In my September Options Update article, I listed no fewer than sixteen options with October expiration dates.Four of these options were trading at or in the money, meaning they were in danger of being assigned. Furthermore, a few options were trading out of the money with small margins of safety.
Before expiration, I took some defensive actions to avoid options assignment. Specifically, I rolled forward several options and in some cases moved the strike price out of the money.
But most of the options expired and I no longer have associated obligations. For puts, there no longer is a chance that I would have to buy shares and the margin that was set aside as collateral gets released. For covered calls, there no longer is a chance that my shares will be called away. The options premium I collected by selling these options become free and clear or secured.
Recap
Here is a summary of the options that expired on 18 October, as presented in last month's Options Update article.
October 2019:
Note that two of these options were in the money, Taiwan Semiconductor Manufacturing (TSM) and Cisco Systems (CSCO), while two more options were at the money, Exxon Mobil (XOM) and AO Smith (AOS). Also, note that two covered calls on T Rowe Price (TROW) were trading out of the money with a margin of safety of only 2%, while TJX (TJX) was trading out of the money with a margin of safety of 7%.
On 18 October, I noticed that TSM was trading above $49 per share. Rather than waiting for an assignment, I decided to roll forward the $45 covered calls to the 15 January 2021, $50 strike price.
Selling the LEAPs covered the cost of buying back the expiring $45 call options and, net of commissions, I collected $140, which increases my options income tally. On the other hand, buying back the $45 call options reduced my secured options income by about $566.
On 18 October, CSCO traded below $47 and well below the $52.50 strike price of the put option I'd sold.
When I sell put options, I do so only on stocks I wouldn't mind buying at the given strike price. If the stock price drops well below the strike price, as in this case, paying (much) more than the going market price certainly is not pleasant. Sometimes trades turn against you, and you just must be OK with that in order to reap the benefits of options trading.
I wanted to add to my CSCO position anyway, so I decided to wait for the options assignment rather than buying back the put option or rolling it forward. CSCO yields about 3% and has a Very Safe dividend according to Simply Safe Dividends. And CSCO's quality score is 24 out of a possible 25.
My effective cost basis is $52.50 – $1.19 = $51.31 per share and I doubled my CSCO position in the process. DivGro's projected annual dividend income (PADI) will increase by $140 as a result.
It turns out that XOM closed just 11¢ above the strike price of the put I'd sold. I would have been happy to buy 100 XOM shares for $67.50, but the option expired and I secured about $134 in options income in the process.
XOM is trading above $69 now and I'll be looking into selling another XOM put soon.
On 18 October, AOS closed at $51.01 per share, well above the $45 strike price of the put I'd sold. As a result, the option expired and I secured about $179 in options income.
While AOS has a dividend safety score of 99 (Very Safe), the stock's quality score is on the low side at 14/25. I'm no longer interested in opening an AOS position, so I won't sell another put option on AOS.
Buying back the $110 covered calls cost only $19 and I secured $408 in options income as a result. In contrast, selling the $115 covered calls expiring in December generated $339 in options income. I'm happy with this trade and moving the strike price to $115 gives me a little more breathing room!
TJX has a dividend safety score of 86 (Very Safe) and a quality score of 23. My TJX position has generated annualized returns of 30%, so I'm very happy with this investment!
The $60 covered calls I'd sold on TJX were in the money on 18 October, so to protect my shares (and PADI of $184), I decided to roll forward the options.
Buying back the $60 covered calls cost $128 and I secured only $2 in options income as a result. In contrast, selling the $65 covered calls expiring in January 2020 generated $188 in options income. Moving the strike price to $65 gives me a little more breathing room!
All the remaining options expired worthless (to the buyers of the options), so I no longer have obligations associated with these options. In the process, I secured options income totaling $1,848! Since my obligations "expired" along with the options, I can now consider selling similar options to collect more options income!
Calls
Traveler's (TRV) is trading just above $130 per share after the company announced disappointing earnings. My cost basis of $115.88 per share. I'll look to sell another covered call, perhaps at the $145 strike price.
