Another Angle on Gold

I've done pretty well on my last couple gold trades using the leveraged ETF DGP. Right now I don't see a great opportunity in the metal itself. It's back down near it's 120 day MA today, but that same moving average has rolled over and is now heading back down. While I'm certainly bullish on precious metals long term, until I see some confirmation of short term direction, I'm not interested in trading it.

That doesn't mean I can't make some money off gold though. Seabridge Gold(SA) is a cheap gold explorer. They have two massive projects in Canada and it's gold reserves are currently priced at around $23/ounce. That's just the gold. There is also plenty of silver and copper "byproducts." At those prices, even if the metal were to drop further, SA would most likely weather the storm better than the metal or some less-attractively priced gold companies. That's not all though, a good company like SA with reserve valuations this low could end up being a takeover target for another company. I'm going to sell puts again, but I'm going out a bit longer than normal.

• Sell to Open: 1 SA Jan 19 2013 20.0 Put @ $2.85

With only about $560 in margin requirements, this will come out to right about 50% returns if it expires worthless. If it drops below $20 and I have to buy the stock, my adjusted entry price would only be $17.15 and I'd own one of the best(and cheapest) gold explorers available.

The Numbers

• Cash: +$285
• Short Option: -$300
• Margin: -$560

Selling Risk in InterOil

InterOil(IOC) has been on a tear lately and finally gave me a chance a few weeks ago to get out of some underwater puts I'd been rolling for a while. That trade had been on since before this blog, so it's not part of the portfolio, but it was a very profitable trade if not a bit more risky than I maybe should have done. This time I'm going to give up some profit for a lot less risk.

• Sell to Open: 4 IOC Mar 17 2012 35.0 Put @ $0.30

This should be a quick trade. If IOC should happen to get hammered in the next two weeks and I buy at $35 I'm ok with that. There's a lot of controversy about IOC and it seems things are pretty well divided between bears who think the whole thing is a fraud and bulls who think it's a jackpot. I'm firmly in the bull's camp although I think it's going to be a volatile ride. That's why I'm able to get such good premiums on the options. $30 doesn't seem like much(and if my commissions weren't as cheap as they are, I couldn't do these trades), but with only about $400 in margin requirements per option, that's more than a 7.5% return in just two weeks. And with premiums as high as IOCs, I should be able to do this trade again and again.

The Numbers

• Cash: +$120
• Short Option: -$140
• Margin: -$1540

Gold Gets Hammered

Gold got smacked hard today and DGP closed well below my stop. That will happen when you're using a tight stop on a leveraged ETF. I'll close out my DGP trade in the morning. I will update this post after the trade is done.

Update:

Gold is bouncing a bit this morning which gave me a bit better of an exit point.

• Sell: 50 shares of DGP @ $56.08

I finish this trade with a gain of $5.22(10%) in about 2 months.

The Numbers

• Cash: +$2,804
• Long Stock: -$2,804

New Trades

Well I got the bounce in gold off support again so I'm still in that trade with another nice pop this morning. If I change my stop or close that trade I'll post again.

But today I put on a couple more trades, selling naked puts on a couple great stocks. The first one is Berkshire Hathaway, which I've traded before. In the Berkshire trade I wrote about how Buffett will always step up to buy at 1.1x book value. In the latest shareholder letter from Buffett, he talked again about buying at that level. Additionally, book value grew at 4.6% and is now right around $73/'B' Share(equal to 1/1500th of an 'A' Shares). Since I still feel like there's a lot of potential for short- to mid-term weakness, I'm going out a little farther.

• Sell to Open: 1 BRKB Jan 19 2013 72.5 Put @ $3.56

With about $1300 in margin requirements, this will net me 27% return in about 10.5 months.

The second trade is Annaly Capital Management(NLY). NLY is a mortgage REIT that deals only in agency-guaranteed loans. They just borrow money from the government at low(some might say artificially low) rates and use it buy mortgages that are guaranteed by Freddie Mac and Fannie Mae. Since they're a REIT, 90% of their earnings come back to the shareholders resulting in nearly a 14% dividend that's super safe. With the Fed promising to keep interest rates low until 2014, NLY will continue to bank big profits. It's a great stock that I've owned and traded in the past. I'm going to do a two-part trade on this one. The first will be a longer term out-the-money put mostly just to collect cash. The second will be a shorter term in-the-money put intended to get a stock position that I can use to collect dividends and sell covered calls against. If the stock rises above 17 and we don't get the stock, we'll just do it again and collect put premiums instead of dividends.

