Options Update: August 2019 (Part 2)

August was a spectacular month for DivGro's options trading! I added options income totaling $6,591 and secured options income of $9,461.

Recall that secured means I no longer have obligations related to the options that produced that income. When options expire or are closed early, my obligations as an option seller fall away.

Part 1 of this article covered the "normal" options trades I executed in August: an options assignment, an expired option, a closed option, some rolled options, and several covered calls and put options trades.

In Part 2, I'm presenting a few closing spread trades, the main contributors to this month's spectacular options income. Additionally, I'll summarize options expiring in September and October, and provide a summary of year to date options income.

Recap

Below is a snapshot showing the trades presented in Part 1:



Here, I'll present the closing spread trades on Kimberly-Clark (KMB),  General Mills (GIS), and Starbucks (SBUX).

Kimberly-Clark (KMB)

In March 2018, I executed a trade based on the recommendation of one of my advanced options trading advisories. The trade took advantage of higher implied volatility in KMB shares after the stock dropped 26% below its 52-week high:

#161	2018-03-14	:	-2	×	KMB 17 Jan 2020 $100.00 P	$ 1,503.00	( $      0.00 )
#160	2018-03-14	:	2	×	KMB 17 Jan 2020 $135.00 C	$        0.00	( $ -783.00 )

For reference, on the day I executed the spread, KMB closed at $105.51 per share.

By selling relatively expensive puts and buying calls with upside potential, the spread created three potentially favorable scenarios:

1. If KMB traded below $100 per share at expiration, the $100 puts would have been exercised, and I would have bought 200 KMB shares at an effective cost basis of $96.40 per share. (Benefit: buy 200 shares of KMB at a discount of about 9%). 
2. If KMB traded between $100 and $135 per share, both options would have expired worthless, allowing me to keep the options premium of about $720. (Benefit: earn 18% return on margin in about 22 months). 
3. If KMB traded above $135 per share, the $135 call would be in the money and the return on margin could be significant. (Benefit: huge upside depending on how much KMB goes above $135).

On 6 August, KMB closed above $133 per share. With about five months to until expiration, I decided to close the spread early and capture some gains:

#161	2018-03-14	:	-2	×	KMB 17 Jan 2020 $100.00 P	$ 1,503.00	( $ -144.15 )
#160	2018-03-14	:	2	×	KMB 17 Jan 2020 $135.00 C	$ 1,434.00	( $ -783.21 )

In all, I netted about $2,010 with this spread trade. Given a margin requirement of $4,000 (20% of 200 shares ⨉ $100 per share = $20,000 ÷ 5), my return is about 50% on margin over a holding period of 17 months, or about 35% annualized. 

General Mills (GIS)

In June 2018, I executed another trade based on the recommendation of one of my advanced options trading advisories.

The trade would have delivered 39% upfront on margin and had a chance of returning 100% or more (on margin) within two years. Here is the trade:

#210	2018-06-20	:	-3	×	GIS 17 Jan 2020 $42.50 P	$ 1,224.00	( $     -1.49 )
#209	2018-06-20	:	3	×	GIS 17 Jan 2020 $60.00 C	$        0.00	( $ -235.46 )

For reference, on the day I executed the spread, GIS closed at $42.56 per share.

The spread created the following scenarios:

1. If GIS traded below $42.50 per share at expiration, the $42.50 calls would have been exercised, and I would have bought 300 GIS shares at an effective cost basis of $39.21 per share. (Benefit: buy 300 shares of GIS at a discount of about 8%). 
2. If GIS traded between $42.50 and $60 per share, both options would have expired worthless, allowing me to keep the options premium of $987. (Benefit: earn 39% return on margin in about 19 months). 
3. If GIS traded above $60 per share, the $60 call would be in the money and the return on margin could be significant. (Benefit: huge upside depending on how much GIS goes above $135).

On 6 August, GIS traded above $52 per share. With about five months to until expiration, I decided to close the spread early and capture some gains:

#210	2018-06-20	:	-3	×	GIS 17 Jan 2020 $42.50 P	$ 1,224.00	( $ -230.52 )
#209	2018-06-20	:	3	×	GIS 17 Jan 2020 $60.00 C	$    231.00	( $ -236.50 )

In all, I netted about $988 with this spread trade. Given a margin requirement of $3,600 (20% of 300 shares ⨉ $60 per share = $18,000 ÷ 5), my return is about 27% on margin over a holding period of 14 months, or about 24% annualized.

