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Tom Armistead
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I am a retired accountant, having spent the early years of my career in the insurance industry and the later part in the field of accounting. My insurance experience has given me the willingness to accept investment risk if I feel the return justifies it; also, an interest in applying risk... More
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  • Monthly Adjustments To Synthetic DGI Portfolio 3 comments
    Jul 29, 2013 12:18 PM | about stocks: RTN, TXN, JNJ

    Today I adjusted the portfolio by rolling all December 2013 short calls out to March 2014. The premiums received for the trades are consistent with 4% annual income on the $250,000 hypothetical portfolio.

    The profits received from the closed positions would be 7.6% annual income for the hypothetical $250,000, when extrapolated and annualized.

    I also rolled LEAPS for Texas Instruments (NASDAQ:TXN) and Johnson & Johnson (NYSE:JNJ) up by 5 and 10, respectively. This reduces the amount at risk, as well as the potential profit. However, it creates positions that are easier to defend in the event of a market pullback. Both stocks were up almost 10% since I opened the positions, and the roll was according to pre-planned strategy.

    The covered calls on TXN and JNJ are in the money, so I have no further exposure to upside on these stocks. Delta for the positions is less than 0.50. I considered either closing the positions, and/or adding another position in a different stock in order to regain the lost exposure. However, there is no urgency and I decided to wait for a while and see what happens.

    The next set of rolls will be made after options expiration in August, when April expirations will become available. The plan is, to roll January short positions out another three months.

    I would like to add some exposure to Raytheon (NYSE:RTN), which comes up on the screen that forms the baisis of the strategy. But I'm hopeful that the market will back up a little bit so I can get a better entry point.

    Stocks: RTN, TXN, JNJ
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Comments (3)
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  • lpjblb
    , contributor
    Comments (41) | Send Message
     
    Tom--the synthetics portfolio has a lot of attraction. Have you considered selling a strangle against the LEAP call as a way to get more income?
    Thanks
    17 Sep 2013, 01:01 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6198) | Send Message
     
    Author’s reply » lpjblb,

     

    At one time I did a fair amount of covered strangles against owning the actual shares, and I' ve thought of doing it against LEAPS as you are suggesting. It's a workable idea.

     

    This portfolio is intended to pick up a certain amount of market exposure while keeping a lot of cash unencumbered in the event we get a serious correction. The income objective is to get about 1% more income from selling calls than I would get from dividends if I owned the shares.

     

    One problem with LEAPS covered calls is if the underlying declines it may not be possible to get income from selling covered calls without selling them at a strike that locks you into a loss if called away.

     

    So the ability to sell puts is my fallback. If for example the underlying goes down 10% and stays there, I would sell a put instead of a covered call. That way I would still be receiving income from selling options.
    17 Sep 2013, 03:58 PM Reply Like
  • lpjblb
    , contributor
    Comments (41) | Send Message
     
    Tom--I understand your point. When you were selling strangles against an underlying, did you ever try selling the LEAP call 20% or so ITM? This caps your gain but gives good downside protection,an adequate return on cash(10-15% on stocks I've looked at) and an acceptable return on Reg-T margin. This seems like a reasonable , low maintenance income trade, and you get the dividend too. I don't think the downside is any worse than owning stock.
    Thanks
    1 Oct 2013, 11:32 AM Reply Like
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