• Sell to Open: 1 NLY Jul 21 2012 16.0 Put @ $0.70
• Sell to Open: 1 NLY Apr 21 2012 17.0 Put @ $0.80

The Numbers

• Cash: +$506
• Short Option: -$515
• Margin: -$2000

Walmart

Walmart(WMT) is down about 4% after their earnings this morning. Still not quite a screaming value at $60/share, but I am going to take advantage to sell a put.

• Sell to Open: 1 WMT Jan 19 2013 55.0 Put @ $2.50

This will work out to 25% in just under a year. Worse case scenario, I buy WMT at $52.50 and collect dividends and sell covered calls on a rock solid company.

The Numbers

• Cash: +$250
• Short Option: -$255
• Margin: -$1000

Out of NETL

Gonna go ahead and close out the NETL arbitrage trade this morning for a nickel. This option didn't expire until April, so there was no point in tying up the margin for an extra $5.

• Buy to Close: 1 NETL Apr 21 2012 49.0 Puts @ $0.05

This trade produced nearly 15% on margin in just 4.5 months.

The Numbers

• Cash: -$5
• Short Option: +$5
• Margin: +$1000

Gold Update
My DGP gold position has been flirting with it's trailing stop the last couple days. If we don't get a bounce this afternoon or tomorrow it will likely break it's trailing stop(currently $56.53) and I will close the position.

Out of MSFT

The naked call I was holding against my Microsoft stock was exercised early(most likely someone chasing the dividend since yesterday was the ex-div date). Anyway, instead of trying to get back into this right now I'm just going to take my profits on this one and wait for a better chance. The option was exercised at $30 so that's a total capital gain of $4.59/share(18%). Additionally I received another $0.52/share in dividends and $0.42/share in option premium(that's including the $0.46 I lost when the shares were called away and I rebought) for a total gain of 21.8% in about 9 months.

• Sell 100 shares of MSFT @ $30.00

The Numbers

• Cash: +$3,000
• Long Stock: -$3,025
• Short Option: +$35

I will try and get back into MSFT if it drops back down in the next couple weeks.

Rolling, Rolling, Rolling

Haven't been very active lately, but I am going to go ahead and roll out the MSFT calls from last week another week. With so little volatility, there wasn't much premium and they barely covered commissions, but I don't want to dump the stock yet.

• Buy to Close: 1 MSFT Feb 10 2012 30.0 Call @ $0.52
• Sell to Open: 1 MSFT Feb 18 2012 30.0 Call @ $0.56

The Numbers

• Cash: +$4
• Short Option: -$4

Hahahaha...Bite me MSFT!

Isn't that awesome! Once again Microsoft is running higher and my greed yesterday is going to bite me again. This time it was the employment report this morning. Might be time to lay off the covered calls until this bullishness in the markets fades a little. If the calls I sold yesterday are still in the money towards the end of the day I'll roll them forward a week or so. I'll update this post if I do.

Update: I rolled the MSFT calls out one week on Friday afternoon.

• Buy to Close: 1 MSFT Feb 03 2012 30.0 Call @ $0.28
• Sell to Open: 1 MSFT Feb 10 2012 30.0 Call @ $0.44

The Numbers:

• Cash: +$16
• Short Option: -$16

More MSFT Calls

A couple weeks ago I got a little greedy with the Microsoft covered calls, but I'm going to try it again.

• Sell to Open: 1 MSFT Feb 03 2012 30.0 Call @ $0.11

MSFT closed the day just $0.05 away from the $30 strike, but I feel that Microsft(and the overall market in general) is a little stretched to the upside and due for at least a pause. These expire tomorrow, so even if it jumps a bit tomorrow, it shouldn't run up too much and even if the option gets exercised, it should be minor. Last week, even with earnings giving the stock a huge boost, it was still only a minor loss.