Walt Disney (DIS) is trading above $130 per share as well. I'm considering selling another $145 covered call.
Puts
Verizon Communications (VZ) is trading above $60 per share, while my cost basis for the 100 shares I own is $47.02. VZ is a high-quality dividend growth (DG) stock with a quality score of 22. I wouldn't mind doubling my VZ position, but not at this valuation! I'll see if I can sell a $50 covered call.
Nike (NKE) is trading near $91 per share, whereas my cost basis is $81.89. NKE has a perfect quality score of 25, but the stock is trading at a premium valuation. I'm considering selling an $80 covered call this time around.
Apple (AAPL) is one of my home run stocks with total returns of more than 145%. The stock made an all-time high of $245.73 per share, well above my cost-basis of $104.41. The stock is getting quite expensive, and I'm unsure if I should sell another put option at this time.
I would love to increase my position in PepsiCo (PEP), but the stock is rather expensive now, trading above $136 per share. My cost basis for 20 shares is $116.44. I don't think I'll sell another put option on PEP at this time.
I don't own General Mills (GIS) and I don't think I'll sell another put option to try to buy shares.
My position in Wells Fargo (WFC) has a cost basis of $45.95, whereas the stock is trading above $51 per share. I wouldn't mind doubling my position, so I'll see if I can sell a put option at the $45 strike price.
Finally, Qualcomm (QCOM) is trading above $80 per share, whereas my smallish position of 35 shares has a cost basis of $69.41. I'll try to sell a put option with a $70 strike price this time around.
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October 2019:
| #383 | 2019-08-02 | : | -1 | × | XOM 18 Oct 2019 $67.50 P | $ 135.00 | ( $ -0.80 ) | → At the money — caution! | ||
| #382 | 2019-08-02 | : | -1 | × | VZ 18 Oct 2019 $52.50 P | $ 108.00 | ( S -0.96 ) | → Out of the money with a 12% safety margin | ||
| #378 | 2019-07-25 | : | -2 | × | NKE 18 Oct 2019 $75.00 P | $ 124.00 | ( $ -0.99 ) | → Out of the money with a 23% safety margin | ||
| #375 | 2019-07-25 | : | -1 | × | AAPL 18 Oct 2019 $180.00 P | $ 180.00 | ( $ -0.65 ) | → Out of the money with a 26% safety margin | ||
| #372 | 2019-07-22 | : | -2 | × | TSM 18 Oct 2019 $45.00 C | $ 380.00 | ( $ -3.30 ) | → In the money by 8% — caution! | ||
| #371 | 2019-07-22 | : | -1 | × | TRV 18 Oct 2019 $155.00 C | $ 255.00 | ( $ -0.35 ) | → Out of the money with a 9% safety margin | ||
| #370 | 2019-07-22 | : | -1 | × | DIS 18 Oct 2019 $145.00 C | $ 407.00 | ( $ -0.80 ) | → Out of the money with a 9% safety margin | ||
| #364 | 2019-06-28 | : | -2 | × | PEP 18 Oct 2019 $110.00 P | $ 118.00 | ( $ -0.99 ) | → Out of the money with a 25% safety margin | ||
| #356 | 2019-06-21 | : | -1 | × | CSCO 18 Oct 2019 $52.50 P | $ 120.00 | ( $ -1.10 ) | → In the money by 10% — 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 ) | → At the money — caution! | ||
| #345 | 2019-05-15 | : | -2 | × | WFC 18 Oct 2019 $42.50 P | $ 240.00 | ( $ -1.00 ) | → Out of the money with a 14% safety margin | ||
| #342 | 2019-05-15 | : | -2 | × | QCOM 18 Oct 2019 $65.00 P | $ 156.00 | ( $ -0.99 ) | → Out of the money with a 14% safety margin | ||
| #320 | 2019-02-22 | : | -1 | × | TROW 18 Oct 2019 $110.00 C | $ 220.00 | ( $ -1.09 ) | → Out of the money with a 2% safety margin | ||
| #319 | 2019-02-22 | : | -2 | × | TJX 18 Oct 2019 $60.00 C | $ 130.00 | ( $ -0.08 ) | → Out of the money with a 7% safety margin | ||
| #310 | 2019-02-20 | : | -1 | × | TROW 18 Oct 2019 $110.00 C | $ 209.00 | ( $ -1.09 ) | → Out of the money with a 2% safety margin |
Note that two of these options were in the money, Taiwan Semiconductor Manufacturing (TSM) and Cisco Systems (CSCO), while two more options were at the money, Exxon Mobil (XOM) and AO Smith (AOS). Also, note that two covered calls on T Rowe Price (TROW) were trading out of the money with a margin of safety of only 2%, while TJX (TJX) was trading out of the money with a margin of safety of 7%.
