After options expiration day, I like to post an article to summarize expirations and any actions I took prior to the expiration day. I also like to present potential replacement trades for the expired options.I had several options that expired on Friday, 19 June. Most were deep out of the money, meaning I didn't really need to take any protective actions to avoid assignment.
As usual, I'll report on my other options trades in an upcoming article.
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.
When options expire I can consider replacement trades, provided the investment thesis remains intact and I can secure a reasonable premium.
Recap
Here is a summary of my options that had an expiration date of 19 June, as presented in May's Options Update article:
June 2020:
The only trade with a cautionary safety margin was ORCL. As it turns out, all these options expired and allowed me to secure options income totaling $1,251.
Realty Income Corporation (O)
O closed at $61.53 per share on options expiration day, some 64% above the strike price of the put option I'd sold on 19 March when the stock traded just above $52 per share. Increased volatility at the time allowed me to grab $350 of options income for the trade!
In a recent analysis of the top holdings of dividend ETFs, O was ranked 51st and fourth among the Real Estate sector stocks:
I currently own 100 shares of O and wouldn't mind doubling my position, but certainly not at the current premium price! O's quality score is on the low side, so I require a solid discount to improve the reward-risk ratio.
A potential replacement trade could be to sell a $50 put option on O expiring in September or in December. For selling puts, I like to see a dividend boost factor of 5.00 or more unless I can buy shares at a discount of at least 10%.
The September put has a premium of about $1.70, which would generate an annualized options yield of 11.40% for a dividend boost factor of 2.50. If exercised, I'd be buying shares for about 22% below the current price.
The December put has a premium of about $3.50, which would generate an annualized options yield of 11.57% for a dividend boost factor of 2.54. If exercised, I'd be buying shares for about 24% below the current price.
I'm somewhat favoring the September expiration, but I'd like to review the premiums before committing.
National Retail Properties, Inc (NNN)
NNN closed at $35.84 per share on options expiration day, some 59% above the strike price of the put option I'd sold on 19 March when the stock traded just below $30 per share. As a result, the option expired and I secured $190 in options income.
According to Simply Safe Dividends, NNN's Dividend Safety Score is Borderline Safe. Additionally, NNN is one of only two stocks in my portfolio with Inferior quality scores:
Notice, though, that ValueLine does not provide a Safety Rank or Financial Strength rating for either of these stocks. Arguably, NNN's (and MAIN's) quality score should be higher.
At this time, I'm not interested in selling another NNN put. I'll reconsider when NNN's Dividend Safety Score is upgraded to Safe.
Hormel Foods (HRL)
On options expiration day, HRL closed at $48.55 per share, well above the $40 put option I'd sold. As a result, the option expired and I secured $155 in options income.
I own 100 shares of HRL and wouldn't mind doubling my position. The stock is trading at about fair value, offers a reasonable yield near 2%, and has an impressive 5-year dividend growth rate [DGR] of 16%:
It looks like I should be able to sell the $44 put expiring in September for about $1.10. That would generate an annualized options yield of 9.32% for a dividend boost factor of 4.86. If exercised, I'd be buying shares about 12% below the current share price.
Oracle Corporation (ORCL)
ORCL closed at $54.40 per share, well above the $47.50 put option I'd sold. As a result, the option expired and I secured $148 in options income.
I own 175 shares of ORCL, essentially a full position of about 1% of total portfolio value. ORCL is rated Excellent with a quality score of 24. It trades about this 7% below fair value and offers a reasonable yield of 1.76% with a strong 5-year DGR of 12%:
Selling an August $50 put on ORCL for $1.21 would generate an annualized options yield of 13.43% for a dividend boost factor of 7.61, which is quite attractive! Additionally, if exercised, I'd be buying ORCL at about 10% below its current share price.
Xcel Energy Inc (XEL)
XEL closed at $64.01 per share, well above the $55 put options I'd sold. As a result, the options expired and I secured $150 in options income.
My position of XEL of 65 shares is relatively small, so I would like to add at least 100 shares. XEL is one of my so-called Home Run stocks, a designation I give to stocks that have produced total returns equaling my original investment.
XEL is rated Fine with a quality score of 21. It yields 2.69%, and with a modest 5-year DGR of about 6%, the stock's Chowder Number [CDN] is not quite where I'd like to see it.
If I sell an October $55 put on XEL for $1.65, I can generate an annualized options yield of 8.07%, which would triple XEL's current dividend. If exercised, I would be buying XEL at a discount of about 17%.
Walmart Inc (WMT)
WMT closed at $119.85 per share on options expiration day, well above it the strike price of $100 of the put I'd sold. So, the option expired and I secured $157 in options income.
WMT is the only member of the most popular Consumer Staples sector stocks I don't own, based on a recent analysis of the top holdings of dividend ETFs:
I previously owned WMT but closed my position due to the stock's low yield and slow dividend growth rate. While the stock is rated Excellent based on its quality score of 24, I'm not interested in reopening a positing, especially at the current premium price!
