Quickie Weekly Portfolio Update:
Today is the last business day for this financial year. The ASX200 just shot up 50 points around 1 pm due to some “good news” from the Euro Summit. Or perhaps it could be due to fund managers putting in a last minute effort to push share prices up to boost their bonuses for this financial year. WES shares suddenly had a big surge in price this week. WES shares closed at $30 yesterday so our June $29.50 puts expired worthless, and we simply get to keep the premium from selling these puts. I have a feeling the price surge could be part of the EOFY “window dressing” so I think I will wait for a few days before putting on another trade on WES. The WES shares may just as suddenly have a big fall next week.
Back to our Monthly Portfolio Update:
We have just completed the third month of this model portfolio. A summary of the income we have received to date in shown in the table below (click to enlarge).
In June, we have made future commitments to buy 1 new stock (Woolworth) by selling put option contracts. We also bought some Telstra shares and sold some covered calls over them. As you can see, the option premiums for defensive stocks like WOW and TLS are much lower compared to the option premiums on the mining stocks that we sold in May. The correction in materials stocks continued in June and all the puts that we sold on our mining stocks (RIO, NCM and ILU) are in now ITM, and if prices stay down, we will have to buy these stocks when these puts expire. We are quite happy to own these stocks. We have kept our exposure on these volatile stocks small and our current exposure to these 3 stocks is around $70,000 or one third of our capital. Even if we suffer a 30% draw down on these stocks, this will mean only a 10% draw down on our total portfolio. When we invest in stocks, we have to expect the value of our capital to fluctuate and should not feel unduly stressed by unrealised losses on quality stocks as we can continue to get income from them from dividends and selling covered calls. Our WES $29.50 put options contracts expired this month and because the stock price was above our strike price on expiry day, our options expired worthless. We can now reuse the cash we set aside to secure these puts to sell more puts.
We received a total of $1,675 in premiums for the option contracts that we sold this month. We used $29,040 of our cash to purchase 8000 Telstra shares at $3.63 per share. With the 0.25% rate cut announced by the RBA in June, the interest rate of our Cash Investment account has been reduced from 4.25% to 4.00%. At the end of the month, we would have received interest of $465.40 for our remaining $141,560 of cash, giving us a total income of $2140.40 or a 1.07% return this month on our capital of $200,000. The income we received this month is lower than previous months. The markets have been full of uncertainty this month with the Greek elections, Euro summit, and the end of financial year. It is better to trade less in times of uncertainty and keep your cash available for better opportunities later.
Next month, we will be receiving our first dividend from our NAB shares. We have 3 put positions (RIO, NCM and ILU) expiring in July as well. If our put options get exercised, we will use some of our cash to buy the stocks. Although mining stocks do not pay a lot of dividends, we can generate our own “dividends” by selling covered calls on these stocks. We have already received income of 5-6% in three months from selling puts on ILU and NCM, which is more than what we would receive from our cash in one year.
Our target return for this model portfolio is 15% per year in income received (see Model Portfolio Set Up). So far, our return is 4.42% in the last 3 months. We have not factored in brokerage and fees in our income tracker and after deducting the expenses, we are still on track to achieving our target return of 15% per year.
I normally provide weekly updates on this model portfolio every Wednesday on this blog. However, as I will be taking some time off, there will be no weekly portfolio updates for the next two weeks. One of the advantages of this income strategy is its low maintenance. After putting on a trade, there is not much to do until the option contract expires.
If you are intrigued by our income strategy but have trouble following the discussions in this post, you will need to first download and read our e-book in order to understand the strategy and do some basic options education (found on our Resources page) to familiarise yourself with option terminology.
Disclaimer: This post is for educational purposes only and should not be treated as investment advice. This strategy would not be suitable for stock investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek investment advice if required.