Options expiration day this month was 21 February. I had four open options trades that were due to expire, two of which were deep in the money. This means that if I did not act in time, the options would have been assigned.In this article, I provide a summary of the actions I took and I present potential replacement trades for the expired options.
I write two options articles per month, one shortly after options expiration day and one to summarize my trades of the past month. I'll report February's trades in an upcoming article.
When options expire, the obligations I have related to those options seize to exist. For covered calls, there no longer is a chance that my shares will be called away. 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. 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 21 February, as presented in January's Options Update article:
February 2020:
One call option and one put option I'd sold traded deep in the money, while a one traded out of the money with a small safety margin. Usually, I closely review open options in the week before expiry and decide what to do about in the money options and out of the money options with small margins of safety. Sometimes, though, an in the money option is assigned earlier and takes the decision out of my hand. This happened with my PSX put, which was assigned on 14 February.
PSX
Phillips 66 (PSX) traded well below the $110 put option I'd sold, so the option was in danger of being exercised. Unfortunately, PSX's stock price dropped some 30% from its 52-week high of $119.92, and the holder of the option decided to exercise the option, meaning I was obliged to buy 100 shares of PSX on 14 February at $110 per share.
Given PSX's quarterly dividend of 90¢ per share, this means my new position of 100 shares will have an initial yield on cost [YoC] of 3.27% and DivGro's projected annual income [PADI] will increase by $360.
With the stock trading just about $82 now, I have an unrealized loss of about 25%. While this is unfortunate, PSX is a solid dividend growth stock with a streak of 16 years of higher dividend payments, a quality score of 19, and a dividend deemed Safe by Simply Safe Dividends.
The trade secured $270 in options income.
DGX
Given the assignment of PSX, I decided to let the $100 covered call on Quest Diagnostics (DGX) expire. As a consequence, the option was assigned and I had to sell 100 DGX shares at $100 per share.
One can argue that swopping PSX for DGX is not a bad move. PSX has a superior yield, a favorable Chowder Number (CDN), and a higher quality score (Qual). Furthermore, according to Value Line, PSX has a higher Financial Strength rating. On the other hand, DGX's dividend is consider Very Safe by Simply Safe Dividends.
Closing my DGX position resulted in total returns of $2,011.77 (including dividends), which represents an annualized return of about 21%.
Additionally, I secured $675 in options income with the assignment of this covered call.
The other two options 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. I rarely execute an options trade if the total options income is not at least $100.
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.
SBUX
Starbucks (SBUX) traded above $87 on options expiration day, so I decided to just let the option expire. It is fortuitous that the option expired last Friday because SBUX dropped well below $85 on Monday and even traded below $82 per share on Tuesday.
The trade secured $186 in options income.
After a challenging week for the stock market, volatility is up huge!
Source: yahoo! finance
It looks like I can sell a April 17, $70 put option for about $175. While my SBUX position is a full position, I wouldn't mind doubling my investment given SBUX's strong CDN and high quality score.
I think this trade is worth considering.
UNP
On options expiration day, Union Pacific (UNP) closed at $188.66, so the $160 put options I'd sold expired. Again, it is a good thing that options expiration day was last Friday before this week's slaughter on Wall Street!
In the process, I secured options income of $216.
UNP now yields 2.43% at $159.81 per share and has an excellent quality score of 24. My fair value estimate is $172, which means UNP is now trading at a discount to fair value of 7%.
I'd be happy to increase my UNP position, so let's consider a put options trade. I can sell a $145 put option expiring in May for about $600 per share. That seems like a great deal, and one that would allow me to buy 100 shares of UNP below my current cost basis!
I'll see if I can get this trade done next week.
Of the four options I'd sold that were to expire in February, two were assigned and two expired. In all, I secured options income totaling $1,347.
The market is quite volatile now and we've seen the fastest correction ever. There are lots of opportunities now, but a cautious approach is needed. The Covit-19 virus could take the market down even more!
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February 2020:
| #437 | 2019-12-18 | : | -1 | × | SBUX 21 Feb 2020 $85.00 P | $ 187.00 | ( $ -0.80 ) |
→ Out of the money with a 3% safety margin
| ||
| #436 | 2019-12-18 | : | -1 | × | PSX 21 Feb 2020 $110.00 P | $ 270.00 | ( $ -0.35 ) |
→ In the money by 18% — caution!
| ||
| #426 | 2019-11-26 | : | -1 | × | UNP 21 Feb 2020 $160.00 P | $ 217.00 | ( $ -0.80 ) |
→ Out of the money with a 15% safety margin
| ||
| #385 | 2019-08-16 | : | -1 | × | DGX 21 Feb 2020 $100.00 C | $ 675.00 | ( $ -0.31 ) |
→ In the money by 12 % — caution!
|
One call option and one put option I'd sold traded deep in the money, while a one traded out of the money with a small safety margin. Usually, I closely review open options in the week before expiry and decide what to do about in the money options and out of the money options with small margins of safety. Sometimes, though, an in the money option is assigned earlier and takes the decision out of my hand. This happened with my PSX put, which was assigned on 14 February.
PSX
Phillips 66 (PSX) traded well below the $110 put option I'd sold, so the option was in danger of being exercised. Unfortunately, PSX's stock price dropped some 30% from its 52-week high of $119.92, and the holder of the option decided to exercise the option, meaning I was obliged to buy 100 shares of PSX on 14 February at $110 per share.
