INVESTING WITH A CONDOM

Monday, June 1st, 2009

This will be a regular column with additions, comments and hopefully responses pro and con.  Sorry I could not think of a better title but it does accurately describe the  current investment strategy at JMR Capital.

Since the last half of 2007, the global equity markets have exhibited the kind of volatility which recalls the “Panics” of the early 20th century. This was discussed in a previous posting entitled Your Great Grandfather’s Stock Market.  So what is a prudent way to invest in this environment?  Many have headed for the mattresses, making risk aversion the new bubble.  Others have been like deer frozen in the headlights with fingers and toes crossed.   Neither approach will bear much fruit going forward and while a passive investment style suits a market whose general trend is clearly up (cf. Jeremy Segal Stocks for the Long Run) there is now a strong case for hands-on active management complete with hedging and downside protection.

To illustrate and lead by example, here are some real examples of investment strategies used in accounts managed at JMR Capital Management.

CASH FLOW IS KING

In the last quarter of 2008 we initiated some positions in exchange traded funds with high cash yields which could be added to by writing (i.e. selling) covered call options.  

HYG.  IShares IBox High Yield ETF. This security replicates a well known high yield bond index which contains the most liquid and tradable US dollar denominated high yield corporate bonds.  The top ten holdings comprise 22% of  $2.7 billion of total assets.

10/30/08      BUY  500 SHARES  @ 71.84     $35920

Since November we have received 7 monthly dividends totaling $2390.5 or $4.78 per share.  In addition we added to the cash flow by selling the following call options:

10/30/08     Sold 5 March 09 $76 calls @ 1.60             $800

Since the price of the stock was below the strike price (76) on the option expiration date, we sold another call.

4/14/09      Sold   5 June  09 $72 calls @ 1.85        $925

Our total from selling the call options  is $1725, which when added to the dividends received since November brings the grand cash flow total to $4115.50 or $8.23 per share.  This gives us a return of 11.5% so far.  To protect the downside we also have a stop loss order at $70.

 

KMP.   Kinder Morgan Energy Partners.  The company owns and manages energy transportation through approximately 8300 miles of pipelines for oil, natural gas and CO2.  It has paid and increased its quarterly dividend every year since 1992. 

 

10/14/08     Buy 400 shares @  50.978     $20,048

12/30/08    Buy 400 shares  @  45.216      $18095

Our total investment for this particular account is $38143 or $47.68 per share

Dividends receveid through the end of April have totaled $2088.  To this we have added to the cash flow by selling the following call option.

1/23/09      Sell June 09 52.20        $1180

Our total cash flow is now $3268 or $4.08 per share.  If the June call is exercised at 52.50 our total return from dividends, call premium and appreciation will be $7123 or 18.6%.  We have placed a stop loss order at 45 to protect our return.

More examples to follow—please stay tuned and let us know what you think.

2 Comments to INVESTING WITH A CONDOM

Kylie Batt
April 20, 2010

Прошу прощения, что я Вас прерываю, но не могли бы Вы расписать немного подробнее….

This will be a regular column with additions, comments and hopefully responses pro and con…..

Kylie Batt
April 21, 2010

Ох спасибо)) пригодятся))…

Since the last half of 2007, the global equity markets have exhibited the kind of volatility which recalls the “Panics” […….

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