I received an e-mail from TradeKing just a little more than an hour ago informing me that my AJO HE options (Aug 2009 $31 strike) had been assigned and my shares of AFL sold.  This is pretty much what I expected to happen given the option contained so little time value: assignment before the ex-dividend date of Aug 19th.  So here’s a summary of round-trip trade.

Critical dates
2009.07.14: Initial position: BTO 100 AFL @ $31.28 (including commissions)
2009.07.14: Initial call option: STO 1 AJO HE (Aug09 $31) @ $2.42 (after commissions)
2009.08.17: Assignment: STC 100 AFL @ $30.94 (including commissions)

Summary
Days position held: 34
Capital investment: $2885.56
Income received: $209.41
Percent return if called: 7.26%
Annualized yield if called: 112.51%

I’m happy with this return, even though if I had simply bought AFL outright I would have been up over $1000 during the similar time period.  Why?  Well for one thing, I do own AFL outright in another investment account.  For another, this has been a learning experience.  I actually sold the options at a strike lower than what AFL was trading at when I entered into this position.   I totally did not expect this run up, and if it hadn’t happened I still would have made money as long as AFL closed above $28.86 on Aug 22nd.

As mentioned in comments on a follow-up to the original post, I had considered trying to capture some of this run up by rolling my option.   But the numbers just wouldn’t work out for me.  Once the price exceeded the $35 mark, the net debit incurred by doing a roll would have exceeded the capital I had in this portfolio.  Plus it would have added more risk that assignment wouldn’t happen and that my basis price could be significantly above what AFL might be trading at near expiration.   I never could find a reason for this rally — all the news I was seeing about AFL indicated things just weren’t as bad as they could have been — which isn’t really a reason to bet on sustained increases to me.

So, now I’m off to do some research and figure out what my next trade should be.

I’ve recently finished a year-long stint on my employer’s “401k Committee”.   We’d been searching for a new 401k plan provider in order to lower fees paid by both the company and individuals, as well as increase participants investing options.  One thing we quickly learned was that many 401k providers are now offering plans that allow participants to opt out of the administrated, standard mutual-fund plan and fully control their assets using a “self-directed brokerage” option.  This, in effect, gives you IRA-like control over your investments while still staying within the plan.

Purchasing stocks in a 401k: priceless

My employer ended up going with a plan administered by Iron Financial where the assets are invested thru TD Ameritrade.   There are a number of nice things about the IF plan, and one of the most important to us was the transparency provided by having all administration fees shown as expense line items on a quarterly basis so everyone knows exactly what fees they’re paying.  But, in my opinion, the real interesting thing is that employees can individually opt for the self-directed brokerage option which means that they can use the retail TD Ameritrade website to trade any stock, ETF, or fund accessible through TD Ameritrade.  So you know I’m opting for that. Here’s what I’ve discovered about how it works.

The first thing of note is that the annual asset-based administration fee is cut in half, down to 25 basis points (0.25%), for those who choose the self-directed brokerage plan versus the 50 basis points for those using the standard mutual fund plan. The drop is because you’re no longer using IF’s screening process to identify the “best” mutual funds that are part of the plan.

Another important fact is that I’m now paying a $9.99/trade commission for the purchase of stocks and ETFs and $0/trade for NTF mutual funds (those are TD Ameritrade’s standard rates) and I can pick literally any stock, ETF or one of 3,200 NTF mutual funds available at TDA. Whereas if I stayed in the standard plan, I’d pay nothing per trade but I’m limited to choosing from about 12 NTF mutual funds (NTF means no-transacation-fee.) I need to be cognizant of the overhead of trading commissions now – though since we’re paid monthly, the fees aren’t necessarily to bad if you’re careful. For example, so far I’ve been ensuring I purchase in amounts over $1K to keep the commissions down to less than 1%.

The next thing to note is that deposits to your account on each pay date will just sit there until you login and place a trade order. This is because you don’t have anyone looking over your shoulder, having noted your trading preferences, and watching for money to hit the account and distribute it. However, most brokers do offer a scheduled investment plan and TD Ameritrade is no different. The catch here is that if your deposit amount changes, you’ll risk either the scheduled trades not being made (if the deposit amount went down) or not using all the money available (if the deposit amount went up.) Because I’m trying to do some rebalancing by each monthly pay check’s deposit, I’m so far doing all manual trades. This also helps me to pick limit order prices that make more timely sense.

The one thing that I’ve found missing when comparing this type of 401k to an IRA is that the trustees of the plan have to manually approve any options level requests before the brokerage lets you request it from them. My employer has decided that they don’t think employees should be taking options risks on their 401k so they won’t approve any employees ability to trade even covered calls. From what I can tell, almost all self-opened IRA plans would allow such a conservative use of options. And some, such as ThinkOrSwim, would allow any type of options as long as the trade has defined risk.

While it’s only been a few months that we’ve had this plan, I’ve got to say that I’m thrilled with the universe of investing options I now have.

TradeKing, the brokerage we use for the trades written about on this blog, is willing to give $50.00 to those opening new accounts through their referral program.   While the referral program has historically given $50 to those who did the referring, between now and August 27, 2009 they’ll also give the new account holder (that’s you) $50 too!

To qualify, a new account holder must be a US resident and open a non-IRA account by the end of August, fund it with at least $1,000 within the next 30 days, and then execute at least one trade within 180 days (about half a year) of the opening of the account.   In addition, the minimum funds of $1,000 (not including trading losses) must remain in the account for those same 180 days or your $50 credit will be surrendered.  Read the full details.

