Monday, November 28, 2016

Options Update: November 2016

The main goal of DivGro is to generate a reliable and growing dividend income stream. I'm fully committed to investing in quality, undervalued dividend growth stocks.

This year, I've added an interesting sideline activity to DivGro, namely using options to boost dividend income. By selling calls against stocks I own or selling puts on stocks I'd like to own, I can collect options income and so boost DivGro's dividend income.

I compile my monthly options update articles shortly after options expiration Friday. That way, I can report on options that expired and those that got exercised. Usually, these articles will also report new options trades and provide a running tally of options income to date.

I split last month's update into 2 parts because of the number of trades I needed to cover. Part 1 covered ten new options trades and a running tally of options income to date, while Part 2 presented assignments, expired and open positions, and uncovered positions.

Although I have nine new options trades to cover this month, I'm not splitting the update into two parts again, so this article will be somewhat long.

Assignments


When an option holder exercises an option, it is said to be assigned. There were no assignments since October's update.

Expired Positions


This month, several open options expired and my obligations to either buy or sell shares "expired" as well. As a result, I secured a total of $814.59 in options income:

#023: 2xWMT Nov 18 2016 67.50 P ::$ 247.60
#020: 2xWFC Nov 18 2016 44.00 P ::$ 161.60
#012: 1xJNJ Nov 18 2017 115.00 P ::$ 135.30
#006: 6xF Nov 18 2016 13.00 C ::$ 156.79
#005: 1xDIS Nov 18 2016 100.00 C ::$ 113.30

Because the calls expired, I can choose to sell new covered calls on my Ford Motor Company (F) and The Walt Disney Company (DIS) shares. 

New Covered Calls


Selling covered calls is a way to collect extra income on stocks you already own. Since my last update, I executed eight covered call trades:

#024 : 2016-11-25: Sold to Open 6 Contracts of Option F Mar 17 2017 13.00 C

I own 600 shares of F at a cost basis of $12.94 per share. I'm willing to sell these shares for $13.00 on or before 17 March 2017:

Open Date :  2016-11-25
Expiration Date :  2017-03-17    Number of Days in Trade : 112
Cost Basis :  $12.94 per shareGain at Strike Price : 0.46%
Strike Price :  $13.00 per share
Number of Contracts : 6Number of Shares :600
Call Premium :  $0.25 per shareOptions Income : $150.00
Commission : $11.20
Net Premium :  $0.231 per shareNet Options Income : $138.79
Options Yield :  1.79%Annualized Options Yield : 5.83%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $12.74Gain if Exercised : 2.06%

This covered call yields 1.79%, or 5.83% on an annualized basis. The yield on cost of my F position is 4.64%, so I'm boosting dividend income by a factor of 1.26. If the options are exercised, I'll sell 600 shares of F at a reduced cost basis of $12.74 per share, for capital gains of 2.06%.



#026 : 2016-11-25: Sold to Open 1 Contract of Option QCOM Feb 17 2017 70.00 C

I own 200 shares of Qualcomm Inc (QCOM) at a cost basis of $62.22 per share. I'm willing to sell 100 of these shares for $70.00 on or before 17 February:

Open Date :  2016-11-25
Expiration Date :  2017-02-17    Number of Days in Trade : 84
Cost Basis :  $62.22 per shareGain at Strike Price : 12.50%
Strike Price :  $70.00 per share
Number of Contracts : 1Number of Shares :100
Call Premium :  $2.00 per shareOptions Income : $200.00
Commission : $7.70
Net Premium :  $1.923 per shareNet Options Income : $192.30
Options Yield :  3.09%Annualized Options Yield : 13.44%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $60.47Gain if Exercised : 15.77%

This covered call yields 3.09%, or 13.44% on an annualized basis. The yield on cost of my QCOM position is 3.41%, so I'm boosting dividend income by a factor of 3.94. If the option is exercised, I'll sell 100 shares of QCOM at a reduced cost basis of $60.47 per share, for capital gains of 15.77%.



#027 : 2016-11-25: Sold to Open 1 Contract of Option QCOM Feb 17 2017 70.00 C

This trade is essentially the same as the previous trade, but I got a slightly better premium for it. I'm willing to sell 100 of my QCOM shares for $70.00 on or before 17 February:

Open Date :  2016-11-25
Expiration Date :  2017-02-17    Number of Days in Trade : 84
Cost Basis :  $62.22 per shareGain at Strike Price : 12.50%
Strike Price :  $70.00 per share
Number of Contracts : 1Number of Shares :100
Call Premium :  $2.02 per shareOptions Income : $202.00
Commission : $7.70
Net Premium :  $1.943 per shareNet Options Income : $194.30
Options Yield :  3.12%Annualized Options Yield : 13.58%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $60.45Gain if Exercised : 15.80%

This covered call yields 3.12%, or 13.58% on an annualized basis. The yield on cost of my QCOM position is 3.41%, so I'm boosting dividend income by a factor of 3.98. If the option is exercised, I'll sell 100 shares of QCOM at a reduced cost basis of $60.45 per share, for capital gains of 15.80%.



