Sunday, November 17, 2019

Expired Options (November 2019)

Several of the options I'd sold expired on Friday, 15 November.

When options expire, 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.

Expiration creates an opportunity to replace some of the expired options with new ones in the coming weeks. In this article, I provide a summary of expired options and discuss potential replacement trades.

Additionally, I discuss what happened with in the money options that would have expired this month. Sometimes, I decide to roll forward such options to avoid assignment. The alternative is doing nothing and waiting for an assignment.

Recap


Here is a summary of the options that expired on 15 November, as presented in October's Options Update article:

November 2019:

#4032019-10-01:-1×SNA 15 Nov 2019 $145.00 P $  260.00 ( $ -0.35 )→ Out of the money with a  15% safety margin
#4012019-10-01:-1×MRK 15 Nov 2019 $80.00 P $  127.00 ( $ -1.58 )→ Out of the money with a  6% safety margin 
#3972019-10-01:-2×ADM 15 Nov 2019 $40.00 P $ 228.00 ( $ -1.00 )→ Out of the money with a  6% safety margin
#3912019-09-20:-3×INTC 15 Nov 2019 $45.00 P $ 129.00 ( $ -3.83 )→ Out of the money with a  26% safety margin 
#3902019-09-20:-2×INTC 15 Nov 2019 $55.00 C $ 168.00 ( $ -1.59 )→ In the money by  3% — caution! 
#3772019-07-25:-2×MS 15 Nov 2019 $42.00 P $ 263.00 ( $ -0.85 )→ Out of the money with a  13% safety margin 
#3652019-06-28:-1×UTX 15 Nov 2019 $115.00 P $ 222.00 ( $ -0.80 )→ Out of the money with a  28% safety margin 
#3622019-06-28:-2×CL 15 Nov 2019 $65.00 P $ 248.00 ( $ -1.00 )→ Out of the money with a  3% safety margin 
#3602019-06-28:-2×ABBV 15 Nov 2019 $60.00 P $ 224.00 ( $ -1.00 )→ Out of the money with a  36% safety margin 
#3582019-06-28:-2×ABBV 15 Nov 2019 $80.00 C $ 303.00 ( $ -0.85 )→ In the money by  2% — caution!
#3432019-05-15:-2×SO 15 Nov 2019 $45.00 P $   88.00 ( $ -0.99 )→ Out of the money with a  38% safety margin 

In the money options approaching expiration are increasingly likely to be assigned. Sometimes, the holder of an option decides to exercise it early, in which case I'm obliged to deliver shares (for calls) or buy shares (for puts).

This is what happened with the in the money Intel (INTC) covered calls listed above.

INTC


On 5 November, with INTC trading above $57 per share, the two INTC covered calls I'd sold got assigned. As a consequence, I was obliged to sell 200 INTC shares at $55 per share.

By exercising the options on 5 November, the holder not only secured unrealized gains of at least $2 but also secured INTC's next dividend payment of 31.5¢ per share.

Despite knowing of the likelihood that my covered calls would be exercised, I decided not to take any defensive actions. INTC was one of my largest holdings and I decided to let these shares go, primarily because I needed cash for some new buys.

Selling the 200 shares delivered returns of 59% or about 21.7% on an annualized basis. Additionally, I secured the options income of $166, which pushed the annualized returns to 22.6% — a very satisfactory trade indeed!

ABBV


On 13 November, I noticed that Abbvie (ABBV) was trading around $87 per share, well above the $80 strike price of the covered calls I'd sold. I decided to roll forward the covered calls and, simultaneously, to increase the strike price to $90.

Buying back the covered calls cost $1,330, so I had to go pretty far out to find a similar premium for $90 covered calls.



Still, the premium collected for selling the two $90 strike, 15 January 2021 covered calls, was not enough to cover the cost of buying back the November covered calls. In the end, the trade cost me about $21.

The Remaining Options


The remaining options all expired worthless (to the buyers of the options) and I no longer will be obliged to either buy or sell the associated shares. In the process, I secured options income totaling $1,789!

I can now consider selling similar options to collect more options income!

