Wednesday, February 25, 2015

A Lesson In The Value of Covered Call Options Final

READ PART ONE
READ PART TWO


One thing about the stock market is that it's okay to change your mind. And that's what I decided to do with Cypress Semiconductor in this month's options play.

Yesterday I sold 13 covered call options contracts with a March 20th expiration and a strike price of $15. The deal for me was a couple-fold. One, on Monday the premium for this call was 50 cents at the start of the trading day, or $50 per contract. As the stock pulled back yesterday that premium gave up 10 cents, or $10 per contract.

I got a little twitchy.

The $16 call for March 20th, the one I would have preferred to have sold, was only about 15 cents or $15 per contract.

Boring.

In January I collected $143 in dividends, and when I sold the first set of contracts on January 21st I collected a premium of $564 after expenses. The March 20th calls gave me a premium of $499 after expenses. Total collected is $1,206.

Based on my cost basis of $12.83 per share, with premiums and dividends collected this puts my total profit at $4,027 if the stock reaches $15 or better by March 20th and I am forced to sell my shares. I am still selling my shares at roughly a 24% gain and I am quite happy with that. I'd be happy to keep my shares as well, of course, and get to play it again in April, but I am inclined to believe that I will be forced to sell.

...and there happen to be a couple other companies on my radar I'd like to put the money from Cypress into.

I still believe that Cypress Semiconductor is a $17 stock, however. And I still like the company. Therefore, if my calls are called and I am forced to sell, I can then start to take a look at selling cash-secured put contracts to either simply collect premiums with no intent to buy shares, or to buy shares at a discount to what I think the future value is.

There is still money in Cypress Semiconductor no matter what happens is the point, and from a technical standpoint whether or not I own the shares,  I can still make money on it. So really, it's win win.

And of course the intention is to make money on wherever my proceeds from the sale of Cypress go.

So there you have it. A lesson in the value of selling covered calls on underlying shares you own to boost your overall profits from a stock. The dividends and options in the event that I'd be forced to sell, put my total per share amount collected to $15.92. So even if it only reaches say, $15.75 and I am forced to sell at $15, I am still getting 17 cents more per share than the market price at the time of the sale.


Sunday, February 22, 2015

Playing Broke To Save Money

There are a ton of tips and tricks on how to stretch your dollars and of course, save money. And believe me, I employ a number of them. I am as miserly as they come, and quite frugal as well to boot. Of course some have another name for me.

Cheap.

Go ahead and have your fun, I say. I am laughing all the way to the bank, and when I really want to have a little extra money for something, I can have it.

So what's one little trick to saving money and having money? It's time to return to the days of make believe like when you were a kid. Only for this play, instead of pretending like you are Warren Buffet or Bill Gates, or perhaps the man who trumps all of their massive wad of cash, you play broke. That is, you severely limit what you have on hand for money, and make it damn difficult to get money in a pinch.

When I was in the Navy one of the things I did, and I'll admit that back then I was still not as good with my money as I am now, but I did still think about. It was a work in progress, shall we say? I made my money hard to get. I left very little funds right up front and accessible, and made sure that the rest was socked away into a savings account at a bank that was 30 miles from where I lived, and that I had no ATM access whatsoever to.

This meant that in order to get access to any of that money I had to physically get into the car during bank hours, and drive 30 miles to make a withdrawal.

That took a little bit of thought. It required a little bit of planning. And that meant that 90% of the time the money stayed at the bank just because it was too much of a pain in the ass to get at. I found other ways to get what I wanted. Or I simply went without.

These days I don't resort to bank accounts miles away. In lieu of that I keep most of my money in my brokerage accounts, and most of that is tied to a stock. It's still accessible. But again, far less accessible than if I could just walk up to an ATM machine and draw it out.

I have to think about a tax implication of selling shares of stock, or have to wait a couple of business days for funds to be transferred to my checking account from my cash account. Especially if I sell shares I have to wait a couple of days for the transaction settlement, and then have to wait a couple more days to transfer the funds. Often times I don't even resort to doing that.

Again, just like before, I find other ways to get what I want. Or I simply go without.

The one thing I have learned over the years is that if you make money too easily accessible it gives you far too much freedom to simply give in, and take it. And 90% of the time it is simply something squandered on, on an impulse. Like New Year's resolutions are rarely followed through on, saying in the moment "I will deal with it later" is a sure way to ensure that it never gets dealt with. And time and time again you will simply find yourself going through more and more cash.

Playing broke is sometimes painful and frustrating, I will admit. But at the end of the day it just seems to make sense to me. When I really want the money for something I know it is there. I can enjoy skipping a fish fry today, for example, to better be able to afford a fishing trip I'd rather do tomorrow.