#028 : 2016-11-25: Sold to Open 1 Contract of Option DIS Jun 16 2017 105.00 C

I own 100 shares of DIS at a cost basis of $97.56 per share. I'm willing to sell these shares for $105.00 on or before 16 June:

Open Date :  2016-11-25
Expiration Date :  2017-06-16    Number of Days in Trade : 203
Cost Basis :  $97.56 per shareGain at Strike Price : 7.63%
Strike Price :  $105.00 per share
Number of Contracts : 1Number of Shares :100
Call Premium :  $2.70 per shareOptions Income : $270.00
Commission : $7.70
Net Premium :  $2.623 per shareNet Options Income : $262.30
Options Yield :  2.69%Annualized Options Yield : 4.84%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $95.11Gain if Exercised : 10.40%

This covered call yields 2.69%, or 4.84% on an annualized basis. The yield on cost of my DIS position is 1.46%, so I'm boosting dividend income by a factor of 3.32. If the option is exercised, I'll sell 100 shares of DIS at a reduced cost basis of $95.11 per share, for capital gains of 10.40%.



#029 : 2016-11-25: Sold to Open 2 Contracts of Option CSCO Apr 21 2017 32.00 C

I own 200 shares of Cisco Systems, Inc (CSCO) at a cost basis of $30.39 per share. I'm willing to sell these shares for $32.00 on or before 21 April:

Open Date :  2016-11-25
Expiration Date :  2017-04-21    Number of Days in Trade : 147
Cost Basis :  $30.39 per shareGain at Strike Price : 5.30%
Strike Price :  $32.00 per share
Number of Contracts : 2Number of Shares :200
Call Premium :  $0.52 per shareOptions Income : $104.00
Commission : $8.40
Net Premium :  $0.478 per shareNet Options Income : $95.60
Options Yield :  1.57%Annualized Options Yield : 3.91%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $30.00Gain if Exercised : 6.68%

This covered call yields 1.57%, or 3.91% on an annualized basis. The yield on cost of my CSCO position is 3.42%, so I'm boosting dividend income by a factor of 1.14. If the options are exercised, I'll sell 200 shares of CSCO at a reduced cost basis of $30.00 per share, for capital gains of 6.68%.



#030 : 2016-11-25: Sold to Open 1 Contract of Option ABBV Feb 17 2017 62.50 C

I own 100 shares of AbbVie Inc (ABBV) at a cost basis of $62.67 per share. I'm willing to sell these shares for $62.50 on or before 17 February:

Open Date :  2016-11-25
Expiration Date :  2017-02-17    Number of Days in Trade : 84
Cost Basis :  $62.67 per shareGain at Strike Price : -0.27%
Strike Price :  $62.50 per share
Number of Contracts : 1Number of Shares :100
Call Premium :  $1.61 per shareOptions Income : $161.00
Commission : $7.70
Net Premium :  $1.533 per shareNet Options Income : $153.30
Options Yield :  2.45%Annualized Options Yield : 10.64%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $61.31Gain if Exercised : 1.95%

This covered call yields 2.45%, or 10.64% on an annualized basis. The yield on cost of my ABBV position is 4.08%, so I'm boosting dividend income by a factor of 2.60. If the option is exercised, I'll sell 100 shares of ABBV at a reduced cost basis of $61.31 per share, for capital gains of 1.95%.



#031 : 2016-11-25: Sold to Open 2 Contracts of Option PFE Mar 17 2017 33.00 C

I own 200 shares of Pfizer Inc (PFE) at a cost basis of $30.68 per share. I'm willing to sell these shares for $33.00 on or before 17 March:

Open Date :  2016-11-25
Expiration Date :  2017-03-17    Number of Days in Trade : 112
Cost Basis :  $30.68 per shareGain at Strike Price : 7.56%
Strike Price :  $33.00 per share
Number of Contracts : 2Number of Shares :200
Call Premium :  $0.66 per shareOptions Income : $132.00
Commission : $8.40
Net Premium :  $0.618 per shareNet Options Income : $123.60
Options Yield :  2.01%Annualized Options Yield : 6.57%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $30.15Gain if Exercised : 9.46%

This covered call yields 2.01%, or 6.57% on an annualized basis. The yield on cost of my PFE position is 3.91%, so I'm boosting dividend income by a factor of 1.68. If the options are exercised, I'll sell 200 shares of PFE at a reduced cost basis of $30.15 per share, for capital gains of 9.46%.



