On 3 January, the February $34 covered call options I sold against my Cisco Systems (CSCO) shares got exercised early.CSCO traded ex-dividend on 4 January, so the options holder decided to call my shares away just in time to grab the dividend. This is one of the drawbacks of American-style options – they can be exercised before expiration.
With CSCO trading in the money, I was well aware of the possibility that the options could be assigned. However, I was traveling from South Africa via Dubai to San Francisco (an exhausting 30 hours of traveling time!) and could not make a defensive move in time. Fortunately, I still own 200 CSCO shares, so I collected the dividend on those shares.
This article presents a summary of my CSCO trades and a final profit/loss analysis.
I bought the shares that were called away in two batches, 100 shares in December 2016 and 200 shares in August 2017 due to an options assignment. As a consequence, my capital gains will be a mix of short-term and long-term gains for tax purposes.
Trade Summary
| 2016-12-09 | Bought: 100 shares of CSCO at $30.04 per share: | $ | 3,004.00 |
| 2017-01-25 | Dividend on 100 shares at 26¢ per share: | $ | 26.00 |
| 2017-04-26 | Dividend on 100 shares at 29¢ per share: | $ | 29.00 |
| 2017-07-26 | Dividend on 100 shares at 29¢ per share: | $ | 29.00 |
| 2017-08-18 | Bought: 200 shares of CSCO at $31.00 per share: | $ | 6,200.00 |
| 2017-10-25 | Dividend on 300 shares at 29¢ per share: | $ | 87.00 |
| 2018-01-03 | Sold 300 shares of CSCO at $34.00 per share: | $ | 10,200.00 |
| Capital Gain: | $ | 996.00 | |
| Dividends Received: | $ | 171.00 | |
Commissions/Fees/Taxes:
|
$
|
7.27
| |
Net Gain:
|
$
|
1,159.73
|
I made a net gain of 12.6% on the original amount invested, which is a gain of 20.9% annualized.
Closing my CSCO position reduced DivGro's PADI by $348.
Options Trades
I should also summarize my CSCO-related options trades related to the 300 shares sold. The following table presents these trades in order of execution:
| ID | DATE | : | NO | × | TICKER OPTION | INCOME | ( EXPENSES ) | ROLLED | SECURED | TOTAL |
| #004 | 2016-08-09 | : | 3 | × | CSCO 19 Aug 2016 $31.00 P | $ 207.00 | ( $ -26.10 ) | $ 180.90 | $ 180.90 | |
| #007 | 2016-08-30 | : | 3 | × | CSCO 21 Oct 2016 $31.00 C | $ 294.00 | ( $ -26.17 ) | $ 267.83 | $ 448.73 | |
| #040 | 2016-12-23 | : | 1 | × | CSCO 21 Apr 2017 $32.00 C | $ 53.00 | ( $ -180.28 ) | → #066 | $ –127.28 | $ 321.45 |
| #066 | 2017-04-03 | : | 1 | × | CSCO 20 Oct 2017 $33.00 C | $ 189.00 | ( $ -19.68 ) | $ 169.32 | $ 490.77 | |
| #068 | 2017-04-04 | : | 2 | × | CSCO 18 Aug 2017 $31.00 P | $ 146.00 | ( $ -0.99 ) | $ 145.01 | $ 635.78 | |
| #104 | 2017-08-30 | : | 3 | × | CSCO 16 Feb 2018 $34.00 C | $ 182.00 | ( $ -2.38 ) | $ 179.62 | $ 815.40 |
key: expired • closed • rolled • assigned • open
So I netted $815.40 from my options trades.
Overall, my CSCO-related trades netted $1,975.13 or 21.5% on the original amount invested.
Concluding Remarks
Selling covered calls carry an assignment risk. In essence, you're exchanging upside potential for the certainty of the options premium. Since June 2016, I've had 26 covered calls expire (or closed early) versus six covered calls that were assigned. While certainly not optimal, I'm satisfied with that track record.
Through December 2017, I've collected options income totaling $20,263 and I've secured options income totaling $11,420. My goal for 2018 is to secure an additional $12,000 in options income.
I have no plans to buy back the 300 CSCO shares. I'm happy with my current position of 200 shares and I'd like to diversify away from the Information Technology sector a bit.
Through December 2017, I've collected options income totaling $20,263 and I've secured options income totaling $11,420. My goal for 2018 is to secure an additional $12,000 in options income.
I have no plans to buy back the 300 CSCO shares. I'm happy with my current position of 200 shares and I'd like to diversify away from the Information Technology sector a bit.
Thanks for reading! Let me know what you think of my CSCO trades and if you think selling covered calls is worth the risking of losing out on upside potential.
Congrats on the great return on investment. I also bought cisco low and am enjoying the gains.. dunno if i will be able to drip though....
ReplyDeleteCheers
Thanks, Passivecanadian -- I appreciate your comment. CSCO is a great dividend growth stock and I'm glad that I've retained 200 shares for the long-run. Take care and happy investing!
DeleteI own some CSCO although very small amount ....32 shares. Got in at a good time and will probably just hold long term. It is a good idea diversifying - I need to diversify my portfolio better! I have not been able to sell covered calls yet but have started learning how to sell puts. In my opinion, if goal is to continue building income it is probably a good idea to sell covered calls as this income is locked in if exercised and I am sure there are other undervalued companies. I would just not sell covered calls with an entire position most likely. Since you are still left with 200 shares I think it was a good call for the long run and to stay diversified. Regardless, great job on the great return! Let's see where you put that money back to work =)
ReplyDelete-TDM
Hi, TDM --
DeleteGood to hear from you. As mentioned above, CSCO is a good dividend growth stock and I'm glad I retained 200 shares, which I'll hold long-term. The 200 shares happens to be in another account where I don't have the option of selling covered calls, otherwise I might have lost my whole position...