Buying 100 shares of WMT would cost $11,985. Given its quarterly dividend of 54¢ per share, WMT would deliver a dividend income of 2 ⨉ $54 = $108 every six months. If I sell a December $100 put option for about $2.62, I'll earn more than double that amount in options income ($262), while only having to set aside about $2,000 on margin.
I'm thinking about doing this trade, even though I favor selling puts only on stocks that I'd like to own. WMT at $97.38 ($100 − 2.52) per share seems quite palatable and, if the option never gets assigned, I'd be generating an annualized options yield of 4.44%.
Philip Morris International Inc (PM)
PM closed at $72.20 per share on Friday, well below the $100 covered call I'd sold. Therefore, the option expired and I get to retain about $101 in options income.
For selling covered calls, I think an achievable goal is to earn double the dividend yield.
Given PM's dividend yield of 6.27%, it is not possible to double that yield without selling a covered call below my cost basis of $80.22. So there is not an appropriate replacement trade at this time.
June 2020:
| #466 | 2020-03-19 | : | -1 | × | O 19 Jun 2020 $37.50 P | $ 350.00 | ( $ -0.30 ) | → Out of the money with a 61% safety margin | ||
| #465 | 2020-03-19 | : | -1 | × | NNN 19 Jun 2020 $22.50 P | $ 190.00 | ( $ -0.30 ) | → Out of the money with a 58% safety margin | ||
| #457 | 2020-03-09 | : | -1 | × | HRL 19 Jun 2020 $40.00 P | $ 155.00 | ( $ -0.35 ) | → Out of the money with a 17% safety margin | ||
| #448 | 2020-01-21 | : | -2 | × | ORCL 19 Jun 2020 $47.50 P | $ 150.00 | ( $ -1.49 ) | → Out of the money with a 9% safety margin | ||
| #440 | 2019-12-18 | : | -2 | × | XEL 17 Jun 2020 $55.00 P | $ 150.00 | ( $ -0.21 ) | → Out of the money with a 16% safety margin | ||
| #428 | 2019-11-26 | : | -1 | × | WMT 19 Jun 2020 $100.00 P | $ 158.00 | ( $ -0.65 ) | → Out of the money with an 18% safety margin | ||
| #412 | 2019-11-13 | : | -1 | × | PM 19 Jun 2020 $100.00 C | $ 102.00 | ( $ -0.65 ) | → Out of the money with a 30% safety margin |
The only trade with a cautionary safety margin was ORCL. As it turns out, all these options expired and allowed me to secure options income totaling $1,251.
Realty Income Corporation (O)
| #466 | 2020-03-19 | : | -1 | × | O 19 Jun 2020 $37.50 P | $ 350.00 | ( $ -0.30 ) |
O closed at $61.53 per share on options expiration day, some 64% above the strike price of the put option I'd sold on 19 March when the stock traded just above $52 per share. Increased volatility at the time allowed me to grab $350 of options income for the trade!
In a recent analysis of the top holdings of dividend ETFs, O was ranked 51st and fourth among the Real Estate sector stocks:
I currently own 100 shares of O and wouldn't mind doubling my position, but certainly not at the current premium price! O's quality score is on the low side, so I require a solid discount to improve the reward-risk ratio.
A potential replacement trade could be to sell a $50 put option on O expiring in September or in December. For selling puts, I like to see a dividend boost factor of 5.00 or more unless I can buy shares at a discount of at least 10%.
The September put has a premium of about $1.70, which would generate an annualized options yield of 11.40% for a dividend boost factor of 2.50. If exercised, I'd be buying shares for about 22% below the current price.
The December put has a premium of about $3.50, which would generate an annualized options yield of 11.57% for a dividend boost factor of 2.54. If exercised, I'd be buying shares for about 24% below the current price.
I'm somewhat favoring the September expiration, but I'd like to review the premiums before committing.
| #465 | 2020-03-19 | : | -1 | × | NNN 19 Jun 2020 $22.50 P | $ 190.00 | ( $ -0.30 ) |
NNN closed at $35.84 per share on options expiration day, some 59% above the strike price of the put option I'd sold on 19 March when the stock traded just below $30 per share. As a result, the option expired and I secured $190 in options income.
According to Simply Safe Dividends, NNN's Dividend Safety Score is Borderline Safe. Additionally, NNN is one of only two stocks in my portfolio with Inferior quality scores:
| Rank | Ticker | Company | 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. |
| 82 | MAIN | Main Street Capital | 9 | 9 | 7.58% | 4.0% | 12 | NA | NA | None | BBB- | 62 | 33 | 32.47 | (1%) |
| 83 | NNN | National Retail Properties | 30 | 8 | 5.75% | 4.2% | 10 | NA | NA | None | BBB+ | 50 | 40 | 35.84 | (9%) |
Notice, though, that ValueLine does not provide a Safety Rank or Financial Strength rating for either of these stocks. Arguably, NNN's (and MAIN's) quality score should be higher.
