$10,000 Income Portfolio

[GOB]

Major Update

I decided to elevate my risk a little and aim for higher premiums. To do this I wanted to be able to sell naked puts and covered calls on AAPL without always having to use spreads. I funded my account with another $10,500 to be able to do this, making the title of this thread a bit of a misnomer. I will have to take on margin to execute this strategy which definitely adds a new layer of risk. However, this is my only account with margin and my other accounts are doing extremely well so I can afford to take this risk.

I plan to trade fairly close to the strike place with the intention of being assigned frequently. Once assigned, I'll sell calls at least $5-10 higher than my assignment so that I make premiums in addition to capital gains. Doing this on a weekly or monthly basis has a good chance of yielding excellent results. I will win if Apple stays flat or gains - my risk is a steep and lengthy drop which I deem unlikely given all the positive catalysts on the horizon.

I placed my first trade today - had to choose a low strike price for margin reasons.

Sold: 1 AAPL 18AUG12 595.00 P: +$81.00
Closed: BeCS 1 AMZN 17AUG12 255/260: -$4.00 (done to free up a little margin - netted about $30 off this spread)

I plan to deposit a little more into this account reasonably soon in order to ease the margin and allow me to continue making other plays as I have been.

[humble_pie]

but how could you have a "covered" call in aapl in a 10k account, or even in a 20k account, when a board lot of stock to cover even one short aapl call costs 62,000.

i do get that the covering stock might be in another account at the same broker. But am left wondering why split the options away from their margin-generating underlying stock & why cloister them in a tiny little margin-less cell of their own ...

[GOB]

IB allows about 4:1 margin. With my $21000 in the account my buying power is about $80000. I plan to actively reduce margin with gains and continual funding of the account. All trades will be from the single account - there's no splitting.

[GOB]

Aug 13

Buy to Close: 1 AAPL 18AUG12 595.00 P: -$32.00 (Total profit +$47.88)
Buy to Close: 1 CLF 18AUG12 40.00 P: -$4.14 (Total profit +$75.64)
Sold: 1 AAPL 18AUG12 620.00 P: +$217.38

[GOB]

Aug 14

Buy to Close: 1 AAPL 18AUG12 620.00 P: -$87.62 (Total profit +$129.76)
Sold: 1 AAPL 18AUG12 625.00 P: +$164.38

[humble_pie]

gob is your purpose here to force the assignment or will you be happy tracking aapl's progress with frequent put adjustments.

this thread is an excellent teaching module imho for options players who have passed beyond introductory stage & are itching to do more.

however 1 thing would worry me. Suppose gob is assigned at 625. His margin debt becomes something like 46-47k, perhaps a bit less depending on how much cash was in the account. Now suppose a sudden market correction takes aapl down to 475, say.

oops. Now the broker wants 10k. Especially at IB, the broker doesn't want 10k like after a polite margin call & a polite wait of a few hours. IB has already upped & sold the aapl shares the minute the margin turned negative. That, to best of my knowledge, is IB's policy.

a party who could easily transfer in extra cash in anticipation of such an IB margin call - ie a person who also has the time to track & calculate each downward ratchet in aapl's price during said market crash - such a party would be OK. But a party trapped by either lack of cash or lack of time could lose most of his account.

[GOB]

humble_pie, I am happy being assigned. The whole strategy of this portfolio is to get great options premiums on stocks that I wouldn't mind owning. If I do get assigned, the plan for this portfolio is to immediately write a covered call to get the premium and perhaps a small capital gain on share appreciation on top of it. So far, I've earned close to 10% in a month without ever owning a single share. Eventually, I will be assigned. In fact, I'm hoping to get into AAPL for the iPhone 5 launch.

As for the risks you mentioned, you're 100% right. I'm aware of the risk I'm taking. I do know this stock very well and am watching it move all the time. I think the odds of a sudden drop like you mentioned are quite low, but non-zero so yes I am taking a risk. But the potential reward is an extremely good ROI. I plan to add funds to my account soon to lower my risk of a margin call. Also with each premium I receive I'm increasing my balance and lowering the amount of margin I use.

Thanks for your input!

[humble_pie]

... I am happy being assigned. The whole strategy of this portfolio is to get great options premiums on stocks that I wouldn't mind owning. If I do get assigned, the plan for this portfolio is to immediately write a covered call to get the premium and perhaps a small capital gain on share appreciation on top of it. So far, I've earned close to 10% in a month without ever owning a single share. Eventually, I will be assigned. In fact, I'm hoping to get into AAPL for the iPhone 5 launch.

strategy is a 10. Well, maybe a 9.5 because of the risk. But taken as a whole this thread is an excellent teaching module so i hope others in cmf forum are listening up.

btw you know what the experts say. They say short put = long stock + short call. The strange thing is that this is not quite my own experience, speaking anecdotally. Generally i find stk minus call to be more profitable; however we are in an era of non-existent interest rates which would otherwise drag on long stock. Also i seldom deal in options as pricey as aapl.

As for the risks you mentioned, you're 100% right. I'm aware of the risk I'm taking. I do know this stock very well and am watching it move all the time. I think the odds of a sudden drop like you mentioned are quite low, but non-zero so yes I am taking a risk.

gob i know that you understand the risk. I think you are managing it very well. You are, i believe, the forum member who mentioned aapl's big cash position as the cushion that would buffer any precipitous drop. Am i correct in assuming that even after paying the dividend co. would still have lots of cash left.

[GOB]

strategy is a 10. Well, maybe a 9.5 because of the risk. But taken as a whole this thread is an excellent teaching module so i hope others in cmf forum are listening up.

btw you know what the experts say. They say short put = long stock + short call. The strange thing is that this is not quite my own experience, speaking anecdotally. Generally i find stk minus call to be more profitable; however we are in an era of non-existent interest rates which would otherwise drag on long stock. Also i seldom deal in options as pricey as aapl.


gob i know that you understand the risk. I think you are managing it very well. You are, i believe, the forum member who mentioned aapl's big cash position as the cushion that would buffer any precipitous drop. Am i correct in assuming that even after paying the dividend co. would still have lots of cash left.

Thanks for the positive comments. AAPL is actually the perfect stock for my strategy because in a addition to knowing it like that back of my hand, as you said options are expensive, which is good for the seller. It's why I can get such great premiums.

You are right about the dividend. Apple has $117 BILLION of cash in the back. Each quarter payment amounts to about 2-3 weeks of profit for them, so even with dividend and buyback the cash is going to continue its rapid growth. I called $530 as the last bottom and it hit almost exactly. I don't think we'll see that level again unless (until?) the whole market crashes. But I've made the decision not to trade in fear of such an event happening. If it does happen, this portfolio may get wiped out, but my others will survive and I'll have cash left to purchase tons of companies at rock bottom valuations.

[Dmoney]

GOB, how often do you plan on updating your portfolio balance?
Great thread with frequent updates, be interesting to see your progress over time.
Congrats on epic first month returns.