Tuesday, September 20, 2016

Options Update: September 2016

Last month, I wrote my first article in a new monthly series about options trades in DivGro. These articles will follow option expiration Friday, usually the third Friday of the contract month.

As I mentioned last month, readers not interested in options can just skip these articles.

Personally, I'm interested in boosting my dividend income with options. By selling calls against stocks I own (covered calls) or selling puts on stocks I'd like to own at a preferred price (naked or cash-covered puts), I can collect option premiums and so boost my dividend income.

For me, this series is as much a learning exercise as it is a way of tracking my options trades. Please feel free to ask questions (or to challenge my thinking) so that we can all learn from this adventure!

None of my open options expired in September, so I'll report my new trades and the status of open option positions. I'll also give an update on stocks available for options trades.

New Covered Calls


I executed 6 covered call trades:

#005 : My first covered call trade is on shares of The Walt Disney Company (DIS):


2016-08-26: Sold to Open 1 Contract of Option DIS NOV 18 2016 100.00 C

I own 127 shares of DIS, but only 100 shares are eligible for options trading. For being willing to sell 100 DIS shares for $100 per share on or before 18 November, I'm earning an instant option yield of 1.18%: 

Open date
: 2016-08-26  
Expiration date
: 2016-11-18  Number of days in trade:
84
Cost basis
: $96.08 per share  
Strike price
: $100.00 per share  
Number of contracts
: 1  Number of shares:100
Call premium
: $1.21 per share  
Option income
:
$ 121.00


  
Brokerage commission
:$     7.70
Net premium
: $1.133 per share  
Net option income
:$ 113.30
Instant option yield
: 1.18%  
Annualized option yield
:5.13%

Over the time in trade of 84 days, the annualized option yield is 5.13%. In comparison, DIS pays a semi-annual dividend of 71¢ per share and yields 1.53% at $92.71 per share.

#006 : The next covered call trade is on shares of Ford Motor Company (F):

2016-08-29: Sold to Open 6 Contracts of Option F NOV 18 2016 13.00 C

For being willing to sell 600 F shares for $13 per share on or before 18 November, I'm earning an instant option yield of 2.02%: 

Open date
: 2016-08-29  
Expiration date
: 2016-11-18  Number of days in trade:
81
Cost basis
: $12.94 per share  
Strike price
: $13.00 per share  
Number of contracts
: 1  Number of shares:600
Call premium
: $0.28 per share  
Option income
:
$ 168.00


  
Brokerage commission
:$   11.21
Net premium
: $0.261 per share  
Net option income
:$ 156.79
Instant option yield
: 2.02%  
Annualized option yield
:9.11%

The annualized option yield of 9.11% compares very favorably to F's current dividend yield of 4.95%. 

#007 : Last month, I bought 300 shares of Cisco Systems, Inc (CSCO) and now I'm selling calls on them:

2016-08-30: Sold to Open 3 Contracts of Option CSCO OCT 21 2016 31.00 C
 
I'm willing to sell my 300 CSCO shares for $31 per share on or before 21 October. In the process I'm earning an instant option yield of 3.12%: 

Open date
: 2016-08-30  
Expiration date
: 2016-10-21  Number of days in trade:
52
Cost basis
: $30.40 per share  
Strike price
: $31.00 per share  
Number of contracts
: 3  Number of shares:300
Call premium
: $0.98 per share  
Option income
:
$ 294.00


  
Brokerage commission
:$     9.10
Net premium
: $0.950 per share  
Net option income
:$ 284.90
Instant option yield
: 3.12%  
Annualized option yield
:21.94%

CSCO pays quarterly dividends of 26¢ per share, yielding 3.35%. This trade delivers an annualized option yield of 21.94%, more than 6.5 times the dividend yield! 

#009 : I sold a call on Dominion Resources, Inc (D). Here are the details:

2016-09-07: Sold to Open 1 Contract of Option D JAN 20 2017 75.00 C
 
I'm willing to sell 100 shares of D for $75 per share on or before 20 January 2017. In the process I'm earning an instant option yield of 4.11%: 

Open date
: 2016-09-07  
Expiration date
: 2017-01-20  Number of days in trade:
135
Cost basis
: $72.90 per share  
Strike price
: $75.00 per share  
Number of contracts
: 1  Number of shares:100
Call premium
: $3.07 per share  
Option income
:
$ 307.00


  
Brokerage commission
:$     7.70
Net premium
: $2.993 per share  
Net option income
:$ 299.30
Instant option yield
: 4.11%  
Annualized option yield
:11.11%

D's dividend yield is 3.69%, so this trade's annualized option yield of 11.11% is about 3 times the dividend yield!

