Passive Family Income » Options

Wells Fargo to merge with Wachovia

John S. — Mon, 04 Oct 2010 11:05:26 +0000

photo credit: FadderUriA few weeks ago, I posted an article about my status on selling Wachovia Covered Call option contracts as one of my passive income streams. I previously mentioned that I had 5 covered call contracts that were set to expire across a wide range of strike prices for my 500+ shares of WB. On the September options expiration day, I had one of these contracts exercised with the other 4 expiring without any action. At the end of the day, I had 400+ shares remaining in my portfolio.

My original goal back in April of this year was to slowly divest a good portion of my WB position. This was a necessary step to diversify my holdings and build a strong dividend-producing portfolio. Instead of selling the shares outright, my plan was to sell covered call contracts spread out across several different strike prices to earn extra income. That way, if the option contracts were not called, I could turn around the next month and continue to earn this income. Between April and September, I earned $964.15 which was a nice income stream. The problem with this approach was that during those months, the price of WB has gone from the upper $20’s to below $10 per share. At one point this week, it traded below $1! As Dividend Growth Investor commented in my first post – I am making this extra income at the expense of the share price dropping over the course of several months. I completely agree with the comment and looking back should have sold most of my position back in April or May. I will add this to my list of lessons learned for stock trading.

photo credit: TheTruthAbout…Well, as you probably already know a lot has happen in those few little days since I first posted about my income generated from selling covered call options. Wachovia was on the brink of financial chaos, similar to Washington Mutual. Then last weekend they worked out a deal with the Federal Government and Citi to basically sell three quarters of their business for around $1 per share. Obviously as a shareholder, I was not pleased with the situation. Well this morning, the next chapter on Wachovia seems to be unfolding. Wells Fargo has announced that it will be merging with all of Wachovia in a deal priced around $7 per share. I am much happier with this news than what came out earlier in the week.

I always look for the bright spot in a bad situation. Yes, I am upset with myself for not exiting out of my position in Wachovia earlier this year. If I had to do it all over again, I would! Earlier in the week, when the Citi deal was announced, many investors panicked and sold. Some of these long time dedicated investors probably sold their positions for under $1. I will admit it crossed my mind a few times, but what would be the point? I decided that I still like some things about WB, or least what was left of it. Instead of selling, I decided to remain confident in what was left of the company and see how things played out. While the $7 share price does not come close to the upper $20’s, it is still much better than $1. I think it is very important in the investment world and in life to not panic. When times are tough you need to stick with your fundamental goals and stay strong. Who knows what will happen over the course of the next few months or years, but I am not going to panic and see how this all plays out. I remain committed to Wachovia, or I guess Wells Fargo into the foreseeable future.

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Adding Bank of Amercia (BAC) to the portfolio

John S. — Wed, 29 Sep 2010 11:09:39 +0000

Last week I posted that I purchased 100 shares of GE (General Electric) as part of my strategy for creating new income streams. To learn more about this strategy, please review my post – Combining high dividend yields with covered call options. Today, I would like to alert my readers that I have added 100 shares of BAC (Bank of America) to my portfolio using the same strategy. While I understand there is a current market downturn in the financial sector, I feel that this is an opportunity to invest in a stock that I have wanted to own for some time. I also understand that the future looks very bleak for this sector and there will probably be more downward pressure on the stock in the near term. However, I believe that selling Covered Calls to hedge against this purchase will help to reduce this downward pressure on the stock.

Details of the Trade
The follow list details the trading activity -

Purchased 100 shares of BAC for an average share price of $25.35 (commission included).
Sold 1 July 27.50 Covered Call contract for net proceeds of $54.99

I continued to follow my strategy for combining high yielding stocks with covered call options and met the following criteria that I have been using -

The stock purchased must be one that I don’t mind owning over the long term. As I stated earlier, I have wanted to own BAC for some time. I think that long term, BAC will be fine and I will look back at this purchase with a smile on my face.
The stock needs to pay a steady dividend. At the time of the purchase, BAC was yielding around 10%. I also completely understand that there is a chance that the dividend could be cut – although management has said otherwise.
The Options activity on the stock needs to be attractive.
I must have enough resources to purchase a minimum of 100 shares required to sell 1 Covered Call Options contract.

Risks
As always, there is risk involved in trading stocks and options. I have identified the following 2 potential risks in making this transaction.

Stock Jumps – One possible risk is losing out on the stock. In the event that BAC jumps past $27.50 per share before the 3rd Friday in July, I would probably lose out on the stock. Let’s face it – this is not going to happen in the next 2+ weeks. If it did, I would return over 10% on my transactions in less than 1 month.
Stock Drops – The other scenario and risk is if the stock has a major drop along with the rest of the market. This is a concern given the current market, but I believe that selling Covered Call options on a monthly basis will hedge against this trend.

Opportunities
I believe that this transaction provides an excellent opportunity to generate monthly cash flow which can be reinvested into purchasing more and more assets. This fits with my long term strategy of becoming financially independent. I will continue to sell Covered Call option contracts against my position when appropriate to generate this additional income.

