Tuesday, February 27, 2018

Options Update: January 2018 (Part 2)

This is Part 2 of my January 2018 options update.

Part 1 presented the regular options trades I executed in January. But I also executed a new strategy for DivGro, which I'll explain in this article. Specifically, I executed three bull put spreads, which combines the selling of a put option with the simultaneous buying of another put option at a lower strike price.

This update will also report on the open options and obligations I have and I'll conclude with 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.

Recall that I consider options income to be secure if I no longer have obligations related to those options. While I keep a running tally of DivGro's options income, I only count secured options income.

In 2017, I secured $8,908 in options income. So 2018's goal represents an increase of about 35%.

As mentioned in Part 1, many of my January options trades were defensive in nature as I attempted to protect my covered calls from rising stock prices. I rolled forward several trades at the cost of giving up secured income. Fortunately, every defensive trade added to DivGro's total options income even though I gave up secured options income in the process.

I also gave up secured options income to execute three bull put spreads.

Bull Put Spreads


In January, I decided to try something new by executing a few bull put spreads.

A bull put spread involves being short one put option and long another put option with the same expiration date but with a lower strike price. The short put generates income and the long put serves as insurance in case the underlying stock's price moves down sharply.

You receive premium for selling the put option, but you pay premium to buy the lower strike price put option. The net premium received is the options income for executing the spread trade.

Below is the expected profit/loss profile at expiration:

If the stock price is above the short put strike, both puts expire worthless and the profit is maximized, equal to the net premium received.

On the other hand, if the stock price is below the long put strike at expiration, the trade results in the maximum loss, which equals the difference between the spread and net premium received.

In between the long and short put strikes, the outcome depends on where the stock price fall relative to the breakeven point. If the short put expires with intrinsic value less than the net premium received, the bull put spread realizes a profit. However, if the short put expires with more intrinsic value than the net credit received, the trade results in a loss.

The breakeven point is the difference between the short put strike and the net premium received.

Here are the bull put spreads I executed in January:

#1362018-01-12:
-8
×JPM 16 Mar 2018 $110.00 P $ 1,864.00 ( $      -10.29 )
#1372018-01-12:
 8
×JPM 16 Mar 2018 $105.00 P $ 0.00 ( $    -842.23 )→ breakeven is $108.74
#1402018-01-12:
-6
×WYNN 16 Mar 2018 $160.00 P $ 3,791.00 ( $        -3.14 )
#1412018-01-12:
 6
×WYNN 16 Mar 2018 $155.00 P $ 0.00 ( $ -2,708.04 )→ breakeven is $158.20 
#1382018-01-12:
-6
×RL 20 Apr 2018 $105.00 P $ 3,566.00 ( $        -3.34 )
#1392018-01-12:
 6
×RL 20 Apr 2018 $100.00 P $ 0.00 ( $ -2,427.25 )→ breakeven is $103.11

All three bull put spreads are $5 and the maximum profit would exceed $1,000 per trade. 

Let's consider each of the bull put spreads to see the possible outcomes. To simplify the presentation, I'm rounding premiums to cents and totals to dollars.

JPM

For 8 options, I received a net credit of $1,011, so the net premium is $1.26 ($1,011 ÷ 8 ÷ 100).
  1. Maximum profit:  JPM closes above $110 per share on 16 March and both puts expire worthless. I'll earn the net premium of $1.26 (or $1,011).
  2. Maximum loss: JPM closes below $105 per share on 16 March and both puts expire in the money. I'll realize the maximum possible loss, $5 - $1.26 = $3.74 (or $2,992).
  3. Breakeven: $110 - $1.26 = $108.74.
WYNN

For 6 options, I received a net credit of $1,080, so the net premium is $1.80 ($1,080 ÷ 6 ÷ 100).
  1. Maximum profit:  WYNN closes above $160 per share on 16 March. Both puts expire worthless and I'll earn the net premium of $1.80 (or $1,080).
  2. Maximum loss: WYNN closes below $155 per share on 16 March. Both puts expire in the money and I realize the maximum possible loss, $5 - $1.80 = $3.20 (or $1,920).
  3. Breakeven: $160 - $1.80 = $158.20.
RL