#010 : This covered call is on shares of Kimberly-Clark Corporation (KMB):

2016-09-07: Sold to Open 1 Contract of Option KMB OCT 21 2016 130.00 C
 
I'm willing to sell 100 shares of KMB for $130 per share on or before 21 October. In the process I'm earning an instant option yield of 0.94%: 

Open date
:
 2016-09-07
  
Expiration date
:
 2016-10-21
  
Number of days in trade
:
44
Cost basis
:
 $118.88 per share
  
Strike price
:
 $130.00 per share
  

Number of contracts
:
 1
  
Number of shares
:
100
Call premium
:
 $1.20 per share
  
Option income
:
$ 120.00


  
Brokerage commission
:
$     7.70
Net premium
:
 $0.950 per share
  
Net option income
:
$ 112.30
Instant option yield
:
 0.94%
  
Annualized option yield
:
7.84%

KMB yields 3.01%. In comparison, this trade delivers an annualized option yield of 7.84%, about 2.6 times the current dividend yield!

#011 : This last covered call trade is on Reynolds American, Inc (RAI). Here are the details:

2016-09-07: Sold to Open 1 Contract of Option RAI FEB 17 2017 52.50 C
 
I'm willing to sell 100 shares of RAI for $52.50 per share on or before 17 February 2017. In the process I'm earning an instant option yield of 4.11%: 

Open date
:
 2016-09-07
  
Expiration date
:
 2017-02-17
  
Number of days in trade
:
163
Cost basis
:
 $32.51 per share
  
Strike price
:
 $52.50 per share
  

Number of contracts
:
 1
  
Number of shares
:
100
Call premium
:
 $1.32 per share
  
Option income
:
$ 132.00


  
Brokerage commission
:
$     7.70
Net premium
:
 $1.243 per share
  
Net option income
:
$ 124.30
Instant option yield
:
 3.82%
  
Annualized option yield
:
8.57%

RAI's quarterly dividend is 46¢ per share, so the stock yields 3.88%. With this trade, I'm earning an annualized option yield of 8.57%, or about 2.2 times the dividend yield!


New Puts


The cool thing about selling put options is that you set the price you're willing to pay! If the share price never drops to the strike price, nothing happens except that you get to keep the option premium! In effect, you're getting paid to while waiting for the share price to drop!

I sold 3 put options since August's report:

#008 : First I sold puts on Intel Corporation (INTC). Here is the trade summary:

2016-08-30: Sold to Open 3 Contracts of Option INTC OCT 21 2016 35.00 P
 
I'm willing to buy 300 shares of INTC for $35 per share on or before 21 October. On the date of my trade, INTC closed at $35.70 per share, yielding 2.91%.

Open date
: 2016-08-30  
Expiration date
: 2016-10-21  
Number of days in trade
:
73
Strike price
: $35.00 per share  


Number of contracts
: 3  Number of shares:300
Put premium
: $0.86 per share  
Option income
:
$ 258.00


  
Brokerage commission
:$     9.10
Net premium
: $0.830 per share  Net option income:$ 248.90
Instant option yield
: 2.37%  
Annualized option yield
11.86%
Share price at execution
: $35.70 per share  
Cost basis if exercised
:$   34.23
Discount at strike price
: 1.96%  
Discount if exercised
4.13%


If this put expires worthless, I'll earn an annualized option yield of 11.86% relative to the share price at execution. That's about 4 times INTC's dividend yield!

#012 : I also sold a put on Johnson & Johnson (JNJ):

2016-09-08: Sold to Open 1 Contract of Option JNJ NOV 18 2016 115.00 P
 
I'm willing to buy 100 shares of JNJ for $115 per share on or before 18 November. On the date of my trade, JNJ closed at $119.47 per share, yielding 2.68%.

Open date
: 2016-09-08  
Expiration date
: 2016-11-18  
Number of days in trade
:
71
Strike price
: $115.00 per share  


Number of contracts
: 1  Number of shares:100
Put premium
: $1.43 per share  
Option income
:
$ 143.00


  
Brokerage commission
:$     7.70
Net premium
: $1.353 per share  Net option income:$ 135.30
Instant option yield
: 1.13%  
Annualized option yield
5.81%
Share price at execution
: $119.47 per share  
Cost basis if exercised
:$ 113.82
Discount at strike price
: 3.74%  
Discount if exercised
4.73%

If this put expires worthless, I'll earn an annualized option yield of 5.81% relative to the share price at execution. That's double JNJ's dividend yield!
#013 : I also sold 2 puts on Pfizer Inc (PFE):

2016-09-09: Sold to Open 2 Contracts of Option PFE OCT 28 2016 34.00 P

I'm willing to buy 200 shares of PFE for $34 per share on or before 28 October. On the date of my trade, PFE closed at $34.10 per share, yielding 3.52%.


