I’ve followed Dryship (DRYS) for years and owned shares off and on. Back in June the shipping index, Baltic Dry ($BDI) started to work its way up and so did shares of shipping companies, including DRYS.
I was out of the stock but some readers held shares during the time the price dropped to around $2 per share. Some sold calls, some sold puts and averaged their cost down. I watched. At $3.09 I started buying, and until the middle of October I owned 6,700 shares in my personal RRSP account and 1,000 shares in another account.
I had sold calls on all of them with a strike price of $3 for October 18, and collected roughly $0.29 cents per share. Since the shares were well over the $3 strike price, they were going to get exercised and taken from me. But I saw an interesting opportunity and took it. Here is what I did.
In the account with 1,000 shares, I bought the calls back, bought another 1,000 shares then sold calls on all 2,000 shares.
My account with 6,700 shares has a more interesting story. When I saw an opportunity to buy calls back and sell them for more money in the future, I tried to figure out how many more shares I could buy. I wondered if BMO would let me run the RRSP account into the red for a hour or so. If they would, I figured I could buy about 1,300 new shares for $3.50, then sell calls on all 8,000 into January 2015 and collect $1 or more per share. That would pay for the cost of buying back the calls on the 6,700, shares plus the cost of buying the other 1,300 shares.
Sadly, BMO wouldn’t let me do that. I had to get to the same spot in three steps. But now I have 8,000 shares in that account, worth roughly $3.50 (as I write), about $28,000 all together, when I started with only $20,700. Being an optimist, it seems quite reasonable for those shares to rise to $4, and that account to get to $32,000 ($4 x 8,000). That would be a gain of 11,300, or 54 per cent in 14 months.
In 2015 I turn 71 and will need to convert that RRSP into some kind of registered retirement fund that can pay me cash for some years to come. Actually, the rule is that in the year I turn 71, I have until the end of that calendar year to convert the RRSP into a retirement fund that starts paying money early the next year.
My RRSP was stuck at $12,000 for years because I never put money into it. I knocked it down to $4,000 during the bear market of 2008, drove it up to $12,000 on the recovery, then up to $24,000 when Consolidated Mining (CLM) doubled. Then the Chinese silver company (SVM) took the value down to $18,000 because I wasn’t watching the account.
Now, after DRYS, the account was at $20,700.
I had sold calls on the 6,700 shares of DRYS for $0.29 or $1,900. The calls cost $0.51 cents to buy back, or $3,443 with commissions. I tried to buy 1,300 new shares but the broker stopped the order. He said I had to have cash in the account to buy more shares. Besides, he said, I had 6,700 shares to sell calls on so why not do that first. So I did. (I also had about $260 in cash in the account.)
I sold a call for January 2015, strike price $4, and collected $0.98 per share: $6,472. That paid off the cost of buying the calls back and left me with around $3,600 in cash. So I bought 1,000 shares for $3.49 ($3,479). Then I sold a call on the 1,000 shares for $947 and next bought another 300 shares and of course sold calls on them for the same January 2015 date at strike price $4.
I collected $0.98 at that $4 strike. I could have sold the $3.50 strike and collected about $1.30. Since I read that DRYS should make a profit in 2014, I figured the shares could go up another $0.50 to at least $4.
This is called investing with an educated hope. It really is speculation.
It took me three buys and three sells, but I did end up with 8,000 shares of DRYS all fully paid for. Of course the last 1,300 were paid for with market money from selling calls.
If the shares get above $4 before January 2015 I likely will buy the calls back and sell the shares so I think it is sort of safe to think the account could be worth something close to $32,000 by 2015. I’m quite sure that at that time I should be able to find some investment such as selling covered calls that makes at least 10 per cent annually so that account could be paying me around $250 a month for many years. That beats having a $12,000 account that pays 100 bucks a month.
If $20,700 worth of shares boosted the account by almost $8,000 for 14 months, can I do this as an investment strategy? Theoretically if $20,700 can make $8,000 then six times that, $124,200, could bring in almost $50,000. Right?
If I could do one of these deals every two months over the course of a year that $124,200 could bring in $48,000, which is about 38 per cent per year.
