Thursday, September 19, 2019

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:


#1612018-03-14:-2×KMB 17 Jan 2020 $100.00 P $ 1,503.00 ( $      0.00 )
#1602018-03-14:  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:

#1612018-03-14:-2×KMB 17 Jan 2020 $100.00 P $ 1,503.00 ( $ -144.15 )
#1602018-03-14:  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:

#2102018-06-20:-3×GIS 17 Jan 2020 $42.50 P $ 1,224.00 ( $     -1.49 )
#2092018-06-20:  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:


#2102018-06-20:-3×GIS 17 Jan 2020 $42.50 P $ 1,224.00 ( $ -230.52 )
#2092018-06-20:  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:


#2392018-10-12:-2×SBUX 17 Jan 2020 $55.00 P $ 966.00 ( $     -0.84 )
#2382018-10-12:  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:


#2392018-10-12:-2×SBUX 17 Jan 2020 $55.00 P $    966.00 ( $   -47.68 )
#2382018-10-12:  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:

#3812019-08-02:-3×PFE 20 Sep 2019 $40.00 C $ 138.00 ( $ -2.39 )
→ Out of the money with a  9% safety margin  
#3802019-08-02:-1×MRK 20 Sep 2019 $80.00 P $ 110.00 ( $ -1.09 )
→ Out of the money with a  4% safety margin  
#3792019-08-02:-1×MDT 20 Sep 2019 $97.50 P $ 158.00 ( $ -0.80 )→ Out of the money with a  13% safety margin  
#3682019-07-16:-2×ORCL 20 Sep 2019 $55.00 P $ 152.00 ( $ -0.99 )
→ In the money by  4% — caution!  
#3672019-07-16:-2×CSX 20 Sep 2019 $72.50 P $ 150.00 ( $ -0.99 )
→ In the money by  2% — caution!   
#3542019-05-28:-2×DAL 20 Sep 2019 $50.00 P $ 310.00 ( $ -1.00 )
→ Out of the money with a  19% safety margin 
#3492019-05-22:-2×ADM 20 Sep 2019 $35.00 P $ 110.00 ( $ -0.75 )
→ Out of the money with a  19% safety margin  
#3482019-05-20:-1×SNA 20 Sep 2019 $140.00 P $ 260.00 ( $ -1.10 )
→ Out of the money with a  11% safety margin 
#3412019-05-15:-1×INTC 20 Sep 2019 $40.00 P $ 105.00 ( $ -0.80 )
→ Out of the money with a  29% safety margin 
#3342019-04-04:-1×HRL 20 Sep 2019 $45.00 C $ 121.00 ( $ -0.30 )
→ Out of the money with a  5% safety margin 
#3322019-03-27:-2×PFE 20 Sep 2019 $45.00 C $ 173.00 ( $ -0.83 )
→ Out of the money with a  19% safety margin  
#3072019-02-20:-2×ADM 20 Sep 2019 $45.00 C $ 234.00 ( $ -0.98 )
→ Out of the money with a  7% safety margin 

October 2019:

#3832019-08-02:-1×XOM 18 Oct 2019 $67.50 P $ 135.00 ( $ -0.80 )
→ Out of the money with a  9% safety margin  
#3822019-08-02:-1×VZ 18 Oct 2019 $52.50 P $ 108.00 ( $ -0.96 )
→ Out of the money with a  14% safety margin  
#3782019-07-25:-2×NKE 18 Oct 2019 $75.00 P $ 124.00 ( $ -0.99 )
→ Out of the money with a  17% safety margin  
#3752019-07-25:-1×AAPL 18 Oct 2019 $180.00 P $ 180.00 ( $ -0.65 )
→ Out of the money with a  24% safety margin  
#3722019-07-22:-2×TSM 18 Oct 2019 $45.00 C $ 380.00 ( $ -3.30 )
→ At the money — caution!  
#3712019-07-22:-1×TRV 18 Oct 2019 $155.00 C $ 255.00 ( $ -0.35 )
→ Out of the money with a  2% safety margin  
#3702019-07-22:-1×DIS 18 Oct 2019 $145.00 C $ 407.00 ( $ -0.80 )
→ Out of the money with a  6% safety margin   
#3642019-06-28:-2×PEP 18 Oct 2019 $110.00 P $ 118.00 ( $ -0.99 )
→ Out of the money with a  23% safety margin  
#3562019-06-21:-1×CSCO 18 Oct 2019 $52.50 P $ 120.00 ( $ -1.10 )
→ In the money by  6% — caution!   
#3472019-05-16:-2×GIS 18 Oct 2019 $47.50 P $ 260.00 ( $ -1.60 )
→ Out of the money with a  14% safety margin   
#3462019-05-16:-1×AOS 18 Oct 2019 $45.00 P $ 180.00 ( $ -1.10 )
→ Out of the money with a  8% safety margin   
#3452019-05-15:-2×WFC 18 Oct 2019 $42.50 P $ 240.00 ( $ -1.00 )
→ Out of the money with a  15% safety margin  
#3422019-05-15:-2×QCOM 18 Oct 2019 $65.00 P $ 156.00 ( $ -0.99 )→ Out of the money with a  21% safety margin   
#3202019-02-22:-1×TROW 18 Oct 2019 $110.00 C $ 220.00 ( $ -1.09 )
→ In the money by  6% — caution!    
#3192019-02-22:-2×TJX 18 Oct 2019 $60.00 C $ 130.00 ( $ -0.08 )
→ Out of the money with a  6% safety margin    
#3162019-02-22:-1×MSFT 18 Oct 2019 $125.00 C $ 287.00 ( $ -1.09 )
→ In the money by  11% — caution!     
#3102019-02-20:-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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2 comments :

  1. Hi, interesting stuff. My I ask which trading advisory do you use. Cheers.

    ReplyDelete
    Replies
    1. Unfortunately, the trading advisory that promoted those spread trades have seized to be. I do still receive monthly trade recommendations from Retirement Trader (Stansberry Research).

      Delete

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