Trimming Our Sails A Bit More
* Heading into June, 2022, our bet is we are in recession or headed there in this quarter
* We will keep selling out of the money puts on the 142 Dividend Champions (DC)
* But we will put on more limits until we sense a recovery
* We will limit purchases to cash available. No margin just yet.
We have already experienced one quarter of declining growth in GDP. Employment is still rigorous but inflation feels both understated and as though it is getting worse. With the market down almost 20% from its peak we don’t feel the Fed put coming back any time soon. Seems like Powell & Co are back to focusing on their dual mandate. So it will be some more rate hikes to quell inflation and that should lead to further increasing mortgage rates. Add those increasing mortgage rates to the diminished wealth effect from a declining market and we think a drop in real estate prices is not far off. That should continue the dampening of the economy and further declines in the equity market. Not so rosy but what did you expect after this prolonged bull market in equities and real estate?
What are we the practitioners of the Make Your Family Rich system doing in this environment? More of the same but less. Over the past year or so we have sold a lot of real estate and with the proceeds have continued to sell cash-backed out of the money puts on DCs (great American companies that have increased their dividends for at least 25 years). Those familiar with the MYFR system know we sell puts on days when the price of the underlying stocks decline a lot. In recent months some options have executed and we deployed some of our cash and each month our income has gone up even in this declining market. This past options expiration Friday (5.20.22), for example, we had a couple of QCOM contracts expire below the strike price so we became the proud owners of more QCOM. QCOM is not quite a DC having increased its dividend for only the last 20 years. But, we believe, given another five years QCOM will be a DC. Followers know that increasing income is how we measure success and that’s why we restrict our acquisitions, with some limited exceptions like QCOM, to DCs.
Most recently, given our economic and market perspectives, we have decided to sell puts only on days when the DOW is down 800 points in the last two days and the individual DC is down about 5% at the time of option sale. Then, we limit our sales to one contract (100 shares) per company. We also limit expirations to three months out and to strike prices at least 15% below the current market. Finally, we try to limit potential liability to the cash we have available. In fact, the algorithms used by Matt and Erin, the account managers, actually limit projected liabilities to a potential margin of 10% of the account value. It would take a very substantial decline to trigger any margin but it would never exceed 10% of our overall ownership.
Keep a close eye on Matt and Erin’s Daily Diary at the beginning of our web site. There, they record the details of their trades including the cash on cash returns of the options trades over the duration of the option. Great information!