Today, 5/6/11, I sold 2 Oct11 ALSK 10 Puts for a net deposit of $278.47 in an IRA account.  My basis for these ALSK shares would be about $8.61 plus transaction costs if they are assigned to me.  This transaction represent a simple return of about 13.84% and an annualized return of about 29.90%.

I already own 600 shares in this account with Oct11 Covered Calls on them at the $10 strike price.  My thinking for these new Puts is that if ALSK is above $10 in October I will roll out the Covered Calls and the Puts will expire worthless.  If ALSK is below $10 in October I will be assigned 200 new shares, average down my basis on the total holding and sell new Covered Calls on them.

S&P has a 12 month price target of 8.50, up from 7.50 last September, and continues its sell recommendation while MarketEdge has a price opinion of 9.67, down from a previous 10.33, and now has an Avoid recommendation, down from an earlier Long recommendation.  MarketEdge has a better track record predicting ALSK movements than S&P.  The YHOO analysts continue with a 12 month price target of 10.00 and a rating of 3.0 where 1.0 is a strong sell and 5.0 is a string buy.  ALSK was up in the mid-eleven’s last December and then fell to the mid-nines in January, climbing back to close to $11 and has again fallen to the low 9′s.  I would really like it to close below $10 (but not too far  below) again so my options can expire worthless and I can then sell some Calls at the 12.50 strike without making a net debit transaction.

On a positive note, ALSK pays a good dividend at about 7.21% on my basis at the last payout.  The dividend is actually about 9.48% on the current market price.  That dividend is possibly a red flag about the company but I am going to continue to hold it for its dividends and the occasional option premiums I collect.  ALSK is certainly not as strong as the major national competitors and has some greater competitive challenges, but I have seen no compelling reason to dump ALSK at this time.  My thoughts have been reinforced by a couple of articles I have read recently regarding the safety of the ALSK dividend and its general financial strength.  ALSK also reported a good quarter recently beating estimates by .01 on revenue.

Many of the stocks that I own and write Covered Calls upon also pay dividends.  Dividends occur on a regular basis and add significantly to my annual investment income.  Year to date I have received a total of $3,123.51 in dividends in my various accounts for 2011.  My year to date average monthly dividends received is currently $780.88.  The year-to-date dividends currently represent about 30.15% of my average monthly investment cash flow and about 2.44% return on my current basis value.

My YTD dividends are up by $176.60 on a monthly average from last year.  That represents a 29.23% increase to date year over year.  I attribute the increased dividends to a few companies raising their dividends and to my purchasing additional dividend paying stocks.  During April, I received notice of the following dividends paid in various accounts for a total of $1,178.35. 

Please notice that PGF is an ETF and pays dividends monthly.  The annualized dividend yield for PGF is based upon the simple and false assumption that it will pay the same dividend each month for the next 12 months.  The actual annualized dividend yield may be more or less than illustrated here.

ANH, MFA and NLY are mortgage REITs that make their money on interest rate spreads.  Their current high annualized dividend yields on my basis are probably at risk when the Fed begins to raise its discount rates.  As of this writing, my current basis, excluding dividends, for many of these stocks is now below their current market price which increases my yield on those stocks.  I attempt to sell Covered Calls on these stocks to reduce my basis which, to some extent, will help mitigate any possible future reduction in their dividend payouts.  I find myself just holding some of these stocks sometimes while I wait for their price to rise to a point that I am comfortable selling new Covered Calls.  If I do not sell new Covered Calls I am content to capture the nice dividend for an indefinite period.  Notably, PGF, NLY, ANH and MFA fall into this category.

I use my basis per share to determine the simple and annualized percentage return because I feel that it gives me a better representation of the value of the dividends as they relate to my portfolio.  My basis may be above or below the market price which causes my return to be lower or higher than published yields for a stock.  I calculate my basis per share as my acquisition price less any option premiums received on those shares.  I do not use dividends to reduce my basis.

Today, 3/24/11, I bought 200 additional shares of ALSK, and rolled out my ALSK Apr11 10 Covered Calls in two IRA accounts.  I purchased the new ALSK shares at 10.83 and 10.81.  I then bought to close my existing 8 ALSK Apr11 10 Calls and sold 10 ALSK Oct11 10 Covered Calls for a net deposit of $406.25 in two IRA accounts, six in one and four in the other.  My basis for these ALSK shares is now 11.92 and 12.27 respectively, excluding dividends received.  These transactions represent simple return of about 2.89% and an annualized return of about 4.97% for the six contracts a simple return of about 4.07% and an annualized return of about 7% on the four contracts.  The latter represents a higher return because I was about to purchase the additional shares for a couple of cents less and sell the new Calls for ten cents more.  Those pennies make a difference.

This sounds a little more complicated than it really was.  Essentially, I reduced my average basis with the new shares and gathered some additional option premium by having additional shares on which to sell Covered Calls.  I would have preferred to sell new Covered Calls at the next higher strike of 12.50, but was not able to do so for a net credit.  I also would have liked to wait closer to April expiration before rolling these Calls out.  However, ALSK goes ex-dividend next week and I wanted to reduce the risk that somebody would call them away just to capture the dividends.  I also wanted to increase my dividend income.  The dividend continues to be 21.5 cents per share as it has been for some time.

I suspect that a reason that ALSK is even above $10 is because of the approaching ex-dividend date and that it will probably fall back a little after that.  S&P has a 12 month price target of 8.50, up from 7.50 when I last checked last September, and continues its sell recommendation while MarketEdge has a price opinion of 10.33, up from 9.20 last September, and continues its Long recommendation.  MarketEdge has a better track record predicting ALSK movements than S&P.  The YHOO analysts have a 12 month price target of 10.00 and a rating of 3.0 where 1.0 is a strong sell and 5.0 is a string buy.  ALSK was up in the mid-eleven’s last December and then fell to the mid-nines in January, climbing since then to its present 10.73 closing price today.  I would really like it to close below $10 again so my options can expire worthless and I can then sell some Calls at the 12.50 strike without making a net debit transaction.

On a positive note, ALSK pays a good dividend at about 6.85% and 6.41% on my prior basis.  My next annualized return will be a little higher because of my reduced basis.  The dividend is actually about 8.01% on the current market price.  That dividend is possibly a red flag about the company but I am going to continue to hold it for its dividends and the occasional option premiums I collect.  ALSK is certainly not as strong as the major national competitors and has some greater competitive challenges, but I have seen no compelling reason to dump ALSK at this time.  My thoughts have been reinforced by a couple of articles I have read recently regarding the safety of the ALSK dividend and it general financial strength.