After options expiration day, I post an article to summarize any actions I took and to present potential replacement trades for the expired options.The previous options expiration day was 20 March.
I had several open options trades that were due to expire and, because of the market action due to Covid-19 concerns, most of them were deep in the money. This means I had to take protective action to avoid options assignment.
As usual, I'll report on my other options trades in an upcoming article, but let's look at those I executed to avoid assignments.
Background
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 20 March, as presented in February's Options Update article:
March 2020:
One put option I'd sold traded deep in the money and one covered call option traded in the money by a small amount. Usually, I closely review open options in the week before expiry and decide what to do about them.
LYB
LyondellBasell Industries NV (LYB) traded below $60 on 9 March, some 25% below the strike price of the put option I'd sold. Increased volatility in the markets made it unlikely that LYB's price would have recovered, so I decided to roll forward the option to the 15 January 2021 expiration date, simultaneously lowering the strike price to $70:
Rolling forward the option cost $165 plus commissions, while I secured $119.65 in options income in the process.
Unfortunately, LYB's share price continued to drop after my trade, even trading as low as $35 per share on 16 March. Given LYB's quality score of 16, I decided to reconsider my position.
With LYB trading 50% below the $70 strike price and given LYB's lowish quality score, I couldn't justify trying to protect this position any longer. So I decided to take the loss and close the position:
It's unfortunate to take this loss, but I'd rather take it now than to buy shares of LYB at some future date for $70 per share. When selling put options, you have to be willing to buy the underlying shares for the strike price of the puts... and I'm no longer willing to do so, given LYB's lowish quality score.
HRL
Hormel Foods (HRL) is one of my stocks that has fared reasonably well in these volatile times. In fact, there was a good chance that my shares would have been called away, as the $47.50 covered call I'd sold was in the money. Therefore, I decided to roll forward the covered call to the 15 January 2021 expiration date, simultaneously increasing the strike price to $52.50.
Rolling forward the covered call netted $240 (minus commissions) in options income, and I secured options income of $124.40 in the process.
The other three 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.
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 covered calls, I aim to earn options income equivalent to double the dividend income of the underlying stock.
Furthermore, I rarely execute an options trade if the total options income is not at least $100.
ADM
Archer-Daniels-Midland (ADM) is trading below $35 per share, some 19% below my cost basis of $43.30 per share. I prefer not to sell options with a strike below my cost basis. To earn at least $100 for selling a $45 strike covered call, I would need to go as far out as the January 2022 expiration date. I'm not willing to do that right now.
PFE
Pfizer (PFE) is trading near $32 per share, about 14% below my cost basis of $37.05 per share. Again, I would need to go as far out as the January 2022 expiration date to earn at least $100 in income for selling a covered call with a strike price above my cost basis. I'd rather not do that!
Of the five options I'd sold that were to expire in March, I closed one, rolled forward another, and had three expire. The market is very volatile now and with stocks dropping precipitously, selling covered calls with strike prices above my cost basis will become quite challenging, if not impossible.
The Covit-19 virus could take the market down even more, so I'm really cautious when considering new trades.
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March 2020:
| #435 | 2019-12-18 | : | -1 | × | LYB 20 Mar 2020 $80.00 P | $ 120.00 | ( $ -0.35 ) | → In the money by 49% — caution! | ||
| #405 | 2019-10-18 | : | -1 | × | ADM 20 Mar 2020 $45.00 C | $ 53.00 | ( $ -1.10 ) | → Out of the money with a 27% safety margin | ||
| #402 | 2019-10-01 | : | -3 | × | PFE 20 Mar 2020 $40.00 C | $ 132.00 | ( $ -1.13 ) | → Out of the money with a 19% safety margin | ||
| #399 | 2019-10-01 | : | -1 | × | HRL 20 Mar 2020 $47.50 C | $ 125.00 | ( $ -0.60 ) | → In the money by 2% — caution! | ||
| #398 | 2019-10-01 | : | -2 | × | ADM 20 Mar 2020 $45.00 C | $ 160.00 | ( $ -0.99 ) | → Out of the money with a 27% safety margin |
One put option I'd sold traded deep in the money and one covered call option traded in the money by a small amount. Usually, I closely review open options in the week before expiry and decide what to do about them.
LYB
LyondellBasell Industries NV (LYB) traded below $60 on 9 March, some 25% below the strike price of the put option I'd sold. Increased volatility in the markets made it unlikely that LYB's price would have recovered, so I decided to roll forward the option to the 15 January 2021 expiration date, simultaneously lowering the strike price to $70:
| Option | Date | Qty | Price | Proceeds | Comm. | Basis | Realized P/L | Code |
| LYB 20MAR20 80.0 P | 2020-03-09 | 1 | 17.5500 | -1,755.00 | -0.23 | 119.65 | -1,635.58 | C |
| LYB 15JAN21 70.0 P | 2020-03-09 | -1 | 15.9000 | 1,590.00 | -0.27 | -1,589.73 | 0.00 | O |
Rolling forward the option cost $165 plus commissions, while I secured $119.65 in options income in the process.
