Logical Progress Advancing a Little Bit Every Day


Selling those Ford calls was a bad idea

A lot of times in life you learn lessons the hard way, and you base your actions on expectations of the future, right or wrong.

Ford is now trading at $15.80 pre-market. I wrote calls with a strike of $15, so I'm leaving a ton of money on the table. My only saving grace here is that I still have 200 un-leveraged shares in another account with a buy price about $10, so I'm still sitting pretty.

On the flip side, because its moved so far away from $15, the premiums on $15 puts expiring next week are going to be practically zero. This is a shame, but at least I put my money to work for me, otherwise that $3000 would have been sitting earning zero interest.

Here is a summary of the anatomy of this trade:
Wrote 2x $15 puts expiring May 24 for a net return of $22
Prior to assignment, I wrote the $15 calls expiring May 31 for a net premium of $14
My total return on the $3000 required to be put on the line was $36, or 1.2% over a two week period. A rough annualized return on this would be about 31.2% assuming I'd be able to repeat this scenario every two weeks, unlikely though.

However if I hadn't written those calls, I'd be up $160 on the whole position. I was certain it would waver around $15 for a little bit, and I'm overall bullish on Ford, but never expected it to rise so much so fast, especially during yesterday's brutal sell off.

Oh well, the important take away here is this: a small profit is better than a massive loss.

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Some thoughts on tax preparation

I realize that for pretty much everyone out there this post is a bit untimely, since tax returns were due on April 15th and it's now late May. However, I am a US ex-pat living abroad and I've got extensions in place. My company has a professional tax preparation service to help ex-pats deal with the unique tax issues that arise from this situation. [Perhaps some articles about my ex-pat experience would be worthwhile posting here?]

I got a bit of a kick in the bum earlier this week by our internal tax team, asking that I complete my tax organizer early in order to avoid excessive costs associated with paying our tax preparer. This was great, because otherwise I would have waited until August or September like I did last year, and not get my refund until October. It's also great because I'm a company man and a shareholder, so any way I can help avoid cost for my employer is good for everyone.

I had completed everything except the portion where I had to list out all my brokerage transactions. I've been putting this off because I did a tremendous amount of transactions last year, day trading quite a bit. I had stacks and stacks of paperwork to go through, ensuring every last dollar was balanced out properly. In doing this I had a few thoughts:

1. Stick to one brokerage account (or as few as possible, at least): last year I traded in three brokerage accounts, four if you count the one where my company stock grants are deposited. This means I had multiple 1099's, schedule D's, and other tax forms that needed to be carefully reviewed. It becomes especially hard because each broker reports this information differently and you have to deal with collecting multiple tax documents to support the return.

2. Create as few tax lots as possible: this isn't totally problematic in terms of completing my return, it just results in a lot of paperwork. Sharebuilder is the classic example: I sold securities last year that I had been adding to on an almost weekly basis since 2008, and so all those lots are detailed on the 1099. It was a whopping 36 pages. The biggest culprit here: dividend reinvestment. In a taxable account, a dividend reinvestment is a tax lot. Sharebuilder is a funny thing, it makes it really easy to build positions for a reasonable cost (assuming you buy big enough lots), but when it comes time to sell, it can get confusing. I'm not against "scaling in" or "averaging down" because I do it all the time, but in the Sharebuilder account I was buying pretty much the same stuff every Tuesday, give or take.

3. Start as soon as possible: brokerages are required by the IRS to provide your tax documents by February 15th, but they are allowed to file extensions, some as late as March 30th. We all know that procrastination is bad, but in the case of someone with a large number of trades to record it can be a major detriment. I'm lucky in my circumstances, I've got extensions and support doing my taxes, but it was still a lot of work. In a perfect world I can send the tax preparer all my forms and have it done, but the way this system works still requires me to record all my transactions, so I may as well have done the tax filing myself if it weren't for all the exotic tax rules for ex-pats that I don't know about.  And honestly, I was going to do this weeks ago, but I got caught up doing things much more fun than tax returns. But I hunkered down for about three hours and knocked it out. Which brings me to my next point...

