Thursday, August 29, 2019

Expired Options (August 2019)

The main options expiration day for August was Friday, 16 August.  I had a few options slated for expiration on that day and this short article explains what happened.

When options expire, I no longer have any associated obligations. The options premium collected become free and clear, also known as secured. Since I started options trading to boost DivGro's dividend income, I've secured options income totaling $29,404.

I usually write monthly options update articles summarizing options trades and also to keep track of options income. These updates serve as a status report on open options and potential obligations. In contrast, this article covers expirations.

Recap


Here is a summary of the options that expired on 16 August, as presented in last month's Options Update article. At the time of publication, Quest Diagnostics (DGX) traded above the $95 strike price of the covered call options I'd sold.

Furthermore, I noted that the put option on Tiffany (TIF) and the covered call options on Gilead Sciences (GILD) only had safety margins of 3% each.

DGX


On 16 August, I noticed that DGX was trading well above the $95 strike price of the covered calls I'd sold. So I decided to roll forward one of the covered calls and to allow the other to be assigned.

The 21 February 2020, $100 strike price covered call paid $674, while it cost me $584 to buy back the expiring $95 covered call. So I collected about $90 in the process.

After expiration, the other covered call got assigned and I sold 100 shares of DGX for $95 per share. The trade netted $195 (including dividends) or an annualized return of about 2.2%. However, if I include the secured options income of $252, the annualized return would increase to 5%.

Why did I decide to allow one option to be assigned?

Well, in a recent analysis of High-Quality Dividend StocksI found several excellent stocks that I wanted to buy, so allowing one of my DGX options to expire provided extra cash for those buys. I hope to report on these buys soon!

TIF


TIF traded near $80 per share during options expiration week, so to avoid being assigned the $90 put I rolled it forward to January 2020, simultaneously dropping the strike price to $85. Buying back the 16 Aug, $90 put cost me $637, but I collected $769 for selling the later-dated $85 put. The trade netted about $130 after commissions.

TIF provides fast-growing and Safe dividend yielding 2.72% and the stock is trading below fair value:

Source: Simply Safe Dividends

However, I'm a little averse to holding the stock with the prospects of a recession looming. The stock performed poorly during the Great Recession, dropping 69% from peak to trough. On the other hand, the company maintained its dividend during this time and has been trending higher since.



I'll see how things go by the January expiration date. If the stock trades in-the-money but near $85 per share, perhaps I'll let the put be assigned.

GILD


On 16 August, GILD closed at $63.14 per share, about 10% below the $70 strike price of the covered calls I'd sold. So the option expired and I secured $313 in options income.

GILD is trading at a discount to fair value, yielding 3.96% or about 40% above its 5-year average yield of 2.81%. The dividend is deemed Very Safe and is growing at a healthy clip.


I have yet to replace the covered calls that expired. With GILD trading below fair value, I'm finding it hard to determine a reasonably safe strike price. Perhaps I'll sell just one covered call this time around.

Concluding Remarks


I secured options income of $313 with August's expired options and collected an additional $220 in options income by rolling forward a couple of options. One covered call got assigned and handed me an annualized return on investment of 5%.

The exciting thing about collecting options income is that I can deploy that income immediately and buy more dividend growth stocks, so boosting DivGro's ability to generate dividend income. 

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