Note to new readers: This is a regular update on the status of our Low Risk Income Model Portfolio which is built using the income strategy described in our e-book “A Low Risk Income Strategy for All Economic Conditions”

This is our first Friday update based on our new schedule. Yesterday was the July expiry date for ASX equity options and all three of our July puts were ITM and would have been exercised. We would now own 500 RIO shares, 1000 NCM shares and 1100 ILU shares.

Doom and gloom continue to dominate the headlines.  Mining shares continued to get beaten up on worries of Europe and China slowing down. Some are even saying the mining boom is over. We had a bit of good news yesterday when the European Central Bank promised to do whatever it takes to save the Euro. Markets everywhere rallied on the news. We will put on two new trades this week.

Trade Transactions This Week

Newcrest Mining: NCM Oct $24 CALL

Since we sold our puts in May, NCM has fallen to a low of $20.89. NCM has rallied a little bit in the past few days but it would be too early to say if the stock has bottomed as price is still in a downtrend. It is also currently bumping up against the 50 day moving average (brown line) as shown in the chart below. Although the stock could continue to rally (especially if the Central Banks start to print money as that tend to push up the price of gold), there is another strong level of resistance at $25.

Rather than hope for more capital gains, I am happy to sell an October $24 call for which I can get a premium of $1.27 today. If my stocks get called away in October at $24, I would have collected a total of $2.51 in option premium (including the $1.24 that I received from selling the July $24 put in May) which is a 10.4% return in a period of just under 6 months. If the stock price falls again, this call premium will help me offset some of the capital loss in the stock.

As we have 1000 NCM shares, we can sell 10 call contracts and collect a premium of $1270. This is a 5.29% return in 3 months or an annualised return of 21.46%.

Iluka Resources: ILU October $8 PUT

On May 16, we decided to take a half sized position on Iluka when we sold the July $13 puts. Since then, the CEO has announced more sales downgrades and the stock took another dive. I have been watching this stock closely and it seemed to have strong buying support when the stock hit $7.72 a few days ago.

Despite the sales downgrade, most analysts still value the share at much higher than the $8.50 that it is trading at today. I am quite happy to buy more ILU shares at $8 per share so I will sell some October $8 puts.

As we only used $14,300 to buy the 11 ILU shares at $13 per share, we still have $15,700 left in our $30,000 allocation for this position. At $8 per share, we can afford to buy 1962 shares so we will sell 19 put contracts. We can get a premium of 56 cents per share for these puts today so we will be paid $1064 for our October put contracts.

My primary exit for this trade is for my put options to expire worthless. This would be the case if ILU’s share price is above $8 (which is what I expect) when the options expire in October. This means we simply get to keep the $1064 of premium income which is a 7% return in just under three months or an annualised return of  28.39%. As you can see, the option premiums are very high when there is strong volatility.

My secondary exit for this trade is for the put options to get exercised so we will have to buy 1900 ILU shares at $8 per share. This would be the case if ILU falls below $8 when the put options expire on October 25. This would bring the total number of shares we own to 3000 and the average price per share down to $9.83.

ILU will also pay a dividend in October. Last year, they paid 20 cents per share. As the shares will go ex-dividend in September, we will only be collecting dividends on the 1100 shares that we already own.

Model Portfolio Update

National Australia Bank: NAB September $24.01 CALL

On May 30, I sold to open NAB September $24.01 call options for $0.76 when NAB was trading at $23.76. Today NAB is trading at $24.08 and call options are now worth $0.83.

For more information about this trade set up, read my May 30 model portfolio update.

Woolworth: WOW August $26.00 PUT

On June 6, I sold to open WOW August $26 put options for $0.65 when WES was trading at $26.24. The government $2 billion handout has been very good for Woolworth. The share price has shot up and today WOW is trading at $28.55 and our call options are barely worth anything now. I will be looking to close these puts out early so we can sell more put options.

The share price will most likely continue to go up until the stock goes ex-dividend in September. Last year WOW paid a 65 cent dividend but we have already collected our 65 cents without even owning any shares by selling the put options.

For more information about this trade set up, read my June 6 model portfolio update.

Telstra: TLS September $3.51 Call

On June 20, I bought some TLS shares at $3.63 per share and sold to open some TLS Sept $3.51 calls. Since then TLS shares have shot up to $3.92 but we will not enjoy any capital gains as we have capped our upside in shares by selling the $3.51 calls. TLS shares are due to go ex-dividend in August and I expect the share price to fall after that.

For more information about this trade set up, read my June 20 model portfolio update.

Current Open Position Snapshot

A summary of our open positions is shown in the table below. We now have 2 open put positions and 3 open covered call positions.

I will be providing a weekly update on this model portfolio on this blog. 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.

Stay tuned!

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.

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