Starbucks (SBUX)

In October 2018, I executed a similar spread trade based on the recommendation of one of my advanced options trading advisories.

The trade would have delivered 35% upfront on margin and had a chance of returning 100% or more (on margin) within two years. Here is the trade:

#239	2018-10-12	:	-2	×	SBUX 17 Jan 2020 $55.00 P	$ 966.00	( $     -0.84 )
#238	2018-10-12	:	2	×	SBUX 17 Jan 2020 $75.00 C	$     0.00	( $ -186.82 )

For reference, on the day I executed the spread, SBUX closed at $55.39 per share.

The spread created the following scenarios:

1. If SBUX traded below $55 per share at expiration, the $55 calls would have been exercised, and I would have bought 200 SBUX shares at an effective cost basis of $51.10 per share. (Benefit: buy 200 shares of SBUX at a discount of about 8%). 
2. If SBUX traded between $55 and $75 per share, both options would have expired worthless, allowing me to keep the options premium of $780. (Benefit: earn 35% return on margin in about 15 months). 
3. If SBUX traded above $75 per share, the $75 call would be in the money and the return on margin could be significant. (Benefit: huge upside depending on how much SBUX goes above $75).

On 14 August, SBUX traded above $94 per share. With about five months to until expiration, I decided to close the spread early and capture some gains:

#239	2018-10-12	:	-2	×	SBUX 17 Jan 2020 $55.00 P	$    966.00	( $   -47.68 )
#238	2018-10-12	:	2	×	SBUX 17 Jan 2020 $75.00 C	$ 4,510.00	( $ -187.75 )

In all, I netted about $5,241 with this spread trade. Given a margin requirement of $3,000 (20% of 200 shares ⨉ $75 per share = $15,000 ÷ 5), my return is 75% on margin over a holding period of only 10 months, or about 90% annualized!

Options Expiring Soon

Below I'm listing options expiring in the next two months. On expiration day, in the money options will result in options assignment, which I'd like to avoid in some cases, if possible.

September 2019:

#381	2019-08-02	:	-3	×	PFE 20 Sep 2019 $40.00 C	$ 138.00	( $ -2.39 )			→ Out of the money with a  9% safety margin
#380	2019-08-02	:	-1	×	MRK 20 Sep 2019 $80.00 P	$ 110.00	( $ -1.09 )			→ Out of the money with a  4% safety margin
#379	2019-08-02	:	-1	×	MDT 20 Sep 2019 $97.50 P	$ 158.00	( $ -0.80 )			→ Out of the money with a  13% safety margin
#368	2019-07-16	:	-2	×	ORCL 20 Sep 2019 $55.00 P	$ 152.00	( $ -0.99 )			→ In the money by  4% — caution!
#367	2019-07-16	:	-2	×	CSX 20 Sep 2019 $72.50 P	$ 150.00	( $ -0.99 )			→ In the money by  2% — caution!
#354	2019-05-28	:	-2	×	DAL 20 Sep 2019 $50.00 P	$ 310.00	( $ -1.00 )			→ Out of the money with a  19% safety margin
#349	2019-05-22	:	-2	×	ADM 20 Sep 2019 $35.00 P	$ 110.00	( $ -0.75 )			→ Out of the money with a  19% safety margin
#348	2019-05-20	:	-1	×	SNA 20 Sep 2019 $140.00 P	$ 260.00	( $ -1.10 )			→ Out of the money with a  11% safety margin
#341	2019-05-15	:	-1	×	INTC 20 Sep 2019 $40.00 P	$ 105.00	( $ -0.80 )			→ Out of the money with a  29% safety margin
#334	2019-04-04	:	-1	×	HRL 20 Sep 2019 $45.00 C	$ 121.00	( $ -0.30 )			→ Out of the money with a  5% safety margin
#332	2019-03-27	:	-2	×	PFE 20 Sep 2019 $45.00 C	$ 173.00	( $ -0.83 )			→ Out of the money with a  19% safety margin
#307	2019-02-20	:	-2	×	ADM 20 Sep 2019 $45.00 C	$ 234.00	( $ -0.98 )			→ Out of the money with a  7% safety margin