At the end of the day it is about having security and freedom. But not the freedom to frivolously spend. Rather, the freedom to spend wisely.

Besides, the best part is that when you get tired of playing broke and need a break back to the wondrous reality that you actually have money, it's right there, and you can go wild if you want and still not break the bank.

Joyous really. And perhaps, in some ways, quite brilliant, however conceited that may sound.

Friday, February 20, 2015

A Lesson In The Value of Covered Call Options 2

READ PART ONE TO THIS

The simple truth is that I took a bit of a risk. When I sold the options contracts the stock was trading only within about 60 cents of the strike price. Being that the stock pushed early on past $15, and closed very close to $15 by the end of the expiration of the covered call options contracts I sold with a $15 strike price, this could have forced me to sell my shares and that would have been the end of it. I still would have enjoyed a profit of $2.17 per share for a profit of $2,821, plus the premiums on contracts sold and dividends received, but now I would be out of the stock, and forced to decide whether or not reinvesting considering my $17 valuation would be as lucrative as being in the stock for just $12.83 per share.

My short term thoughts on that are that it would not be likely that I would reinvest. I was convinced that the stock would not trade higher than $15 by the expiration date of the contracts I sold. A less than $2 profit on future shares purchased would simply not be in line with what I expect out of a stock.

The key here is, though, that no matter where I think the stock will go, and no matter where the stock was when I sold the contracts, I did not believe I was wrong that the stock would not trade higher than $15 by February 20th. Selling the contracts to someone who believed I was wrong is also key. He paid me for the right to buy my shares at $15 because he was convinced the stock would be worth more by February 20th.

Again, this is where a little bit of technical analysis helps, and something you will have to discover on your own. To go into the reasons WHY I was so convinced of this is simply too involved to try to explain here.

What did I sell?

In January, based on my opinion that Cypress Semiconductor (CY) would not close higher than $15 by February 20th, I (wrote) sold 13 covered call options contracts for Cypress Semiconductor (CY) with a $15 strike price and with an expiration date of February 20th. I collected approximately $585 in premiums for this. After expenses I received a total of $564.

Again, I fully intended that these contracts would expire worthless, that the stock would not trade above $15 per share, and that I would get to keep both the premiums paid to me AND keep my stock to boot.

Moreover, now that those contracts indeed expired worthless since we only reached $14.95 per share at the expiration, I now get to decide to sell more contracts for March to collect more premiums.

Remember that I think that the stock is worth $17. But resistance is around $15.48 based on the recent high. That is approximately 52 cents shy of $16. It closed on February 20th at $14.95. That is 53 cents short of the high and $1.05 short of $16. Will it push higher in March past $15? I think it will. But, how much higher will it go past the $15.48 high before experiencing a bit of a pull back due to profit taking? I think it will not see $16 by the March 20th expiration date of the next options cycle. I also expect that seeing a new high of $16 or more 30 days from now is unlikely. We are going to push a bit higher, but breaking the high by 52 cents just seems to me a bit of stretch unless some major news comes our way. I do not anticipate that.

Again, based on analysis I will not get into here, I think the stock will see a NEW high through March, but the trading range will be from $14.95 to $15.75 per share.

With that in mind, selling covered call options contracts with a March 20th expiration date and with a $16 strike price is a safe bet. Based on what I see now I do not believe that Cypress Semiconductor will close above $16 by March 20th. It is highly likely that the stock will close lower, and I will again get to collect my premiums for the contracts (written) sold, AND will continue to be able to hold my stock and receive dividends without being forced to sell my shares.

At this time I have not yet made a decision, but I told you I would provide you a real time example of what I am doing here. When I pull the trigger on a March 20th covered call options contract I will let you know how that went.


...to be continued
READ THE FINAL INSTALLMENT







A Lesson In The Value of Covered Call Options

I am going to give you a real time example of how stock options, done right, can make you a significant alternative income. For those of us who invest in the stock market, we call this generating cash on underlying investments that you wish to own, do not wish to sell, but that you wish to continue to earn from.

When I have talked about stock options in the past, I always stress that I do not buy stock options. I sell stock options. Why do I do this? It is simply a matter of this being my strategy. I buy stocks because I believe they are worth more than the price that they are currently trading for.

Pretty simple right?

Therefore I do not wish to sell the stock of a company that I feel is going to continue to make inroads, continue to advance, and continue to provide a great income opportunity over time. You sell your losers. You do not sell your winners. But when you have winners, you make the most out of them. You get every penny out of them that you can. You do not worry about what the rest of the markets are doing, or what the rest of the markets are thinking. You do your homework, you decide a valuation, and you proceed from there. And you keep in mind that everyone invested in a company has a different idea about what the company is doing, what it is going to do, and so this helps to create a vast market of individual investors willing to do all sorts of things depending on where they want to be with the stock.

