Sunday, January 19, 2020

Expired Options (January 2020)

Several options I'd sold were slotted to expire on Friday, 17 January. Some of them were in the money, meaning the options would have been assigned if I didn't take any actions.

In this article, I provide a summary of the actions I took to avoid assignment and I present potential replacement trades for the expired options.

When options expire, the obligations I have related to those options seize to exist. 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. I consider the options income associated with expired options to be secured

Recap


Here is a summary of the options that would have expired on 17 January, as presented in December's Options Update article:



Four call options and one put option I'd sold traded in the money, while a few traded out of the money with small safety margins. In the week before expiry, I reviewed all of these options and determined what, if anything, I needed to do about in the money options.

BEN

On 15 January, Franklin Resources (BEN) traded between $25.00 and $25.37 per share, well below the $30 put options I'd sold. To avoid assignment, I rolled forward the options and lowered the strike price.

 Symbol
Date
 Qty 
 Proceeds 
 Comm. 
 BEN 17JAN20 30.0 P  2020-01-15 
 3
-1,413 
-0.23  
 BEN 17JUL20 27.5 P  2020-01-15 
-3
978 
-0.26  

Buying back the puts cost $1,413.23, so I relinquished secured options income of $1,152.23 when accounting for the $261 originally received for selling the puts. On the other hand, I sold three $27.50 puts expiring in July for $977.74, somewhat offsetting the loss. Including commissions, this trade resulted in a net loss of $435.49.

With BEN closing at $25.74 on options expiration day, the new puts remain in the money. However, now I have six months to see how things develop.

CMCSA

Comcast (CMCSA) traded between $46.01 and $46.28 on 15 January, well above the $45 covered calls I'd sold. To avoid assignment, I rolled forward the options and simultaneously increased the strike price.

 Symbol
Date
 Qty 
 Proceeds 
 Comm. 
 CMCSA 17JAN20 45.0 C 2020-01-15 
 2
-256 
-1.49  
 CMCSA 17JUL20 47.5 C  2020-01-15 
-2
402 
-1.50  

In this case, I managed to roll forward the options for a net gain. I secured options income of $135.93 and collected $400.50 in additional options income, net of commissions. The trade resulted in a net gain of $536.43.

CMCSA closed at the money on 17 January at $47.50 per share.

D

Dominion Energy (D) traded between $82.13 and $82.99 on 15 January, well above the $80 covered call I'd sold. To avoid assignment, I rolled forward the options and simultaneously increased the strike price.

 Symbol
Date
 Qty 
 Proceeds 
 Comm. 
 D 17JAN20 80.0 C  2020-01-15 
 1
-236 
-0.29  
 D 17JUL20 82.5 C  2020-01-15 
-1
267 
-0.30  

Buying back the call cost more than the income originally received, so I relinquished secured options income of $61.64. On the other hand, I collected $266.70 for selling the July $82.40 call. So the trade resulted in a net gain of $205.06.

D closed at $84.05 on Friday, 17 January, so the new calls remain in the money.

KO

On 15 January, Coca-Cola (KO) traded between $56 and 56.98 per share, well above the $52.50 covered calls I'd sold. To avoid assignment, I rolled forward the options and simultaneously increased the strike price.

 Symbol
Date
 Qty 
 Proceeds 
 Comm. 
 KO 17JAN20 52.5 C  2020-01-15 
 2
-807 
-1.68  
 KO 18SEP20 55.0 C  2020-01-15 
-2
717 
-1.70  

Buying back the covered calls resulted in a net loss of 743.26 in secured options income, while I collected $715.30 in new options income for selling the September $55 covered calls. Including commissions, the trade resulted in a net loss of $27.96.

T

AT&T (T) traded between $37.79 and $38.03 on 15 January, well above the $35 covered calls I'd sold. To avoid assignment, I rolled forward the options and simultaneously increased the strike price.

 Symbol
Date
 Qty 
 Proceeds 
 Comm. 
 T 17JAN20 35.0 C  2019-12-12 
 5
-2,089 
-1.59  
 T 21JAN22 40.0 C 2019-12-12 
-5
2,209 
-1.64  

Originally, I sold these covered calls for $261.05. Buying back the in the money covered calls cost $2,087.41, so I relinquished secured options income totaling $1,826.36. On the other hand, I collected $2,207.36 for selling the $40 LEAPs expiring in January 2022. The trade resulted in a net gain of $381.

On Friday, 17 January, KO closed at $38.38 per share, so the new covered calls are out of the money.

Expired Options


The remaining options all expired worthless (to the buyers of these options), meaning I have no further obligations and the options income originally received is now secured.

I can now consider replacement trades.

For puts, I only consider stocks I wouldn't mind owning at the selected strike price. When selling puts, I aim to collect options income equivalent to five times the underlying stock's dividend unless I can buy shares at a discount of at least 10%.

For covered calls, the selected strike price could become the selling price, so I need to be OK with selling my shares at that price. When selling calls, I aim to earn options income equivalent to double the dividend income of the underlying stock.

I rarely execute an options trade if the total options income is not at least $100.

CSX

On options expiration day, CSX (CSX) closed at $76.40, so the two $70 put options I'd sold expired. In the process, I secured options income of $818.20, net of commissions.

CSX yields 1.26% at $76.40 per share and has a quality score of 18. My fair value estimate is $78.

