Sunday, February 25, 2018

Options Update: January 2018 (Part 1)

Welcome to my first options update article of 2018!

I write monthly options update articles to keep track of options trades in my DivGro portfolio. I mostly sell covered calls on dividend growth stocks I own or secured puts on stocks I would like to own. Sometimes, I execute more speculative options trades, too.

DivGro is focused on investing in dividend growth stocks, but I added options trading to the mix in June 2016 to boost dividend income. Collecting options income allows me to buy more dividend growth stocks.

Each options update serves as a status report on open options and obligations I have. I also report new trades and provide a running tally of DivGro's options income to date.

One of my 2018 goals is to secure at least $12,000 in options income. This is a challenging goal and represents an increase of about 43% over 2017's secured options income total. I see options trading as a significant growth area for DivGro and I'm looking forward to the challenge!

January was an interesting month for options trading. The markets scaled higher and higher and volatility remained anemic. Many of my January options trades were defensive in nature as I attempted to protect my covered calls from rising stock prices.

Of course, January ended with a bang and the first few weeks of February trading were pretty volatile!

Below is a snapshot showing the trades I executed in January. You can see all my options trades on a new options page that automatically updates whenever I enter new trades.


Regular readers may spot something shocking here...

My secured options income, which was $11,420 at the end of 2017, dropped to $3,413 at the end of January! What the heck happened? How did I lose $8,007 in secured income?

Well, let's first look at the month to month change in total options income. Here is last month's snapshot as a reminder:


So, total options income shows a gain of $6,629.

As mentioned earlier, I executed several defensive trades in January to protect my covered calls from rising stock prices. But there is another reason for the big drop in secured options income.

As I'll explain in Part 2 of this article, in January I executed three bull put spreads. A bull put spread combines the selling of a put option with the simultaneous buying of another put option at a lower strike price.

Assigned Options


When an options holder exercises an option, it is said to be assigned.

In January, one option contract I had sold got assigned:

#1032017-08-30:-3×CSCO 16 Feb 2018 $34.00 C $ 182.00 ( $ -2.38 )

On 3 January, the February $34 covered call options I sold against my Cisco (CSCO) shares got exercised early. The options holder exercised the options just before CSCO's ex-dividend date (on 4 January), calling my shares away in time to grab the dividend. This is one of the drawbacks of American-style options – they can be exercised before expiration.

Fortunately, I still own 200 CSCO shares, so I collected the dividend on those shares.

See this article for a complete trade summary, but the bottom line is that I netted $815.40 from my CSCO options trades and 21.5% overall on my CSCO-related trades.

Expired Options


In January, the following short put options expired:

#1272017-11-30:
-2
×EEM 19 Jan 2018 $46.00 P $    234.00 ( $ -0.85 )
#1252017-11-21:
-3
×X 19 Jan 2018 $26.00 P $    252.00 ( $ -2.09 )
#1242017-11-21:
-2
×RL 19 Jan 2018 $80.00 P $    150.00 ( $ -0.09 )
#1232017-11-21:
-3
×BAC 19 Jan 2018 $25.00 P $    120.00 ( $ -2.23 )
#1172017-11-17:
-2
×MO 19 Jan 2018 $62.50 P $    140.00 ( $ -0.99 )
#1122017-09-14:
-1
×WFC 19 Jan 2018 $50.00 P $    166.00 ( $ -1.59 )
#1092017-08-30:
-2
×WFC 19 Jan 2018 $50.00 P $    364.00 ( $ -1.30 )
#1082017-08-30:
-2
×TGT 19 Jan 2018 $50.00 P $    336.00 ( $ -1.59 )
#0942017-07-18:-2×SBUX 19 Jan 2018 $52.50 P $    246.00 ( $ -1.00 )

Due to these expirations, I secured options income of $1,996.27.

On options expiration day, the iShares MSCI Emerging Markets ETF (EEM) closed at $50.44, which is 10% above the put option's strike price of $46. I no longer have the obligation to buy 200 EEM shares at $46 per share.

On options expiration day, the United States Steel (X) closed at $38.72, which is 49% above the put option's strike price of $26. I no longer have the obligation to buy 300 X shares at $26 per share.

