Friday, November 1, 2013

November Long-term Trade: T

Update 12/4/2013: T closed the month below its 12-month moving average and I've closed the position. It turned out to be as short as any other position I open: 33 days, during which time it lost 5.1%, or 56.4% annualized.

Bottom line: Historically, the moving average cross worked, but it needs something to guard against slow-motion whipsaws. Back to the drawing board.

I've opened a position under the long-term trading plan I posted on Thursday. See "Long-term Trading Rules".

The stock is AT&T Inc. (T), which closed above its average price for the last 12 months after closing below the average for five months.

I have three goals with this strategy:
  1. Earn capital gains through the rise in the share price.
  2. Hold each position long enough to qualify for taxation at the long-term capital gains rate, i.e., one year. Long-term gains have a maximum rate in 2013 of 20%; short-term gains, of 39.6%. The U.S. median household income is in the 25% tax bracket, and that's the rate imposed on short-term capital gains, while long-term gains in that bracket are taxed at 15%. So that's a 10% gain on the trade right out of the box.
  3. Put unproductive income to work. My short-term strategies, largely based on options spreads or less liquid shares, don't produce enough trading opportunities to engage all of my trading funds. My long-term strategy, based on the most liquid shares on the market, provides a means to trade those funds.
  4. Collect dividends. My short-term options trades aren't eligible for dividends, and I'm rarely in a short-term shares position long enough to collect.
  5. Earn income on the position through the sale of covered calls. This can conflict with the second goal, since a covered-call position can for sale of the shares if the price rises above the call strike price.
T is selling at about $36 a share, so a 100-share unit is $3,600. 

The quarterly dividend yield, annualized at the present price and rate, is 4.95%, with the stock next going ex-dividend sometime in January. 

The most recent buy signal under this strategy, as I mentioned, lasted five months. It produced capital gains of only 0.68% in the period.

The entry price was $30.16. There were two dividends of 45 cents apiece in that period, so the dividend yield was 2.98%.

If I had sold covered calls, I would have earned, conservatively, about $2.50 per share, for an 8.29% gain.

Add it up, the position would have yielded 3.66% without covered calls or 11.95% with covered calls. Annualized, that's 8.78% without covered calls or 28.68% with covered calls.

The position didn't last long enough to qualify for long-term capital gains, which would have added 10% to the yield.

I selected potential trades from 125 highly liquid stocks rated neutral or bullish by Zacks. Aside from T, three others broke above their 12-month moving average: KO, TSM and ABT. I chose T because it paid the highest dividend.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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