TSM
On 18 October, I noticed that TSM was trading above $49 per share. Rather than waiting for an assignment, I decided to roll forward the $45 covered calls to the 15 January 2021, $50 strike price.
| TSM 18OCT19 45.0 C | 2019-10-18 | 2 | -943 | 377 | -566 | C;P |
| TSM 15JAN21 50.0 C | 2019-10-18 | -2 | 1,083 | -1,083 | 0 | O;P |
Selling the LEAPs covered the cost of buying back the expiring $45 call options and, net of commissions, I collected $140, which increases my options income tally. On the other hand, buying back the $45 call options reduced my secured options income by about $566.
CSCO
On 18 October, CSCO traded below $47 and well below the $52.50 strike price of the put option I'd sold.
When I sell put options, I do so only on stocks I wouldn't mind buying at the given strike price. If the stock price drops well below the strike price, as in this case, paying (much) more than the going market price certainly is not pleasant. Sometimes trades turn against you, and you just must be OK with that in order to reap the benefits of options trading.
I wanted to add to my CSCO position anyway, so I decided to wait for the options assignment rather than buying back the put option or rolling it forward. CSCO yields about 3% and has a Very Safe dividend according to Simply Safe Dividends. And CSCO's quality score is 24 out of a possible 25.
My effective cost basis is $52.50 – $1.19 = $51.31 per share and I doubled my CSCO position in the process. DivGro's projected annual dividend income (PADI) will increase by $140 as a result.
XOM
It turns out that XOM closed just 11¢ above the strike price of the put I'd sold. I would have been happy to buy 100 XOM shares for $67.50, but the option expired and I secured about $134 in options income in the process.
XOM is trading above $69 now and I'll be looking into selling another XOM put soon.
AOS
On 18 October, AOS closed at $51.01 per share, well above the $45 strike price of the put I'd sold. As a result, the option expired and I secured about $179 in options income.
While AOS has a dividend safety score of 99 (Very Safe), the stock's quality score is on the low side at 14/25. I'm no longer interested in opening an AOS position, so I won't sell another put option on AOS.
TROW
Next up is TROW, which closed at $109.41 on 18 October, just 59¢ below the $110 covered call I'd sold.
Because TROW practically was trading at the money, I decided to protect my shares (and PADI of $608!) by rolling forward both options.
| TROW 18OCT19 110.0 C | 2019-10-18 | 2 | -19 | 427 | 408 | C;P |
| TROW 20DEC19 115.0 C | 2019-10-18 | -2 | 339 | -339 | 0 | O;P |
Buying back the $110 covered calls cost only $19 and I secured $408 in options income as a result. In contrast, selling the $115 covered calls expiring in December generated $339 in options income. I'm happy with this trade and moving the strike price to $115 gives me a little more breathing room!
TJX
TJX has a dividend safety score of 86 (Very Safe) and a quality score of 23. My TJX position has generated annualized returns of 30%, so I'm very happy with this investment!
The $60 covered calls I'd sold on TJX were in the money on 18 October, so to protect my shares (and PADI of $184), I decided to roll forward the options.
| TJX 18OCT19 60.0 C | 2019-10-18 | 2 | -128 | 130 | 2 | C;P | |
| TJX 17JAN20 65.0 C | 2019-10-18 | -2 | 188 | -188 | 0 | O;P | |
Buying back the $60 covered calls cost $128 and I secured only $2 in options income as a result. In contrast, selling the $65 covered calls expiring in January 2020 generated $188 in options income. Moving the strike price to $65 gives me a little more breathing room!