Open date
: 2016-09-08  
Expiration date
: 2016-10-28  
Number of days in trade
:
49
Strike price
: $34.00 per share  


Number of contracts
: 2  Number of shares:200
Put premium
: $0.64 per share  
Option income
:
$ 128.00


  
Brokerage commission
:$     8.40
Net premium
: $0.598 per share  Net option income:$ 119.60
Instant option yield
: 1.75%  
Annualized option yield
13.07%
Share price at execution
: $34.10 per share  
Cost basis if exercised
:$ 33.49
Discount at strike price
: 0.29%  
Discount if exercised
1.80%

If this put expires worthless, I'll earn an annualized option yield of 13.07% relative to the share price at execution. That's about 3.71 times PFE's dividend yield!

Available Stocks For Options Trades


Each option controls 100 shares, so I need to own at least 100 shares of a stock to make it eligible for covered call trading. Here are the stocks in my DivGro portfolio that are available for options trading:

Ticker
Company
#Shares
Cost
Basis
Recent
Price
Call
ADV
Put
ADV
AbbVie, Inc
100
$62.67
$64.72
1,467
1,529
Gilead Sciences, Inc
100
$94.49
$80.08
7,623
4,439
The Coca-Cola Company
100
$40.60
$43.67
1,473
892
Pfizer Inc
100
$25.07
$34.77
4,479
2,488

The last two columns show the average number of call and put options executed in 20 consecutive days, in August 2016. I'm including it here to show how widely options trading volume varies by stock. 

Open Options Positions


Below is a summary the 10 open options positions in my portfolio. Quoted prices are closing prices on 19 September. 

Three positions are in the red. PFE closed at $33.65 per share, so my PFE puts are in the money. This means that I may have to buy 200 shares of PFE for $34.00 per share on or before 28 October. Similarly, with D's closing price of $75.90, my D calls are in the money. This means I may have to sell 100 shares of D for $75.00 per share on or before 20 January 2017.

My JNJ put is still out of the money, as JNJ closed at $117.66 per share on 19 September. However, JNJ is trending lower and we'll have to wait to see what happens in the next 2 months through 18 November, the expiration date.

Options Income Tally


Here is a running tally of the total amount received from options trades, as well as the options premiums secured due to options that expired:

#013: 2xPFE OCT 28 2016 34.00 P ::
$119.60
(total: $2,557.13 • secured: $402.79)
#012: 1xJNJ NOV 18 2016 115.00 P ::
$135.30
(total: $2,437.53 • secured: $402.79)
#011: 1xRAI FEB 17 2017 52.50 C ::
$124.30
(total: $2,302.23 • secured: $402.79)
#010: 1xKMB OCT 21 2016 130.0 C ::
$112.30
(total: $2,177.93 • secured: $402.79)
#009: 1xD JAN 20 2017 75.00 C ::
$299.30
(total: $2,065.63 • secured: $402.79)
#008: 3xINTC OCT 21 2016 35.00 P ::
$248.90
(total: $1,766.33 • secured: $402.79)
#007: 3xCSCO OCT 21 2016 31.00 C ::
$284.90
(total: $1,517.43 • secured: $402.79)
#006: 5xF NOV 18 2016 13.00 C ::
$156.79
(total: $1.232.53 • secured: $402.79)
#005: 1xDIS NOV 18 2016 100.0 C ::
$113.30
(total: $1,075.74 • secured: $402.79)
#004: 1xCSCO AUG 19 2016 31.00 P ::
$197.90
(total: $  962.44 • secured: $402.79)
#003: 1xDIS AUG 19 2016 98.50 C ::
$87.30
(total: $  764.54 • secured: $402.79)
#002: 1xTGT JAN 20 2017 65.00 P ::
$361.75
(total: $  677.24 • secured: $315.49)
#001: 6xF AUG 19 2016 13.00 C  ::
$315.49
(total: $  315.49 • secured: $315.49)

key: option income secured • trade still open • put option exercised

Thanks for reading! Please let me know if you found this article informative. Also let me know if you're interested in learning more about options, or just want to see how my goal of boosting dividend income with options income goes.  

