Retirement Strategy: Actions To Take During A Flat Market (Part 14)

Includes: BAC, CVX, DD, DUK, GE, INTC, JNJ, KO, NLY, O, PG, PM, SO, T, XOM
by: Regarded Solutions

We are in a "holding pattern" with our "Core Retirement Portfolio" since making a few key changes. We sold several positions, we took profits by selling a portion of other positions, and we replaced several positions with better ones.

Our current portfolio consists of ExxonMobil (XOM), Johnson and Johnson (JNJ), AT&T (T), General Electric (GE), Annaly Capital (NLY), Southern Company (SO), Procter and Gamble (PG), Philip Morris (PM), Intel (INTC), Realty Income (O), Chevron (CVX), E.I. du Pont (DD), Duke Energy (DUK), Coca-Cola (NYSE:KO), Bank of America (NYSE:BAC)

As you can see we now have placed BAC into our core holdings. Given the future hike in dividend tax rates, a slight move such as this, with a small percentage of our available cash, could help us reap a greater capital appreciation to increase our portfolio value and help defray the additional taxes we would be subjected to if the strategy works. I believe it will, as I believe BAC has taken steps to improve its balance sheet for future earnings growth and a higher PPS.

By doing so, we can sell part of our BAC holdings if need be, to pay for the additional taxes we will be responsible for, and we might be able to rebalance the portfolio to offset the capital gains from that sale, by selling an equal amount of shares with decreases.

If we have only gains, so be it, we hold for better opportunities and pay the taxes due on our dividends.

However, we are getting ahead of ourselves.

For the past month or so we have been waiting for a pullback or a correction, that does not want to co-operate. Given the fact that we have freed up about $22,500 in cash reserves, as our core portfolio continues to grow, one of the toughest questions any investor faces is what to do while the market is in a holding pattern with no clear direction, no correction as of yet, and we are in between dividend payments.

We know when to buy (low). We know when to sell (high). We know how to cash those delightful dividend checks when they arrive. Now what?

Actions To Contemplate While We Wait

1) Obviously we can sit tight with what we have and wait for an inevitable pullback or correction, but we might miss another 5% move higher without taking any action

2) We could deploy our cash reserves immediately and give in to the sideways action of the market. At least we would have more shares of dividend paying stocks to pay us more income. Yet we are faced with the prospect of a pullback that could happen the day after we purchase more shares within our portfolio eroding the overall value! Not what I want to see, that's for sure.

3) We could select several stocks to sell puts in at a low enough strike price to factor in the anticipated pullback or a portion of it, and collect the premiums while we wait.

Personally, I would go for #3, so let's pick out a few stocks that we can pocket some premiums in, by selling puts as well as acknowledging that we would add to these positions anyway with our cash reserves at some point. That way we can put our money to work without having to pay today's PPS of any stock we like.

Core Portfolio Stocks To Sell Puts In Now

1) Sell 1 contract of XOM April put options, $82.50 strike price

2) Sell 1 contract of GE April put options, $17.00 strike price

3) Sell 1 contract of O April put options, $35.00 strike price

4) Sell 1 contract of DUK April put options, $20.00 strike price

5) Sell 2 contracts of INTC April put options, $25.00 strike price

Buy taking the above actions now, we would pocket premiums of roughly $185.00 which is added to our cash reserves immediately.

The strike prices reflect a minimum of a 5% DECREASE from current share prices, so if the orders are actually filled, we would own the shares at acceptable entry points.

If the prices of the shares continue to stay flat or increase, the put options will expire worthless, without taking ownership of the stocks, and we keep the premium and can do the process over again.

We also have the potential to continue to write covered calls against the shares we already own as well. So we can double dip so to speak.

Another advantage is that if we do fill our purchases, they are transaction free, and will offset some or all of the costs of the put transactions! (A small added bonus but hey it's money in OUR pockets right?)

My Opinion

Obviously we are taking our strategy to another level by adding an additional option play.

Selling puts is very similar to selling calls. We get a premium to buy the shares rather than to sell the shares. Since we can do both, we can enhance our overall portfolio value while we continue to maintain our positions, collect the dividends, and wait for the pullback to plow our cash reserves back into our dividend stocks!

The drawback upfront is that the money from our cash reserves secures the purchase of all the shares we sold the puts in, guaranteeing the brokerage that the money will be there. In this scenario, about $20,000 of our $22,000 is "secured" within our accounts (not taken) to pay for the shares in the event we wind up purchasing them at the put strike price.

I hope I have broken down this strategy into an easy to understand action that if you desire to implement as we have for our "Team Alpha" portfolio, you can do so with relative ease, secure in the knowledge that you know more than you did before.

I look forward to answering any questions you might have.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.

Disclosure: I am long BAC, XOM, JNJ, T, NLY, O, GE, INTC, SO, KO.