Wednesday, December 21, 2016

Recent Sell: Union Pacific Corporation


Founded in 1862 and based in Omaha, Nebraska, Union Pacific Corporation (NYSE:UNP) operates the largest public railroad in North America, with 32,000 miles of track linking 23 states in the western two-thirds of the United States. UNP hauls coal, industrial products, intermodal containers, agricultural goods, chemicals, and automotive products.

I bought shares of UNP on several occasions starting in February 2014. Most recently, I bought 44 shares to round out my position to 100 shares.

On 26 September 2016, I sold one contract of option UNP Dec 16 2016 97.50 C for $2.18 per share, collecting $210.30 in options premium income after commissions.

Last Friday, the option was exercised and I sold my shares for $97.50 per share.


Here is the original scenario, as stated in case the option got exercised:
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%.
UNP's share price recovered quickly after dipping to below $88 on 1 November 2016. In fact, it recovered too quickly and shot past my option's strike price. That's the risk of covered calls. You decide beforehand what price you'd be willing to accept for your shares and you could end up "leaving money on the table" if the share price goes above your strike price.

Here is a price history chart of UNP showing my buy and sell prices:
Trading Summary

2014-02-18Bought: 12 shares of UNP at $88.97 per share:$1,067.64
2014-04-01 Dividend on 12 shares at 45.5¢ per share: $5.46
2014-07-01 Dividend on 12 shares at 45.5¢ per share: $5.46
2014-10-01 Dividend on 12 shares at 50.0¢ per share: $6.00
2015-01-02 Dividend on 12 shares at 50.0¢ per share: $6.00
2015-03-30 Dividend on 12 shares at 55.0¢ per share: $6.60
2015-06-30 Dividend on 12 shares at 55.0¢ per share: $6.60
2015-07-06Bought: 14 shares of UNP at $96.31 per share:$1,348.32
2015-09-30 Dividend on 26 shares at 55.0¢ per share: $14.30
2015-12-30 Dividend on 26 shares at 55.0¢ per share: $14.30
2016-03-18Bought: 30 shares of UNP at $84.86 per share: $2,545.77
2016-03-31 Dividend on 26 shares at 50.0¢ per share: $14.30
2016-06-30 Dividend on 56 shares at 55.0¢ per share: $30.80
2016-09-26 Bought: 44 shares of UNP at $94.24 per share: $4,146.43
2016-09-26Sold 1 Option UNP Dec 16 2016 97.50 C: $218.00
2016-09-30 Dividend on 56 shares at 50.0¢ per share: $30.80
2016-12-16Assigned 1 Option UNP Dec 16 2016 97.50 C: $0.00
2016-12-16
  Sold 100 shares of UNP at $97.50 per share:
$
9,750.00
2016-12-29 Dividend on 100 shares at 60.5¢ per share: $60.50
Capital gain:
$
859.84

Dividends received:
$
201.12

Commissions/fees/taxes:
$
52.92

Net gain:
$
1008.04

I made a net gain of 11.34% on the original amount invested, or 13.02% annualized.

Conclusion

Covered call trading is a two-edged sword. It provides a way to generate options income and so boost dividend income. Sometimes, though, the stock price moves quickly above the chosen strike price and you have to fulfill your obligation to sell your shares.

Nevertheless, I'm satisfied with the outcome. Annualized gains of 13% are more than adequate, and options income of $218 over a 3-month period easily beats UNP's quarterly dividend of $60.50.

Closing my UNP position removes $242.00 from DivGro's projected annual dividend income (PADI), which now totals $12,298.

Thanks for reading! Let me know what you think of this options trade in the comments below.

6 comments :

  1. I did pretty much the same thing with CSX. I sold some cash-secured puts in late 2015, which were exercised in early 2016 when the stock dipped, so I began holding them. Then I sold some covered calls, which were exercised in late 2016 when the stock price soared.

    Overall, it ended up being among the better returning investments of the year.

    I like your dividend/option blend. I do the same thing.

    ReplyDelete
    Replies
    1. I'm very excited about this (relatively) new strategy I'm following, namely boosting dividends with options. Dividend growth stocks are "stocks you want to own", and selling puts on such stocks is a great strategy. Covered calls have some drawbacks (realizing short-term capital gains, etc), but, if chosen carefully, I think they can be quite lucrative!

      Take care and thanks for commenting!

      Delete
  2. I enjoyed your article, and I am thinking about using covered calls to increase the income yield. I'm having trouble understanding how your 10.66% total yield turned into a 12.24% annualized yield. Would you walk through the math for me?

    ReplyDelete
    Replies
    1. Sure, Mack!

      I bought UNP in 4 lots. Notice the majority (74%) of my shares had a holding period less than a year. In fact, a weighted average of the 4 holding periods is 318 days. (I use the value of each of the initial investments as weights). 10.66% x 365.25 / 318 = 12.24%.

      Hope that helps (and makes sense).

      Delete
    2. Thank you. All the best for a Happy New Year!

      Delete

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