Thursday, May 22, 2014

Using Covered Calls to make money with WWE stock

The last few months have been crazy for shareholders of World Wrestling Entertainment Inc. (WWE). The company's stock reached almost $32 a share on news of revenue from a TV deal and their own online streaming subscription channel. I first noticed the movement because on Stocktwits.com there was abnormal volume. As of earlier this week May 20th, 2014 the stock was all the way down to $11 on news that disappointed on the T.V. deal and the amount of people subbed to their online streaming channel. Some see this as an outstanding opportunity and others think the stock will keep going lower. I have some free cash I wanted to put to work and found a way to have limited losses with the opportunity for a nice gain. I purchased 200 shares of the company at $11 with commission the total was $2206.95. I then sold July 19th covered calls at the $10 strike price for $1.65 or $165 per 100 shares. WWE will also have a dividend payment the ex-dividend date is June 11th for .12 a quarter or .48 a year for a 4.3% yield. With the $1.65 from the covered call and .12 from the dividend that is a total of $1.77 a share minus the $1 from the $10 strike price so .77 per one 100 shares profit. Below are the possible scenarios if the price goes up, stays the same, or decreases in value.


Scenario 1: Stock price goes up

Purchase price 200 shares for $2200 + commission $6.95 = $2206.95
Option price $10 July 19 strike $165 x 2 = $330 - 8.45 com 2 options = $321.55
Dividends collected $12 per 100 shares = $24
Total 200 shares @ $10 = $2000 + $321.55 + $24 - $20 commission on sale = $2325.55
Profit $2325.55-$2206.95 = $118.60 / 2206.95 = 5.4% profit in 2 months

Scenario 2: Stock price goes down under $10 strike to $9.90 as share

Purchase price 200 shares for $2200 + com $6.95 = $2206.95
Option price $10 July 19th strike $165 x 2 = $330 - 8.45 com 2 options = $321.55
Dividends collected $12 per 100 shares = $24
Total 200 shares @ $9.90 = $1980 + $321.55 + $24 = $2325.55
Profit is $118.60 for a 5.4% and we still own the shares to write another covered call or sell. The average cost per share went from $11 down to $9.31 a share with shares sitting at $9.90 a share. A new yield on cost on the dividend of 5.1%

Scenario 3: The stock price drops below the Break-even point of what was received from the Dividend and Cover Call.  Lets say $9.35 a share which would be 15% decline from the purchase price. 

Purchase price 200 shares for $2200 + com $6.95 = $2206.95
Option price $10 July 19th strike $165 x 2 = $330 - 8.45 com 2 options = $321.55
Dividends collected $12 per 100 shares = $24
Total 200 shares @ $9.35 = $1870 + $321.55 + $24 = $2215.55
Profit is $8.60. This is the break even point, if shares fall we will be forced to make a choice to keep or cut loose. I do think the dividend would be safe and .48/$9.35 = 5.1% dividend yield on cost.


Overall I like the risk/reward factor and the potential yield on cost even if the stock does fall lower. WWE has a good history of paying a dividend. The company isn't in trouble just didn't meet the absurd expectations. The key will be getting more subs to cover paid per/view revenue.  I will keep everyone posted on this trade and position. Let me know what you think!

Thanks
DSF

Disclaimer: This is a personal weblog. The opinions expressed here are my own. All data and information provided on this site is for informational purposes only. Please do your own research before investing.


Tuesday, May 20, 2014

My Investment Theory

After reading the book "Keynes's Way to Wealth: Timeless Investment Lessons from The Great Economist" by John F. Wasik. I have been inspired to write my own way to wealth and it is below. I recommend buying this book it has a history of Keynes's and his investments. I like how the book shows Keynes thinking as he became older and how he invested in the 1920's, 1930's and 1940's up to his death. This time period is one of the most difficult to invest in. 