For 6 options, I received a net credit of $1,135, so the net premium is $1.89 ($1,135 ÷ 6 ÷ 100).
  1. Maximum profit:  RL closes above $105 per share on 20 April. Both puts expire worthless and I'll earn the net premium of $1.89 (or $1,135).
  2. Maximum loss: RL closes below $100 per share on 16 April. Both puts expire in the money and I realize the maximum possible loss, $5 - $1.89 = $3.11 (or $1,866).
  3. Breakeven: $105 - $1.89 = $103.11.
When collecting options income, you assume the associated obligations. This is no different with bull put spreads. You collect the net premium and assume the obligations of the bull put spread. But with bull put spreads you're also paying for the "insurance" of the lower strike price put. Of course, that payment is covered by the premium collected for selling the higher strike price put. 

I choose to record the two legs of spread trades as separate trades. That's why I assign two trade numbers to spread trades, such as #136 and #137 for the JPM bull put spread above. The implication of this choice is that I "give up" secured options income to pay for the long put. Simultaneously, though, I increase DivGro's total options income by the collected premium of the short put. 

The bottom line is that I pay for bull put spreads by giving up secured options income, hopefully only temporarily, until the obligations I assume in the process, expire. 

Options Expiring Soon


I look forward to expiring options, hopefully allowing me to secure more options income. Of course, for in the money options, I have decisions to make before the expiration date.

The following options expire in March and April:

March:
#1182017-11-17:
-2
×TXN 16 Mar 2018 $85.00 P $ 200.00 ( $        -0.99 )→ Out of the money with a  26% safety margin 
#1312018-01-10:
-3
×TGT 16 Mar 2018 $60.00 P $ 144.00 ( $        -1.48 )→ Out of the money with a  26% safety margin  
#1352018-01-12:
-3
×KSS 16 Mar 2018 $55.00 P $ 405.00 ( $        -0.14 )→ Out of the money with a  21% safety margin 
#1362018-01-12:
-8
×JPM 16 Mar 2018 $110.00 P $ 1,864.00 ( $      -10.29 )→ Out of the money with a  7% safety margin 
#1372018-01-12:
 8
×JPM 16 Mar 2018 $105.00 P $ 0.00 ( $    -842.23 )→ insurance for bull put spread
#1402018-01-12:
-6
×WYNN 16 Mar 2018 $160.00 P $ 3,791.00 ( $        -3.14 )→ Out of the money with a  4% safety margin 
#1412018-01-12:
 6
×WYNN 16 Mar 2018 $155.00 P $ 0.00 ( $ -2,708.04 )→ insurance for bull put spread

April:
#1282018-01-10:
-1
×AXP 20 Apr 2018 $100.00 P      $ 330.00 ( $        -0.80 )→  In the money by 1% 
#1302018-01-10:
-3
×KBH 20 Apr 2018 $31.00 P $ 306.00 ( $        -1.49 )→  In the money by 4%  
#1352018-01-12:
-3
×KSS 16 Mar 2018 $55.00 P $ 405.00 ( $        -0.14 )→ Out of the money with a  21% safety margin 
#1382018-01-12:
-6
×RL 20 Apr 2018 $105.00 P $ 3,566.00 ( $        -3.34 )→ Out of the money with a  3% safety margin 
#1392018-01-12:
 6
×RL 20 Apr 2018 $100.00 P $ 0.00 ( $ -2,427.25 )→ insurance for bull put spread

I'm not reporting February's expirations, because I'll cover them in my next options update article.

