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 week we will start managing the covered calls in our portfolio using the “Delta Strategy” for growth stocks and the “Ex-dividend Strategy” for income stocks as described in my last post Covered Call Returns In All Market Conditions. The “delta” of our NCM call reached 0.85 today which means we need to “roll” this call option. Two of our income stocks (NAB and TLS) have gone ex-dividend and since we have already held them for longer than 46 days, we will close the calls and sell the stocks as per the rules of the Ex-dividend strategy. More details will be given in the update of each position below.

We will also sell covered calls that are 5% OTM on our two remaining growth stocks (RIO and ILU) as per the rules of the Delta Strategy. Our cash levels will increase to $129K from selling our NAB and TLS stocks so we can sell more cash secured puts. As you might have noticed, there were no new trades in the past two weeks as there was a lot of uncertainty due the Central Bank Summit in Jackson Hole and the European Central Bank meeting the following week. It now looks like more stimulus will be on the way in both the US and Europe and together with the $184 billion stimulus announced by China, the stock market is likely to remain bullish, at least for the next few months.

Trade Transactions This Week

We have 5 new trades this week.

Rio Tinto: RIO Nov $57 CALL

It was good that we closed our almost worthless call just before RIO rebounded. Now we can sell another call and we will sell at the strike price that is 5% OTM. With RIO trading at $54.37 today, the appropriate strike is $57. To reduce the cost of commissions, we will sell 2 month options (rather than 1 month options as per the ASX study). The premium for the Nov $57 put option is $1.57.

Iluka Resources: ILU Nov $10 CALL

With ILU trading at $9.36 today, we will sell a $10 call which is the strike price this is closest to 5% OTM. The premium for the Nov $10 put option is $0.30.

Commonwealth Bank: CBA Nov $55.00 PUT

As our NAB shares have been sold, we will sell puts on another bank stock. CBA announced great earnings but the share price has pulled back since it went ex-dividend and is trading at $54.27 today. We will sell a slightly ITM put as we expect the share price to move back towards $58 before the next dividend payment. The premium for the Nov $55 put option is $1.62.

Telstra: TLS Nov $3.90 PUT

As our TLS shares have been sold at $3.82 today, we will sell some puts on TLS so we can get paid to wait buy the shares again before the next dividend payment. We will sell slightly ITM $3.90 puts as we expect the price of TLS to move back towards $4.00 before the next dividend payment. The premium for the Nov $3.90 put option is $0.13.

Amcor: AMC Nov $7.50 PUT

As we prefer to have a heavier weighting on defensive stocks, we will sell puts on AMC which also announced good earnings  and went ex-dividend recently. AMC was trading around $7.60 today so we will sell $7.50 puts. The premium for the Nov $7.50 put option is $0.195.

Model Portfolio Update

National Australia Bank: NAB September $24.01 CALL (calls closed, shares sold)

On May 30, I sold to open NAB September $24.01 call options for $0.76 when NAB was trading at $23.76. We bought these calls back at $1.15 and sold the shares at $24.98 today. We will include the realised capital gains from selling the stock in our Income Tracker and return the capital we used to purchase NAB shares back into the bank in our Capital Tracker.

Telstra: TLS September $3.51 Call (calls closed, shares sold)

On June 20, I bought some TLS shares at $3.63 per share and sold to open some TLS Sept $3.51 calls for $0.12. We bought these calls back at $0.36 and sold the shares at $3.82 today. We will include the realised capital gains from selling the stock in our Income Tracker and return the capital we used to purchase TLS shares back into the bank in our Capital Tracker.

Newcrest Mining: NCM Oct $24 CALL (calls rolled to a higher strike price)

On July 27, I sold to open NCM October $24 call options for $1.27 when NCM was trading at $23.23. Today NCM was trading at $26.80 and our calls are now ITM with a delta of 0.85 as shown in the option chain below.

According to the ASX study, you should roll to a 5% OTM call (strike price of $28) in the same month but this would mean taking a bigger realised capital loss in the option. Our net loss would be $1.18 ($3.01-$1.27-$0.56). I prefer to sell a longer dated option with more premium to reduce my realised loss so I will sell a Nov $28 call for $0.91 as shown in the option chain below. This reduces our realised loss to $0.83. As we purchased our NCM shares at $24 per share, we also have unrealised gains of $2.80 per share in our NCM shares.

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. The share price was trading at $9.36 today. The put options are now worth $0.16.

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

Westfield Group: WDC Oct $10 PUT

On August 17, I sold to open WDC October $10 put options for $0.36 when WDC was trading at $9.76. WDC shares have gone back up to $10.05. Our put options are now worth $0.27.

For more information about this trade set up, read my August 17 model portfolio update.

Current Open Position Snapshot

A summary of our open positions is shown in the table below. We now have a total of 8 open positions – 5 open put positions and 3 open covered call positions:

As we are now managing our positions using the Delta Strategy,  we will really only need to take action when any of our call deltas reach 0.85 or when the options expire. 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.

Looking for something?

Use the form below to search the site:


Still not finding what you're looking for? Drop us a note so we can take care of it!

Visit our friends!

A few highly recommended friends...

Archives