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
ABBV	AbbVie, Inc	100	$62.67	$64.72	1,184	676
CSCO	Cisco Systems, Inc	200	$30.39	$31.10	3,531	2,031
KMB	Kimberly-Clark Corporation	100	$118.88	$115.58	225	319
PFE	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	: 2	x	WMT Nov 18 2016 67.50 P	::	$ 247.60	« total: $ 4,130.45 • secured: $    902.85 »
#022	: 1	x	HSY Jan 20 2017 90.00 P	::	$ 195.30	« total: $ 3,882.85 • secured: $    902.85 »
#021	: 1	x	GD Jan 20 2017 130.00 P	::	$ 127.30	« total: $ 3,687.55 • secured: $    902.85 »
#020	: 2	x	WFC Nov 18 2016 44.00 P	::	$ 161.60	« total: $ 3,560.25 • secured: $    902.85 »
#019	: 2	x	NKE Dec 16 2016 50.00 P	::	$ 209.60	« total: $ 3,398.65 • secured: $    902.85 »
#018	: 1	x	KO Dec 16 2016 42.00 C	::	$ 107.30	« total: $ 3,189.05 • secured: $    902.85 »
#017	: 6	x	F Jan 20 2017 11.00 P	::	$ 186.79	« total: $ 3,081.75 • secured: $    902.85 »
#016	: 1	x	GILD Feb 17 2017 95.00 C	::	$ 104.30	« total: $ 2,894.96 • secured: $    902.85 »
#015	: 1	x	PFE Mar 17 2017 35.00 C	::	$ 74.30	« total: $ 2,790.66 • secured: $    902.85 »
#014	: 1	x	UNP Dec 16 2016 97.50 C	::	$ 210.30	« total: $ 2,716.36 • secured: $    902.85 »
#013	: 2	x	PFE Oct 28 2016 34.00 P	::	$ 119.60	« total: $ 2,506.06 • secured: $    902.85 »
#012	: 1	x	JNJ Nov 18 2017 115.00 P	::	$ 135.30	« total: $ 2,403.46 • secured: $    919.85 »
#011	: 1	x	RAI Feb 17 2016 52.50 C	::	$ 124.30	« total: $ 2,268.16 • secured: $    919.85 »
#010	: 1	x	KMB Oct 21 2016 130.00 C	::	$ 112.30	« total: $ 2,143.86 • secured: $    919.85 »
#009	: 1	x	D Jan 20 2017 75.00 C	::	$ 299.30	« total: $ 2,031.56 • secured: $    807.55 »
#008	: 3	x	INTC Oct 21 2016 35.00 P	::	$ 248.90	« total: $ 1,732.26 • secured: $    807.55 »
#007	: 2	x	CSCO Oct 21 2016 31.00 C	::	$ 189.93	« total: $ 1,483.36 • secured: $    558.65 »
#007	: 1	x	CSCO Oct 21 2016 31.00 C	::	$ 94.97	« total: $ 1,293.43 • secured: $    368.72 »
#006	: 6	x	F Nov 18 2016 13.00 C	::	$ 156.79	« total: $ 1,215.53 • secured: $    385.79 »
#005	: 1	x	DIS Nov 18 2016 100.00 C	::	$ 113.30	« total: $ 1,058.74 • secured: $    385.79 »
#004	: 3	x	CSCO Aug 19 2016 31.00 P	::	$ 197.90	« total: $    945.44 • secured: $    385.79 »
#003	: 1	x	DIS Aug 19 2016 98.50 C	::	$ 87.30	« total: $    764.54 • secured: $    402.79 »
#002	: 1	x	TGT Jan 20 2017 65.00 P	::	$ 361.75	« total: $    677.24 • secured: $    315.49 »
#001	: 6	x	F 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!