Options Update: September 2016

Last month, I wrote my first article in a new monthly series about options trades in DivGro. These articles will follow option expiration Friday, usually the third Friday of the contract month.

As I mentioned last month, readers not interested in options can just skip these articles.

Personally, I'm interested in boosting my dividend income with options. By selling calls against stocks I own (covered calls) or selling puts on stocks I'd like to own at a preferred price (naked or cash-covered puts), I can collect option premiums and so boost my dividend income.

For me, this series is as much a learning exercise as it is a way of tracking my options trades. Please feel free to ask questions (or to challenge my thinking) so that we can all learn from this adventure!

None of my open options expired in September, so I'll report my new trades and the status of open option positions. I'll also give an update on stocks available for options trades.

New Covered Calls

I executed 6 covered call trades:

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#005 : My first covered call trade is on shares of The Walt Disney Company (DIS):


2016-08-26: Sold to Open 1 Contract of Option DIS NOV 18 2016 100.00 C
I own 127 shares of DIS, but only 100 shares are eligible for options trading. For being willing to sell 100 DIS shares for $100 per share on or before 18 November, I'm earning an instant option yield of 1.18%: 

Open date	:	2016-08-26
Expiration date	:	2016-11-18		Number of days in trade	:	84
Cost basis	:	$96.08 per share
Strike price	:	$100.00 per share
Number of contracts	:	1		Number of shares	:	100
Call premium	:	$1.21 per share		Option income	:	$ 121.00
				Brokerage commission	:	$     7.70
Net premium	:	$1.133 per share		Net option income	:	$ 113.30
Instant option yield	:	1.18%		Annualized option yield	:	5.13%

Over the time in trade of 84 days, the annualized option yield is 5.13%. In comparison, DIS pays a semi-annual dividend of 71¢ per share and yields 1.53% at $92.71 per share.

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#006 : The next covered call trade is on shares of Ford Motor Company (F):

2016-08-29: Sold to Open 6 Contracts of Option F NOV 18 2016 13.00 C

For being willing to sell 600 F shares for $13 per share on or before 18 November, I'm earning an instant option yield of 2.02%: 

Open date	:	2016-08-29
Expiration date	:	2016-11-18		Number of days in trade	:	81
Cost basis	:	$12.94 per share
Strike price	:	$13.00 per share
Number of contracts	:	1		Number of shares	:	600
Call premium	:	$0.28 per share		Option income	:	$ 168.00
				Brokerage commission	:	$   11.21
Net premium	:	$0.261 per share		Net option income	:	$ 156.79
Instant option yield	:	2.02%		Annualized option yield	:	9.11%

The annualized option yield of 9.11% compares very favorably to F's current dividend yield of 4.95%. 

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#007 : Last month, I bought 300 shares of Cisco Systems, Inc (CSCO) and now I'm selling calls on them:

2016-08-30: Sold to Open 3 Contracts of Option CSCO OCT 21 2016 31.00 C

  I'm willing to sell my 300 CSCO shares for $31 per share on or before 21 October. In the process I'm earning an instant option yield of 3.12%: 

Open date	:	2016-08-30
Expiration date	:	2016-10-21		Number of days in trade	:	52
Cost basis	:	$30.40 per share
Strike price	:	$31.00 per share
Number of contracts	:	3		Number of shares	:	300
Call premium	:	$0.98 per share		Option income	:	$ 294.00
				Brokerage commission	:	$     9.10
Net premium	:	$0.950 per share		Net option income	:	$ 284.90
Instant option yield	:	3.12%		Annualized option yield	:	21.94%

CSCO pays quarterly dividends of 26¢ per share, yielding 3.35%. This trade delivers an annualized option yield of 21.94%, more than 6.5 times the dividend yield! 

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#009 : I sold a call on Dominion Resources, Inc (D). Here are the details:

2016-09-07: Sold to Open 1 Contract of Option D JAN 20 2017 75.00 C

  I'm willing to sell 100 shares of D for $75 per share on or before 20 January 2017. In the process I'm earning an instant option yield of 4.11%: 

Open date	:	2016-09-07
Expiration date	:	2017-01-20		Number of days in trade	:	135
Cost basis	:	$72.90 per share
Strike price	:	$75.00 per share
Number of contracts	:	1		Number of shares	:	100
Call premium	:	$3.07 per share		Option income	:	$ 307.00
				Brokerage commission	:	$     7.70
Net premium	:	$2.993 per share		Net option income	:	$ 299.30
Instant option yield	:	4.11%		Annualized option yield	:	11.11%

D's dividend yield is 3.69%, so this trade's annualized option yield of 11.11% is about 3 times the dividend yield!

