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”

The market remained fairly bullish this week. A number of companies including National Australia Bank and Newcrest Mining which are in our model portfolio announced earnings this week. More details about this will be discussed below in our update for each of these positions.

Trade Transactions This Week

Westfield Group: WDC Oct $10 PUT

As part of our plan to create a diversified portfolio, we will sell puts on stocks in different sectors. To date we have positions in the mining (ILU, NCM, RIO), financial (NAB), consumer staples (WOW) and telecommunications (TLS) sectors. One sector that has been doing well in the past year is property trusts and one of the best performing stock in this sector is Westfield. Westfield share price has been in a steady uptrend for about a year as shown in the chart below.

On Monday Aug 13, the stock went ex-dividend causing the stock price to dip briefly. On Wednesday, Westfield reported a 31.4% increase in half year profit so I expect the share price to perform well in the next few months.

As my expectation is for WDC price to rise to $10 or more in the next few months, I will sell an ITM option to collect a little more option premium. From the option chain below, we can collect a premium of $0.36 for the October $10 put option.  As our allocation for each position is $30,000, we can sell 30 contracts of WDC $10 put options. The total premium we will receive for this trade would be $1,080 ($0.36 premium x 30 contracts x 100 shares per contract).

My primary exit for this trade is for the put options to expire worthless. This would be the case if WDC’s share price is above $10 (which is what I expect) when the options expire in October. This means we simply get to keep the $1,080 of premium income which is a 3.6% return in just over two months or an annualised return of 18.8%.

My secondary exit for this trade is for the put options to get exercised so we will have to buy WDC shares at $10 per share. Our real cost for the shares would be $9.64 ($10 – $0.36 option premium) which is still less than what it would cost us to buy the shares outright today. This would be the case if WDC is trading below $10 when the put options expire on October 25.

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. NAB shares retreated slightly this week after the bank announced slightly disappointing quarterly results and is trading at $24.74 today. The call options are now worth $1.11.

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 WOW was trading at $26.24. The share price has shot up and today WOW is trading at $28.17 and our put options are barely worth anything now. As we have sufficient cash to cover the WDC puts that we just sold, we will just wait for these options to expire on August 30.

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. TLS shares recovered a little bit after last week’s sell off. Today the shares are trading at $3.88 and the call options are worth $0.38. TLS shares are due to go ex-dividend on August 20 and the share price may fall further after that.

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

Newcrest Mining: NCM Oct $24 CALL

On July 27, I sold to open NCM October $24 call options for $1.27 when NCM was trading at $23.23. Since then the share price has gone up slightly to $25.16 and the call option is now worth $1.90.

For more information about this trade set up, read my July 27 model portfolio update.

Iluka Resources: ILU October $8 PUT

On July 27, I sold to open ILU October $8 put options for $0.56 when ILU was trading at $8.51. Since then the share price has rallied up to $10.72 and the put option is now only worth $0.07.

For more information about this trade set up, read my July 27 model portfolio update.

Rio Tinto: RIO September $58 CALL

On August 10, I sold to open RIO Sept $58 call options for $1.28 when RIO was trading at $56.98. Since then the share price has pulled back to $55.27 and the call option is now only worth $1.01.

For more information about this trade set up, read my August 10 model portfolio update.

Current Open Position Snapshot

A summary of our open positions is shown in the table below. We now have 3 open put positions and 4 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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