Thursday, November 3, 2016

Options Update: October 2016 (Part 1)

Time again for an options update!

I usually write these articles shortly after options expiration Friday, but I decided to delay this one by a week because I sold a weekly option that expired last Friday. I wanted to include details on that trade in this month's update. I won't be trading weekly options again in the foreseeable future. Weekly options have lower volume and strike prices have wider spreads.

Last month I added nine new options trades. This month I'm reporting ten new options trades, as well as two expirations, a partial exercise, and an assignment. As usual, I'll give an update of all open trades and a running tally of my options income to date.

Due to the length of this update, I decided to split the article into two parts. Part 1 covers the new options trades and provides a running tally of my options income to date. Part 2 will discuss assignments, expired and open positions, and uncovered positions. For the uncovered positions, I'll consider some suitably covered calls.

Introduction


The main goal of DivGro is to generate a reliable and growing dividend income stream. I'm fully committed to investing in dividend growth stocks trading below fair value. Options trading is a way 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.

New Covered Calls


Selling covered calls is a way to collect extra income on stocks you already own. In the past four weeks, I executed four covered call trades:

#014 : 2016-09-26: Sold to Open 1 Contract of Option UNP Dec 16 2016 97.50 C

I own 100 shares of Union Pacific Corporation (UNP) at a cost basis of $91.36 per share. I'm willing to sell these shares for $97.50 on or before 16 December:

Open Date : 2016-09-26
Expiration Date : 2016-12-16    Number of Days in Trade : 81
Cost Basis : $91.36 per shareGain at Strike Price : 6.72%
Strike Price : $97.50 per share
Number of Contracts :1Number of Shares :100
Call Premium : $2.18 per shareOptions Income : $218.00
Commission : $7.70
Net Premium : $2.103 per shareNet Options Income : $210.30
Options Yield : 2.30%Annualized Options Yield : 10.38%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $89.43Gain if Exercised : 9.03%

This covered call yields 2.30%, or 10.38% on an annualized basis. The yield on cost of my UNP position is 2.41%, so I'm boosting dividend income by a factor of 4.31. If the option is exercised, I'll sell 100 shares of UNP shares at a reduced cost basis of $89.43 per share, for capital gains of 9.03%.



#015 : 2016-09-26: Sold to Open 1 Contract of Option PFE Mar 17 2017 35.00 C

I own 100 shares of Pfizer Inc (PFE) at a cost basis of $25.07 per share. I'm willing to sell these shares for $35.00 on or before 17 March 2017:

Open Date :  2016-09-26
Expiration Date :  2017-03-17    Number of Days in Trade : 172
Cost Basis :  $25.07 per shareGain at Strike Price : 39.61%
Strike Price :  $35.00 per share
Number of Contracts : 1Number of Shares :100
Call Premium :  $0.82 per shareOptions Income : $82.00
Commission : $7.70
Net Premium :  $0.743 per shareNet Options Income : $74.30
Options Yield :  2.96%Annualized Options Yield : 6.29%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $24.50Gain if Exercised : 42.87%

This covered call yields 2.96%, or 6.29% on an annualized basis. The yield on cost of my PFE position is 4.79%, so I'm boosting dividend income by a factor of 1.31. If the option is exercised, I'll sell 100 shares of PFE at at reduced cost basis of $24.50 per share, for capital gains of 42.87%.



#016 : 2016-09-26: Sold to Open 1 Contract of Option GILD Feb 17 2017 95.00 C

I own 100 shares of Gilead Sciences, Inc (GILD) at a cost basis of $94.49 per share. I'm willing to sell these shares for $95.00 on or before 17 February 2017:

Open Date :  2016-09-26
Expiration Date :  2017-02-17    Number of Days in Trade : 144
Cost Basis :  $94.49 per shareGain at Strike Price : 0.54%
Strike Price :  $95.00 per share
Number of Contracts : 1Number of Shares :100
Call Premium :  $1.12 per shareOptions Income : $112.00
Commission : $7.70
Net Premium :  $1.043 per shareNet Options Income : $104.30
Options Yield :  1.10%Annualized Options Yield : 2.80%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $93.62Gain if Exercised : 1.48%

This covered call yields 1.10%, or 2.80% on an annualized basis. The yield on cost of my GILD position is 1.99%, so I'm boosting dividend income by a factor of 1.41. If the option is exercised, I'll sell 100 GILD shares at a reduced cost basis of $93.62 per share, for capital gains of 1.48%.



