As mentioned earlier, right after August expiration I began looking for new covered call opportunities.  As mentioned earlier in this blog, one of my strategies is to look at the Dividend Aristocrats list for companies who will likely be paying dividends prior to next month’s option expiration, so that’s what I did.

Between last month and this month, I’ve written a little Python application that downloads quotes, plus dividend information, from Yahoo Finance.  Using that as an initial screen to find companies that last paid dividends 3 months ago, plus whose current price fits within the range of my portfolio’s ability to buy at least 100 shares, I went off and did more research on the companies that came up.   In the end, I decided to make a covered call trade with Supervalue (SVU) and the Sept $15 call.

I should also mention that I did consider continuing on with calls for Aflac (AFL) and Home Depot (HD).  But I just felt AFL was too risky given the rather large run-up it has just gone through which I can’t quite explain.  And if I can’t explain why it went up, I certainly can’t forecast when it might go down.  Best to just stay away.  For HD, the premium for selling calls was just too low and I felt I’d have a better guaranteed income somewhere else, thus why I went back to the dividend aristocrats list.

Here is my analysis.  As usual, I’ve included my comissions in the numbers, which is why some values go to fractions of a cent.

Critical Dates:
2009.08.26: Initial position: BTO 200 SVU @ $14.76475
2009.08.26: Initial call option: STO 2 SVU IC (Sep09 $15) @ $0.2375
2009.08.28: Ex-dividend date: DIV 200 @ $0.1725
Summary, if NOT called (static return):
Days position held: 24
Capital investment: $2952.95
Income received: $82.24
Percent return: 2.79%
Annualized yield: 51.86%

Summary, if CALLED at expiration:
Days position held: 24
Capital investment: $2952.95
Net profit if called: $124.34
Percent return if called: 4.21%
Annualized yield if called: 87.25%

Early last week, I executed a number of covered call trades but didn’t get around to writing about them until now.  Here’s a summary of the first one, a covered call with Alcoa (AA) and a bullish Sept $13 call (AA IO)

Given that my August call option on AA expired rather than getting assigned, and that I’ve posted before about a bullish belief in AA, I went looking to sell at least the $13 strike for Sept.  As I mentioned previously, the Sept $13 strike was at about an bid of $0.50 during August’s expiration weekend, whereas the $14 was less than half that, so I entered an STO order for the $13 hoping it wouldn’t change much.  Unfortunately, it did, and I began a process of chasing it down, entering asks at the bid/ask midpoint throughout Monday, Tuesday, and Wednesday.   I was hoping to catch things in an uptick, but that just didn’t happen.  If I had simple entered an order for exactly the bid on Monday morning, I would have done much better for myself.  Eventually, I gave up the chase (of course, just before things temporarily swung back my way) and did just that.  Note to self, if you see an acceptable deal, take it and don’t get too greedy.

Here’s the analysis of the trade that I actually completed.  As before, I’ve included all commissions in the prices which is why I go out to fractions of a cent.  And I’m using the ex-dividend date as the date of record for the dividend.

Critical Dates:
2009.08.26: Initial position: HOLD 200 AA @ $11.65
2009.08.26: Initial call option: STO 2 AA HL (Sep09 $13) @ $0.21875 (after commissions)
No dividend expected before expiration.

Summary, if NOT called (static return):
Days position held: 24
Capital investment: $2330.00
Income received: $43.75
Percent return: 1.88%
Annualized yield: 32.70%

Summary, if CALLED at expiration:
Days position held: 24
Capital investment: $2330.00
Income received: $43.75
Net profit if called: $308.80
Percent return if called: 13.25%
Annualized yield if called: 563.77%

At yesterday’s close of $11.55, I’m just barely staying ahead of my updated call basis of $11.43 after this trade.

For the last couple months, we’ve been letting the 6-month CDs in our emergency fund CD ladder expire so that we could move the money over to Ally Bank’s 9-month No Penalty CD product.  We did that again this month, but with one significant difference, this month our local credit union (Austin Telco Federal Credit Union) provides a 1-basis point higher yield than Ally’s product.  So why would we still go with Ally?

Flexibility vs. interest yield?

First, let’s summarize the different products and yields.  ATFCU is currently offering a 6-month term CD with a 1.86% APY.  There are no fees, but there is a minimum balance of $1,000 and there is also a penalty if you need to withdraw money before the end of the term.  If you do withdraw any money, they charge a penalty of 90-days worth of the interest you would have earned on the CD, even if you haven’t actually earned it yet.  Thus, if you have to liquidate the CD in the first 90 days, you won’t even get your principal balance back. They do allow partial withdrawals, as long as you leave a $1,000 minimum in the CD, but it isn’t clear to me if the penalty they charge is based on the amount you withdraw or whether it is always 90-days worth of interest of the opening amount.

Ally is currently offering a 9-month No Penalty CD with a 1.85% APY.  Again, there are no fees but there are also no minimums.  And the big kicker is that you can withdraw your money, though you have to take all of it out at once, but there is no penalty for doing so.  You get to keep all the interest you’ve earned so far, and you are guaranteed to get your principal back.  (Assuming you are under the FDIC limits for your relationship with Ally.)   And, I’ve just noticed a new benefit on the Overview description of this product: “For your peace of mind, accounts funded within 10 days of opening receive the highest rate during those 10 days.”  This guarantees you will at least receive the rate you saw on their site even if it takes a few days for your funding money to move through the banking system to Ally.