I'll have to monitor AXP and KBH carefully. AXP is a dividend growth stock with a track record of 6 consecutive years of higher dividend payments, but the stock yields only 1.42%. KBH is not a dividend growth stock and yields only 0.34%. I don't really want to own these stocks and my trades are somewhat speculative—in a sense squeezing "dividends" out of these upward trending stocks. If successful, I'll earn annualized yields exceeding 10% with these trades.

So far, the bull put spreads are working out favorably. If the share price stays above the higher put strike price, I'll earn just more than $1,000 per bull put spread. Also, I'll earn something if the share price stays above the breakeven prices listed earlier. Anything below breakeven will result in a loss.

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:

key:  expired  •  closed  •  rolled  •  assigned  •  open 

IDDATE:NO×TICKER OPTIONINCOME( EXPENSES )ROLLEDTOTAL➤ SECURED
#1412018-01-12:  6×WYNN 16 Mar 2018 $155.00 P $ 0.00 ( $ -2,708.04 )$ 26,892.46 ➤ $ 3,413.46 
#1402018-01-12:  -6×WYNN 16 Mar 2018 $160.00 P $ 3,791.00 ( $        -3.14 )$ 29,600.50 ➤ $ 6,121.50 
#1392018-01-12:  6×RL 20 Apr 2018 $100.00 P $ 0.00 ( $ -2,427.25 )$ 25,812.64 ➤ $ 6,124.64 
#1382018-01-12:  -6×RL 20 Apr 2018 $105.00 P $ 3,566.00 ( $        -3.34 )$ 28,239.89 ➤ $ 8,551.89 
#1372018-01-12:  8×JPM 16 Mar 2018 $105.00 P $ 0.00 ( $    -842.23 )$ 24,677.23 ➤ $ 8,555.23 
#1362018-01-12:  -8×JPM 16 Mar 2018 $110.00 P $ 1,864.00 ( $      -10.29 )$ 25,519.46 ➤ $ 9,397.46 
#1352018-01-12:  -3×KSS 16 Mar 2018 $55.00 P $    405.00 ( $        -0.14 )$ 23,665.75 ➤ $ 9,407.75 
#1342018-01-10:  -4×QCOM 17 Jan 2020 $65.00 C $ 3,140.00 ( $        -2.05 )$ 23,260.89 ➤ $ 9,407.89 
#1332018-01-10:  -20×F 17 Jan 2020 $12.00 C $ 3,720.00 ( $      -15.96 )$ 20,122.94 ➤ $ 9,409.94 
#1322018-01-10:  -2×KO 18 Jan 2019 $47.00 C $    414.00 ( $        -2.58 )$ 16,418.90 ➤ $ 9,425.90 
#1312018-01-10:  -3×TGT 16 Mar 2018 $60.00 P $    144.00 ( $        -1.48 )$ 16,007.48 ➤ $ 9,428.48 
#1302018-01-10:  -3×KBH 20 Apr 2018 $31.00 P $    306.00 ( $        -1.49 )$ 15,864.96 ➤ $ 9,429.96 
#1292018-01-10:  -2×FAST 18 May 2018 $50.00 P $    350.00 ( $        0.00 )$ 15,560.45 ➤ $ 9,431.45 
#1282018-01-10:  -1×AXP 20 Apr 2018 $100.00 P $    330.00 ( $        -0.80 )$ 15,210.45 ➤ $ 9,431.45 
#1272017-11-30:  -2×EEM 19 Jan 2018 $46.00 P $    234.00 ( $        -0.85 )$ 14,881.25 ➤ $ 9,432.25 
#1262017-11-30:  -2×BBT 16 Mar 2018 $46.00 P $    192.00 ( $        -0.99 )$ 14,648.10 ➤ $ 9,199.10 
#1252017-11-21:  -3×X 19 Jan 2018 $26.00 P $    252.00 ( $        -2.09 )$ 14,457.09 ➤ $ 9,200.09 
#1242017-11-21:  -2×RL 19 Jan 2018 $80.00 P $    150.00 ( $        -0.09 )$ 14,207.18 ➤ $ 8,950.18 