Unfortunately, LYB's share price continued to drop after my trade, even trading as low as $35 per share on 16 March. Given LYB's quality score of 16, I decided to reconsider my position.
| Ticker | CCC | Yrs | Qual. | Yield | 5-Yr DGR | CDN | VL Safety Rank | VL Fin. Stren. | M* Econ. Moat | S&P Credit Rating | SSD Divi. Safety | Fair Val. | Price | (Disc.) Prem. |
| LYB | ✅ | 9 | 16 | 8.46% | 9.0% | 17 | 3 | A | Narrow | BBB+ | 51 | 84 | 49.63 | (41%) |
With LYB trading 50% below the $70 strike price and given LYB's lowish quality score, I couldn't justify trying to protect this position any longer. So I decided to take the loss and close the position:
| Option | Date | Qty | Price | Proceeds | Comm. | Basis | Realized P/L | Code |
| LYB 15JAN21 70.0 P | 2020-03-16 | 1 | 31.0000 | -3,100.00 | -0.34 | 1,589.73 | -1,510.61 | C |
It's unfortunate to take this loss, but I'd rather take it now than to buy shares of LYB at some future date for $70 per share. When selling put options, you have to be willing to buy the underlying shares for the strike price of the puts... and I'm no longer willing to do so, given LYB's lowish quality score.
HRL
Hormel Foods (HRL) is one of my stocks that has fared reasonably well in these volatile times. In fact, there was a good chance that my shares would have been called away, as the $47.50 covered call I'd sold was in the money. Therefore, I decided to roll forward the covered call to the 15 January 2021 expiration date, simultaneously increasing the strike price to $52.50.
| Option | Date | Qty | Price | Proceeds | Comm. | Basis | Realized P/L | Code |
| HRL 20MAR20 47.5 C | 2020-03-18 | 1 | 2.8000 | -280.00 | -0.23 | 124.40 | -155.83 | C |
| HRL 15JAN21 52.5 C | 2020-03-18 | -1 | 5.2000 | 520.00 | -0.25 | -519.75 | 0.00 | O |
Rolling forward the covered call netted $240 (minus commissions) in options income, and I secured options income of $124.40 in the process.
Expired Options
The other three options expired worthless (to the buyers of these options), meaning I have no further obligations and the options income originally received is now secured.
| #435 | 2019-12-18 | : | -1 | × | LYB 20 Mar 2020 $80.00 P | $ 120.00 | ( $ -0.35 ) | → In the money by 49% — caution! | ||
| #405 | 2019-10-18 | : | -1 | × | ADM 20 Mar 2020 $45.00 C | $ 53.00 | ( $ -1.10 ) | → Out of the money with a 27% safety margin | ||
| #402 | 2019-10-01 | : | -3 | × | PFE 20 Mar 2020 $40.00 C | $ 132.00 | ( $ -1.13 ) | → Out of the money with a 19% safety margin | ||
| #399 | 2019-10-01 | : | -1 | × | HRL 20 Mar 2020 $47.50 C | $ 125.00 | ( $ -0.60 ) | → In the money by 2% — caution! | ||
| #398 | 2019-10-01 | : | -2 | × | ADM 20 Mar 2020 $45.00 C | $ 160.00 | ( $ -0.99 ) | → Out of the money with a 27% safety margin |
I can now consider replacement trades.
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 covered calls, I aim to earn options income equivalent to double the dividend income of the underlying stock.
Furthermore, I rarely execute an options trade if the total options income is not at least $100.
ADM
Archer-Daniels-Midland (ADM) is trading below $35 per share, some 19% below my cost basis of $43.30 per share. I prefer not to sell options with a strike below my cost basis. To earn at least $100 for selling a $45 strike covered call, I would need to go as far out as the January 2022 expiration date. I'm not willing to do that right now.
PFE
Pfizer (PFE) is trading near $32 per share, about 14% below my cost basis of $37.05 per share. Again, I would need to go as far out as the January 2022 expiration date to earn at least $100 in income for selling a covered call with a strike price above my cost basis. I'd rather not do that!
Summary
Of the five options I'd sold that were to expire in March, I closed one, rolled forward another, and had three expire. The market is very volatile now and with stocks dropping precipitously, selling covered calls with strike prices above my cost basis will become quite challenging, if not impossible.
The Covit-19 virus could take the market down even more, so I'm really cautious when considering new trades.
Soon sections of my blog will only be available to subscribers, so I encourage you to sign up now!
So do you still write calls if the stocks go significantly down? I just wrote a piece on why people should avoid this strategy for this reason.
ReplyDeleteI haven't since the big market drop, but that doesn't mean I won't. Volatility is high, so one can get a good chunk of change for writing calls. If the markets go up quickly, your calls could be assigned. But if it does, volatility will likely drop and allow you to roll forward or buy back the covered call for less out of pocket. Nevertheless, I'll probably avoid doing this on stocks already in my portfolio. Writing NEW covered call still makes sense to me, though.
DeleteI am more and more inclined to test the writing puts strategy. There are a few stocks I'd like to own and I like that approach. What delta or percentage of option ITM are you looking at when writing? You don't go below $100 premium so you would extend DOE rather than delta. You could play with different delta but maybe you are set on a specific % that you wouldn't go over? Curious to know. Thank you!
ReplyDeleteI don't consider delta; rather, I look at the percentage ITM and go further out with the expiration date in order to secure at least $100 in options income. For stocks I really want to own, I choose a strike price at or below what I want to pay, in most cases 10% below fair value. (Of course, that's not necessarily 10% below the current price). I've sold puts on stocks ATM, too. The premium then ensures a discount to the current price. Those are usually short expirations, though.
Delete