A Little Action Goes A Long Way

By Jim Nelson, Editor, Bonner & Partners on November 30, 2014

We hope that you had a wonderful holiday, and now that the leftovers are all gone it’s back to business.

With the market being closed on Thursday and shortened trading hours on Friday, we didn’t think that we would have a new trade last week. But as you saw on Friday, that wasn’t the case. The market gave us an opportunity and we sent it straight to you.

You should have received a flash alert from us recommending another round of puts on BP Plc. (NYSE:BP). This time, with an opportunity to lock in an entry price even lower than before. And we get to collect another round of income.

If you missed it, we recommended that you sell to open January 2015 $38 BP puts for no less than 50 cents per share. The holiday didn’t stop the OPEC meeting and oil is now sitting at the lowest it’s been since 2010. Combine this news with a post-holiday trading session, and we were looking at a clear opportunity.

Plus if we end up being put these shares, we’re getting shares of BP at an outrageously cheap price. Remember we called BP cheap at $40…and now we’re locking in a potential entry of $38.

After our alert hit your inbox, those contracts traded between $55 and $68. The largest chunk of volume was at $59, so we’ll be using that as our entry price when tracking this trade in our portfolio. If you didn’t have a chance to get in on Friday, we recommend using a limit order to try and get in on Monday. As long as shares are trading above $38 and you can lock in more than $50 per contract, we recommend you get in.

Action to take: Sell-to-open January 2015 $38 BP puts for no less than 50 cents per share, or $50 per contract. You’ll need to keep $3,800 in your brokerage account for the duration of this put contract. As always, use a limit order.

Why We Don’t Buy and Hold

Last Wednesday, we read an interesting piece in Barron’s titled “Four Best Places to Stash Cash And Still Earn Yield”. Of course it caught our attention, safe yield is near and dear to our hearts. It’s the entire reason that we do what we do.

The article boiled down to suggesting that four best options for investors are as follows…

1. Online bank money market account with yields of around 0.85%

2. Bank CDs with yields between 1.5% and 2.8%

3. Ultra-short bond funds with yields between 0.6% and 2.3%

4. Short-term bond exchange-traded funds with yields between 0.52% and 1.1%

We respect Michael Aneiro quite a bit, and follow him regularly, but we can’t call those numbers yields. Just take a look at inflation, and any income that you’ve accumulated is negated.

Using the inflation numbers provided by the Bureau of Labor Statistics, it takes $101.92 to buy the same amount that $100 would last year. That means a yield of 1.92% is your break even. We think that real inflation is a lot higher than this government provided number…which is why we try to lock in double digit annualized yields on all of our positions.

In order to get more yield, something has got to give with a conservative buy-and-hold strategy. The first would be to add more risk to the strategy. It’s the age old investor problem of wanting to get more for your money, but not assuming too much risk.

We have a different solution to the problem of wanting more yield. Instead of taking on more risk, we give up a little more of our time and have a slightly more active trading strategy. We stress that it’s only slightly more active. You don’t have to sit in front of your account for hours at a time trading in and out of positions.

And as we’ve pointed out before, our risk is less than it would be just holding the stock because we have added income to lower our cost basis. We’ve also set ourselves up to make money if the market doesn’t do exactly what we’re expecting it to do.

Let’s break down the entire trade on BP…meaning we’ll look at both times we named an entry price.

We first added BP to our portfolio on October 10. At that time shares were trading at $41.62. Instead of picking up shares at this already cheap price, we decided to name our entry price at $40. In exchange for selling Nov $40 put contracts on BP we collected $100 for each one.

All we had to do in exchange was hold $4,000 in our account just in case we ended up buying the shares.

With the most recent trade on Friday, we’ve added $59 to that total. In just two months we’ve collected $159 from out BP position. That’s 2.65 times the amount of one quarterly dividend payment…in just 51 days.

We have already collected 4% in just two months. Yet in that amount of time shares are down 5.5%. Buying puts would have been worse. You’d have lost 100% on last month’s contracts.

Our reasoning for this trade includes the assumption that oil prices can’t go much lower. We are essentially making an investment with the basis that oil prices will go up. It make perfect sense. If oil prices go up, shares of BP will go up. We won’t get put the stock and we will keep collecting income without having to spend a dime.

Yet, oil prices have actually fallen…and we’re still making money. The exact opposite of what we were expecting happened. That’s one of the benefits of a strategy that allows you more income with less risk. Even being wrong makes you money.

For us that kind of security and yield makes up for the additional time it takes to get into these options positions.

This brings up a great opportunity for us to take the time to ask you how long it takes you to get into one of our recommendations. Are you finding it easy to read our alert and then place your trade within 10 minutes? Or is there something that is still holding you back from making this trade easily?

We want to remind you that we personally take the time to read every single email that comes to Although we can’t write back giving individual advice we can answer your questions or respond to comments and critiques in these weekly alerts.

Feel free to send us anything that’s on your mind related to income investing or the markets in general.

That’s it for this evening.


JimNelsonsig kellysig

Jim Nelson and Kelly Green

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