My Investment Theory  
My Way to Wealth 
Getting Started 
The main goal is to compound our money. To build up principle making passive income to live on each month. Look at stocks like owning a house and dividends as rent we collect. I invest in mostly dividend paying stocks and bond funds. The money is reinvested in the security or taken in cash to redeploy elsewhere. I like having a position in cash to take advantage when the market is fearful and to trim core positions as the market rises. Cash is the best way to be neutral and is a core position. Like a good General I only use this position if the risk reward is going to be successful. The portfolio will always have core positions in companies who have demonstrated over many years the ability to return money to shareholders and increase the value of the brand and business for example: Coke Cola (KO). I will use covered call options to lock in gains and help when the market goes lower. 

My philosophy takes shape from business greats such as: Warren Buffett, Charlie Munger, Kevin O’Leary and John M. Keynes. And many other greats.  I buy good companies at reasonable prices, collect dividends, and will be greedy when others are fearful and fearful when others are greedy. I like diversification but I tend to have 10 positions or less in the portfolio. This allows me to focus on my best ideas and understand fully what the companies are doing. 

Performance is very important! The only reason to invest is to make a profit. I like to compare the portfolio with the Dow Jones average and the SP 500 (SPY) index. These are the standard benchmarks for all investors.  I want to invest with managers who have consistently beat the averages over 1, 5, and 10 year periods. The stock market has been a great way to generate wealth over long periods of time. The average return annually since 1802 is 6.6% after inflation. 

Sunday, May 11, 2014

Understanding Expectations and Making some McProfits

Understanding Expectations


Managing expectations is very important if you want to become a great investor. Most people want to hit the home run or the big jack pot. This mentality leads to risky decisions which end up actually losing money. Grinding out a small win or collecting a few dollars consistently with dividends is boring but the best way to make money over the long run. Many people want to see things happen right away and don't have the patience to let things develop they jump in and out of stocks or companies. What I have learned is people love to watch stock prices instead of understanding how the business is run and growing. If you develop a thesis let it play out most people have a thesis which is correct but don't let it play out and miss out on the profits. Not every drop in the price of a stock is a bad thing. Maybe it is for fundamental reasons or it could just be profit taking or even reasons that make no sense giving a intelligent investor the opportunity to buy. Just because a stock falls is not a good reason to sell if a stock rises does not mean a good reason to buy unless you feel the company will continue its success. When Warren Buffett bought $1 billion in The Coca Cola company in 1988 and 1989 he did so even after the company had risen fivefold the prior six years and 500 fold the previous sixty years (source is The Warren Buffett Way by Robert G Hagstorm.) Below is an example of a company I own which has been consistent money maker. 

McProfits


McDonalds has been in my portfolio since I first started this blog and my channel and it was bought at $89 and as high as $98 and low as $86. I have bought it even after it pretty much doubled from the 2008 bottom. This is the perfect example of understanding a company and not putting to much concern in a monthly or quarterly number that misses expectations. I am happy with the yield on cost and the dividend growth this company provides. The value and growth are from operations and the movement into coffee which I feel has many years of growth. The stock price is currently at $102.93. Many stocks may have outperformed MCD but the risk of being invested in MCD is low and overtime a great company will have returns that will usually outperform the averages. Its best to buy great companies at good prices I think MCD is fairly valued any pull back would present an opportunity for someone who has no shares but over the long term you can't go wrong with a company as innovative as MCD. It doesn't hurt to get a 3.1% yield while you wait. This is my example of managing expectations and being rewarded for having patience.

Disclaimer: This is a personal weblog. The opinions expressed here are my own. All data and information provided on this site is for informational purposes only. Please do your own research before investing.

New Strategy for investing in Under Armour Inc. (UAA) and Monster Beverage Corp. (MNST)

On March 24, 2017 my blog entry Under Armour Inc. (UAA) Opportunity I talk about my purchase of 100 shares of UAA on 2/6/2017 for $20.55. I...