#018 : 2016-09-26: Sold to Open 1 Contract of Option KO Dec 16 2016 42.00 C

I own 100 shares of The Coca-Cola Company (KO) at a cost basis of $40.60 per share. I'm willing to sell these shares for $42.00 on or before 16 December:

Open Date :  2016-09-26
Expiration Date :  2016-12-16    Number of Days in Trade : 81
Cost Basis :  $40.60 per shareGain at Strike Price : 3.45%
Strike Price :  $42.00 per share
Number of Contracts : 1Number of Shares :100
Call Premium :  $1.15 per shareOptions Income : $115.00
Commission : $7.70
Net Premium :  $1.073 per shareNet Options Income : $107.30
Options Yield :  2.64%Annualized Options Yield : 11.92%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $39.70Gain if Exercised : 5.80%

This covered call yields 2.64%, or 11.92% on an annualized basis. The yield on cost of my KO position is 3.45%, so I'm boosting dividend income by a factor of 3.46. If the option is exercised, I'll sell 100 shares of KO shares at a reduced cost basis of $39.70 per share, for capital gains of 5.80%.



I think an achievable goal is to double dividend income. The covered call trades on UNP and KO more than double my dividend income, but those on PFE and GILD fell short.

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! I sold six put options since September's report:

#017 : 2016-09-26: Sold to Open 6 Contracts of Option F Jan 20 2017 11.00 P

I'm willing to buy 600 shares of Ford Motor Company (F) for $11.00 per share on or before 20 January 2017. F closed at $12.01 per share on the date of my trade:

Open Date : 2016-09-26
Expiration Date : 2017-01-20    Number of Days in Trade : 116
Price at Close : $12.01 per shareDiscount at Strike Price : 8.41%
Strike Price : $11.00 per share
Number of Contracts :6Number of Shares :600
Put Premium : $0.33 per shareOptions Income : $198.00
Commission : $11.20
Net Premium : $0.311 per shareNet Options Income : $186.80
Options Yield : 2.59%Annualized Options Yield : 8.16%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $10.72Discount if Exercised : 10.77%

This put option trade yields 2.59%, or 8.16% on an annualized basis. At $12.01 per share, F yields 5.00%, so I'm boosting dividend income by a factor of 1.63. If the options are exercised, I'll buy 600 shares at a cost basis of $10.72 per share, a discount of 10.77%.



#019 : 2016-10-07: Sold to Open 2 Contracts of Option NKE Dec 16 2016 50.00 P

I'm willing to buy 200 shares of Nike Inc (NKE) for $50.00 per share on or before 16 December. NKE closed at $51.79 per share on the date of my trade:

Open Date : 2016-10-07
Expiration Date : 2016-12-16    Number of Days in Trade : 70
Price at Close : $51.79 per shareDiscount at Strike Price : 3.46%
Strike Price : $50.00 per share
Number of Contracts :2Number of Shares :200
Put Premium : $1.09 per shareOptions Income : $218.00
Commission : $8.40
Net Premium : $1.048 per shareNet Options Income : $209.60
Options Yield : 2.02%Annualized Options Yield : 10.56%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $49.04Discount if Exercised : 5.32%

This put option trade yields 2.02%, or 10.56% on an annualized basis. At $51.79 per share, NKE yields 1.24%, so I'm boosting dividend income by a factor of 8.54. If the options are exercised, I'll buy 200 shares at a cost basis of $49.04 per share, a discount of 5.32%.


#020 : 2016-10-11: Sold to Open 2 Contracts of Option WFC Nov 18 2016 44.00 P

I'm willing to buy 200 shares of Wells Fargo & Co (WFC) for $44.00 per share on or before 18 November. WFC closed at $45.45 per share on the date of my trade:

Open Date : 2016-10-11
Expiration Date : 2016-11-18    Number of Days in Trade : 38
Price at Close : $45.45 per shareDiscount at Strike Price : 3.19%
Strike Price : $44.00 per share
Number of Contracts :2Number of Shares :200
Put Premium : $0.85 per shareOptions Income : $170.00
Commission : $8.40
Net Premium : $0.808 per shareNet Options Income : $161.60
Options Yield : 1.78%Annualized Options Yield : 17.09%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $43.28Discount if Exercised : 4.78%

This put option trade yields 1.78%, or 17.09% on an annualized basis. At $45.45 per share, WFC yields 3.34%, so I'm boosting dividend income by a factor of 5.11. If the options are exercised, I'll buy 200 shares at a cost basis of $43.28 per share, a discount of 4.78%.