If you’re new to investing and trading, or have always been a buy-and-hold investor, this seems like a great opportunity to open a new account and give yourself some separation to try out new ideas.   TradeKing has no account minimums or inactivity fees, offers flat commissions of $4.95 (market and limit entered online or via phone call), and $4.95/trade + $0.65/contract on options.   As I’ve discovered, it is MUCH easier to make small, profitable option trades (like you’ll want to make when you’re learning the process) when the commissions you’re paying are low.

E-mail me at davmp@geographic-independence.com if you’d like a referral to get you started!  I promise not to use your e-mail address for anything except sending you the referral.   (Note that if you just go open an account on your own, you won’t get the $50 credit.)

Just a brief note to record that on the 3rd, I adjusted our AA covered call by buying back the AA HL ($11 strike) options and selling replacement AA HO ($13 strike) options for a net debit of $1.33255 (including commissions).

For the last week or so I’ve been doing even more research on Alcoa, which resulted in a growing bullish feeling.  I now think it very likely AA will be trading above $13 at August expiration.  As a result, I looked into what the spread was on swapping my existing $11 strike for a $13 strike, and found the net debit was within what I considered a reasonable risk range for the additional return by two ways of measuring.  First, the additional capital invested brings our cost basis up to $11.65/share, which I felt was reasonable given my valuation analysis of Alcoa and how I think it will perform over the next year.  Second, the debit was low enough that the return if the options were assigned at August expiration would almost double ($271 vs. $137).

It’s been quite awhile since I posted an update on our progress toward our geographic independence goal – by which I mean what is our GI-qualified income and how does it measure up to our plan for hitting our GI goal?

Kaaaa-ching!

Our weighted average GI income for the month was $594.55, which is a decent jump up from the last time I did a similar analysis.  However, the real news is that we were within spitting distance of breaking the $1K barrier this month!  Our GI-qualified income was $956.34.  The main reasons for that are:

1. A 47% increase in online revenue from blogging – $340 in AdSense revenue.
2. Big, quarter-ending, dividends on the GI investment portfolio, including a $91 dividend on a ~$2K position in NLY alone.
3. And the start of income from doing covered calls.

The rest comes from interest on cash, investment dividends, and credit card rewards (which Kimberly is starting to question as GI-qualified but I think counts as it results from making a few simple decisions about how to purchase things we’d be buying anyway.)

As you can likely guess, having almost $1K in income yet only a weighted average of $594.55 means that our income in prior months was quite a bit lower.   Between my last update in February and this one, we hit a low of $352.3o in weighted income in May, and a correspondingly low actual cash income of $265.44.  But we are averaging $476.66/month in monthly GI income for the first 7 months of 2009.  For the year to date, just under 40% comes from online sources, 20% is interest on cash, 20% is investment dividends, and the rest is from nascent efforts like covered calls or miscellaneous, irregular sources like credit card rewards.   I’m hoping the income from trading can go up quite a bit in the future.

A footnote should be that I’m counting interest earned but not yet credited on our No Penalty CDs at Ally Bank as part of our GI-qualified income.  It appears that Ally doesn’t credit any interest to your accounts for these CD products until either you close out the CD, or it reaches maturity.  Because there is no penalty for closing the CD at any point, and your earned interest is paid out 100% at that time, I feel okay counting it as if it was credited during the month.

So how does this month’s income compare to the plan?  In short, we’re WELL ahead of the plan.  The weighted income exceeds the plan’s target for July, 2012!  This is a jump of almost 1.5 years ahead from the last comparison.   While that is great news, both my wife and I feel we’re risking falling behind by not making faster progress on starting our own online business – meaning something other than blogging.   However, time has been tight due to doing our own remodeling of our master bathroom.   Once that is finished, we’ll dive headfirst into establishing our own business.

Given that we’re more than half-way through the year, I took a look back at our short-term GI goals for 2009 and have the following comments.  (The number of each comment corresponds to the number of each goal.)

1. Contribute an average of $100/month to our GI portfolio.  Even if we don’t contribute another penny this year, we’ve already exceeded this mark.   This growth in capital in the portfolio is really what has allowed us to start doing covered call trades, and to consider doing outright options trading.
2. Go live with a technology start-up.  This is the area where I’ve already mentioned us being way behind.  There is still a good chance of going live before the end of the year.
3. Increase blogging revenue to $300/month.  It’s only the end of July and we now have two months of exceeding this target.  The $340 we received in July for the AdSense period ending in June, and the $340 we have yet to receive for the AdSense period ending July 31st.
4. Increase returns on the GI portfolio using non-buy-and-hold strategies.  We’ve done our first three covered call trades in the last 4 weeks, and it is looking very likely that the two not yet liquidated will be assigned at August expiration.  The end result looks like a total income of over $420 in just 7 weeks, or an annualized yield of 82%.  This is much higher than our average long-term buy-and-hold return, though I will admit we could have done much better if we’d simply bought and hold AFL through this same time period.
5. Establish processes for sticking with the budget and maximing GI income.  At this point, I think we have a good hold on this one, thanks to trying to find something to post about on this blog.   We’ve figured out ways to maximize returns on cash, including our emergency fund.  We’ve figured out an easier way to pay bills and earn credit card rewards doing so.  We’ve figured out efficient ways to invest and trade our GI portfolio.

It looks like we’re doing quite well for our 2009 goals!