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Monthly Income Portfolio – July Update

July Results - Click to enlarge

In the past, we have been expressing the view the equity markets were oversold and a rebound was likely to occur at any time.  Last week’s oversized bounce was probably due to two factors, the parliamentary vote in Greece forestalling a near term default event and the end of QE2 with the resulting bubble in the Treasury market that began deflating.  For the time being rising interest rates are reflecting a return to the “risk-on” condition.

As we caught an upturn in the market, all of our positions are deep in profits. We have captured 90% or more of the total profits in most of our put positions. Even though we are 10 days from expiration of July options, we will take profits on all five positions today. This will give us a total of $3,992.50 profit in less than one month. This is a return of 3.99% on the starting balance of $100,000. These positions were initated on June 27 so we are only 6 trading days (8 total days) into the trade. This is an annualized return of 182% which is hard to beat in most portfolios. Here is the positions today before selling them (see July Results).

Since July options expire on July 16, we will add new positions for August expiration.  We closed all July put positions so we did not get any stock put to us.  The new positions are shown in the chart below (see new positions).  We will write more puts on Under Armour (UA), Cummings (CMI) and Coach (COH): all with new strike prices in August 2011.  We will add two new stocks with put writes: MetroPCS Communications (PCS) and Celgene (CELG).    This creates a total of $6,190 in premiums received from selling August puts from these new positions (see the breakdown by position in chart).   This is a return of 5.98% based on the portfolio value of $103, 579.37 shown in chart.   In addition we invested $3,978 of our profits in 650 shares of Alpine Total Dynamic Dividend Fund (AOD) which pays a monthly dividend and has a yield of 10.7%.  We will continue to invest profits in monthly dividend payers.

New Positions - Click to enlarge

Under Armour, Inc. (UA) is engaged in the development, marketing and distribution of branded performance apparel, footwear and accessories for men, women and youth. The Company’s products are sold worldwide and are worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as consumers with active lifestyles. Its products are offered in over 23,000 retail stores worldwide. Most of its products are sold in North America. The Company’s trademarks include UNDER ARMOUR, HEATGEAR, COLDGEAR, ALLSEASONGEAR and the Under Armour UA Logo. The Company’s product offerings consist of apparel, footwear and accessories for men, women and youth.
Cummins Inc. (CMI) designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, fuel systems, controls and air handling systems. The Company sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. It has four segments: Engine, Power Generation, Components and Distribution. It serves its customers through a network of more than 600 company owned and independent distributor locations and more than 6,000 dealer locations in more than 190 countries and territories. In November 2010, it purchased a majority interest in a previously independent North American distributorship. On January 4, 2010, it acquired the 70% interest in Cummins Western Canada (CWC). In April 2011, the Company sold its exhaust business to Global Tube.
Coach, Inc. (COH) is a marketer of fine accessories and gifts for women and men. Coach’s product offerings include handbags, women’s and men’s accessories, footwear, business cases, jewelry, wearables, sunwear, travel bags, fragrance and watches. Coach operates in two business segments: Direct-to-Consumer and Indirect. During the fiscal year ended July 3, 2010, the Company introduced Poppy, which offers a variety of silhouettes. It also introduced additional lifestyle collections. The accessories include women’s and men’s small leather goods, novelty accessories and women’s and men’s belts. The Company’s footwear is distributed through select Coach retail stores, coach.com and over 950 United States department stores. The wearables category consists of jackets, sweaters, gloves, hats and scarves, including both cold weather and fashion. During fiscal 2010, Estee Lauder Companies Inc., through its subsidiary, Aramis Inc., became Coach’s fragrance licensee.
MetroPCS Communications, Inc. (PCS) is a wireless telecommunications provider in the United States measured by the number of subscribers served. The Company offers wireless broadband mobile services under the MetroPCS brand in selected metropolitan areas in the United States. The Company provides a variety of wireless communications services to its subscribers on a no long-term contract, paid-in-advance basis. As of December 31, 2010, the Company had approximately 8.1 million subscribers. Its products and services include voice services, data services, custom calling features and advanced handsets. At December 31, 2010, the Company had thirteen operating segments based on geographic regions within the United States: Atlanta, Boston, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco and Tampa/Sarasota.
Celgene Corporation (CELG) is a global integrated biopharmaceutical company. The Company is primarily engaged in the discovery, development and commercialization of therapies designed to treat cancer and immune-inflammatory related diseases, such as immunomodulation and intracellular signaling pathways in hematology, oncology and immune-inflammatory diseases. Its primary commercial-stage products include REVLIMID, VIDAZA, THALOMID (inclusive of Thalidomide Celgene and Thalidomide Pharmion), ABRAXANE and ISTODAX. Other sources of revenue include sales of FOCALIN to Novartis Pharma AG (Novartis), which is a licensing agreement with Novartis, which entitles it to royalties on FOCALIN XR and the entire RITALIN family of drugs. On January 15, 2010, it acquired Gloucester Pharmaceuticals, Inc. (Gloucester), which is a privately held pharmaceutical company. On October 15, 2010, the Company acquired Abraxis BioScience, Inc. (Abraxis).