Given PSX's quarterly dividend of 90¢ per share, this means my new position of 100 shares will have an initial yield on cost [YoC] of 3.27% and DivGro's projected annual income [PADI] will increase by $360.
With the stock trading just about $82 now, I have an unrealized loss of about 25%. While this is unfortunate, PSX is a solid dividend growth stock with a streak of 16 years of higher dividend payments, a quality score of 19, and a dividend deemed Safe by Simply Safe Dividends.
| Ticker | Yrs | VL Safety Rank | VL Fin. . | M* Econ. Moat | S&P Credit Rating | SSD Divi. Safety | Qual | Yield | 5-Yr DGR | CDN | Fair Val. | Price | (Disc.) Prem. |
| PSX | 8 | 2 | A+ | Narrow | BBB+ | 65 | 19 | 4.92% | 13.1% | 18 | 100 | 73.22 | (26%) |
The trade secured $270 in options income.
DGX
Given the assignment of PSX, I decided to let the $100 covered call on Quest Diagnostics (DGX) expire. As a consequence, the option was assigned and I had to sell 100 DGX shares at $100 per share.
One can argue that swopping PSX for DGX is not a bad move. PSX has a superior yield, a favorable Chowder Number (CDN), and a higher quality score (Qual). Furthermore, according to Value Line, PSX has a higher Financial Strength rating. On the other hand, DGX's dividend is consider Very Safe by Simply Safe Dividends.
| Ticker | Yrs | VL Safety Rank | VL Fin. Stren. | M* Econ. Moat | S&P Credit Rating | SSD Divi. Safety | Qual | Yield | 5-Yr DGR | CDN | Fair Val. | Price | (Disc.) Prem. |
| DGX | 9 | 2 | B++ | Narrow | BBB+ | 81 | 18 | 2.15% | 10.4% | 13 | 109 | 104.42 | (4%) |
Closing my DGX position resulted in total returns of $2,011.77 (including dividends), which represents an annualized return of about 21%.
Additionally, I secured $675 in options income with the assignment of this covered call.
Expired Options
The other two options 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. I rarely execute an options trade if the total options income is not at least $100.
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.
SBUX
Starbucks (SBUX) traded above $87 on options expiration day, so I decided to just let the option expire. It is fortuitous that the option expired last Friday because SBUX dropped well below $85 on Monday and even traded below $82 per share on Tuesday.
The trade secured $186 in options income.
After a challenging week for the stock market, volatility is up huge!
Source: yahoo! finance
It looks like I can sell a April 17, $70 put option for about $175. While my SBUX position is a full position, I wouldn't mind doubling my investment given SBUX's strong CDN and high quality score.
| Ticker | Yrs | VL Safety Rank | VL Fin. Stren. | M* Econ. Moat | S&P Credit Rating | SSD Divi. Safety | Qual | Yield | 5-Yr DGR | CDN | Fair Val. | Price | (Disc.) Prem. |
| SBUX | 10 | 1 | A++ | Wide | BBB+ | 67 | 22 | 2.09% | 22.1% | 24 | 84 | 78.43 | (7%) |
I think this trade is worth considering.
UNP
On options expiration day, Union Pacific (UNP) closed at $188.66, so the $160 put options I'd sold expired. Again, it is a good thing that options expiration day was last Friday before this week's slaughter on Wall Street!
In the process, I secured options income of $216.
UNP now yields 2.43% at $159.81 per share and has an excellent quality score of 24. My fair value estimate is $172, which means UNP is now trading at a discount to fair value of 7%.
| Ticker | Yrs | VL Safety Rank | VL Fin. Stren. | M* Econ. Moat | S&P Credit Rating | SSD Divi. Safety | Qual | Yield | 5-Yr DGR | CDN | Fair Val. | Price | (Disc.) Prem. |
| UNP | 13 | 1 | A++ | Wide | A- | 88 | 24 | 2.43% | 15.4% | 18 | 172 | 159.81 | (7%) |
I'd be happy to increase my UNP position, so let's consider a put options trade. I can sell a $145 put option expiring in May for about $600 per share. That seems like a great deal, and one that would allow me to buy 100 shares of UNP below my current cost basis!
I'll see if I can get this trade done next week.
Summary
Of the four options I'd sold that were to expire in February, two were assigned and two expired. In all, I secured options income totaling $1,347.
The market is quite volatile now and we've seen the fastest correction ever. There are lots of opportunities now, but a cautious approach is needed. The Covit-19 virus could take the market down even more!
Soon sections of my blog will only be available to subscribers, so I encourage you to sign up now!
I had my first ever option expired this weekend.It was interesting experience.
ReplyDeleteCongratulations, desidividend! I wish you all the best in your options trading adventure!
DeleteWhat do you do with the money secured from your option trades? Do You reinvest in your portfolio or keep it aside in a bank account for your daily expenses?
ReplyDeleteAnd what about the dividends? you take cash or shares?
I retain options and dividend income in my brokerage account and use it, along with new capital, to buy dividend growth stocks. I'm still building my portfolio, so I'm reinvesting all forms of income to buy more shares. Retirement is still a few years off, so I'm not using the income to cover daily expenses, yet.
Delete