I'll write about two new buys soon. One is an international stock in the Energy sector and the other is a real estate ETF -- so good diversification in my view.
Take care and happy investing!
Hi FerdiS, been a while since I checked in. In Nov I also did the 30 hour trip thru Dubai (only from SE Asia)and it killed me! Went on Emirates Air (free points from partner Alaska) and found the service lacking a bit. But the real killer was the time. Wow.
ReplyDeleteAnyway, I own a small position in CSCO, up significantly since I bought like most everything, no intent to sell. I don't do the options thing but probably should sit down and study it. Just feel it will complicate my life and I work to many hours at the moment for any more complications.
Since its been a while since I checked in, I noticed your forward dividends and thought to myself...hummmm, Mine are near yours now and I know you have a much bigger portfolio value than mine so I went to the Portfolio page and took a look. Tried doing the math and was further confused. $544K x 4.02% brought in about $22K. Then I realized that was YOC. Obviously, I can find your yield by dividing your forward dividends into your market value, but why publish YOC rather then yield? You yourself call YOC a "feel good metric" and yield is far more important and real (IMO). Why not just publish yield or publish both? Just curious?
My forward dividends are now at $13,139, I am super excited about that now that we are in 2018. I plan to retire in SE Asia when I hit my number and I am getting close!
Have a great holiday!
Mike A here. Sorry, don't know why its a "unknown" post
DeleteHi, Mike A -- good to hear from you again. Yes, traveling for 30 straight hours is not my idea of fun. Especially the trip from Dubai to San Francisco (nearly 16 hours) was brutal. After having breakfast and watching 3 movies, we "only" had 9 more hours to go...
DeleteMy problem with yield is that it is ever-changing. For a stock, the share price varies all the time, whereas the dividend changes at most a few times a year, but mostly only once a year. The same can be said for portfolio yield. Dividing projected annual dividends by portfolio market value has a slowly increasing numerator and a wildly varying denominator. How does that help with portfolio management? I don't think it does.
Yield on Cost and Projected Annual Yield (which I report on in my monthly reviews) are more useful, in my view. YoC expresses the yield relative to cost basis. Similarly, my portfolio's projected annual yield (projected annual dividends divided by total capital invested (not current market value) is the portfolio's yield relative to cost basis.
Let's look at 2 scenarios:
I invest $50k in a dividend growth stock yielding 3%. My projected annual dividend income is $1,500. Initial Yield and initial Yield on Cost are both 3%.
A: The market explodes higher and my portfolio value goes to $75k. No dividend changes announced. Yield is now 2% (YoC remains at 3%).
B: The market tanks and my portfolio value goes to $30k. No dividend changes announced. Yield is now 5% (YoC remains at 3%).
Compared with where I started, portfolio A now yields 2% and portfolio B yields 5%. What does that tell me about my portfolio and how I should be managing it. Not much, I suggest.
On the other hand, YoC remains at 3% because I no dividend changes happened. It represents more properly the fact that I had invested $50k into a 3% yielding stock, no matter what the market has done in the mean time.
I call YoC a feel good metric because it properly represents how much yield my invested capital afforded when I deployed that capital. It also grows over time as dividend increase, properly representing the fact that my initial capital now affords a larger yield because of dividend growth.
I hope that helps to explain my decision to show average portfolio YoC rather than average portfolio yield (even though I show both yield and YoC for each investment individually).
Take care and happy investing!
BTW -- where in SE Asia do you plan on retiring?
Glad you were still able to collect some dividends in the past and with current shares.
ReplyDelete-DFG
Thanks, DFG -- as mentioned, the 200 shares I retained are in another account that does not provide options trading, otherwise I probably would have sold those, too.
DeleteHi FerdiS, insightful post, as always. You inspired me to trade options more actively too.
ReplyDeleteI agree the ability to exercise an option at anytime is a serious drawback to sellers of American style options. With CSCO trading at 39 at the time of option exercise, the implied loss of selling 300 shares at $34 strike is $1500, which negates the $815.40 income from your CSCO option trades, and then some. Given the stock market's upward bias, writing call options is a risky proposition, for one gives up a lot of potential gains for a small fixed premium.
If I think that way (seeing this trade as a "loss" and a risky proposition), then I probably won't trade options. When I sold the calls, I knew exactly what the outcome could be and I was happy with that. The fact that CSCO popped so much higher in a hot bull market is not something I could have known upfront. Hindsight is easy; foresight is hard.
DeleteThe fact is, through December 2017, I've collected options income totaling $20,263 and I've secured options income totaling $11,420. That means at least $20,263 is sitting in my portfolio (in the form of dividend paying stocks) earning dividend income and building my dividend generating "snowball".
Thanks for your reply! I wasn't suggesting that it was necessarily a bad trade. You obviously have a sound options trading system in place to have collected so much options income, or else I would not be trying to emulate your options strategy. I was just pointing out that the risk with writing call options is something to be cognizant of. Given the upward bias of the stock market, it is probably safer to write put options than to write call options because the downside is limited to zero whereas the upside of a stock is theoretically unlimited. There is more risk missing out the upside than missing out the downside of a stock.
DeleteAnd thanks for your reply -- I appreciate your viewpoint and for expressing it so clearly. I agree fully that one should be cognizant of the the risk involved. But let me also point out the risk with put options writing. The market has a very strong upward bias, until it doesn't. When it capitulates, it'll go down much faster than it has risen. And if one is not careful, one could end up having to buy back puts at a loss, or come up with the funds to cover lots of assigned puts. So, I don't quite agree with your last statement. Things can change fast.
Delete