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#010 : This covered call is on shares of Kimberly-Clark Corporation (KMB):

2016-09-07: Sold to Open 1 Contract of Option KMB OCT 21 2016 130.00 C

  I'm willing to sell 100 shares of KMB for $130 per share on or before 21 October. In the process I'm earning an instant option yield of 0.94%: 

Open date	:	2016-09-07
Expiration date	:	2016-10-21		Number of days in trade	:	44
Cost basis	:	$118.88 per share
Strike price	:	$130.00 per share
Number of contracts	:	1		Number of shares	:	100
Call premium	:	$1.20 per share		Option income	:	$ 120.00
				Brokerage commission	:	$     7.70
Net premium	:	$0.950 per share		Net option income	:	$ 112.30
Instant option yield	:	0.94%		Annualized option yield	:	7.84%

KMB yields 3.01%. In comparison, this trade delivers an annualized option yield of 7.84%, about 2.6 times the current dividend yield!

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#011 : This last covered call trade is on Reynolds American, Inc (RAI). Here are the details:

2016-09-07: Sold to Open 1 Contract of Option RAI FEB 17 2017 52.50 C

  I'm willing to sell 100 shares of RAI for $52.50 per share on or before 17 February 2017. In the process I'm earning an instant option yield of 4.11%: 

Open date	:	2016-09-07
Expiration date	:	2017-02-17		Number of days in trade	:	163
Cost basis	:	$32.51 per share
Strike price	:	$52.50 per share
Number of contracts	:	1		Number of shares	:	100
Call premium	:	$1.32 per share		Option income	:	$ 132.00
				Brokerage commission	:	$     7.70
Net premium	:	$1.243 per share		Net option income	:	$ 124.30
Instant option yield	:	3.82%		Annualized option yield	:	8.57%

RAI's quarterly dividend is 46¢ per share, so the stock yields 3.88%. With this trade, I'm earning an annualized option yield of 8.57%, or about 2.2 times the dividend yield!

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New Puts

The cool thing about selling put options is that you set the price you're willing to pay! If the share price never drops to the strike price, nothing happens except that you get to keep the option premium! In effect, you're getting paid to while waiting for the share price to drop!

I sold 3 put options since August's report:

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#008 : First I sold puts on Intel Corporation (INTC). Here is the trade summary:

2016-08-30: Sold to Open 3 Contracts of Option INTC OCT 21 2016 35.00 P

  I'm willing to buy 300 shares of INTC for $35 per share on or before 21 October. On the date of my trade, INTC closed at $35.70 per share, yielding 2.91%.

Open date	:	2016-08-30
Expiration date	:	2016-10-21		Number of days in trade	:	73
Strike price	:	$35.00 per share
Number of contracts	:	3		Number of shares	:	300
Put premium	:	$0.86 per share		Option income	:	$ 258.00
				Brokerage commission	:	$     9.10
Net premium	:	$0.830 per share		Net option income	:	$ 248.90
Instant option yield	:	2.37%		Annualized option yield	:	11.86%
Share price at execution	:	$35.70 per share		Cost basis if exercised	:	$   34.23
Discount at strike price	:	1.96%		Discount if exercised	:	4.13%

If this put expires worthless, I'll earn an annualized option yield of 11.86% relative to the share price at execution. That's about 4 times INTC's dividend yield!

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#012 : I also sold a put on Johnson & Johnson (JNJ):

2016-09-08: Sold to Open 1 Contract of Option JNJ NOV 18 2016 115.00 P

 

I'm willing to buy 100 shares of JNJ for $115 per share on or before 18 November. On the date of my trade, JNJ closed at $119.47 per share, yielding 2.68%.