4. Do it in as few sittings as possible: I know sometimes it can be easier to do these types of things in small allotments, especially if you work on your return each time a new tax document comes in, but sometimes you just need to focus on everything all at once. In my case, I completed the basic information, interest and dividends, but when it came to the brokerage transactions I just froze. There were so many, and there were three active accounts. I procrastinated for weeks, then I got the motivation from my employer, and decided to just knock it out. I had to go into the office so I could use my large screen monitors. I drank a few cups of coffee, poured all over my paperwork, and completed the transaction worksheet in about three hours. No distractions.

That's it! It's just about getting it done and doing it right. My goal for the 2013 tax year is to transfer all my remaining securities into the Interactive Brokers account, so there's one source of brokerage data to maintain. I'm repatriating as well so I have one more year of tax drama to deal with before getting back into regular US resident tax rules, then it will be back to using TurboTax and getting my return on time. 

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Picking up Ford shares

As noted previously, I had a cash lot left over from the exercise of my MO calls. Rather than plow all the money into new securities I took a gamble and wrote some puts on Ford at $15/share. If the rally had continued through the week I was happy for them to expire worthless, but I'm also equally as happy to get assigned. Well, that's what happened at the close on Friday. Ford closed at $14.79, which was very close to my buy price taking into account the option premium I collected.

Knowing that I was going to get assigned, I went ahead and wrote some $15 calls expiring next Friday. My expectation is that, with the short trading week and ominous uncertainty, they will not close above $15 on Friday. I'm also pretty confident that they won't fall too much by then, allowing me to sell another set of $15 calls expiring the following Friday.

Keep in mind that I'm not raking in massive profits from this strategy, just maintaining income and trying to buy down my total investment in the security. It also helps toward my monthly commission minimums. It looks like this month I've made my $10 minimum, but not yet met my $30 minimum required to waive the cost of my market data subscription, so I'm expecting an $11.50 charge at the end of the month. Fortunately the option premiums I collected more than cover this, so I don't need to rely solely on the dividends to meet this minimum. I want to emphasize that I'm not really all that concerned about these fees, as in previous brokerage accounts my commissions and fees were far greater than this, but just want to highlight how an average investor can use creative methods to ensure these are covered. With a diverse enough portfolio one should be able to make enough trades and collect enough income in order to securely cover these charges.

I'm looking forward to next Friday to see how this plays out. The best case scenario is that it continues to trade close to $15, but not exceed it, allowing me to write more $15 calls. The worst case scenario is that Ford goes to zero (doubt it). The mediocre scenario is that it closes above $15 and I'm left holding just the premium from the calls. However, if this happens, and I can realistically predict an exercise, I will likely again write more $15 puts and see what happens. Ford doesn't go ex-div until around August, so I'm not really interested in holding the stock until then. If I happen to be holding it then, great, but it also will cause me to stop leveraging it, since the dividends may not be considered qualified if I sell it too soon after becoming entitled to the dividend.

Thanks for reading, updates to follow next week.

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Added JNJ to aristocrats portfolio

This week I had some cash left over from the exercise of my MO options, so I rolled some of it into JNJ right before the ex-div of May 23. It was trading at a 52-week high, so I was a bit reluctant at first, but decided that I can average down on the pullback. JNJ is a powerhouse of a company, having paid dividends for 50 years. It currently has a 68% payout ratio, so it's getting to be on the high side, but I trust that earnings will continue to increase and this ratio will remain stagnant. They also just raised their dividend from $0.61/share to $0.66/share, not too shabby. The yield now is approximately 2.9%

Of course, with the recent pullback, I'm already down a few bucks per share, but lucky for me I only bought in 10 shares this time. If it continues to pull back to about $80/share I will add more. My strategy in this portfolio is to add more closer to the ex-date, but since I got JNJ near its 52-week high, it would be prudent to buy down my cost as the price pulls back significantly, and not wait for the next ex-div.