#4032019-10-01:-1×SNA 15 Nov 2019 $145.00 P $  260.00 ( $ -0.35 )→ Out of the money with a  15% safety margin
#4012019-10-01:-1×MRK 15 Nov 2019 $80.00 P $  127.00 ( $ -1.58 )→ Out of the money with a  6% safety margin 
#3972019-10-01:-2×ADM 15 Nov 2019 $40.00 P $ 228.00 ( $ -1.00 )→ Out of the money with a  6% safety margin
#3912019-09-20:-3×INTC 15 Nov 2019 $45.00 P $ 129.00 ( $ -3.83 )→ Out of the money with a  26% safety margin 
#3772019-07-25:-2×MS 15 Nov 2019 $42.00 P $ 263.00 ( $ -0.85 )→ Out of the money with a  13% safety margin 
#3652019-06-28:-1×UTX 15 Nov 2019 $115.00 P $ 222.00 ( $ -0.80 )→ Out of the money with a  28% safety margin 
#3622019-06-28:-2×CL 15 Nov 2019 $65.00 P $ 248.00 ( $ -1.00 )→ Out of the money with a  3% safety margin 
#3602019-06-28:-2×ABBV 15 Nov 2019 $60.00 P $ 224.00 ( $ -1.00 )→ Out of the money with a  36% safety margin 
#3432019-05-15:-2×SO 15 Nov 2019 $45.00 P $   88.00 ( $ -0.99 )→ Out of the money with a  38% safety margin 

Snap-on (SNA) closed above $163 per share on options expiration day, so the $145 put option I'd sold expired worthless. I'm not looking to sell another put option on SNA.

Last Friday, Merck (MRK) closed at $84.90 per share, well above the $80 put option I'd sold. The put expired worthless and in my favor. I now own 110 MRK shares, so I'm not looking to sell another put option on MRK.

Archer-Daniels-Midland (ADM) closed at $42.87 per share, well above the $40 strike price of the put options I'd sold. The puts expired worthless and in my favor. I already own 300 shares of ADM, so I'm not looking to sell more put options on ADM.

Even after selling 200 shares due to the options assignment mentioned earlier, I still own 300 shares of INTC. I won't be selling additional put options on INTC at this time. The three $45 put options I'd sold expired worthless, as INTC is trading well above $57 per share.

Morgan Stanley (MS) closed at $48.99 per share, well above the $42 strike price of the put options I'd sold. MS yields 2.88% and has a quality score of 17, making it a high-quality dividend growth [DG] stock. I'll consider selling two more puts, perhaps $45 strike price puts this time around.

United Technologies (UTX) closed at $149.36 per share on Friday, 15 November, well above the $115 put option I'd sold. I'm no longer interested in selling a UTX put, as the company is spinning off parts of its business and will be merging its aerospace business with Raytheon (RTN).

On Friday, Colgate-Palmolive (CL) closed at $66.37 per share, a little above the $65 strike price put options I'd sold. So the options expired worthless and in my favor. Although CL has a quality score of 24 out of a possible 25 points, I no longer want to buy shares. The stock's Chowder number of 6.37 is too low for me to invest at this time.

Snap-on (SNA) closed at $155.34 on Friday, 27 September. I would like to own more shares (I currently own 25 at a cost basis of $150.12), but the stock's price is a little high for my taste. I think I'll consider selling a single put at a strike price of $145. If assigned, I'll lower my cost basis and I'll be able to sell a covered call and collect more options income.

ABBV closed at $88.63 per share, well above the $60 puts I'd sold. The puts expired worthless and to my benefit. As I already own 200 ABBV shares, I won't be selling more ABBV put options at this time.

Finally, the Southern (SO) $45 puts I'd sold expired worthless as well, as SO closed above $62 per share. I'm not looking to sell SO puts to replace these expired options, as I no longer want to own SO. Recently, I opened a position in Pinnacle West Capital (PNW), which is the additional Utilities sector stock I wanted to buy.

Summary


I secured options income totaling $1,778 from expired options in September. Rolling forward two ABBV covered call options cost about $21. Finally, two INTC covered call options got assigned and I sold 200 INTC shares for annualized returns of 22.6%.

As we're approaching the end of 2019, I'm slowing down my selling of put options. The markets are at all-time highs and a bear could be around the corner, waiting to pounce! I'm taking it easy for the time being...

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