Open date	:	2016-09-08
Expiration date	:	2016-11-18		Number of days in trade	:	71
Strike price	:	$115.00 per share
Number of contracts	:	1		Number of shares	:	100
Put premium	:	$1.43 per share		Option income	:	$ 143.00
				Brokerage commission	:	$     7.70
Net premium	:	$1.353 per share		Net option income	:	$ 135.30
Instant option yield	:	1.13%		Annualized option yield	:	5.81%
Share price at execution	:	$119.47 per share		Cost basis if exercised	:	$ 113.82
Discount at strike price	:	3.74%		Discount if exercised	:	4.73%

If this put expires worthless, I'll earn an annualized option yield of 5.81% relative to the share price at execution. That's double JNJ's dividend yield!

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#013 : I also sold 2 puts on Pfizer Inc (PFE):

2016-09-09: Sold to Open 2 Contracts of Option PFE OCT 28 2016 34.00 P

I'm willing to buy 200 shares of PFE for $34 per share on or before 28 October. On the date of my trade, PFE closed at $34.10 per share, yielding 3.52%.

Open date	:	2016-09-08
Expiration date	:	2016-10-28		Number of days in trade	:	49
Strike price	:	$34.00 per share
Number of contracts	:	2		Number of shares	:	200
Put premium	:	$0.64 per share		Option income	:	$ 128.00
				Brokerage commission	:	$     8.40
Net premium	:	$0.598 per share		Net option income	:	$ 119.60
Instant option yield	:	1.75%		Annualized option yield	:	13.07%
Share price at execution	:	$34.10 per share		Cost basis if exercised	:	$ 33.49
Discount at strike price	:	0.29%		Discount if exercised	:	1.80%

If this put expires worthless, I'll earn an annualized option yield of 13.07% relative to the share price at execution. That's about 3.71 times PFE's dividend yield!

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Available Stocks For Options Trades

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 available for options trading:

Ticker	Company	#Shares	Cost Basis	Recent Price	Call ADV	Put ADV
ABBV	AbbVie, Inc	100	$62.67	$64.72	1,467	1,529
GILD	Gilead Sciences, Inc	100	$94.49	$80.08	7,623	4,439
KO	The Coca-Cola Company	100	$40.60	$43.67	1,473	892
PFE	Pfizer Inc	100	$25.07	$34.77	4,479	2,488

The last two columns show the average number of call and put options executed in 20 consecutive days, in August 2016. I'm including it here to show how widely options trading volume varies by stock. 

Open Options Positions

Below is a summary the 10 open options positions in my portfolio. Quoted prices are closing prices on 19 September. 

Three positions are in the red. PFE closed at $33.65 per share, so my PFE puts are in the money. This means that I may have to buy 200 shares of PFE for $34.00 per share on or before 28 October. Similarly, with D's closing price of $75.90, my D calls are in the money. This means I may have to sell 100 shares of D for $75.00 per share on or before 20 January 2017.

My JNJ put is still out of the money, as JNJ closed at $117.66 per share on 19 September. However, JNJ is trending lower and we'll have to wait to see what happens in the next 2 months through 18 November, the expiration date.

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:

#013	: 2	x	PFE OCT 28 2016 34.00 P	::	$119.60	(total: $2,557.13 • secured: $402.79)
#012	: 1	x	JNJ NOV 18 2016 115.00 P	::	$135.30	(total: $2,437.53 • secured: $402.79)
#011	: 1	x	RAI FEB 17 2017 52.50 C	::	$124.30	(total: $2,302.23 • secured: $402.79)
#010	: 1	x	KMB OCT 21 2016 130.0 C	::	$112.30	(total: $2,177.93 • secured: $402.79)
#009	: 1	x	D JAN 20 2017 75.00 C	::	$299.30	(total: $2,065.63 • secured: $402.79)
#008	: 3	x	INTC OCT 21 2016 35.00 P	::	$248.90	(total: $1,766.33 • secured: $402.79)
#007	: 3	x	CSCO OCT 21 2016 31.00 C	::	$284.90	(total: $1,517.43 • secured: $402.79)
#006	: 5	x	F NOV 18 2016 13.00 C	::	$156.79	(total: $1.232.53 • secured: $402.79)
#005	: 1	x	DIS NOV 18 2016 100.0 C	::	$113.30	(total: $1,075.74 • secured: $402.79)
#004	: 1	x	CSCO AUG 19 2016 31.00 P	::	$197.90	(total: $  962.44 • secured: $402.79)
#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

Thanks for reading! Please let me know if you found this article informative. Also let me know if you're interested in learning more about options, or just want to see how my goal of boosting dividend income with options income goes.