GE – A New Financial Cow for Our Growing Herd

Well, our milk-the-cow strategy has been going strong this year, after developing the strategy and working out the kinks in paper-based and live trading over the last 3 years. So we've decided to add a new cow to our growing herd, namely General Electric (GE).

For my smaller investors, I needed to find a stock that did not require a lot of margin, that offered an attractive rate of retail/wholesale options cost, that offered high frequency of options contracts (weeklies, preferably), and equally important, that offered low bid/ask spreads. These are all criteria for choosing a good candidate to generate maximum income from a strategy based on rolling options.

At around $6.00 a share, I could establish a long term strangle (buying out of the money puts and calls) for $4.10 per share or $410 per contract.
This puts an outer limit at possible losses if I am careful not to lose money on my frequent option rolls (milking my cow).

I sold my first at the money puts and calls on the same day at a 6.00 strike. Later that day I had to buy them back at a loss to reset the straddle to $6.50. I did so by rolling from the original July 31 sold strikes to Aug 7 sold strikes. This created a $9.50 loss per contract but a positive cash flow of $15.41.

As I'm writing this, on the next day, the stock has not moved much, but the options positions have turned profitable. The currently have a positive value of $209 if I were to close them.

size: 41 contracts
Long Term Hedge: $4,510 or $1.10 per share
Cash Flow to Date: $650 or $0.07 per share
P&L to date : ($95) or ($0.02) per share

BAC Milkings 30 July

Today BAC has moved up slightly and looks like it may eventually close the gap at $25. For now we will roll our 24 strikes up to 24.50 and book some profits. We make $391 on 10 contracts, or $0.39 per share of new profit.

This is in about 4 weeks of time, so our stock cow is being very generous. At this pace, we'll recover our initial outlay in about 3 months, and could potentially treble our money by the time our original outlay loses all hedging value.

size: 10 contracts
Long Term Hedge: $4,010 or $4.01 per share
Cash Flow to Date: $929 or $0.92 per share
P&L to date : $1,426 or $1.43 per share

IWM Milking 31 July

Well, we were right yesterday in our belief that IWM would head lower. We dropped to 145.50 and believe we have support at 145. Because we guessed right in the direction of the move, we were able to bank a lot of lost premium. We have $2322 of profits for the day on 35 positions.

We are going to roll immediately (it's 10:45 am). We'l sell the July 31 straddle for an Aug 5 straddle centered on a 145 strike. This is cash flow positive, by $3.62 per share, boosting our positive cash flow by $11969.

size: 35 contracts
Long Term Hedge: $93,159 or $26.61 per share
Cash Flow to Date: $23,961 or $6.84 per share
P&L to date : $46,406 or $13.25 per share

IWM

IWM has not moved a lot, but we chose to roll from 148 strikes to 147 strikes to slightly improve our theta erosion on the sold options.
This is also because technical analysis suggests the stock will move to that level today or tomorrow. If we're right, doing so now will bring in more overall premium. Conversely, if we're wrong it will diminish that revenue, so this is not a neutral decision.

Doing so booked a profit of $5772 on our 35 contracts. We sacrificed $1561 in cash flow, but we still have ample positive cash flow reserves.

size: 35 contracts
Long Term Hedge: $93,159 or $2,66 per share
Cash Flow to Date: $11,992 or $3.42 per share
P&L to date : $44,084 or $12.59 per share

SPY Milkings 31 July

SPY gapped up 4 points this morning on positive earnings reports from the FANG stocks, which represent a big portion of the economy. This placed out positions, centered on $319 in anticipation of a possible drop to support there, deep under water on the call side. Despite that, we were quite profitable on the positions, due to the effect of time erosion on these weekly options.

We immediately rolled, rather than waiting for further time erosion. That is because I don't want the margin impact that would result from the calls being exercised before the end of the day, which can happen, though it is infrequent. By doing it early I am foregoing high time erosion in the morning hours, but boosting my control of the margin environment. Those are trade-offs one needs to weigh.

Note: A possibly more lucrative and nuanced approach would be to just roll the threatened call side to the higher level extending it by one week, but to wait until the jul 31 Put loses all value by mid-day or so in order to only roll that one at that time. In my case I have many other positions to roll and other investing decisions to make, so the perfect became the enemy of the good. I preferred to sin on the side of making smaller profits but not having to scramble later to figure out how to reduce my spiked margin requirements.

If SPY moves back higher today, we may even choose to roll a second time. But for now, we've rolled out our positions one week in time.
We've boosted profits by $1221 to an overall today of $13,640 on 16 contracts and sacrificed only $317 of cash flow, while re-centering our
straddle by 4 entire points.

size: 16 contracts
basis $48,535 or $28.56 / share
cash flow $17,003 $10.62 / share
p&l $10,317 or $8.52 /share

BAC – 28 JULY No Roll Needed

The Gods of Finance are smiling on our BAC positions today. The stock has zigged and zagged and closed within 10 cents of our "fulcrum", a straddle centered on $24.50.

At day's end we had accumulated another $368 in unrealized earnings, in addition to our $1426 of realized earnings. This represents about 30% of our total outlay in about 4 weeks. We could close out both our short term position and our long term position for a net gain of $501 on $4010 invested, which is a 12% gain in less than 1 month. But of course it would be silly to do so. We expect these premium milkings to continue. If they continue at the same pace we could see premium earnings of $18,000 to $22,000 on an investment of $4000, which would about triple our investment.

SPY – 28 July – No Rolls.

For most of the day, the SPY has remained very close to our "fulcrum" point, centered on $323.

In the last 15 minutes of the day, SPY took a drop towards $391, so we may recenter this tomorrow morning. Ideally we would have done so today, and booked a $600 to $700 profit on the 16 contracts, and been well positioned for tomorrow. However, I was involved with another trade when this dip occurred, and you don't want to do these rolls in haste.

Such is life. These sold options are losing a lot of value due to time erosion - which we want - so we should be able to make the adjustment tomorrow while still banking a profit.

SPY Roll 27 July

SPY has moved up from $321 to $323, wo we recentered on that new strike of 323. The positions were profitable, making an additional $5,772 overall, or $360.75 per contract or $3.28 per share. I took advantage of the profits and the excess cash flow to roll forward in time. This gains more time erosion on our sold positions, which allows us to "milk" our financial cow more frequently.

size: 16 contracts
basis $48,535 or $28.56 / share
cash flow $17,320 $10.82 / share
p&l $10,317 or $6.44 /share

IWM – Roll 27JUL

At the last minute, a break of IWM to a higher high caused me to roll the Aug 3 147 PUT/CALL straddle into a 148 PUT/CALL straddle. I had not intended to do so, as the options were centered close to the market price, but I detected a breach of higher highs suggesting the market could rise to 148 by tomorrow.

The positions were profitable, so it was an easy roll. In fact, I decidedto roll them forward in time, to the calls expiring in 4 days, on July 31 from August 3. This sacrifices a bit of cash flow, but those new options should produce better time decay for us, thereby increasing our ultimate milked earnings.

size: 35 contracts
Long Term Hedge: $93,159 or $2,661.68 per contract
Cash Flow to Date: $13,553 or $387.22 per contract
P&L to date : $38,372 or $1,096.34 per contract

Milk The Cow Forum

My recent article on Seeking Alpha - an income producing options strategy I've labeled "Milk The Cow" - has elicited a lot of interest from readers and prompted a lot of questions. So I've created this post for readers to be able to interact off of the Seeking Alpha site and continue the discussion.

As a result, we've added a new forum section to this website. Simply register for free, and start posting your questions and feedback.

Thanks