#1232017-11-21:  -3×BAC 19 Jan 2018 $25.00 P $    120.00 ( $        -2.23 )$ 14,057.27 ➤ $ 8,800.27 
#1222017-11-17:  -1×VLO 18 Jan 2019 $80.00 C $    892.00 ( $        -0.64 )$ 13,939.50 ➤ $ 8,682.50 
#1212017-11-17:  -3×NKE 20 Apr 2018 $50.00 P $    208.00 ( $        -2.39 )$ 13,048.14 ➤ $ 8,683.14 
#1202017-11-17:  -2×AAPL 16 Feb 2018 $150.00 P $    376.00 ( $        -1.60 )$ 12,842.53 ➤ $ 8,685.53 
#1192017-11-17:  -2×WBA 15 Dec 2017 $70.00 P $    244.00 ( $        -0.99 )$ 12,468.13 ➤ $ 8,687.13 
#1182017-11-17:  -2×TXN 16 Mar 2018 $85.00 P $    200.00 ( $        -0.99 )$ 12,225.12 ➤ $ 8,444.12 
#1172017-11-17:  -2×MO 19 Jan 2018 $62.50 P $    140.00 ( $        -0.99 )$ 12,026.11 ➤ $ 8,445.11 
#1162017-10-20:  -2×INTC 17 Jan 2020 $40.00 C $ 1,032.00 ( $        -1.01 )$ 11,887.10 ➤ $ 8,306.10 
#1152017-10-20:  -1×D 20 Apr 2018 $80.00 C $    253.00 ( $        -0.35 )$ 10,856.11 ➤ $ 8,307.11 
#1142017-10-20:  -1×DIS 15 Dec 2017 $95.00 P $    145.00 ( $      -17.59 )$ 10,603.46 ➤ $ 8,307.46 
#1132017-09-27:  -2×VLO 17 Nov 2017 $70.00 P $    162.00 ( $        -0.99 )$ 10,476.05 ➤ $ 8,180.05 
#1122017-09-14:  -1×WFC 19 Jan 2018 $50.00 P $    166.00 ( $        -1.59 )$ 10,315.04 ➤ $ 8,019.04 
#1112017-09-14:  -2×AAPL 15 Dec 2017 $135.00 P $    204.00 ( $      -14.17 )→ #120$ 10,150.63 ➤ $ 7,854.63 
#1102017-08-30:  -2×WMT 15 Dec 2017 $75.00 P $    314.00 ( $        -7.15 )$ 9,960.80 ➤ $ 7,664.80 
#1092017-08-30:  -2×WFC 19 Jan 2018 $50.00 P $    364.00 ( $        -1.30 )$ 9,653.95 ➤ $ 7,357.95 
#1082017-08-30:  -2×TGT 19 Jan 2018 $50.00 P $    336.00 ( $        -1.59 )$ 9,291.25 ➤ $ 6,995.25 
#1072017-08-30:  -2×GILD 15 Feb 2018 $80.00 C $    923.00 ( $        -1.91 )$ 8,956.84 ➤ $ 6,660.84 
#1062017-08-30:  -20×F 16 Mar 2018 $12.00 C $    480.00 ( $ -2,221.51 )→ #133$ 8,035.75 ➤ $ 6,662.75 
#1052017-08-30:  -2×ABBV 15 Jun 2018 $70.00 C $ 1,373.00 ( $        -1.32 )$ 9,777.26 ➤ $ 8,404.26 
#1042017-08-30:  -4×QCOM 20 Apr 2018 $60.00 C $    524.00 ( $ -2,963.96 )→ #134$ 8,405.58 ➤ $ 8,405.58 
#1032017-08-30:  -3×CSCO 16 Feb 2018 $34.00 C $    182.00 ( $        -2.38 )$ 10,845.54 ➤ $ 10,845.54 
#1022017-08-18:  -2×HRL 15 Dec 2017 $32.50 P $    200.00 ( $        -0.11 )$ 10,665.92 ➤ $ 10,665.92 
#1012017-07-18:  -3×PFE 15 Dec 2017 $34.00 C $    210.00 ( $        -2.39 )$ 10,466.03 ➤ $ 10,466.03 
#1002017-07-18:  -2×LOW 19 Jan 2018 $75.00 P $    830.00 ( $    -113.67 )$ 10,258.42 ➤ $ 10,258.42 
#0992017-07-18:  -3×GE 18 Jun 2018 $30.00 C $    153.00 ( $      -12.21 )$ 9,542.09 ➤ $ 9,542.09 
#0982017-07-18:  -3×NKE 19 Jan 2018 $50.00 P $    301.00 ( $      -79.22 )→ #121$ 9,401.30 ➤ $ 9,401.30 
