Retirement Income

Stocks and Options

September 27th, 2011 at 11:03 am

Kraft Foods Inc. (KFT) – Rolled Out and Down Jan12 Calls

Today, 9/2711, I BTC 2 KFT Jan12 32 Covered Calls and STO 2 KFT Jan13 30 Covered Calls for a net deposit of $496.95 in an IRA account.  My basis for these KFT shares is now 25.27, excluding dividends received.  These transactions represent a simple return of about 8.95% and an annualized return of about 6.71%. 

KFT goes ex-dividend on September 28 which and  I wanted to help ensure that I would not be called away at this time for the dividends.  KFT is trading five dollars above my strike price but it has been my experience that the further out the option expiration date is the less likely that the option will be exercised.  I really wanted to roll the strike price up but could not do so for a net deposit in the transaction.  I would have even liked to keep the strike at the same level but the $32 strike is not available for January 2013.  I intend to see if I do so when Jan14 Leaps are posted.  Hopefully I can roll up to the Jan14 35 strike for another net deposit.

Even though I rolled the strike price down with this transaction, I stand to gain about an additional $90 if called away because the reduction in the strike price is less than the net deposit I earned by the roll out.  That is what really tipped me toward making this transaction rather than just rolling out to the March 2012 $32 strike.

S&P has raised its 12 month target to $36 from $34 for KFT and continues its Hold rating on it.  MarketEdge has increased its price opinion to 34.87 from 31.67 for KFT and now has a Neutral rating on it.  The 17 Yahoo analysts have an average 12 month price target of $39.12 and a recommendation of 1.9 where 5.0 is a Strong Buy and 1.0 is a Strong Sell.

It helps that I am in the money on KFT and am really okay if it gets called away at this strike.  However, as I suggested above, I will probably try to continue to roll the stock out so as to maintain ownership and continue collecting the dividends and option premiums.

I originally acquired KFT as a spin off from MO back in 2007.  Since 2009 I have received $638 in total dividends or $2.90 per share in total.  My records do not currently reflect any dividends I may have received prior to 2009.  The dividends are a little more than a 4% annualized yield on my option reduced basis.  Couple the dividends with the option premiums I collect and I am happy to continue owning KFT.

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