#021 : 2016-10-11: Sold to Open 1 Contract of Option GD Jan 20 2017 130.00 P

I'm willing to buy 100 shares of General Dynamics Corporation (GD) for $130.00 per share on or before 20 January 2017. GD closed at $149.60 per share on the date of my trade:


Open Date : 2016-10-11
Expiration Date : 2017-01-20    Number of Days in Trade : 101
Price at Close : $149.60 per shareDiscount at Strike Price : 13.10%
Strike Price : $130.00 per share
Number of Contracts :1Number of Shares :100
Put Premium : $1.35 per shareOptions Income : $135.00
Commission : $7.70
Net Premium : $1.273 per shareNet Options Income : $127.30
Options Yield : 0.85%Annualized Options Yield : 3.08%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $128.90Discount if Exercised : 13.84%

This put option trade yields 0.85%, or 3.08% on an annualized basis. At $149.60 per share, GD yields 2.03%, so I'm boosting dividend income by a factor of 1.51. If the option is exercised, I'll buy 100 shares at a cost basis of $128.90 per share, a discount of 13.84%.



#022 : 2016-10-11: Sold to Open 1 Contract of Option HSY Jan 20 2017 90.00 P

I'm willing to buy 100 shares of The Hershey Company (HSY) for $90.00 per share on or before 20 January 2017. HSY closed at $94.63 per share on the date of my trade:


Open Date : 2016-10-11
Expiration Date : 2017-01-20    Number of Days in Trade : 101
Price at Close : $94.63 per shareDiscount at Strike Price : 4.89%
Strike Price : $90.00 per share
Number of Contracts :1Number of Shares :100
Put Premium : $2.03 per shareOptions Income : $203.00
Commission : $7.70
Net Premium : $1.953 per shareNet Options Income : $195.30
Options Yield : 2.06%Annualized Options Yield : 7.46%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $88.22Discount if Exercised : 6.78%

This put option trade yields 2.06%, or 7.46% on an annualized basis. At $94.63 per share, HSY yields 2.62%, so I'm boosting dividend income by a factor of 2.85. If the option is exercised, I'll buy 100 shares at a cost basis of $88.22 per share, a discount of 6.78%.



#023 : 2016-10-14: Sold to Open 2 Contracts of Option WMT Nov 18 2016 67.50 P

I'm willing to buy 200 shares of Wal-Mart Stores, Inc (WMT) for $67.50 per share on or before 18 November. WMT closed at $68.45 per share on the date of my trade:

Open Date : 2016-10-14
Expiration Date : 2016-11-18    Number of Days in Trade : 35
Price at Close : $68.45 per shareDiscount at Strike Price : 1.39%
Strike Price : $67.50 per share
Number of Contracts :2Number of Shares :200
Put Premium : $1.28 per shareOptions Income : $256.00
Commission : $8.40
Net Premium : $1.238 per shareNet Options Income : $247.60
Options Yield : 1.81%Annualized Options Yield : 18.87%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $17.00
Cost Basis if Exercised : $66.35Discount if Exercised : 3.07%

This put option trade yields 1.81%, or 18.87% on an annualized basis. At $68.45 per share, WMT yields 3.62%, so I'm boosting dividend income by a factor of 5.21. If the options are exercised, I'll buy 200 shares at a cost basis of $66.35 per share, a discount of 3.07%.



Selling puts is riskier than selling covered calls. I'd like to see a dividend boost factor of five or more, unless I can buy shares at a discount of at least 10%. The HSY trade does not meet either of these criteria.

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:

#023: 2xWMT Nov 18 2016 67.50 P ::$ 247.60« total: $ 4,130.45 • secured: $    902.85 »
#022: 1xHSY Jan 20 2017 90.00 P ::$ 195.30« total: $ 3,882.85 • secured: $    902.85 »
#021: 1xGD Jan 20 2017 130.00 P ::$ 127.30« total: $ 3,687.55 • secured: $    902.85 »
#020: 2xWFC Nov 18 2016 44.00 P ::$ 161.60« total: $ 3,560.25 • secured: $    902.85 »
#019: 2xNKE Dec 16 2016 50.00 P ::$ 209.60« total: $ 3,398.65 • secured: $    902.85 »
#018: 1xKO Dec 16 2016 42.00 C ::$ 107.30« total: $ 3,189.05 • secured: $    902.85 »
#017: 6xF Jan 20 2017 11.00 P ::$ 186.79« total: $ 3,081.75 • secured: $    902.85 »
#016: 1xGILD Feb 17 2017 95.00 C ::$ 104.30« total: $ 2,894.96 • secured: $    902.85 »
#015: 1xPFE Mar 17 2017 35.00 C ::$   74.30« total: $ 2,790.66 • secured: $    902.85 »
#014: 1xUNP Dec 16 2016 97.50 C ::$ 210.30« total: $ 2,716.36 • secured: $    902.85 »
#013: 2xPFE Oct 28 2016 34.00 P ::$ 119.60(-$ 17.00)« total: $ 2,506.06 • secured: $    902.85 »
#012: 1xJNJ Nov 18 2017 115.00 P ::$ 135.30« total: $ 2,403.46 • secured: $    919.85 »
#011: 1xRAI Feb 17 2016 52.50 C ::$ 124.30« total: $ 2,268.16 • secured: $    919.85 »
#010: 1xKMB Oct 21 2016 130.00 C ::$ 112.30« total: $ 2,143.86 • secured: $    919.85 »
#009: 1xD Jan 20 2017 75.00 C ::$ 299.30« total: $ 2,031.56 • secured: $    807.55 »
#008: 3xINTC Oct 21 2016 35.00 P ::$ 248.90« total: $ 1,732.26 • secured: $    807.55 »
#007: 2xCSCO Oct 21 2016 31.00 C ::$ 189.93« total: $ 1,483.36 • secured: $    558.65 »
#007: 1xCSCO Oct 21 2016 31.00 C ::$   94.97(-$ 17.07)« total: $ 1,293.43 • secured: $    368.72 »
#006: 6xF Nov 18 2016 13.00 C ::$ 156.79« total: $ 1,215.53 • secured: $    385.79 »
#005: 1xDIS Nov 18 2016 100.00 C ::$ 113.30« total: $ 1,058.74 • secured: $    385.79 »
#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'm approaching my first $1,000 in secured option income. With five options expiring in November, I should easily cross the $1,000 mark with next month's Option Update!

Take care everybody and thanks for reading! Look out for Part 2 in a couple of days.

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!

8 comments :

  1. I like the visual treatment of putting the trade details in a box and highlighted annualized return. Nice touch!

    ReplyDelete
    Replies
    1. Thanks -- I'm glad you like the visual treatment, Financial Velociraptor!

      It took some doing to format the transactions properly. Fortunately I now have a system in place, so hopefully future updates will go much faster!

      Delete
  2. Incredible DivGro! I'm loving it! I'm assuming the puts are cash-secured? Really enjoy the data in your box as well. Is that your own excel or what? THANKS for sharing this info!

    ReplyDelete
    Replies
    1. Thanks, Passive Income Dude -- I'm glad you find this information worth sharing...

      Although I'm trading in a margin account, I have plenty of cash on hand to cover the puts. Data in the boxes are generated from a Google Sheets spreadsheet. As mentioned above, it took some time to get the formatting done. Now that I've got it set up, future updates should be easier.

      Delete
  3. I'm new with the option business. Can you explain your term: what do you mean by "secured".
    Also if your option got expired, is it good or bad?

    ReplyDelete
    Replies
    1. Hi vivianne -- because I'm always selling options (not buying), it's a good thing when options expire. When an option expires, I no longer have a potential obligation to fulfill. At that point, the option premium received for selling the option is "free and clear", meaning I can count it towards total option income received. I call this "secured" option income.

      Hope that helps! Please ask more questions if my description is unclear.

      Delete
  4. I enjoy this format. It presents a clear and concise summary of each trade.

    I also like seeing how the different approaches and philosophies to this strategy are evolving in the DGI/OptionsTrading blogosphere.

    For example: not counting the premium as income until after the contract has expired. I get it, and it totally makes sense.

    I think of it differently though. I count the income immediately. One of the primary appeals of doing the trade is that I know I will get paid that premium regardless of what happens. In other words I consider it "secured" as soon as it hits my account. It's not like I have to give it back. Granted, I still have an obligation to the contract, but I consider anything that happens subsequently a separate transaction.

    Of course, this means I do not adjust my cost basis if I'm assigned (i.e. if I sold a put for $1/share with a $50 strike...my cost basis if/when assigned is still $50...not $49). The $1 was for the option trade. Buying 100 shares at $50 was something I had to do, but it's its own thing in my mind.


    It's not really a different strategy or approach...it's just a different way to think about it.

    Of course being exposed to new ideas and perspectives is, like, the whole point of the internet right?

    ReplyDelete
    Replies
    1. Hi catfishwizard !

      I really like your perspective, as it seems like you have some experience trading options.

      My thinking on counting or not counting premiums is probably influenced a little by tax treatment, where the cost basis needs to take the option premiums into account... I think.

      I'm still relatively new to all of this, so I might change my mind and do what you do, eventually!

      Take care and thanks for commenting!

      FerdiS

      Delete

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