#0972017-07-18:  -3×WFC 15 Sep 2017 $52.50 P $    222.00 ( $    -364.44 )→ #112$ 9,179.52 ➤ $ 9,179.52 
#0962017-07-18:  -2×WBA 25 Aug 2017 $75.00 P $    130.00 ( $        -0.99 )$ 9,321.96 ➤ $ 9,321.96 
#0952017-07-18:  -1×TXN 20 Oct 2017 $75.00 P $    134.00 ( $        -6.89 )$ 9,192.95 ➤ $ 9,192.95 
#0942017-07-18:  -2×SBUX 19 Jan 2018 $52.50 P $    246.00 ( $        -1.00 )$ 9,065.84 ➤ $ 9,065.84 
#0932017-07-18:  -1×DIS 20 Oct 2017 $97.50 P $    105.00 ( $        -0.80 )$ 8,820.84 ➤ $ 8,820.84 
#0922017-07-18:  -1×AAPL 20 Oct 2018 $130.00 P $    114.00 ( $        -8.04 )$ 8,716.64 ➤ $ 8,716.64 
#0912017-07-01:  -3×GE 15 Sep 2017 $33.00 C $      99.00 ( $        -3.98 )→ #099$ 8,610.68 ➤ $ 8,610.68 
#0902017-06-21:  -2×TGT 19 Jan 2018 $65.00 C $      76.00 ( $    -235.55 )$ 8,515.66 ➤ $ 8,515.66 
#0892017-06-21:  -2×INTC 20 Oct 2017 $36.00 C $    152.00 ( $    -853.97 )→ #116$ 8,675.21 ➤ $ 8,675.21 
#0882017-06-21:  -20×F 15 Sep 2017 $12.00 C $    220.00 ( $      -62.44 )→ #106$ 9,377.18 ➤ $ 9,377.18 
#0872017-06-21:  -5×BAC 18 Aug 2017 $22.00 P $    190.00 ( $        -6.48 )$ 9,219.62 ➤ $ 9,219.62 
#0862017-06-16:  -2×WMT 15 Sep 2017 $70.00 P $    246.00 ( $        -9.16 )→ #110$ 9,036.10 ➤ $ 9,036.10 
#0852017-06-16:  -1×VLO 15 Dec 2017 $70.00 C $    230.00 ( $ -1,211.42 )→ #122$ 8,799.26 ➤ $ 8,799.26 
#0842017-06-16:  -2×TGT 20 Oct 2017 $45.00 P $    248.00 ( $      -22.58 )→ #108$ 9,780.68 ➤ $ 9,780.68 
#0832017-06-16:  -3×PPL 20 Oct 2017 $37.00 P $    147.00 ( $      -32.48 )$ 9,555.26 ➤ $ 9,555.26 
#0822017-06-16:  -1×CVS 18 Aug 2017 $75.00 P $    222.00 ( $        -0.80 )$ 9,440.74 ➤ $ 9,440.74 
#0812017-06-16:  -2×AXP 21 Jul 2017 $80.00 P $    266.00 ( $        -1.00 )$ 9,219.54 ➤ $ 9,219.54 
#0802017-05-12:  -2×ABBV 15 Sep 2017 $67.50 C $    408.00 ( $ -1,295.88 )→ #105$ 8,954.54 ➤ $ 8,954.54 
#0792017-05-12:  -2×KO 19 Jan 2018 $45.00 C $    200.00 ( $    -227.69 )→ #132$ 9,842.42 ➤ $ 9,842.42 
#0782017-05-12:  -2×DIS 15 Dec 2017 $110.00 C $ 1,090.00 ( $      -83.99 )$ 9,870.11 ➤ $ 9,870.11 
#0772017-05-12:  -1×OC 18 Aug 2017 $60.00 P $    210.00 ( $        -1.95 )$ 8,864.10 ➤ $ 8,864.10 
#0762017-04-21:  -1×D 20 Oct 2017 $77.50 C $    323.00 ( $    -222.69 )→ #115$ 8,656.05 ➤ $ 8,656.05 
#0752017-04-21:  -3×INTC 16 Jun 2017 $35.00 P $    189.00 ( $        -3.86 )$ 8,555.74 ➤ $ 8,555.74 
#0742017-04-21:  -2×GILD 15 Sep 2017 $75.00 C $    210.00 ( $    -949.47 )→ #107$ 8,370.60 ➤ $ 8,370.60 
#0732017-04-21:  -20×F 16 Jun 2017 $12.00 C $    320.00 ( $        -9.11 )$ 9,110.07 ➤ $ 9,110.07 
#0722017-04-21:  -2×LOW 21 Jul 2017 $80.00 P $    408.00 ( $    -743.57 )→ #100$ 8,799.18 ➤ $ 8,799.18 
#0712017-04-21:  -5×BAC 21 Jul 2017 $20.00 P $    160.00 ( $        -2.28 )$ 9,134.75 ➤ $ 9,134.75 