16 comments :

  1. Ciao DG,
    Very detailed report here, my best compliment, I should copy your system as it makes it very clear what you are doing. Do you tend to close a trade before expiration or alway wait for the contract to expire worthless?
    Ciao ciao
    Stal

    ReplyDelete
    Replies
    1. Thanks, stalflare -- please copy away!

      In my view, in-the-money options that will be exercised are candidates for rolling over or closing early, since Scottrade charges $17 for exercised options!

      So far, I've just let options go through expiration without attempting to close them. I'm still working on spreadsheets that would allow me to find opportunities where buying to close would make sense...

      Delete
  2. Interesting following you, as I do a lot of the same, but I also do a lot of put writing solely for income purposes. I did notice, however, that with so many small transactions the Scottrade commissions are huge. I use Interactive Brokers, and my options trades are generally only a buck or two, and IB never charges a fee for exercised options, which can really add up if Scottrade is charging you $17 for essentially doing nothing upon option expiration other than letting the option work.

    ReplyDelete
    Replies
    1. Hi Raleigh1208 -- thanks for your comment!

      I'm somewhat annoyed with Scottrade for charging that $17. I think I'll call them about it.

      I have a small IB account, which I've used so far only for some speculative options trades. The one thing that IB lacks is providing data electronically at tax time. They have great report generating features, but I want files I can import into Turbo Tax. That's why I'm hesitating to transfer my accounts to IB.

      Delete
    2. I understand the need for the reporting. I use Gainskeeper for this purpose. It's not free, but I feel it's reasonable. I import electronically my trades from IB monthly into Gainskeeper and then at tax time import electronically from Gainskeeper into my tax program. I use TaxAct Online for this purpose. Thanks again for sharing all your information; very informative and helpful.

      Delete
    3. Thanks for the information. If I decide to go to IB, I'll definitely look into Gainskeeper!

      Cheers
      FerdiS

      Delete
  3. Thanks for putting together the detailed information. I like writing puts as a strategy to generate income and enter a position you want at a more advantageous price. and may start doing this However, it does make me a little nervous around the Fed meeting (even though I am betting they won't raise rates), and the election raising specter of a potential bigger correction. I'm being wimpy and sitting on cash for now.

    ReplyDelete
    Replies
    1. Hi Greg -- I've slowed down myself to see what the Fed will do. Nothing wrong with sitting on cash waiting to see what happens! When the decision comes, you'll be in a position to move quickly, or not (depending on what happens!).

      Take care and happy investing!

      Delete
  4. Wow, very impressive shortterm return. I'd like to learn more, but I don't think I'd ever get into the option trading game. Do continue to share. Thanks!

    ReplyDelete
    Replies
    1. Thanks, vivianne -- most of the income is not yet "secured". We'll see how it goes, though, so far so good. I'll continue to give options updates, but probably only monthly.

      Delete
  5. Looking good Ferdi. Lots of options going and I hope to boost mine up a bit some too. I need to transfer cash over to my other brokerage account though because commissions are a lot cheaper. Any calls in particular on KO look good? I haven't looked at it myself in a while so I guess it's about time to look at it again. I should have sold one when the share price was up around $45-46.

    ReplyDelete
    Replies
    1. Thanks, PiP -- I haven't looked at KO in detail yet. I wanted to wait until after the Fed's meeting to see what they do. I'm guessing no interest raises, but you never know. I'm also considering moving my portfolio to another brokerage with better commissions, since those at Scottrade are not favorable. Perhaps IB as suggested above...

      Delete
  6. Nicely done. I enjoy seeing the spread of options love in the blogosphere.

    ReplyDelete
    Replies
    1. Thanks, Financial Velociraptor -- I'm just a starter, so it would be really great to see more blog posts about options trading, especially within the context of dividend growth investing and boosting dividends!

      Delete
  7. You're doing great especially considering that you're just starting out with options. Keep up the good work Ferdi. Options are fun to sell. You won't win them all, but if you can win 75% or more you'll be very profitable. Best of luck to you. I haven't officially launched the site yet, but I've started a new site dedicated to my options trades, http://www.optionshunting.com covers all of my trades.

    ReplyDelete
    Replies
    1. Thanks, Investment Hunting -- we'll see how it goes. I'd be happy with a 75% winning rate, although its not clear what "winning" really means as far as selling options are concerned. If your stock is called away, does that mean not winning? And if you're assigned shares at your preferred price after selling puts, does that mean not winning?

      I've created an options-specific blog too, but never launched it. I decided to keep everything under the DivGro umbrella, since I'm selling options only on my DivGro stocks anyway.

      All the best with the new site!

      Delete

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