of reasons but I think a main one is the massive amounts of money that have flooded the world economy to promote economic growth. Despite the best meaning efforts most of this money ends up with people who already have money and is creating investment bubbles of inflated prices in lots of places including the stock market. That is precisely why I chose long standing quality stocks for the FMF with the exception of AGNC who I will get to shortly. At some point the stock market bubble will burst like all bubbles do but that would only be a short term setback for top-quality companies like Phillip Morris, AT&T, and Coca-Cola who would be able to pick up market share and buy up competitors at discounts.

  On February 25th PM and T were the most profitable investments with KO chugging along and AGNC showing a loss despite providing the bulk of the dividends (mortgage real estate trusts like AGNC have to provide 90% of their profits as dividends to obtain a preferred tax status from the government). Six months later little has changed with PM, T, and KO but AGNC has surged past KO in profitability.

Stock	Average Purchase Price	Price on Labor Day	Purchased Shares	Reinvested Shares	Dividend	Quarterly Dividend
PM	83.935	567.9	30	0.323	1.02	30.93
KO	42.862	102.84	57	1.314	0.35	20.41
AGNC	19.639	257.34	100	12.412	0.18	60.69
T	36.360	446.39	67	3.392	0.48	33.79
Total Quarterly Dividends						145.82
Monthly Dividends						48.60

  The reinvested dividends have accumulated an extra 12 shares of AGNC which makes its bottom line more susceptible to swings in price as far as the FMF is concerned. Right now AGNC is in an upswing because it spent $562 MILLION DOLLARS to purchase management company it had been paying $400 million dollars a year to in fees. The purchase was lauded and the price of AGNC skyrocketed. But then AGNC did something very curious – they lowered their dividend from 20 cents a share to 18 cents a share. This decision was also lauded and the stock went up again. When I first purchased AGNC in March of 2015 the dividend was 22 cents a share which was lowered to 20 cents in May 2015.

  This caused me to do a little digging into AGNC. I found that in addition to the common stock I own they also have a preferred stock (AGNCP) that gives a 50 cent quarterly dividend that hasn’t been cut in at least 4 years. The preferred stock apparently gets their dividend off the top and leaves the common stock with what’s left. AGNC is trading at 19.5 currently but I think that a lower dividend will have to lead to a lower stock price at some point. A price of $18 would make the dividend the customary 12% yield which seems to me what most people want from this type of investment.

  This leaves me in a quandary with one of the FMF pillars. I can see a downturn in AGNC and if past performance is predictive another dividend cut could be in the future next year. Covered call options on AGNC don’t sell for nearly the same prices as stocks like Intel and Exxon yet the stock is still profitable. I decided to take a ‘Solomon-like’ attitude and cut the baby in half. I put in a sell order for the 100 shares of AGNC stock I purchased at a trailing stop price of 50 cents, meaning that when the price of AGNC goes down 50 cents from the highest point after I placed the trailing stop order my sell order will be placed. This will guarantee me a reasonable profit which I will keep in the form of the 12 shares from the reinvested dividends. I’m not sure what I will do with the proceeds in the event I do sell the AGNC shares. I tend to think I will hold onto the cash to buy AGNC back at a lower price. The other option would be to throw the proceeds into a stock like Intel that I understand a lot better than AGNC. More annoying to me is that I thought I had picked my four stocks carefully enough that I could just let them run on auto-pilot but AGNC is now making me think which is not something I had in mind when I started this exercise 18 months ago.