Downgrade Portfolio - Thanksgiving Status

CCI has been busy with Thanksgiving holiday travels and hence only watched last week's market train wreck from afar. I thought that a good way to get back into the mood of the markets was to do an end of November review of the “downgrade portfolio” a few days early.

Readers will recall that about the time S&P downgraded US debt in early Aug, CCI put some dry-powder to work on the simple assumption of “buy when others were fearful”. The specifics of those trades and update status can be found at this google doc and are described below under the trade status heading. 

Overall, this basket of 9 diverse positions is essentially at break even.  Up .2% to be exact. With last weeks drop the S&P is also at basically break even over the same time frame. Certainly nothing too spectacular to report, but the mix of results may be illustrative for readers.

• 4 trades are closed at gains of 0.9%, 5.5%, 9.1%, and 4.6% respectively
• 4 trades are open with current gains of 3.9%, 7.7%, 4.5%, and 1.4% respectively
• 1 trade is open and currently down 22% percent. Down 8% last week while I was out..ouch
  
  

Frankly, this distribution of trades disappointingly represents classic problem with more active trading where big losers overwhelm modest size winners in a portfolio. Most observers would say that, CCI should have cut losses in the the loser earlier. Certainly true, and I do currently have “traders remorse” over not selling the position earlier. However, this also represents the only position of the nine that did not have an option oriented, hedge associated with it. So I really, really have a severe case of “hedgers

remorse”. There was plenty of opportunity to lower the cost basis in this stock via covered calls that were not taken. I will try not to let that happen again too often, and it is good lesson for readers to think about having hedges in places. (especially while taking time off and not watching positions)

Oh well, overall this portfolio is tracking the market so certainly not a terrible situation.

Trade Status

Bank of New York (BK) is down 22%. CCI felt this somewhat different banking stock might behave better than most other financial services stocks if the sector was once again hit by a wave of selling. Instead it is under-performing the poor performance of the financial sector. I will have to do a little digging to see what the rationale for that might be. While doing that fundamental research, hopefully $18 will hold as the chart support level. (Yes...hope can be a strategy...lol)

Three long positions and associated covered calls

Ford (F) - Bought a lot of stock at $10.18. Sold and then subsequently covered a lot of $11 Sept calls against the position for a gain of $.35. Did the same thing again with November $11 calls for a gain of $.49.

After last weeks sell off the stock is trading at 9.75. With option premiums collected to-date the break even on the position is $9.34. Still generally bullish on Ford at these prices. Willing to hold for awhile longer and re-establish yet another covered call position on any bounce.

Waste Management (WM) - Sold Aug $30 puts for $.70, and the stock was put to us at an effective purchase price of $29.30. Closed trading Friday at $30.31 for about a $1 capital gain. Over the past months, sold calls against the position for a $.63 gain and collected a $.34 dividend. Overall the position is up 7.7% and the stock goes x-dividend for another $.34 (1.1%) this week.

Will likely look to establish another round of covered calls on a bounce.

Utilities ETF (XLU) – Originally bought the etf at $31.72 and sold Jan $32 calls against it for $1.23.

The intent was for this conservative group of utility stock to stay stable through the end of the year and pocket both the option premium and two dividend cycles. The etf close trading today at $34.85. The original plan remains in place. We plan to hold through the dividend cycle and assuming it is still trading above $32 will likely exit the trade at near a 7% gain.

Four short puts trades were made. All were closed for a profit..

• Japan ETF (EWJ) $9 put – closed for a profit of .9% in a little more than a week.
• Health Care Sector (XLV) Jan $29 puts – closed at $.39 for a gain of 4.6% in about 2 months
• Bank of America(BAC) – first the Sept $7 puts and then the $6 Oct. puts for a gain of 5.5% in about 2 months.
• Corning (GLW) – Initially sold Oct $13 puts for $.75 cents. Those expired worthless and put the same trade on for $13 puts in November for $41 cents. Covered that position after the earnings move at $.08 for a gain of $33. In total $1.08 (9.1%) gain in about 3 months.
  

Materials ETF (XLB) – As previously described. Initially the Dec $31 puts were sold and those proceeds were used to buy the Dec $34 calls. Zero out of pocket costs. When XLB was trading higher we were able to finance the covering of the short Dec $31 puts by selling the Dec $37 calls. Received a very small credit. In option language, that was starting with a risk reversal and converting it to a vertical call spread. In common sense language that was risking less ($31) to now have a can't lose shot at making $3 or about 10%.It is nice to be sitting in a place where we are now essentially playing with the houses money.

XLB has fallen off the cliff this week. Down to $31.40. At this time, it certainly looks like this shot at a larger gain is going to expire worthless, but who knows. With these option strikes now 10% out of the money, will be looking for ways to re-position the strikes or exit the trade.