The Remaining Options
All the remaining options expired worthless (to the buyers of the options), so I no longer have obligations associated with these options. In the process, I secured options income totaling $1,848! Since my obligations "expired" along with the options, I can now consider selling similar options to collect more options income!
Calls
Traveler's (TRV) is trading just above $130 per share after the company announced disappointing earnings. My cost basis of $115.88 per share. I'll look to sell another covered call, perhaps at the $145 strike price.
Walt Disney (DIS) is trading above $130 per share as well. I'm considering selling another $145 covered call.
Puts
Verizon Communications (VZ) is trading above $60 per share, while my cost basis for the 100 shares I own is $47.02. VZ is a high-quality dividend growth (DG) stock with a quality score of 22. I wouldn't mind doubling my VZ position, but not at this valuation! I'll see if I can sell a $50 covered call.
Nike (NKE) is trading near $91 per share, whereas my cost basis is $81.89. NKE has a perfect quality score of 25, but the stock is trading at a premium valuation. I'm considering selling an $80 covered call this time around.
Apple (AAPL) is one of my home run stocks with total returns of more than 145%. The stock made an all-time high of $245.73 per share, well above my cost-basis of $104.41. The stock is getting quite expensive, and I'm unsure if I should sell another put option at this time.
I would love to increase my position in PepsiCo (PEP), but the stock is rather expensive now, trading above $136 per share. My cost basis for 20 shares is $116.44. I don't think I'll sell another put option on PEP at this time.
I don't own General Mills (GIS) and I don't think I'll sell another put option to try to buy shares.
My position in Wells Fargo (WFC) has a cost basis of $45.95, whereas the stock is trading above $51 per share. I wouldn't mind doubling my position, so I'll see if I can sell a put option at the $45 strike price.
Finally, Qualcomm (QCOM) is trading above $80 per share, whereas my smallish position of 35 shares has a cost basis of $69.41. I'll try to sell a put option with a $70 strike price this time around.
Concluding Remarks
For sellers of options like myself, it is fun to see options expire. It means you secured the options income and have no more associated obligations! I'll be looking to replace some of the expired trades with new ones in the coming weeks... rinse and repeat!
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Ciao FerdiS,
ReplyDeleteVery well made report as usual. I am curious about your "strategy" when selling calls and puts. While for puts I guess it's down to an "entry point" that you would not mind (and eventually you roll further and down if the option goes south), for calls how do you work?
I sell calls on stocks that normally I would not want to sell, normally I try to sell at least 20% above my average price with a premium that equates at least to 1/4th of the total dividend (normally I sell 6 to 12 months expiry dates). The problem that I have had with this approach is that this year, many of the stocks that I sold calls against were "lost" as the price grew too much and I was far too much ITM to roll the position. I had to let the stocks go, with a 20% capital gain, but technically I didn't want to sell them.
Thanks for the heads up! Ciao ciao
Stal
Hi, Stal -- thanks for your comment and good to hear from you again!
DeleteYou're correct about the strike price for selling puts, though I also consider the expiration date because the combo is what determines the option's price and therefore my income potential. I like to see income of at least $100 per transaction. Sometimes I accept less, but that happens infrequently. Further, I do roll forward put options if the strike price moves too far below the strike price or if I don't want to buy shares at the time of expiration.
Selling calls are trickier if you're not really willing to let them go. Your strategy (20%, 1/4 premium, etc) sounds fine and is somewhat similar to mine. In a bull market, this will continue to be tricky. I sometimes roll forward to LEAPs, if possible, moving the strike price up as far as I can afford to. Even that is not always possible. If assigned (and if there is significant capital gains), my brokerage allows me to buy shares (at the market price) and substitute them for my own shares. At least this avoids the capital gains taxes even though I have to accept the loss in the process.