By the end of September 2012, we would have completed the sixth month of our first Low Risk Income model portfolio. In this first model portfolio, we have mainly demonstrated the simplest covered call and put selling strategy (i.e. the “vanilla” strategy) which is simply to sell the options and wait for them to expire. Our income strategy revolves around generating income from dividends, franking credits, interest and option premiums. As dividends are paid twice a year in Australia, we have just completed one “dividend cycle” and the next six months would be simply a “rinse and repeat” of what we done in the past six months. It is time to move on to learn more advanced strategies so I will be wrapping up our “Vanilla” model portfolio today with a monthly update for September and a final Model Portfolio Update.
Monthly Portfolio Update for September 2012
A summary of the income we have received to date in shown in the table below (click to enlarge).
In September, we closed out the covered call positions on two of our income stocks (NAB and TLS) after they went ex-dividend and after we have held the stocks for the 45 days needed to receive the franking credits. We sold three new lots of put options on CBA, TLS and AMC which were secured by the cash that we have in the bank after selling our shares. NCM shares rebounded sharply so we rolled our NCM calls to a higher strike price and we also sold calls on both our ILU and RIO shares. We received a total of $4,531.50 in premiums for the new option contracts that we sold this month. However, we booked in losses of $4,128 on the NAB, TLS and NCM options that we closed. The option losses on NAB and TLS were pretty much offset by the realised capital gains from selling the shares which amounted to $2,096. Hence, our net income from selling our shares and options in September is $2,499.50 ($4,531.50 – $4128 + $2096).
We also received $2089.36 of dividends (inclusive of franking credits) from our RIO and TLS shares in September and we will another $637.64 of dividends from our ILU and NCM shares in October. Hence, our total dividend income is $2,727.
The interest rate of our Cash Investment account remained at 4.00% in September. At the end of the month, we would have received interest of $426.41 for our $129,700 of cash in the bank, giving us a total income of $5,652.91 or a 2.83% return this month on our capital of $200,000.
Portfolio Performance (April to September 2012)
Our target return for this model portfolio is 15% per year in income received (see Model Portfolio Set Up). After six months, we have received gross income of $17,383. Based on the Halifax Self-Service brokerage rate, our brokerage costs would have been $1108, giving us a net income of $16,275 or 8.14% on our capital of $200,000. This translates to an annualised return of 16.28%, which slightly exceeds our income target of 15% per year. The breakdown of our income is shown below. As you can see, almost half of the income comes from selling options.
The market value of some of our shares has rebounded and the unrealised capital gains from our NCM shares offset the unrealised losses in our ILU and RIO shares. Based on today’s valuation, we have a net unrealised loss of $42 as shown in our capital tracker below. By buying quality stocks that we are happy to hold long term and having a diversified portfolio of both growth and defensive stocks, we can keep our unrealised capital losses manageable.
New “All Stars” Model Portfolio
In October (after the school holidays), I will be starting our new “All Stars” Model Portfolio which will include using more active trade management strategies such as the “delta” strategy described in the ASX study on Covered Call returns. We will also be taking advantage of some of the capabilities of the Halifax Trader Workstation account to reduce risk and improve our returns. I will write more about this new model portfolio next week.
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.