For those of you who haven’t followed my posts about my Prosper experience, I am both a lender and borrower. Each month I plan on providing an update on the status of both accounts. Today I would like to update my status of my borrower account and the Prosper loan I have taken out. For additional information on my Prosper borrowing experience, please review the following posts:
Tips on How to Borrow Money using Prosper
Tracking the status of my Prosper loan – May (2008)
An unexpected transaction in my portfolio on May 30th (2008) required some action on my part which directly impacted my Prosper loan funds. As I had noted in some of my previous articles, I used the money from the loan to invest in 23 shares of FRO (Frontline Ltd.). I also took some additional money I had set aside for investing and purchased another 77 shares of the stock. This allowed me to use my strategy for combining high yielding stocks with Covered Call options. Over the course of a few months I had traded in and out of several Covered Call contracts with the 100 shares that I owned. The stock had run up very quickly after I had sold my first contract for April $50. In order to stay in the stock and hopefully receive the dividend paid out in June, I pushed out this contract to May $50 and then finally to Aug $50 while each time bringing in positive cash flow.
I am not sure why I wasn’t thinking it could happen, but the Covered Call Option contract that I sold for Aug $50 for my a FRO (Frontline Ltd.) shares was called on May 30 (2008). I didn’t think this would happen until the July/August (2008) time period when it came closer to the expiration date. Why was the May 30 (2008) date important for the contract to be called? Well – June 2 (2008) just happened to be the Ex-Dividend Date on the stock.
While I was a little frustrated with myself for letting the stock slip away without the dividend payment, I still was pleased with my end result. The following list details my results from owning 23 shares of the stock:
- Purchased 23 shares of FRO for $970.09 (commission included) for an average share price of $42.18
- Brought in $18.85 from trading Covered Call Options for the 23 shares
- Sold the 23 shares of FRO for $1,140.33 (commission & option access fees included) for an average share price of $49.58
- TOTAL RETURN – $189.09
In the end I was very pleased with my return of 19.5% in less than 3 months. Of course, I was planning on receiving the June (2008) dividend payment and then adjusting my strategy which didn’t work out. However, I was able to generate positive cash flow which was the end goal. I have since invested my $1,159.18 ($970.09 + $189.09) into a new stock and will provide an update in my June (2008) Part 2 post in the coming weeks. I will also provide a detailed breakdown of my total expenses vs. income from my $1,000 loan.
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Congrats on this yield. It certainly could have worked out worse.
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Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
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Passive Family Income,
Congratualations on your profit. The scenario above is exactly why I am hesitant about selling covered calls – i feel that I am cutting my winners. Have you thought about selling naked puts in order to enter into stocks when they reach a certain low point?
With this strategy, you are basically getting paid for placing a limit order.
I also wanted to thank you for visiting my blog and commenting. One think that you might want to change is your blogger profile since your website is not on it. Thus if anyone liked your comments on my blog, they would not end up on your blog
Best Regards,
Dividend Growth Investor
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Ralph – Thanks, yes it could have gone much worse than it did.
Allen – Thanks for the nice comments and I will check out your site as well!
Dividend Growth Investor – I do agree with your comments about selling covered calls and cutting your winners. At the time of the trade I understood the limitations I was setting for the stock and was ok with it. Unfortunately, it made a huge run up almost immediately after I made the purchase so the timing on the options transaction hurt me as well. I had never thought about selling naked puts. Have you done this? Do you trade options at all? I am interested in your feedback if you have.
I will also take your advice and update my blogger profile. Thanks for the tip!
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PFI,
I have traded options (long). I am thinking about implementing a strategy to do so that would enable me to both keep my stocks and earn profit from the premiums. So far I haven’t found something like that.
With selling options for premium, you do earn money 95% of the time. The 5% when you lose money, however, you lose more than your winners combined.
I am thinking about using selling naked puts like a limit order where I get paid to enter it. Would I do it? Maybe not yet. Why?
I am undercapitalised to do that now. For example if I wanted to buy JNJ, I need to sell 1 put contract at say $60. That means that if the stock falls below $60, I would have to come up with $6000 to buy the stock. That would affect my asset allocation.
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