October 2019:

#383	2019-08-02	:	-1	×	XOM 18 Oct 2019 $67.50 P	$ 135.00	( $ -0.80 )			→ Out of the money with a  9% safety margin
#382	2019-08-02	:	-1	×	VZ 18 Oct 2019 $52.50 P	$ 108.00	( $ -0.96 )			→ Out of the money with a  14% safety margin
#378	2019-07-25	:	-2	×	NKE 18 Oct 2019 $75.00 P	$ 124.00	( $ -0.99 )			→ Out of the money with a  17% safety margin
#375	2019-07-25	:	-1	×	AAPL 18 Oct 2019 $180.00 P	$ 180.00	( $ -0.65 )			→ Out of the money with a  24% safety margin
#372	2019-07-22	:	-2	×	TSM 18 Oct 2019 $45.00 C	$ 380.00	( $ -3.30 )			→ At the money — caution!
#371	2019-07-22	:	-1	×	TRV 18 Oct 2019 $155.00 C	$ 255.00	( $ -0.35 )			→ Out of the money with a  2% safety margin
#370	2019-07-22	:	-1	×	DIS 18 Oct 2019 $145.00 C	$ 407.00	( $ -0.80 )			→ Out of the money with a  6% safety margin
#364	2019-06-28	:	-2	×	PEP 18 Oct 2019 $110.00 P	$ 118.00	( $ -0.99 )			→ Out of the money with a  23% safety margin
#356	2019-06-21	:	-1	×	CSCO 18 Oct 2019 $52.50 P	$ 120.00	( $ -1.10 )			→ In the money by  6% — caution!
#347	2019-05-16	:	-2	×	GIS 18 Oct 2019 $47.50 P	$ 260.00	( $ -1.60 )			→ Out of the money with a  14% safety margin
#346	2019-05-16	:	-1	×	AOS 18 Oct 2019 $45.00 P	$ 180.00	( $ -1.10 )			→ Out of the money with a  8% safety margin
#345	2019-05-15	:	-2	×	WFC 18 Oct 2019 $42.50 P	$ 240.00	( $ -1.00 )			→ Out of the money with a  15% safety margin
#342	2019-05-15	:	-2	×	QCOM 18 Oct 2019 $65.00 P	$ 156.00	( $ -0.99 )			→ Out of the money with a  21% safety margin
#320	2019-02-22	:	-1	×	TROW 18 Oct 2019 $110.00 C	$ 220.00	( $ -1.09 )			→ In the money by  6% — caution!
#319	2019-02-22	:	-2	×	TJX 18 Oct 2019 $60.00 C	$ 130.00	( $ -0.08 )			→ Out of the money with a  6% safety margin
#316	2019-02-22	:	-1	×	MSFT 18 Oct 2019 $125.00 C	$ 287.00	( $ -1.09 )			→ In the money by  11% — caution!
#310	2019-02-20	:	-1	×	TROW 18 Oct 2019 $110.00 C	$ 209.00	( $ -1.09 )			→ In the money by  6% — caution!

Seven options are in or at the money and several are out of the money with small margins of safety, so I'll have to monitor these carefully as the options expiration dates approach.

Concluding Remarks

My options goal in 2019 is to collect a total of $21,000 at an average of $1,750 per month.

	Total Options Income		Secured Options Income
This Month:	$  61,359		$  38,865
Last Month:	$  54,768		$  29,404
Difference:	$    6,591		$    9,461

After collecting $6,591 in options income in August, my year to date total jumped to $18,566. This averages about $2,321 per month, which now is well ahead of the desired monthly average of $1,750.

In 39 months of options trading, I've collected options income totaling $61,359. Of this total, $38,865 is secured, meaning I no longer have obligations to fulfill and I "own" that money free and clear.

While DivGro's focus remains dividend growth investing, options trading certainly contributes significantly to my portfolio's performance.

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

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