On options expiration day, the Ralph Lauren (RL) closed at $112.78, which is 41% above the put option's strike price of $80. I no longer have the obligation to buy 200 RL shares at $80 per share.

On options expiration day, the Bank of America (BAC) closed at $31.72, which is 27% above the put option's strike price of $25. I no longer have the obligation to buy 300 BAC shares at $25 per share.

On options expiration day, the Altria Group (MO) closed at $70.03, which is 12% above the put option's strike price of $62.50. I no longer have the obligation to buy 200 MO shares at $62.50 per share.

On options expiration day, the Wells Fargo (WFC) closed at $63.84, which is 28% above the put option's strike price of $50. I no longer have the obligation to buy 300 WFC shares at $50 per share.

On options expiration day, the Target (TGT) closed at $77.46, which is 55% above the put option's strike price of $50. I no longer have the obligation to buy 200 TGT shares at $50 per share.

On options expiration day, the Starbucks (SBUX) closed at $60.93, which is 16% above the put option's strike price of $52.50. I no longer have the obligation to buy 200 SBUX shares at $52.50 per share.

Closed Options


When an out of the money option goes further out of the money, you can close the option early and secure most of the options income.

I didn't close any options early in January. 

Rolled Options


Rolling forward options means buying back an option and selling another option with a later expiration date. You can do this to avoid options assignment for in the money options.

In January, I rolled forward three call options, one on Qualcomm (QCOM), one on Ford (F), and one on Coca-Cola (KO):

#1342018-01-10:
  -4
×QCOM 17 Jan 2020 $65.00 C $ 3,140.00 ( $        -2.05 )
#1042017-08-30:
  -4
×QCOM 20 Apr 2018 $60.00 C $    524.00 ( $ -2,963.96 )→ #135
#1332018-01-10:
-20
×F 17 Jan 2020 $12.00 C $ 3,720.00 ( $      -15.96 )
#1062017-08-30:
-20
×F 16 Mar 2018 $12.00 C $    480.00 ( $ -2,221.51 )→ #134
#1322018-01-10:
  -2
×KO 18 Jan 2019 $47.00 C $    414.00 ( $        -2.58 )
#0792017-05-12:
  -2
×KO 19 Jan 2018 $45.00 C $    200.00 ( $    -227.69 )→ #133

QCOM is battling a takeover bid from Broadcom (AVGO), which recently lowered its offer to $79 per share. However, QCOM's 52-week high is below $70 per share and it looks increasingly unlikely that the bid will succeed. I decided to "spend" some of my secured income to protect my QCOM shares. Additionally, I increased the strike price to $65 per share. We'll see how this saga turns out!

In January, Ford's shares climbed to a 52-week high of $13.48 before tumbling to a new 52-week low of $10.19. My timing could only have been worse if I rolled these options on the 11th instead of on the 10th! Nevertheless, I should be able to recover much of the secured income I'd given up to protect the upcoming dividend and special dividend. This year, F is paying 13¢ per share on top of its regular 15¢ per share dividend, so, effectively the stock is yielding 6.1%.

KO dropped precipitously at the end of January and along with the market in early February, to well below $43 per share. Again, my timing on the roll-forward trade was poor, though it did not cost me all that much to execute. KO reported strong Q4 results and is guiding for another year of strong organic revenue and operating margin growth. The company should benefit from the Tax Act, allowing it to pay down some debt with repatriated cash.

New Covered Calls


Selling covered calls is a way to collect extra income on stocks you already own. I did not sell any covered calls in January.