Given the big differences in flexibility / penalties, we’re obviously better off using the Ally No Penalty CD for our emergency fund.  If we really do have an emergency, we can withdraw our money without penalty.  Plus, we get an extra 3-months of a potentially higher APY, plus the flexibility to close the CD and open a new one, with no penalties, if rates go up.  This is certainly well worth the 0.01% APY we’re forgoing by not sticking with ATFCU.  However, it is also clear that we need to keep tracking yields on the CD products offered at a number of institutions as Ally is no longer paying the above market rates that made it so obviously a better deal.  I’m not sure at what rate difference we’d stop preferring Ally.  Is there a rate at which you’d take the more restrictive account type?

I had two covered call positions waiting on August expiration, which was Saturday.  My AA HO (Aug 09 $13 strike) almost certainly expired as AA closed at $12.56 on Friday — I just can’t be sure until Monday morning given past experiences with TradeKing notification.  And I’ve received assignment notification on the short-term JGL HY (Aug 09 $27.50) play even though HD closed at exactly $27.50 Friday.  Not quite sure why some one would exercise that, but they did.  So what do I do next?

One call assigned, so back to cash

To be fair, TradeKing has removed the AA HO option from my account summary page, but the Activity page doesn’t show a line item for it’s expiration.  Given that this is the first time I might have ever had a call option simply expire in a TradeKing account, I’m not sure if they ever show expiration as activity line items.  Safest to wait until Monday morning and just plan for both possibilities — starting out holding 200 shares of AA or being liquidated to cash.  It’s worth pointing out that my cost basis on the AA is $11.65, so even if the call wasn’t assigned, I can still sell the shares for a profit.  Using Friday’s closing price of $12.56, I’d be up $183.29 for the round trip, or a 7.87% return.  Over the 32 days for which the capital was locked up in this trade, that would be a 137.22% annualized yield.  However, given my bullish belief in AA (yes even though the news is reporting high inventories of aluminum) I’d probably only do this if I identified a much better ROI trade for September expiration.

Another possibility is to simply sell new calls against the AA shares.  The similar strike call for AA but with Sept expiration had a bid/ask midpoint of $0.53 on Friday’s close, so selling those would net me about $100 after commissions.  Or you could think of that as lowering my cost basis to $11.15.   If AA exceeded the $13 strike by September expiration, that would be a profit of about $365, a return of about 15.7%.  Given the new 50 days total holding period for the trade, that would be annualized yield of about 189%.  Not bad at all.

Given that I’m bullish on AA, what about looking at the $14 strike instead?  This call had a bid/ask midpoint of $0.225 at Friday’s close, so selling 2 calls would net just under $40 after commissions, lowering my cost basis to $11.45.  In addition, this trade would let me capture some additional upside ($200 worth) should I be right about being bullish.  If the call is assigned, I’d be looking at a profit of about $505 in this case.  The yield of about 21.7% would turn into an annualized yield of around 318%.   But there’s alot more risk of the call not being assigned in this case, and the bulk of the profit comes from that happening.  Otherwise, I’m only collecting an additional $40 of income, or a 1.7% yield (about 24% annualized.)

I’m not sure what to do at this point, but given that I need to research new trades since the HD/JGL HY trade was closed out, I’ll probably wait to decide until I’ve done the research for using that cash and can determine how much capital I can put toward whatever looks good there.   If I feel more confident in something with a higher ROI that could use the full portfolio, it certainly makes sense to sell the AA.   There’s always the chance that I simply do another buy-write with HD and then only need the capital I already have in cash at the moment.

After doing some research last night, I identified three short-term covered calls to track briefly this morning.  I ended up pulling the trigger on a trade involving Home Depot (HD) and the Aug 2009 $27.50 strike call option (JGL HY).  Here’s my analysis.

While we have the tools, we needed the materials

I ended up looking at Home Depot because of a noticeable change in my own personal experiences with a couple of local stores.  My wife and I have been doing a sweat-equity bathroom remodel on and off since last November.  During that time, we’ve made frequent trips to both Home Depot and Lowes stores and I’ve noticed the following trends.  First, the folks at HD are friendlier and MUCH more knowledgeable than they were just 9 months ago — we haven’t been able to enter the place without being asked if we need help with anything, and in all but one case, the advice we got was very useful.  Second, HD stores seem packed, both in comparison to what I remember from 9 months ago, but especially when compared to the number of people at Lowes when we’ve had to go there because HD was out of something.  In short, I’m gaining confidence in HD taking share away from Lowes, and thus in a growth in stock price.

As a second step, I looked at both short term, medium term, and longer term options premiums.   Since I was looking to sell an OTM short-term call, I wanted to capture at least some premium for this week, plus there is a good chance I’d be holding the underlying after this Friday’s expiration.  So what I was looking for in the mid and long term was what sort of IV (implied volatility) there is and whether I was setting myself up to receive good premiums on future sold calls.  Yes, the volatility is there for a reason, but again I’m feeling HD’s direction is up from my own personal experience with the stores, so I’m just a bit more comfortable holding HD when compared to other possible trades I looked at.

Anyway, here’s the details of the trade I actually completed this morning.  As usual, in the following I’ve already added or subtracted commission costs as appropriate; which is why the numbers go out to 4 decimal places.

Critical dates
2009.08.18: Initial position: BTO 100 HD @ $27.1795 (including commissions)
2009.08.18: Initial call option: STO 1 JGL HY (Aug09 $27.50) @ $0.1839 (after commissions)

Summary, if not called.
Days position held: 4
Capital investment: $2717.95
Income received: $18.39
Percent return: 0.68%
Annualized yield: 85.03%

Summary, if called.
Days position held: 4
Capital investment: $2717.95
Income received: $45.49
Percent return: 1.67%
Annualized yield: 354.76%