Tuesday, November 8, 2016

Options Update: October 2016 (Part 2)

In Part 1 of my October Update of my October options update, I covered new covered calls and cash-secured puts and provided a running tally of my options income to date. I reported ten new options trades, four covered calls, and six cash-secured puts. In all, I have executed 23 options trades of which 16 remain open. 

In Part 2, I'll discuss assignments and present expired and open positions. One assignment added new shares to my DivGro portfolio and a few covered calls expired, so I have several uncovered positions to consider. These positions offer opportunities to generate more options income.

As I mentioned in Part 1, I consider myself a beginner options trader with lots yet to learn. If you're an experienced options trader and see anything I do that looks suspicious, please let me know in the comments below!

I write these options updates not only to share the trades but to clarify my thoughts and to learn. I learn best by doing, putting real money on the line and putting theory into practice. If you're new to options, I hope you find these articles worth reading!

Options trading is a way to boost dividend income. With DivGro, I'll continue to focus on investing in great dividend growth stocks trading at a discount to fair value.

At this time, less that a quarter of my DivGro positions are eligible for options trading. Either I don't own at least 100 shares or the position is in a brokerage account where options trading is not available. In due course, I'll move eligible DivGro positions to a brokerage account where options trading is allowed.

Assignments


When an option holder exercises an option, it is said to be assigned

One of my Cisco Systems, Inc (CSCO) $31 calls was assigned early. Interestingly, the other two calls were not exercised. The partial assignment means that 100 of my 300 CSCO shares got called away. With a cost basis of $30.31 and taking commissions into account, I recorded modest capital gains of 1.43% (12% annualized). 

In September, I decided that I wanted to buy more shares of Pfizer Inc (PFE). Instead of buying shares outright, I sold two $34 puts with an expiration date of 28 October for 64¢ per share. At the time, PFE traded just above $34 and the trade represented a potential discount of about 2%. 

Unfortunately, PFE's share price declined faster than anticipated. At the close on expiration day, PFE traded for $31.93 per share. Nevertheless, I was obliged to buy 200 shares of PFE at $34 per share. Sometimes, short put options will go against you and this is one of those times.

Taking commissions into account, my cost basis is $33.49 per share.

Expired Positions


In this period, several open options expired and my obligations to either buy or sell shares "expired" also. As mentioned above, two of my CSCO covered calls were not exercised. Instead, the calls expired on 21 October and I secured about $190 in options income.

Another covered call that expired is a Kimberly-Clark Corporation (KMB) $130 call, which earned me $112 of options income, or 7.84% on an annualized basis. For reference, KMB's dividend yield is 3.20% at $115.05 per share.

Finally, an Intel Corporation (INTC) put option expired on 21 October, earning about $249 of options income. The annualized option yield is 11.86% versus INTC's dividend yield of 2.99% at $34.73 per share.


Open Positions


Below is a summary of the sixteen open options in my portfolio. Quoted prices are for mid-day trading on 8 November. Five of these positions have expiration dates in November.


Currently, three positions are in the red.

Ford Motor Company (F) is trading at $11.44 today and the 20 January 2017, $11 puts are not yet in-the-money. However, F is trending lower and we'll have to see what happens in the next three months.

The Coca-Cola Company (KO) is trading at $42.78 today, so my 16 December, $42 calls are in-the-money. Selling KO at $42 per share will generate capital gains of 5.8%.

Finally, my covered call trade on Reynolds American, Inc (RAI) is in the money. On 21 October, British American Tobacco offered to buy RAI in a deal worth $47 billion, causing RAI's share price to spike by nearly 10%. RAI is trading above $55 per share, so my 17 February 2017, $52.50 call option is in-the-money.

Uncovered Positions


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 eligible for options trading:

Ticker
Company
#Shares
Cost
Basis
Recent
Price
Call
ADV
Put
ADV
AbbVie, Inc
100
$62.67
$64.72
1,184
676
Cisco Systems, Inc
200
$30.39
$31.10
3,531
2,031
Kimberly-Clark Corporation
100
$118.88
$115.58
225
319
Pfizer Inc
300
$30.68
$34.77
3,306
1,325


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 quickly consider various covered call scenarios and potential income, including time premium and dividends. At this time, only my CSCO shares offer a profitable covered call trade. The 20 January 2017, $32 calls offer potential income of 59¢ per share. Note that this amount includes a dividend of 26¢ per share:


At 3% out-of-the-money, if these options are called away I'll generate income of $1.52 per share:


Options Income Tally


I already shared my running tally of total options income received in Part 1 of this update, but I decided to repeat it here for reference. Below, secured means options income from expired options:

#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« 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« 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« 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

Take care everybody and thanks for reading!

4 comments :

  1. Hi Ferdi. I've never heard of Born To Sell. I'll check this out for sure. It sounds like a great tool. I look at Puts that force me to buy shares as an opportunity or challenge. You're down now, but you could sell covered calls to reduce your cost basis and collect dividends. Thanks for sharing.

    ReplyDelete
    Replies
    1. I've just started using Born To Sell -- there is a tutorial page and several interesting features on offer. It is exclusively for Covered Calls. I'm excited to be trying it out over the next year. I'm enjoying this options trading adventure!

      Delete
  2. Ferdi, On your PFE Put trade, did you consider rolling the put out a couple of months and down in price to 33? I have done this several times on stocks that have dropped in price more than I wanted.

    ReplyDelete
    Replies
    1. I did consider rolling the put. Unfortunately, at this time, I'm using Scottrade's simple trading platform which would require paying commissions twice to roll a trade. Yeah, that sucks! (They do offer a more comprehensive trading platform, but I'll have to create a new account for that).

      Delete

Contact Form

Name

Email *

Message *

Follow by Email