The Numbers:

• Cash: +$11
• Short Option: -$11

MSFT Update

The other option expiration update I had was the Microsoft covered calls. This one wasn't as simple. The market love MSFTs earnings last week and the stock price raced up past the strike price Friday morning. I had a chance to close the call at breakeven early in the day, but decided to put in a limit order and let things play out whichever way and deal with it today. Well, MSFT kept plugging higher all day and the stock got called away at $29. Since I wasn't ready to end this trade yet though, I repurchased the stock this morning. Luckily MSFT has been dropping today and I was able to repurchase at $29.46. With the $0.14 option premium on the latest call, that means I'm only missing out on $0.32 share. Not what I wanted when I sold those most recent calls, but that happens with covered call positions sometimes. I am going to continue to track this as a single trade.

• Sell 100 shares MSFT @ $29.00
• Buy 100 shares MSFT @ 29.46

The Numbers

• Cash: -$46

ECA Update

I meant to write about updating my expiring options last week, but was out of town until yesterday and didn't have a chance to put it together. The Encana naked puts have gone away from me since pretty much day one and are significantly under water. I rolled them again and got very little premium even rolling it out all the way to July. If these are still deep in the money in July and the premiums aren't there, I will look at letting the stock get assigned to me. If I can only grab $0.30 in premium, I'm probably better off collecting and reinvesting the dividends.

• Buy to Close: 1 ECA Jan 21 2012 27.0 Put @ $9.53
• Sell to Open: 1 ECA Jul 21 2012 27.0 Put @ $9.87

The Numbers

• Cash: +$34

Microsoft Calls

I've gotten a nice little pop in the price of Microsoft, so I'm going to take advantage and sell another covered call against my shares. Stocks seem a little anxious to move higher these days, so I'm going to keep this one short and sweet.

• Sell to Open: 1 MSFT Jan 21 2012 29.0 Call @ $0.14

Once again this isn't much money, but it's only a week away and we've got some room to spare with MSFT just above $28 these days.

The Numbers

• Cash: +$14
• Short Option: -$15

All That Glitters

Let's give gold another shot. Gold is below both it's 120-day and 200-day moving averages so it's technically in bear mode, but I'm willing to take a shot that it's exhausted it's downside momentum for the time being. Just like last time, I'm going to use the same triple-leveraged ETF(DGP) with a tight stop. For now I'm going to use a 5% soft trailing stop. I bought this morning at $50.86/share. If DGP breaks it's 5% trailing stop(about $48), I will take another look at the technical picture and decide whether to give it some more room or not. Regardless of what happens with that, I will keep a hard 10% trailing stop and sell if it hits that. On the upside I'm looking for gold to at least go up to $1,750. That's about 10% on the upside which would be approximately 30% gain since I'm using the 3x leveraged ETF.

• Buy: 50 shares of DGP @ $50.86

The Numbers

• Cash: -$2,543
• Long Stock: +$2,543
• Available Margin: -$1,500

Year End Review

Welcome to the year end review. I'm not sure what the best way to write/grade this post, so bear with me while I wing it. I also don't expect it to be too in depth. And while I will likely comment on open trades and make note of the total portfolio value, I will be focusing on realized gains.

I wasn't very active with the published trades this year, but I hope to do more consistent posts this year. I only had 23 trades(including rolling options) in about 8 months and since this blog is more of a high percentage singles hitter than a home run hitter with lots of strikeouts, the gains on these trades is often pretty small. This means my total returns are going to be smaller than I was hoping for. This should improve as I do more trades in 2012.

First up is my inaugural trade: the Microsoft covered call. I still have the shares of stock and it finished the year up slightly with just over 2% in unrealized gains. More importantly though I received $52 in dividend income and $54 in covered call proceeds for a total realized gain of $106 for about a 4.2% gain on the initial outlay of $2,541. This trade will never be a huge winner for the portfolio because I'm not tracking reinvested dividends and on a stock like MSFT I'll be more conservative on the covered calls so that I don't get my stock called away from me.

Cisco was a moneymaker for me this year. I started with some longer term naked puts which I eventually closed out for just $0.08 per contract for a total realized gain of $196 for both contracts(approx. 30% gain on margin) in 7 months. The other CSCO trade ended up being 6 trades in one as I rolled it out a several times. I also closed out that trade for $0.08 per contract after receiving a total of $209 per contract in option premiums for a total realized gain of $402 on margin requirements of approximately $650 for gains of about 63% in just 7 months. All told, I had $598 in realized gains with Cisco. Not too shabby.

