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Thursday, June 16, 2016

Would You Buy Target For Less Than $62?

2016-06-09: Sold to Open 1 Contract of Option TGT JAN 20 2017 65.00 P

Last week I wrote about my first options trade for DivGro. As mentioned in that article, one of my goals this year is to find opportunities to boost dividend income. I don't want to do this by chasing yield. Rather, I'd like to use options to generate a little extra income in addition to the dividend income I already receive.

One way to boost income is to sell covered calls against stocks I own in my DivGro portfolio. I can sell one call for every 100 shares I own and collect the option premium in return.

Another way to boost my income is to sell a cash-secured put on a stock I would like to own at a strike price I'm willing to pay. The put buyer will have the right to sell me 100 shares of the stock at the strike price before the option's expiration date.

To learn about my first cash-secured put trade for DivGro, please read this article at Seeking Alpha.

I provide full details of the trade and explain the possible outcomes. I also provide an updated stock analysis and share my fair value estimate of TGT. In essence, I'm committing to buy TGT at less than $62, or at a discount of about 20% to fair value.


Please feel free to leave comments on this article either at Seeking Alpha or here, on my blog. I'll do my best to respond to each comment as quickly as possible.

6 comments :

  1. Congrats on your second options transaction. Be warned selling puts is addicting, so be careful ;-). I really like the idea of selling puts on stocks you would want in your portfolio. There's limited risk there. I've bought Target twice the past 30 days, which totals about 50 shares. I would've done exactly what you did, but I don't have the capital to buy 100 shares right now. Best of luck with this transaction.

    ReplyDelete
    Replies
    1. Thanks Investment Hunting -- I'll heed your warning :-)

      Now that I have an established portfolio, with many stocks trading higher than my entry point, selling puts may be a good way of adding more shares at a suitable price. We'll see how it goes...

      Thanks for reading and commenting!

      Delete
  2. I really want to get back into investing through options because it's a great way to limit your risk as well as generate income. If done right the biggest risk is the unforeseen "blowup" which you likely wouldn't have been able to do anything about anyways. The only real downside to options is that they require a lot more capital in order to be conservative which makes it a bit slower progress.

    ReplyDelete
    Replies
    1. Yes, your right about the capital issue. As you may be aware, I have my DivGro portfolio split accross several accounts. The Scottrade holdings (where currently I trade options) are about 20% of portfolio value. The majority is invested in FolioInvesting accounts, where I can't trade options. I'm considering moving my largest FolioInvesting account to InteractiveBrokers where I can trade options.

      Delete
  3. Hi, what is your typical expiration period for covered calls? thanks

    ReplyDelete
    Replies
    1. It varies a lot. Generally, I don't like to do a trade if I can't generate income of at least $100. To do so, I go further out, if necessary.

      Delete

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