You will not always be right, but that's okay. That is part of the game.

I said you have to do your homework, and repeat this here because if the idea is that if you do not wish to sell your stock, but want to continue to generate income on your stock, you need to have a good idea where you think the share price is realistically going to go.

I won't get into the math of that. You'll have to figure that out on your own. But there are tons of websites that can provide you valuable information on how to valuate a stock.

I currently own 1,300 shares of Cypress Semiconductor, and that's already great because it is a stock that pays you while you wait. My quarterly dividends on this stock are $143. Even if the stock does nothing at all, I'll earn $572 in a year just because I happen to own it. My cost basis per share is $12.83, and as of the close of today's trading, ($14.95) I am already up $2.12 per share, or have an on paper profit of $2,756.

I have no intention of selling my shares. I think the stock is worth about $17 per share.

But herein lies a part of the fun of this. I do believe I own a $17 stock. I do not believe that my $17 stock is going to trade at $17 within the next 30 days. I made this decision in January. In fact, in January I did not believe the stock would trade much above even $15 within the next 30 days, and moreover, I did not believe that the stock would close trading at $15 or higher 30 days from January.

It did go past $15 briefly. But as I suspected, it did not stick, and the stock took a significant down turn after pushing past $15. The stock broke resistance and people took profits. It's that simple.

Why is this important?

I want to make a monthly income on a stock that is now showing a profit. I want the best of all worlds. I want my $17 stock. I want my dividends. I want to keep on owning it. And I want the other investors in the market who believe the stock is going to go higher sooner to want to buy the right to buy my shares at $15.

I am looking for those individuals who believe in the same valuation I do, but believe that it will reach that valuation before I think it will.

This creates a market of buyers in the options world willing to pay a premium to have the right to buy shares at $15 that they are convinced are worth significantly more. If they can buy an option to buy shares at $15 and the stock goes to $17, they reduce their gain by the amount of the premium they paid for the option, but still win since selling the shares they obtain at $17 still reaps them a good reward.

Remember, the options allow them to buy the shares at $15. In their world, they are up $2 per share minus the premium.

Guys like me love this, and take this to the bank.

The options buyer  says "I can buy the stock, or I can buy the right to buy it at a price that I think is valued less than what I think it is worth. If I buy the stock I lose more than if I buy the right to buy it. If the stock does not do what I think it will do, I am only out what I paid for the right. Not the total loss of buying the stock outright and losing the overall value of my investment."

This is where guys like me come in and make money.

I am more than willing to sell you the right to buy my shares that I have $12.83 invested in that are worth $17 for $15 before they will actually be worth $17. Why? Because I am convinced that my $17 stock will not be worth $17 in the time period you think it will be. You are willing to pay me to buy my shares for less than they are worth thinking they will meet the valuation before I think they will. Even if I am wrong, and the stock does something unpredictable, I still get my premium and sell my shares for more than I paid for them.

Enter charts and technical analysis which is way more than I will get into here, but do your research and you can learn where technical analysis can help to make short term decisions on where a stock is heading based on market sentiment...

And that word I used earlier in this text. Resistance. It is important to know what that is, and how you can decide where to set your strike prices in short term options selling.


...to be continued

READ PART TWO




Thursday, February 19, 2015

Today's Swimsuits: The Blog

Blogs are sometimes just simply hit or miss. It's just the nature of things. Either you don't have a topic that enough people will ultimately find interesting, or the layout is all wrong, or there is simply too much other competition out there making it virtually impossible to get anywhere.

And then there are swimsuits.

Of course, the only reason I ever visit Nelda Hoxie's blog, Today's Swimsuits, is for the articles. After all, Ms. Hoxie writes with detail and precision, and you can almost feel the fabric of the suit on your skin as you read along. I hardly ever notice that she also includes pictures of bikini clad women in each of her descriptive entries.

Ahem.

I have followed Nelda in a couple of different places, and that's really how I found her blog. But being that summer is right around the corner, I like what she has done with the blog, and of course enjoy the articles, I thought I would share.

If you have not yet visited Today's Swimsuits I encourage you to do so. Especially for the ladies who may be looking for just the perfect swimsuit to add to her ensemble for the coming warmer days ahead.

It is a blog worth reading, and I give Nelda Hoxie a two thumbs up hands down. It's fantastically done, and in all ways good. Pictures, descriptive content, and layout combined. It's just fantastic. I am actually quite envious.

I bet she is making a killing.