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Archive for April, 2012

My Seagate Technology Trade

It is impossible to know what kind of reaction an earnings report will get and such was the case yesterday with Seagate Technology (STX) when they reported earnings after the close of the market.  It is still unclear exactly what will transpire as a result of this information since the market hasn’t opened today.

But regardless of what happens, I always want to be prepared and able to make adjustments whether the stock decides to go up, down, or sideways.

Seagate Gets My Attention

Seagate initially got my attention in November of last year as a stock that was paying a decent dividend of over 4%.  I thought it would be an important component to my dividend plan for my retirement account.  Ultimately, being able to manage a portfolio of dividend stocks will be some great knowledge to have so that I don’t have to deplete principal during retirement and can live off the generated income instead.

When I purchased STX, I was able to buy it for under $18 per share.  Since then, I have more than doubled my position and sold calls and purchased puts so that my current basis for the entire position in STX is $23.41 as of this moment.  Because the stock took a major hit earlier this month, I was concerned about the earnings report.  So yesterday, I purchased the May $25 puts for $0.68 per share.

Because I also wanted to benefit from a possible positive reaction especially with the DOW over 13,000 again, I bought back the April $26 calls that I had sold leading to the current net basis.  Now I still have many April $28 calls and May $28 calls outstanding so those April calls could easily get exercised this week if the strength continues.  But I could still buy back the stock next week to get the $0.25 dividend.

Guaranteed Profit

The best thing about this entire series of transactions is that, no matter what, I have a guaranteed profit of $1.59 in May even if the stock drops to $10 per share.  The protective puts assure me of that.  It still works out to a return of $1.59/$23.41 = 6.79% for 6 months worth of time.  Certainly not a bad return at all.  Plus I have the previous dividends which I don’t count in the basis at all.

Should I end up selling all the shares at $28 in April and May, the return would jump to $4.59/$23.41 = 19.6%!  It would actually be even better because I still have a few calls that I could sell between now and then to lower the basis a bit more.

But You Missed Out!

Now some of you might be thinking that I missed out on a big time gain if the stock went from sub-$18 to over $28.  And you would be right.  But how did I know in November that it would happen like this.  I didn’t!  And anybody who says otherwise is a liar!

Because I don’t know which way the market will go after purchasing a stock, I want to avoid big losses rather than hit home runs.  I know that in the long run I will be better off.

Maybe someday I will explain how I purchased GME at $25.82, sold it at $24 and made over 4% annualized profit.  But that’s a subject for another post or even an ebook.

In the meantime, I will be curious to see what happens with STX over the next several days and weeks.

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6 comments - What do you think?  Posted by Cash Flow Mantra - April 18, 2012 at 8:19 am

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Getting the Most Out of My Tax Saver Benefit Plan

When it turns out that you owe a lot of money to the IRS, it is best to save money on taxes in any way possible.  One of the ways for me to do that is by getting the most out of my tax saver benefit (TSB) plan at work.

What is a Tax Saver Benefit (TSB) Plan?

At our place of employment the TSB is a flexible spending plan that allows employees to set aside pre-tax dollars for use on either child care during the year or medically related expenses that aren’t covered by insurance such as deductibles and co-pays.  Some employers may refer to these plans as flexible spending accounts or plans or “cafeteria plans”.

For 2012, the maximum that we can contribute is $6,000 for either child care, medical expenses or a combination of both.  Since my wife stayed at home when the kids were younger and now we don’t need child care, we have always selected the medical expense option.

The difficulties associated with these plans is that you have to use the money or you would lose it.  So it is imperative that an accurate assessment of needs during the upcoming year be made since the anticipate payroll deductions are determined each fall for the following year.  This is different from a Health Savings Account (HSA) in which the money will roll over from year to year and can be invested as well.

Speaking of the HSA…

It used to be that I didn’t have a Health Savings Account at work, but now that it is available, I have signed up for that plus a high deductible health plan.  Because I have an HSA, the impact on the TSB is a little bit tricky.  I can no longer use the TSB for co-pays or other medical expenses.  That is what the HSA is for.  Instead, the TSB is basically for eyes and teeth now.

Having six kids means a fair amount of dental work and routine care during the year, so I am able to take advantage of the TSB and save some money on my taxes.  Believe me, every bit helps.

Now this year, in order to maximize the benefit that I am receiving, I called the orthodontist in November before the enrollment period to estimate my costs for this year and set aside that amount plus a little bit extra.  The kids are getting into that age where they are getting braces so it is relatively easy to figure out the costs that will be incurred in 2012.  I plan on doing the same thing for the next year since the last 2 kids are getting close to that age.

In the meantime, thanks to our relative health, I have been able to put away money in the HSA for later and not use any of it over the past several years.  Ultimately, the plan is to have it available should I need my knees replaced like my dad.  They swell when I run and are often sore, but I am getting along and hope to put off any significant procedures as long as possible.

Readers, do you have a flexible spending plan or health savings account to set aside pre-tax dollars for later use?

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4 comments - What do you think?  Posted by Cash Flow Mantra - April 16, 2012 at 10:22 am

Categories: Saving, Taxes   Tags: , , , , , , , , ,

Buying Stocks on Sale

Yesterday, the stock market dropped the most since November 2011.  So, what was your take?  Did it bother you that the value of your stocks dropped significantly or did you consider it an opportunity to buy stocks on sale?  Matt makes a great contrast between the attitude of declining prices when it comes to stocks versus the response to declining prices with gasoline.

I look at the fact that my investment horizon is over 25 years.  I figure that trying to pick up some shares on a down day is better for me in the long run.  I bought several shares of STX last week for $25.82 on average when it was down over 8% in a day due to some poor guidance.  I figured that the stock pays a dividend which should help create a floor under any sort of decline.  I also figured that I could always sell some covered calls to decrease my basis if need be.

Yesterday Bought More AKS

Yesterday, I was able to purchase another 100 shares of AK Steel for $6.95.  The plan is to sell some covered calls with the $7 strike and a May expiration.  I put in the order today to do so at $0.65 per share.  It hasn’t sold, but I wouldn’t be surprised if it did over the next two days before the weekend.

If it doesn’t happen and the stock ends up dropping again, I can pick up some more shares below $7.  It is not a big deal and will lower the overall basis of the stock.  The biggest risk is that AKS has financial difficulties and stops paying a dividend or even goes bankrupt.  I don’t think that will happen over the next few months, but I do have to consider that if I increase my position too much, I will want to buy some protective puts.

I had some put options when my position was bigger.  They paid off for me as the stock slid from the teens down into single digits.  But now my overall exposure hasn’t been that large so I let the puts fall by the wayside.  I figured I would save the cost and simply work with selling calls.  However, it may be worth reconsidering if I want to purchase more shares over the next few days.

The other consideration is the fact that earnings will be coming out later this month.  That can always be a big trigger for volatility and moves one way or the other.  A big move down is bad and could hurt.  The May $6 strike puts cost $0.15 each.  It is probably worth it to buy some tomorrow and prepare to sell some calls as well.

Overall, the market has made a decent run over the past few months.  I am not surprised that it is time for a breather.  Summer is coming and earnings season is expected to be disappointing.  Even though yesterday was a big down day and today saw a bit of a rebound, I would probably use the down days to add to positions but only a little bit at a time.  That is what I will be doing.

So, are you buying any stocks?

 

 

 

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14 comments - What do you think?  Posted by Cash Flow Mantra - April 11, 2012 at 5:58 pm

Categories: Investing   Tags: , , , , , , , ,

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