key:
  expired  •  closed  •  rolled  •  assigned  •  open 


For a complete listing of all options transactions, please visit my Options History page.

Goals Progress


I count secured options income, which is income from options with no further obligations.


Total
Options Income
Secured
Options Income
This Month:
$ 26,892$   3,413
Last Month:
$ 20,263$ 11,420
Difference:
$   6,629$ -8,007

I started 2018 with $11,420 in secured options income, so with only $3,413 secured through January 2018, I'm down $8,007 so far in 2018. That means I'll have to secure $20,007 in the rest of 2018 to reach my options goal! The defensive trades and bull put spreads I executed in January have made a challenging goal even more challenging!

We'll see how the bull put spreads go. Hopefully, they'll pay off nicely and allow me to get my secured options income back on track!

Thanks for reading! 

What do you think of my bull put spreads? Do you think it is a worthwhile strategy to pursue? Have you executed spread trades and do you have any words of wisdom to share? Please comment below and share your thoughts!

4 comments :

  1. Thx for sharing. My February update will be interesting... O have a few lessons learned and an action plan going forward.

    ReplyDelete
    Replies
    1. Hi, Amber Tree -- I look forward to reading about your lessons learned! The correction at the start of February and the increased volatility made things interesting as far as options trading goes, to say the least!

      Delete
  2. I've definitely found that naked/cash secured/share secured options have been the most profitable for me as compared to some of the tighter spread trades. One trade type that I really like though is the ratio spread because there's a lot of management possibilities there although it does have the naked option component to it. I've started to try and incorporate some basic TA when determining where I want to put my spread trades though which has helped some, but who knows if that was just luck of the draw or will actually prove useful. The thing I've found that works best though is to widen out the spreads as much as you're comfortable.

    ReplyDelete
    Replies
    1. Thanks for your comment, Passive IncomePursuit. It is good to share our experiences with options trading, and I appreciate that you did the same. Options trading is such a wide topic that I (still) consider myself to be a learner "driver". When I have more time to do learn/research, I'll look into spread trading more carefully.

      Delete

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