#032 : 2016-11-25: Sold to Open 1 Contract of Option KMB Mar 17 2017 120.00 C

I own 100 shares of Kimberly-Clark Corporation (KMB) at a cost basis of $118.88 per share. I'm willing to sell these shares for $120.00 on or before 17 March:

Open Date :  2016-11-25
Expiration Date :  2017-04-17    Number of Days in Trade : 147
Cost Basis :  $118.88 per shareGain at Strike Price : 0.94%
Strike Price :  $120.00 per share
Number of Contracts : 1Number of Shares :100
Call Premium :  $2.80 per shareOptions Income : $280.00
Commission : $7.70
Net Premium :  $2.723 per shareNet Options Income : $272.30
Options Yield :  2.29%Annualized Options Yield : 5.69%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $116.33Gain if Exercised : 3.16%

This covered call yields 2.29%, or 5.69% on an annualized basis. The yield on cost of my KMB position is 3.10%, so I'm boosting dividend income by a factor of 1.84. If the option is exercised, I'll sell 100 shares of KMB at a reduced cost basis of $116.33 per share, for capital gains of 3.16%.



I think an achievable goal is to double dividend income. The covered call trades on QCOM, DIS, and ABBV more than double my dividend income, but those on F, CSCO, PFE, and KMB fall short. Overall, though, I'm more than doubling my dividend income with these covered calls.

New Put Contracts


Selling put options allows me to set the price I'm willing to pay for a stock I want to buy. In effect, I get paid while I'm waiting for the share price to drop!

In my most recent pulse article, I identified three existing DivGro positions that I would like to increase. One of those is Cisco Systems, Inc (CSCO), a stock that is discounted by about 13% to my fair value estimate:

• Cisco Systems, Inc (CSCO)
streak 6 years 3-year growth rate 32% yield 3.50% @ $29.69 payout 49% debt 45% 
moat narrow credit rating AA- safety financial strength A++

CSCO is trading at a 13% discount to fair value and I already own 200 shares of CSCO.


#025 : 2016-11-25: Sold to Open 3 Contracts of Option CSCO Dec 16 2016 30.00 P

I'm willing to buy 300 shares of CSCO for $30.00 per share on or before 16 December. CSCO closed at $30.07 per share on the date of my trade:

Open Date : 2016-11-25
Expiration Date : 2016-12-16    Number of Days in Trade : 21
Price at Close : $30.07 per shareDiscount at Strike Price : 0.23%
Strike Price : $30.00 per share
Number of Contracts :3Number of Shares :300
Put Premium : $0.40 per shareOptions Income : $120.00
Commission : $9.10
Net Premium : $0.370 per shareNet Options Income : $110.90
Options Yield : 1.23%Annualized Options Yield : 21.38%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $29.69Discount if Exercised : 1.27%

This put option trade yields 1.23%, or 21.38% on an annualized basis. At $30.07 per share, CSCO yields 3.46%, so I'm boosting dividend income by a factor of 6.18. If the options are exercised, I'll buy 300 shares at a cost basis of $29.69 per share, a discount of 1.27%



Selling puts is riskier than selling covered calls. Generally, I like to see a dividend boost factor of five or more, unless I can buy shares at a discount of at least 10%. 

Open Positions


Below is a summary of the 19 open options in my portfolio. Quoted prices are end-of-session prices on 25 November. Four of these options expire in December:



Currently, eight positions are in the red.

Of these positions, Reynolds American, Inc (RAI) and Union Pacific Corporation (UNP) both are deep in the money. I'm considering rolling both options forward to later expiration dates and/or higher strike prices.

Uncovered Positions


At this time, I don't have any uncovered positions in my Scottrade brokerage account.

In my FolioInvesting account, I have several positions with at least 100 shares. These positions would be eligible for covered call trading, except that FolioInvesting does not offer options trading. I'm planning on moving these stocks to a new account where I can trade options.

Here are the stocks in my FolioInvesting account that I need to move to a brokerage that offers options trading:

Ticker
Company
#Shares
Cost
Basis
Recent
Price
Call
ADV
Put
ADV
Apple, Inc
100
$104.41
$111.77
62,826
36,278
The Gap, Inc
165
$29.95
$25.57
705
524
Intel Corporation
120
$23.31
$35.44
11,824
4,653
Qualcomm Inc
100
$62.22
$68.29
3,757
2,255
T
AT&T Inc
150
$33.43
$39.21
6,637
3,650


The last two columns show the average number of call and put options executed in 21 consecutive days, in October 2016. I'm including it here to show how widely options trading volume varies by stock.