Usually a regular trade for me, I just didn't have the time this year to do much expiration week trading, but back in June I did make a couple trades(both winners). I realized gains of $33 on First Solar and $28 on Amazon. At less than 1% combined gain on margin, this was a small winner, but I was only in it for 2 days and would normally be doing several trades like this every month. Those start to add up.

I did do a fair amount of arbitrage trades. It was successful for the most part, but I also had my only realized loss on an arbitrage trade.

• VSEA - Closed out for a total gain of $140(about 11% on margin) in about 3 months
• KCI - Closed out for a total gain of $125(about 8% on margin) in about 3 months
• LZ - Since I already had this trade on the books before I started the blog, I tracked this one with the price I could have gotten at the time so my realized gains on this one are smaller than the actual gains I saw in my account. Still, I closed it out for total gain of $60(2.1% on margin) in just a month and a half.
• MMI - Still open and in the black.
• NETL - Still open and in the black
• PPDI - Closed out for a total gain of $96(about 12% on margin) in just 6 weeks
• TLVT - And here's my loser :-( Read my exit post on the trade for how I screwed up this one. It was closed out for $646 for a total loss of $326(about 30% on margin)

The Encana naked puts is also a loser so far as well, but it's still open. My timing was pretty bad on this one and I already rolled it out once and likely will have to at least once more to turn this trade profitable. I will look at this trade again at option expiration in a couple weeks and decide whether to stay in it or not.

My leveraged gold trade wasn't quite as profitable as I was hoping, but I won't complain about a 5.5% gain in a month. I closed it out at $56.83 after buying at $53.86 for a total gain of $148.50 on an initial outlay of $2,693.

The Berkshire naked puts and Microsoft naked puts were both winners, but I didn't close them out until January 3. For 2011 purposes, they are both unrealized gains.

The only other trade that was closed out in 2011 was the quick trade on the SSO puts. This was another quick, low return profit that gave me a realized gain of $36(about 1.5% on margin) in just 4 days.

All told, I had realized gains of $1,044.50 on an initial portfolio of $25,000. That comes out to about 4.2% in 7 months for an annualized gain of about 7.2%. I normally won't use annualized gains except on the year end review because I do so much short term trades and it skews the results pretty drastically. For example, that SSO trade that made me 1.5% in 4 days would equal nearly a 100% gain if you annualize it. That's not an accurate representation of the trade, especially when I'm not making that trade every week.

4.2% isn't great, but considering the overall market was almost dead even for the year(looking at the S&P500), it's pretty good. If I beat the market by 4% every year, I'd do pretty damn well for myself.

As for the unrealized gains, the model portfolio at market close today(January 4, 2012) is $26,160.50 for a gain of $1,160.50 or just slightly more than my realized gains.

Here's to a great 2012 folks!

Site News

2012(20-duz) is here. Even though I've only been doing this blog since last May, I'm going to do a year-end review of the model portfolio sometime this week. I will be using the account values from last Friday to calculate returns. Unfortunately, I forgot to do this over the weekend, so some values(mostly things like margin and open option positions) will have to be estimated. I don't anticipate this causing more than a few dollars difference one way or the other, but I will make sure and do it on time next year. Here's to another good year!

Closing out trades

Two more winners to close out today; My naked BRK.B puts from October and my naked MSFT puts from the end of November. The market jump this morning has killed most of the remaining value on both these trades. Luckily I get cheap commissions on options from TD Ameritrade. With higher commissions it's not always worth it to close out "zero-risk" trades when they get cheap like this. I know these aren't technically "zero-risk," but since they are both rock-solid companies I don't see any risk to holding the options since they are just an opportunity for me to purchase the stock cheaper than it is now. The only reason I close them out is because it frees up margin for more profitable trades(within the current model portfolio, I have plenty of margin available, but that may not always be the case. It only costs me a few bucks to close them out now and if the stock drops again I can get back in for a better price.

• Buy to Close: 1 BRKB Jan 20 2012 67.5 Put @ $0.09
• Buy to Close: 2 MSFT Jan 21 2011 24.0 Put @ $0.04

I ended up with about a 21% gain in 2 1/2 months on Berkshire and a 12% gain in just a month with Microsoft.

The Numbers

• Cash: -$17
• Short Option: +$17
• Margin: +$1000