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City of London. Quick day out

Just went out for a spot of lunch and grabbed a photo at monument.


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Why I use Interactive Brokers

While writing my dividend aristocrats articles I mentioned my use of Interactive Brokers, so I thought it would be a good idea to do an article about why changing to Interactive Brokers was the best trading decision I've made in my investing career.

There are pros and cons to every broker, and I've tried quite a few. The biggest con for me are the commissions and other fees. Paying $7.95 per trade plus options fees is ridiculous, it makes it really hard to make money writing options! If your game plan is just to buy and hold stock, then get any brokerage account you want, pay the high commissions and move on. The commissions aren't going to matter if you're looking for long term capital appreciation and dividend compounding. However, if you want to move in and out of positions or go short options for quick gains, you need low commissions.


Dividend Calendar – Filling in the Gaps

Having the ability to visualize the longer term outcome of this project can be motivating, or so I found out when I decided to sit down and create a dividend calendar. Since my objective is steady monthly income I wanted to avoid certain months where my holdings were cranking out more cash than other months. In my case it happens the June-September-December-March cycle seems to be the most popular. It can be pretty straight forward to do one in your favorite spreadsheet software, and even extend it further by crunching numbers: I have mine connected to two spreadsheets tracking two brokerage accounts where I maintain my expected dividend payments, then calculating the total expected income for each month.

Here's a snapshot:


Aristocrats Update: Altria (MO) dropped from portfolio

Screen Shot 2013-05-18 at 22.17.35This Friday was options expiration, and I'm a bit sorry to say that I let my shares go. I had $34 calls that I wrote over a month ago, around the onset of the rally. I thought the price was going to pull back, giving me an opportunity to close the position for a small profit, but then it just continued to run. It got so deep into the money it didn't make much sense to roll it. 

The problem with rolling a call that's deep in the money is that you'll need to push the expiration much further away to pocket some more cash in the process, and you often won't be able to roll up to a higher strike unless you max out the time horizon.

Anyways, faced with the choice of pocketing an extra $20 or $30 in premium and pushing my expiration out to January 2014 or letting the stock go, I decided to let it go. I have Altria shares in two other accounts: my Roth and my Sharebuilder; so in some respects I'm probably a bit overweight on it. I got a few dividend payments out of it, and I was able to write a few calls from time to time. All in all, I made good money on it while I had it, it's time to employ the money elsewhere.

What to do next

Well, I'll have $3400 on Monday to plow into some other positions. I can either carry on buying small blocks of aristocrats, or write some puts on something to push the cash out. I did consider writing some Altria puts on Friday right before expiration, but decided not to. See usually when my shares get exercised I'll take the cash and write a secured put on the same security, with the hopes of either getting back in to write more calls.

Here's what's on my radar this week for dividend Aristocrats:3M (MMM) ex-date is Wednesday 22 May
Johnson & Johnson (JNJ) ex-date is Thursday 23 May
McGraw-Hill Financial (MHFI) ex-date is Friday 24 May

Also on my radar is Ford Motor Co (F), breaking $15 this week is a huge signal, with some saying it's a psychological level and the next stop being $20. Thinking of writing some puts against my $3400 and buying a small block of MHFI with what's left. We'll see how it plays out.

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S&P Dividend Aristocrats Portfolio Part Two: Existing Components

In my last article I briefly discussed my strategy of building a dividend portfolio paying a monthly stream of income based on the S&P dividend aristocrats index. I haven't determined how many stocks are going to make up this portfolio, but the idea is to buy stocks on a set schedule that eventually leads to extremely regular dividend payments. I don't have a DRIP in this brokerage account (the tradeoffs are well worth it), so every dividend will just build up my cash balance, and slowly reduce the amount of my earned income I need in order buy more securities.