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 waiting for the share price to drop! I sold the following put contracts in this period:

#1352018-01-12:
-3
×KSS 16 Mar 2018 $55.00 P $    405.00 ( $ -0.14 )
#1312018-01-10:
-3
×TGT 16 Mar 2018 $60.00 P $    144.00 ( $ -1.48 )
#1302018-01-10:
-3
×KBH 20 Apr 2018 $31.00 P $    306.00 ( $ -1.49 )
#1292018-01-10:
-2
×FAST 18 May 2018 $50.00 P $    350.00 ( $  0.00 )
#1282018-01-10:
-1
×AXP 20 Apr 2018 $100.00 P $    330.00 ( $ -0.80 )


#128 : 2018-01-10: Sold to Open 1 Contract of Option AXP Apr 20 2018 100.00 P

I'm willing to buy 100 shares of American Express (AXP) for $100.00 per share on or before 20 April. AXP closed at $101.22 per share on the date of my trade:

Open Date :  2018-01-10
Expiration Date :  2018-04-20    Number of Days in Trade : 100
Price at Close :  $101.22 per shareDiscount at Strike Price : 1.21%
Strike Price :  $100.00 per share
Number of Contracts : 1Number of Shares :100
Put Premium :  $3.30 per shareOptions Income : $330.00
Commission : -$0.80
Net Premium :  $3.292 per shareNet Options Income : $329.20
Options Yield :  3.25%Annualized Options Yield : 11.88%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $0.00
Cost Basis if Exercised : $96.69Discount if Exercised : 4.47%

This put option trade yields 3.25%, or 11.88% on an annualized basis. At $101.22 per share, AXP yields 1.38%, so I'm boosting dividend income by a factor of 8.59. If the option is exercised, I'll buy 100 shares at a cost basis of $96.69 per share, a discount of 4.47%.



#129 : 2018-01-10: Sold to Open 2 Contracts of Option FAST May 18 2018 50.00 P

I'm willing to buy 200 shares of : (FAST) for $50.00 per share on or before 18 May. FAST closed at $54.05 per share on the date of my trade:

Open Date :  2018-01-10
Expiration Date :  2018-05-18    Number of Days in Trade : 128
Price at Close :  $54.05 per shareDiscount at Strike Price : 7.49%
Strike Price :  $50.00 per share
Number of Contracts : 2Number of Shares :200
Put Premium :  $1.75 per shareOptions Income : $350.00
Commission : $0.00
Net Premium :  $1.750 per shareNet Options Income : $350.00
Options Yield :  3.24%Annualized Options Yield : 9.24%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $0.00
Cost Basis if Exercised : $48.25Discount if Exercised : 10.73%

This put option trade yields 3.24%, or 9.24% on an annualized basis. At $54.05 per share, FAST yields 2.37%, so I'm boosting dividend income by a factor of 3.90. If the options are exercised, I'll buy 200 shares at a cost basis of $48.25 per share, a discount of 10.73%.



#130 : 2018-01-10: Sold to Open 3 Contracts of Option KBH Apr 20 2018 31.00 P

I'm willing to buy 300 shares of KBH Home (KBH) for $31.00 per share on or before 20 April. KBH closed at $34.32 per share on the date of my trade:

Open Date :  2018-01-10
Expiration Date :  2018-04-20    Number of Days in Trade : 100
Price at Close :  $34.32 per shareDiscount at Strike Price : 9.67%
Strike Price :  $31.00 per share
Number of Contracts : 3Number of Shares :300
Put Premium :  $1.02 per shareOptions Income : $306.00
Commission : -$1.49
Net Premium :  $1.015 per shareNet Options Income : $304.51
Options Yield :  2.96%Annualized Options Yield : 10.80%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $0.00
Cost Basis if Exercised : $29.98Discount if Exercised : 12.66%

This put option trade yields 2.96%, or 10.80% on an annualized basis. At $34.32 per share, KBH yields 0.35%, so I'm boosting dividend income by a factor of 30.90. If the options are exercised, I'll buy 300 shares at a cost basis of $29.98 per share, a discount of 12.66%.