That would be a good sideline income for a working person or a nice add on for a retired guy or gal.
But there are a couple of problems. First, there is no guarantee that DRYS will stay at this price.
Second, it’s not easy to find shares that can pay $0.98 cents on $3.50 (28 per cent) for 14 months. Still, if you can find stocks with a low downside risk and bring in 15, 18 or 22 per cent per year, nothing wrong with that.
The big risk
Over the years I have noticed something. Often when the premiums from selling calls are so good it makes me wonder, the shares are ready to drop. Is this the case with DRYS?
Well the premium certainly was generous when I sold those calls on October 17 or 18. But guess what happened on October 21. Yes, the shares dropped from around $3.45 to $3.08. My paper cost is $2.33, so I’m not worried about losing money yet. But all of a sudden that $8,000 profit has shrunk.
All is not lost. I can still buy that Jan. 2015 call back for $0.20 less than I sold it for and sell a call at a lower strike price, say $3, and pick up more cash. That is my fall back plan. I will watch.
Back to finding other stocks with big premiums. You would likely have to sell calls on U.S. stocks, since most Canadian stocks don’t have options more than six months out. But if they paid 12 per cent for six months the idea could still work. Out of curiosity I checked on Barrick Gold — priced at $19.07. Selling calls to Jan. 2015 at $19 would bring in $3,400 which is 17 per cent which is a long ways from 38 per cent. Still good, I suppose, but much lower than DRYS is paying at this time. Do keep in mind that DRYS has dropped in price.
First Majestic (FR) or (AG) would pay around $4,600 on $20,000 worth of shares. That’s 23 per cent. Again, a long way from 38 per cent but not so bad.
$20,700 could buy 1,300 of FR shares as I’m writing on Oct. 20, and the premium for January 2015 is $4 per share, which would be $3.20 net — which is $41,00 or 19 per cent. So on that $124,000 it could be much easier to make $23,500 than $48,000.
In other words, it looks like collecting something over 30 per cent a year selling covered calls 14 months out is rather rare.
You could look at selling calls for six months out twice a year. So, given that there seems to be a big risk when the premiums are high as they were with DRYS, it might be wiser and safer to sell calls on stocks that pay a lower premium and have more safety or less risk built into the price. Of course I could have worked more safely by selling calls for $3 strike right off the bat and that is always something to consider.
And my last fall back might be to buy that call back on DRYS, sell the shares and lose a penny or three and move the money into another stock that pays a smaller premium. Nothing says that another stock can’t drop either. I will watch and let you know how this trade works out.
Bombardier (BBD.B): I have owned BBD.B shares patiently since shares were $4.06. My average cost is $4.74 because I bought more as the price went up. Shares touched $5.11 a couple times and dropped again to around $5.75. I collect a dividend of 2.5 cents per share every quarter — about 2.5 per cent a year.
On October 21 shares finally broke out and closed at $5.30. If shares do roll over and drop I might sell a call at least on some. As stocks head for the in season for industrials (near the end of October) this industrial might do well.
Bonavista (BNP): I’m looking to buy some shares in BNP. The dividend is $0.07 paid monthly. Earnings are predicted to go from about $0.20 per year to about that much per quarter. But the shares went to their 50-day moving average and dropped, so I’m waiting a bit longer.
Davis + HENDERSON (DH): This company helps businesses run their business. It bought a U.S. business this past summer which is supposed to be accretive, that is, help make money for DH right off the bat. Shares were around $24 at the time and I was waiting for a bit of a pullback, which did happen but only down to $26. The shares bounced back up so I guess I will buy a few hundred shares and buy more whether the price goes up or down. As the market heads for the in season for industrials (near the end of October) this stock might do well.
TOURC (TOG): This stock went from being a growth to a dividend payer. I started buying at about $1.60. Shares reverse split one for five so that put the cost at about $8 and I bought more shares as the price went up some. Again on Oct. 21 shares touched $10 and change and started to drop so I sold out at $9.88. I gained well over $1 per share which is over 12 per cent for about three months. †