What do you think about the trade? Do you think this is a good way to generate monthly cash flow?

Disclaimer - I am not recommending the purchase of Bank of America stock in regards to this post. Instead, I am detailing my strategy for generating monthly income by using this stock as a catalyst. Please do your own Due Diligence before making any purchases. Thanks!

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Creating a new Income Stream – General Electric

John S. — Fri, 27 Aug 2010 11:13:57 +0000

Recently, I have been looking to create a new income stream by purchasing an asset which will generate monthly cash flow. I decided to purchase 100 shares of GE (General Electric) earlier this week near the stock’s 52-week low. I have always admired General Electric as a company and found a great buying opportunity. While I believe there are several rough quarters in front of GE, I still think it is an excellent company and will be fine for years to come. As part of this purchase, I followed my strategy for Combining high dividend yields with covered call options. The stock purchase met the following criteria that I use in this strategy -

The stock purchased must be one that I don’t mind owning over the long term. As I stated earlier, I have always wanted to own GE and found an opportunity this week to make the purchase.
The stock needs to pay a steady dividend. At the time of the purchase, GE was yielding around 4.5% and has had a strong history of raising it’s dividend.
The Options activity on the stock needs to be attractive.
I must have enough resources to purchase a minimum of 100 shares required to sell 1 Covered Call Options contract.

Details of the Trade
The follow list details the trading activity -

Purchased 100 shares of GE for an average share price of $27.55 (commission included).
Sold 1 July 29.00 Covered Call contract for net proceeds of $31.99

Risks
As always, there is risk involved in trading stocks and options. I have identified the following 2 potential risks in making this transaction.

Stock Jumps – One possible risk is losing out on the stock. In the event that GE jumps past $29.00 per share before the 3rd Friday in July, I would probably lose out on the stock. Now, I don’t really view this as a risk but more as a lost opportunity. If I were to lose out on the stock with a jump in the price, I would still profit – $168.99 in less than one month for a 6% gain. If I could raise 6% per month for the entire year, I could retire early.
Stock Drops – The other scenario and risk is if the stock has a major drop along with the rest of the market. This is a definite possibility, but one that I can live with. As I stated above, GE is a stock that I don’t mind holding long term. I would continue to sell Covered Call Options when applicable against the stock to generate the monthly income. In addition, assuming that they don’t completely cut their dividend, I can also collect each quarter and increase my net shares.

Opportunities
I believe that this transaction provides an excellent opportunity to generate monthly cash flow which can be reinvested into purchasing more and more assets. This fits with my long term strategy of becoming financially independent. I will plan on using following the steps listed below assuming the stock does not have a huge jump past $29 per share over the next several weeks.

Sell Covered Calls – If the July 29 Contract expires, I will then look out to August to find an opportunity to sell another Covered Call contract against GE which will bring in monthly cash flow. The plan is to continue to do this each and every month depending on the current market situation.
Reinvest Dividend – I will plan on reinvesting the quarterly dividend directly back into the stock which will increase my total shares and help to generate additional income down the road.

What do you think about the trade? Do you think this is a good way to generate monthly cash flow?

Disclaimer - I am not recommending the purchase of General Electric stock in regards to this post. Instead, I am detailing my strategy for generating monthly income by using this stock as a catalyst. Please do your own Due Diligence before making any purchases. Thanks!

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Wachovia Covered Call Contracts

John S. — Mon, 09 Aug 2010 11:36:21 +0000

Today is the September Options expiration day. One of my more successful passive income streams is selling covered call options against stocks that I own in my portfolio. This month, I have five covered call contracts open on shares of Wachovia that I have in my portfolio. I own 500+ shares of WB and have been selling covered call contracts against the stock since April. Below is a breakdown of the income generated from selling these option contracts.

April Calls – $96.99
May Calls – $303.25
June Calls – $253.97
July Calls – $81.98
August Calls – $138.98
September Calls – $88.98
TOTAL – $964.15

The 500+ shares that I own had been in my portfolio for some time. It wasn’t until April of this past year that I decided to increase my monthly cash flow by selling these contracts to hedge against downward pressure in the financial sector. My strategy has been to stagger the contracts across a few key strike prices each month. In the event, the stock has a significant increase, then more than likely the contract(s) will be called. I am actually looking to unload a good portion of my Wachovia holdings because of uncertainties in the financials and with the long-term health of the company. I am in the process of spreading my holdings across many different high yielding stocks and reducing my stake in this company is part of that plan.

Today, it looks like several of my contracts will be called with the huge run up in prices of the financials in the past two days. Just two days ago, WB looked like it could follow Lehman Brothers or AIG and drop under $5. It is amazing what a few days and some positive news makes. I will provide an update on my status next week once the expiration date passes.

On a side note, for those interested in selling covered call options, check out my article on eHow titled – How to sell covered call options. If you have the stomach to withstand the ups and downs, the financial sector is an interesting place to sell covered call option contracts. The volatility is amazing and has been for several months, which allows for more money to be made by selling these contracts. On the other hand, there is tremendous risk involved by trading in this sector.

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