Last Week's Income Report: September 27th, 2021
In the previous Weekly Income Report, I listed a few choice adjectives that have been used to describe September’s market action: “lackluster,” “deteriorating,” “alarming,” and my personal preference, “wobbly.”
Last week, though, I heard one that made me chuckle. CFRA Research’s Sam Stovall called the market “spoiled.”
“On Monday…even though nervous investors and the financial media made it sound as if a new financial crisis was at hand, the S&P 500 fell less than 2% on the day,” Stovall wrote.
The concern stemmed from fears that a collapse of Chinese property developer Evergrande could spill over into global markets. But stocks quickly turned higher as investors bought the dip, and the broader-market index notched a small weekly gain.
The reversal was due in part to comments made by the Federal Reserve following a two-day monetary policy meeting. The central bankers said the economy had made enough progress for them to start scaling back stimulus efforts as soon as November.
“As a result of [Wednesday’s] FOMC meeting-conclusion relief rally, the market has still not undergone a refreshing dial reset of 5%+ on a closing basis, and therefore remains the 9th longest advance between 5%+ declines since [World War II],” according to Stovall.
Perhaps Stovall is onto something and investors have become spoiled. But as I said last week, the only way forward is to trade the market at hand. And that’s exactly what we’re doing at Options Income Blueprint.
We closed two more winners last week, bringing our September cash total to $150.
You’ll notice that there’s a repeat winner on there — Marvell Technology (MRVL), which is one of my favorite semiconductor stocks.
We’ve also traded Citigroup (C) a number of times this year – five times in fact just since late July, earning $223 in income.
While that may not sound like a great deal of cash, we’ve earned an average annualized return of 88%. That’s a far cry above the 26% annualized return we generally target at Options Income Blueprint.
One of the reasons for the high rates of return is that we held the positions for just two to four days, closing out early to lock in profits.
Let’s run through the most recent Citigroup trade so you can see how closing early boosted our rate of return.
During Tuesday’s Live Trading Session, I recommend members sell the C Sep Week Four (9/24) 65 Put for $0.47, or $47 per contract.
Since we had to put up $6,500 per contract to secure the put, our potential rate of return was 0.7% ($47 in income / $6,500 in capital required). And since we would have been in the trade for four days if we held through expiration, our potential annualized rate of return was 66% if the option expired worthless.
However, the next day shares were up nearly 3% and the premium on the option we sold had dropped to just $0.10.
At the time, I told members that while we are not day traders, the profit we were sitting on was simply too good to pass up. So, I recommended an early closeout.
Giving up a dime to close the position meant that we booked a profit of $0.37, or $37 per contract, thereby earning a return of 0.6% versus the 0.7% initially projected. But since we were only in the trade two days rather than four, our annualized rate of return jumped to 104%.
I take a number of factors into consideration when deciding whether to close a position early. Of course, there is the rate of return. But I also look at how the stock is trading, as well as broader market risk.
It’s really more of an art than a science, and one I’ve perfected over decades. I can’t give you a hard-and-fast rule about when to close early, but as you see from the numbers, early closeouts can result in big annualized returns.