With the covered call investment tools available at borntosell.com, I can get a summary of all covered positions under various scenarios. Generally, I'll do slightly better if my covered call options are called:

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:

#032: 1xKMB Apr 21 2017 120.00 C ::$ 272.30« total: $ 5,673.84 • secured: $ 1,717.44 »
#031: 2xPFE Mar 17 2017 33.00 C ::$ 123.60« total: $ 5,401.54 • secured: $ 1,717.44 »
#030: 1xABBV Feb 17 2017 62.50 C ::$ 153.30« total: $ 5,277.94 • secured: $ 1,717.44 »
#029: 2xCSCO Apr 21 2017 32.00 C ::$   95.60« total: $ 5,124.64 • secured: $ 1,717.44 »
#028: 1xDIS Jun 16 2017 105.00 C ::$ 262.30« total: $ 5,029.04 • secured: $ 1,717.44 »
#027: 1xQCOM Feb 17 2017 70.00 C ::$ 194.30« total: $ 4,766.74 • secured: $ 1,717.44 »
#026: 1xQCOM Feb 17 2017 70.00 C ::$ 192.30« total: $ 4,572.44 • secured: $ 1,717.44 »
#025: 3xCSCO Dec 16 2016 30.00 P ::$ 110.90« total: $ 4,380.14 • secured: $ 1,717.44 »
#024: 6xF Mar 17 2017 13.00 C ::$ 138.79« total: $ 4,269.24 • secured: $ 1,717.44 »
#023: 2xWMT Nov 18 2016 67.50 P ::$ 247.60« total: $ 4,130.45 • secured: $ 1,717.44 »
#022: 1xHSY Jan 20 2017 90.00 P ::$ 195.30« total: $ 3,882.85 • secured: $ 1,469.84 »
#021: 1xGD Jan 20 2017 130.00 P ::$ 127.30« total: $ 3,687.55 • secured: $ 1,469.84 »
#020: 2xWFC Nov 18 2016 44.00 P ::$ 161.60« total: $ 3,560.25 • secured: $ 1,469.84 »
#019: 2xNKE Dec 16 2016 50.00 P ::$ 209.60« total: $ 3,398.65 • secured: $ 1,308.24 »
#018: 1xKO Dec 16 2016 42.00 C ::$ 107.30« total: $ 3,189.05 • secured: $ 1,308.24 »
#017: 6xF Jan 20 2017 11.00 P ::$ 186.79« total: $ 3,081.75 • secured: $ 1,308.24 »
#016: 1xGILD Feb 17 2017 95.00 C ::$ 104.30« total: $ 2,894.96 • secured: $ 1,308.24 »
#015: 1xPFE Mar 17 2017 35.00 C ::$   74.30« total: $ 2,790.66 • secured: $ 1,308.24 »
#014: 1xUNP Dec 16 2016 97.50 C ::$ 210.30« total: $ 2,716.36 • secured: $ 1,308.24 »
#013: 2xPFE Oct 28 2016 34.00 P ::$ 119.60(-$ 17.00)« total: $ 2,506.06 • secured: $ 1,308.24 »
#012: 1xJNJ Nov 18 2017 115.00 P ::$ 135.30« total: $ 2,403.46 • secured: $ 1,325.24 »
#011: 1xRAI Feb 17 2016 52.50 C ::$ 124.30« total: $ 2,268.16 • secured: $ 1,189.94 »
#010: 1xKMB Oct 21 2016 130.00 C ::$ 112.30« total: $ 2,143.86 • secured: $ 1,189.94 »
#009: 1xD Jan 20 2017 75.00 C ::$ 299.30« total: $ 2,031.56 • secured: $ 1,077.64 »
#008: 3xINTC Oct 21 2016 35.00 P ::$ 248.90« total: $ 1,732.26 • secured: $ 1,077.64 »
#007: 2xCSCO Oct 21 2016 31.00 C ::$ 189.93« total: $ 1,483.36 • secured: $    828.74 »
#007: 1xCSCO Oct 21 2016 31.00 C ::$   94.97(-$ 17.07)« total: $ 1,293.43 • secured: $    638.81 »
#006: 6xF Nov 18 2016 13.00 C ::$ 156.79« total: $ 1,215.53 • secured: $    655.88 »
#005: 1xDIS Nov 18 2016 100.00 C ::$ 113.30« total: $ 1,058.74 • secured: $    499.09 »
#004: 3xCSCO Aug 19 2016 31.00 P ::$ 197.90(-$ 17.00)« total: $    945.44 • secured: $    385.79 »
#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

I've earned my first $1,000 in secured option income and I'm well on my way to reaching the $2,000 level. With four options expiring in December, I should cross the $2,000 mark before year's end.

Take care everybody and thanks for reading!

I consider myself a beginner as far as options trading goes, so I still have lots to learn. If you see anything I do or write that you disagree with, please let me know in the comments below. Or if you just want to share some advice or encouragement, I'd be happy to hear from you, too!

1 comment :

  1. You're doing so well with options Ferdi. Congrats on all of these great trades.

    ReplyDelete

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