DGI Adventure – 01-06-2016 Payday: Covered Call Sale – Barrick Gold Corporation (ABX)

I got paid today. I sold one covered call contract (ABX160219C00009000)
for $0.23/share. The sale netted $15.30 after $7.70 trade commission. The shares
will be at risk for 44 days. The call premium represents 1.7% of the assignment
price or a 14% annualized gain. ABX shouldn’t go ex-dividend until after the
expiration date, so there is no boost to dividend income, but also less
likelihood for assignment. Woo hoo!

Capital One Investing may be a “discount” brokerage, but the
options commissions are pretty damn steep, which is why I need big swings like
today to make it even close to worth it. It still probably isn’t, but I’m also
sick of staring at these crappy gold mining stocks with big unrealized capital
losses while they generate next to nothing in income.

Something is better than nothing, and if the shares get
called away they get called away. I also put in a limit order at the ask end of the
spread to sell six AUY160219C00002500
contracts but it didn’t execute. That one would be more like a 17% annualized
gain. We’ll see what happens tomorrow.

Last month I promised I would someday tell
the story of how I came to own the ABX and AUY shares that are in my portfolio. Today I will
tell the tale of ABX. AUY will come some other day.

It all started back in 2014…

The company I work for is pretty heavily involved in the
mining industry. We do a lot of other stuff too, but about 70% of our revenues
come from the mining business. Of that revenue, Barrick Gold is probably our
biggest customer. I’m not specifically involved in that division of the company,
I’m employed by the other 30% of what the company does…and very happy about
that too. Times are tough in the mining business.

I wasn’t delusional that I had some special kind of industry
insight into Barrick’s prospects. I just had a familiarity with them, and felt
like it’s probably one of the better run gold mining companies out there. I had
also decided that I wanted to invest in a gold company rather than just gold,
because at least gold companies pay dividends. The share price hit 10+ year
lows in March of 2014, and I figured how much lower could it possibly go?

Here’s a helpful hint in case you ever forget the answer to
that question: ZERO. It could always go
to zero.

I hadn’t exactly forgotten the answer to that
question; I knew I was taking a risk. But I didn’t have any idea what the stock
was worth either. I didn’t look at their financials. I knew they paid a
dividend but I didn’t think about if it was a reasonable percentage of their
cash flow or not. I didn’t know what their debt situation was. I did absolutely
no quantitative research. I said “I know who this company is. I feel like they’re
not a horrible company. Holy cow that stock is down a lot! It must be cheap!” I
wasn’t even trying to “catch a falling knife” it had been basically flat for
the last year or so: 


ABX weekly chart 2011 – 2014 – from Google Finance.

I decided the bottom was in. Or it was at least close. I
kinda had this feeling at the time that gold was ready to make a comeback in
2015. So I bought 126 shares at $18.11/share on March 31, 2014. I let the
dividends automatically reinvest for two quarters then started collecting the
income as cash from the 126.64 shares I owned.

Well I was wrong about gold making a comeback in
2015, and I was wrong about the bottom for ABX being close: 


ABX weekly chart 2014 – present – from Google Finance.

In round numbers the investment has lost about $1,300 in
imaginary cost basis bucks. Until today it had paid
a measly total of $26.59 in actual cash income. But no more! I’m going to start
getting some freaking money back from this lemon.

Yes, the strike price is way below my cost basis, but I’ve
come to grips with the fact that this is a loser investment.  I may like Barrick Gold as a client of the
company I work for, but it doesn’t mean it was a good stock to buy at
$18.00/share. (Chevron is a big customer too but I’m
not buying anymore shares
right now.)

I should have done more research before I bought ABX. I didn’t.
I’m ready to accept the loss as tuition for a lesson well learned. But
accepting a loss is one thing. I’m not just going to sell my shares to Mr.

I will sell the shares for $9.00/share if they get assigned
by whoever bought this option contract. They probably won’t unless the price is
well over $9.23 (strike price + premium paid), which represents a 16% gain from
today’s closing price. Oh yeah… and the clock is ticking.

Meanwhile I have $15.30 in my account that I didn’t have
yesterday. Woo hoo!

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