#131 : 2018-01-10: Sold to Open 3 Contracts of Option TGT Mar 16 2018 60.00 P

I'm willing to buy 300 shares of Target (TGT) for $60.00 per share on or before 16 March. TGT closed at $70.15 per share on the date of my trade:

Open Date :  2018-01-10
Expiration Date :  2018-03-16    Number of Days in Trade : 65
Price at Close :  $70.15 per shareDiscount at Strike Price : 14.47%
Strike Price :  $60.00 per share
Number of Contracts : 3Number of Shares :300
Put Premium :  $0.48 per shareOptions Income : $144.00
Commission : -$1.48
Net Premium :  $0.475 per shareNet Options Income : $142.52
Options Yield :  0.68%Annualized Options Yield : 3.81%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $0.00
Cost Basis if Exercised : $59.52Discount if Exercised : 15.16%

This put option trade yields 0.68%, or 3.81% on an annualized basis. At $70.15 per share, TGT yields 3.54%, so I'm boosting dividend income by a factor of 1.08. If the options are exercised, I'll buy 300 shares at a cost basis of $59.52 per share, a discount of 15.16%.



#135 : 2018-01-12: Sold to Open 3 Contracts of Option KSS Mar 16 2018 55.00 P

I'm willing to buy 300 shares of Kohl's (KSS) for $55.00 per share on or before 16 March. KSS closed at $63.87 per share on the date of my trade:

Open Date :  2018-01-12
Expiration Date :  2018-03-16    Number of Days in Trade : 63
Price at Close :  $63.87 per shareDiscount at Strike Price : 13.89%
Strike Price :  $55.00 per share
Number of Contracts : 3Number of Shares :300
Put Premium :  $1.35 per shareOptions Income : $405.00
Commission : -$0.14
Net Premium :  $1.350 per shareNet Options Income : $404.86
Options Yield :  2.11%Annualized Options Yield : 12.25%
----------------------------  ----------------------------------------------------  -----------
Commission if Exercised : $0.00
Cost Basis if Exercised : $53.65Discount if Exercised : 16.00%

This put option trade yields 2.11%, or 12.25% on an annualized basis. At $63.87 per share, KSS yields 3.44%, so I'm boosting dividend income by a factor of 3.56. If the options are exercised, I'll buy 300 shares at a cost basis of $53.65 per share, a discount of 16.00%.


For selling puts, I like to see a dividend boost factor of 5.00 or more unless I can buy shares at a discount of at least 10%. All of these put option trades meet my desired criteria.

Concluding Remarks


In Part 2 of this article, I'll present three bull put spreads I executed in January, list the options expiring soon, and present a running tally of DivGro's options income to date.

Thanks for reading and take care, everybody!

2 comments :

  1. Hi, FerdiS. As always, I enjoy your options post. Great work and great detail. Thanks for sharing.
    A few questions...
    When you write the puts, are they naked puts, or cash-secured puts?
    If cash-secured, are you looking for a certain baseline return on the cash you've got to set aside to secure the trade? I see you want a boost factor of 5 or more, but let's say the stock yielded 0.5%, and you got a boost factor of 5, so the options yield was 2.5%. Do you consider this yield OK for a short trade? But perhaps not for longer ones? I often grapple with determining at acceptable return on the cash used to secure the put.
    Finally, on the TGT puts, the annualized options yield and boost factor are low for this trade compared to your others. What is it you like about this trade? Is it the discount and/or purchase price should TGT get assigned? Thanks!

    ReplyDelete
  2. Hi, Engineering Dividends!

    Thanks for your comments and questions. I'll try my best to answer.

    Naked means uncovered, either you haven't shorted the underlying stock or you haven't set aside the reserve cash to purchase the underlying stock.

    I trade in a margin account at Interactive Brokers, which sets aside only 20% of the put obligation. In essence, that means I'm writing naked puts. I'm aware of the associated risk. But I write puts on stocks I wouldn't mind owning (mostly dividend growth stocks). I have enough cash to cover several puts if assigned, and the margin provides an extra buffer (though at the cost of margin interest).

    Options yield should exceed dividend yield (my rule of thumb is 5 times), otherwise you might as well invest in the underlying. Options income is short term gains taxed at a higher rate. And even though I calculate annualized yield, you can't really expect to repeat options trades so effectively that you can count on earning that higher yield. So that's why I use the 5x boost factor.

    As for TGT, I closed my TGT position last year to "harvest" tax losses. In hindsight, that was a poor move as TGT's stock price shot up Dec and Jan. So that trade is to replace my TGT dividends (TGT yields 3.26% now) and for the outside chance of reopening a position close to where I sold my shares.

    ReplyDelete

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