The highest strike price that would deliver a discount of at least 10% is $67.50. Selling two May $67.50 puts should earn at least $190 in options income, given the current bid/ask of $0.95/$1.08.

The annualized options yield for this trade would be 3.87%, for a dividend boost factor of 3.08 (below my goal of 5x). However, if the puts are exercised, I'd be buying shares at a discount of 12.91% to the current share price.

GILD

Gilead Sciences (GILD) closed at $62.98 on options expiration day, so the two $60 put options I'd sold expired. Net of commissions, I secured options income of $267.44.

GILD yields 3.93% at $62.98 per share. Since I already own a full position in GILD and I'm not looking to add more shares, selling puts on GILD would be a speculative trade.

The highest strike price that would deliver a discount of at least 10% is $55. Selling two May $55 puts should earn at least $140 in options income, given the current bid/ask of $0.70/$0.83.

The annualized options yield for this trade would be 3.45%, for a dividend boost factor of only 0.86 (well below my goal of 5x). However, if the puts are exercised, I'd be buying shares at a discount of 12.67% to the current share price.

LOW

On Friday, 17 January, Lowe's (LOW) closed at $122.36, so the $125 covered call option I'd sold expired. I secured options income of $181.20, net of commissions.

LOW yields 1.84% at $122.36 per share. I think the stock is worth $129 per share, so a strike price of $135 would seem like a good selling price. Since I own 100 shares, I can sell one $135 covered call. For the April expiration, I'd have to collect $107 to ensure a dividend boost factor of 2.00. The current bid/ask is $1.03/$1.16.

If successful, the annualized options yield for this trade would be 4.76%.

MDT

On options expiration day, Medtronic (MDT) closed at $119.03, so the $100 put option I'd sold expired. In the process, I secured options income of $195.20, net of commissions.

MDT yields 1.82% at $119.03 per share and has a quality score of 24. My fair value estimate is $117.

The highest strike price that would deliver a discount of at least 10% below my fair value estimate is $105. Selling one May $105 put should earn at least $104 in options income, given the current bid/ask of $1.04/$1.17.

The annualized options yield for this trade would be 2.72%, for a dividend boost factor of 1.50 (below my goal of 5x). However, if the puts are exercised, I'd be buying shares at a discount of 12.67% to the current share price.

ORCL

Oracle (ORCL) closed at $55.13 on Friday, 17 January, so the $52.50 put option I'd sold expired. Net of commissions, I secured options income of $211.41.

ORCL yields 1.73% at $55.13 per share. I think ORCL would be fairly valued at $59 per share.

I wouldn't mind adding more shares to my current position. ORCL has a quality score of 24 and a Chowder Number of 15, making it an investment likely to deliver 8% annualized returns based on the Chowder rule.

The highest strike price that would ensure a discount of at least 10% is $47.50. Unfortunately, the March expiration trades at a bid/ask of only $0.20/$0.22, so I have to consider the June expiration with a current bid/ask of $0.71/$0.88. Selling two June $47.50 puts should earn at least $142 in options income.

The annualized options yield for this trade would be 3.07%, for a dividend boost factor of 1.76 (below my goal of 5x). However, if the puts are exercised, I'd be buying shares at a discount of 15.15% to the current share price.

TJX

TJX (TJX) closed at $62.68 on options expiration day, so the two $65 call options I'd sold expired. In the process, I secured options income of $188.

TJX yields 1.46% at $62.68 per share. I think the stock is fairly valued at $62 per share, so a strike price of $67.50 would seem like a good selling price. Since I own 200 shares, I can sell two $67.50 covered calls. The April expiration should provide dividend income of at least $110 since the current bid/ask is $0.55/$0.60.

The annualized options yield for this trade would be 4.93%, for a dividend boost factor of 2.37.

TXN

On options expiration day, Texas Instruments (TXN) closed at $131.70, so the two $70 put options I'd sold expired. In the process, I secured options income of $142.90, net of commissions.

TXN yields 2.77% at $131.70 per share. Since I already own a full position in TXN and I'm not looking to add more shares, selling puts on TXN would be a speculative trade.

The highest strike price that would deliver a discount of at least 10% is $115. Selling one April $115 put should earn at least $120 in options income, given the current bid/ask of $1.20/$1.35.

The annualized options yield for this trade would be 3.25%, for a dividend boost factor of only 1.19 (well below my goal of 5x). However, if the puts are exercised, I'd be buying shares at a discount of 13.48% to the current share price.

WBA

Walgreens Boots Alliance (WBA) closed at $54.41, so the three $65 covered calls I'd sold expired. Net of commissions, I secured options income totaling $489.35.

WBA yields 3.36% at $54.41 per share. I think the stock is worth $63 per share, so a strike price of at least $65 would be a good selling price. Since I own 300 shares, I can sell three $65 covered calls.

Unfortunately, none of the available $65 strike/expiration date combinations will allow me to get a dividend boost factor of 2.00. So I won't look to replace these expired options.

Summary


Of the options I'd sold that were to expire in January, I rolled forward one put and four covered calls. The remaining eight options expired. In all, I relinquished secured options income of $1,153.86 but collected new options income totaling $4,567.60.

As mentioned last month, the markets continue to make all-time highs and a bear could be around the corner just waiting to pounce! While I have a challenging options income goal for 2020, I want to be cautious going forward...

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