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:

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#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 share Gain at Strike Price :  6.72% Strike Price :  $97.50 per share Number of Contracts : 1 Number of Shares : 100 Call Premium :  $2.18 per share Options Income :  $218.00 Commission :  $7.70 Net Premium :  $2.103 per share Net Options Income :  $210.30 Options Yield :  2.30% Annualized Options Yield :  10.38% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $89.43 Gain 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%.

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#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 share Gain at Strike Price :  39.61% Strike Price :  $35.00 per share Number of Contracts : 1 Number of Shares : 100 Call Premium :  $0.82 per share Options Income :  $82.00 Commission :  $7.70 Net Premium :  $0.743 per share Net Options Income :  $74.30 Options Yield :  2.96% Annualized Options Yield :  6.29% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $24.50 Gain 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%.

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#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 share Gain at Strike Price :  0.54% Strike Price :  $95.00 per share Number of Contracts : 1 Number of Shares : 100 Call Premium :  $1.12 per share Options Income :  $112.00 Commission :  $7.70 Net Premium :  $1.043 per share Net Options Income :  $104.30 Options Yield :  1.10% Annualized Options Yield :  2.80% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $93.62 Gain 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%.

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#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 share Gain at Strike Price :  3.45% Strike Price :  $42.00 per share Number of Contracts : 1 Number of Shares : 100 Call Premium :  $1.15 per share Options Income :  $115.00 Commission :  $7.70 Net Premium :  $1.073 per share Net Options Income :  $107.30 Options Yield :  2.64% Annualized Options Yield :  11.92% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $39.70 Gain 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%.

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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:

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#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 share Discount at Strike Price :  8.41% Strike Price :  $11.00 per share Number of Contracts : 6 Number of Shares : 600 Put Premium :  $0.33 per share Options Income :  $198.00 Commission :  $11.20 Net Premium :  $0.311 per share Net Options Income :  $186.80 Options Yield :  2.59% Annualized Options Yield :  8.16% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $10.72 Discount 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%.

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#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 share Discount at Strike Price :  3.46% Strike Price :  $50.00 per share Number of Contracts : 2 Number of Shares : 200 Put Premium :  $1.09 per share Options Income :  $218.00 Commission :  $8.40 Net Premium :  $1.048 per share Net Options Income :  $209.60 Options Yield :  2.02% Annualized Options Yield :  10.56% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $49.04 Discount 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%.

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#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 share Discount at Strike Price :  3.19% Strike Price :  $44.00 per share Number of Contracts : 2 Number of Shares : 200 Put Premium :  $0.85 per share Options Income :  $170.00 Commission :  $8.40 Net Premium :  $0.808 per share Net Options Income :  $161.60 Options Yield :  1.78% Annualized Options Yield :  17.09% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $43.28 Discount 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%.

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#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 share Discount at Strike Price :  13.10% Strike Price :  $130.00 per share Number of Contracts : 1 Number of Shares : 100 Put Premium :  $1.35 per share Options Income :  $135.00 Commission :  $7.70 Net Premium :  $1.273 per share Net Options Income :  $127.30 Options Yield :  0.85% Annualized Options Yield :  3.08% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $128.90 Discount 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%.

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#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 share Discount at Strike Price :  4.89% Strike Price :  $90.00 per share Number of Contracts : 1 Number of Shares : 100 Put Premium :  $2.03 per share Options Income :  $203.00 Commission :  $7.70 Net Premium :  $1.953 per share Net Options Income :  $195.30 Options Yield :  2.06% Annualized Options Yield :  7.46% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $88.22 Discount 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%.

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#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 share Discount at Strike Price :  1.39% Strike Price :  $67.50 per share Number of Contracts : 2 Number of Shares : 200 Put Premium :  $1.28 per share Options Income :  $256.00 Commission :  $8.40 Net Premium :  $1.238 per share Net Options Income :  $247.60 Options Yield :  1.81% Annualized Options Yield :  18.87% ----------------------------   --------------------- -------------------------------   ----------- Commission if Exercised :  $17.00 Cost Basis if Exercised :  $66.35 Discount 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%.

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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	: 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	(-$ 17.00)	« 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	(-$ 17.07)	« 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	(-$ 17.00)	« 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

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!