Monthly Income Portfolio – June 2011

Today we started actual trading in the Monthly Income Portfolio through Thinkorswim trading.  The trading is in real time with actual market prices and commissions.  The rules are as following for this trading portfolio:

  • Enter positions by selling puts to collect the option premium.  We will not sell a put unless we have the capital to cover the stock if exercised and we are forced to purchase the stock;
  • If we are put the stock, we will sell covered calls to earn more premium from the stock.  If the covered call is exercised, we will let the stock get called away from us.  Then, we have a decision to go back to selling puts to re-enter the position;
  • We will take the gains from the monthly income and invest in monthly dividend stocks on a monthly basis.  This creates a safer method to earn monthly dividends to protect our capital while earning monthly income;
  • The portfolio will maintain a cash level of 10% in case of trade adjustments as needed.

As rules indicate, we enter positions by selling puts to collect the premium income.  We have selected 5 stocks to sell July 2011 expiration puts on: BX, COH, UA, POT and CMI.  The total put premiums collected is $4530.00 (see graphic below) for the next 30 days.  This is a 4.53% return on the initial starting balance of $100,000.  We will monitor these puts to see how the positions play out over the next month.   If these options are put to us, then we will sell August 2011 calls on the shares we own.  If option is not exercised, we will sell more puts for premium in August 2011.

Click to Enlarge

The Monthly Income Portfolio

n the past we discussed how to create a monthly income portfolio using puts, covered calls and monthly income dividend stocks.  Now, we have teamed with TradeMonster to create a paper trading account so you can follow the trades we place each month in this account.  

The account has $100,000 in cash and can trade $200,000 in total through margin. The basic rules of trading in this account are:

  • Enter positions by selling puts to collect the option premium.  We will not sell a put unless we have the capital to cover the stock if exercised and we are forced to purchase the stock;
  • If we are put the stock, we will sell covered calls to earn more premium from the stock.  If the covered call is exercised, we will let the stock get called away from us.  Then, we have a decision to go back to selling puts to re-enter the position;
  • We will take the gains from the monthly income and invest in monthly dividend stocks on a monthly basis.  This creates a safer method to earn monthly dividends to protect our capital while earning monthly income;
  • The portfolio will maintain a cash level of 10% in case of trade adjustments as needed.

This is the easiest method to learn how to create a monthly income portfolio.  We will track the performance of the portfolio on a regular basis.  The majority of trades will occur around option expiration and the following week.  We will look to trade the monthly options on the puts and covered call strategies.

Click to enlarge

We will begin trading near the May 2011 option expiration date.  The goal of the trading account is to create a monthly income that can compound over time.  Your goal is to learn how this is done so you can create your own monthly income portfolio.  This portfolio can be created with a much lower capital than $100K.  You will just need to adjust the number of option contracts per trade to the amount of capital in your account.

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