At this time, I'm not interested in selling another NNN put. I'll reconsider when NNN's Dividend Safety Score is upgraded to Safe.
Hormel Foods (HRL)
| #457 | 2020-03-09 | : | -1 | × | HRL 19 Jun 2020 $40.00 P | $ 155.00 | ( $ -0.35 ) |
On options expiration day, HRL closed at $48.55 per share, well above the $40 put option I'd sold. As a result, the option expired and I secured $155 in options income.
I own 100 shares of HRL and wouldn't mind doubling my position. The stock is trading at about fair value, offers a reasonable yield near 2%, and has an impressive 5-year dividend growth rate [DGR] of 16%:
| Rank | Ticker | Company | 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. |
| 34 | HRL | Hormel Foods | 53 | 22 | 1.92% | 16.0% | 18 | 1 | A+ | Narrow | A | 99 | 48 | 48.55 | 2% |
It looks like I should be able to sell the $44 put expiring in September for about $1.10. That would generate an annualized options yield of 9.32% for a dividend boost factor of 4.86. If exercised, I'd be buying shares about 12% below the current share price.
Oracle Corporation (ORCL)
| #448 | 2020-01-21 | : | -2 | × | ORCL 19 Jun 2020 $47.50 P | $ 150.00 | ( $ -1.49 ) |
ORCL closed at $54.40 per share, well above the $47.50 put option I'd sold. As a result, the option expired and I secured $148 in options income.
I own 175 shares of ORCL, essentially a full position of about 1% of total portfolio value. ORCL is rated Excellent with a quality score of 24. It trades about this 7% below fair value and offers a reasonable yield of 1.76% with a strong 5-year DGR of 12%:
| Rank | Ticker | Company | 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. |
| 9 | ORCL | Oracle | 11 | 24 | 1.76% | 11.9% | 14 | 1 | A++ | Wide | A+ | 99 | 58 | 54.40 | (7%) |
Selling an August $50 put on ORCL for $1.21 would generate an annualized options yield of 13.43% for a dividend boost factor of 7.61, which is quite attractive! Additionally, if exercised, I'd be buying ORCL at about 10% below its current share price.
Xcel Energy Inc (XEL)
| #440 | 2019-12-18 | : | -2 | × | XEL 17 Jun 2020 $55.00 P | $ 150.00 | ( $ -0.21 ) |
XEL closed at $64.01 per share, well above the $55 put options I'd sold. As a result, the options expired and I secured $150 in options income.
My position of XEL of 65 shares is relatively small, so I would like to add at least 100 shares. XEL is one of my so-called Home Run stocks, a designation I give to stocks that have produced total returns equaling my original investment.
| Rank | Ticker | Company | 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. |
| 51 | XEL | Xcel Energy | 17 | 21 | 2.69% | 6.2% | 9 | 1 | A+ | Narrow | A- | 79 | 58 | 64.01 | 11% |
XEL is rated Fine with a quality score of 21. It yields 2.69%, and with a modest 5-year DGR of about 6%, the stock's Chowder Number [CDN] is not quite where I'd like to see it.
If I sell an October $55 put on XEL for $1.65, I can generate an annualized options yield of 8.07%, which would triple XEL's current dividend. If exercised, I would be buying XEL at a discount of about 17%.
Walmart Inc (WMT)
| #428 | 2019-11-26 | : | -1 | × | WMT 19 Jun 2020 $100.00 P | $ 158.00 | ( $ -0.65 ) |
WMT closed at $119.85 per share on options expiration day, well above it the strike price of $100 of the put I'd sold. So, the option expired and I secured $157 in options income.
WMT is the only member of the most popular Consumer Staples sector stocks I don't own, based on a recent analysis of the top holdings of dividend ETFs:
I previously owned WMT but closed my position due to the stock's low yield and slow dividend growth rate. While the stock is rated Excellent based on its quality score of 24, I'm not interested in reopening a positing, especially at the current premium price!
Buying 100 shares of WMT would cost $11,985. Given its quarterly dividend of 54¢ per share, WMT would deliver a dividend income of 2 ⨉ $54 = $108 every six months. If I sell a December $100 put option for about $2.62, I'll earn more than double that amount in options income ($262), while only having to set aside about $2,000 on margin.
I'm thinking about doing this trade, even though I favor selling puts only on stocks that I'd like to own. WMT at $97.38 ($100 − 2.52) per share seems quite palatable and, if the option never gets assigned, I'd be generating an annualized options yield of 4.44%.
Philip Morris International Inc (PM)
| #412 | 2019-11-13 | : | -1 | × | PM 19 Jun 2020 $100.00 C | $ 102.00 | ( $ -0.65 ) |
PM closed at $72.20 per share on Friday, well below the $100 covered call I'd sold. Therefore, the option expired and I get to retain about $101 in options income.
For selling covered calls, I think an achievable goal is to earn double the dividend yield.
Given PM's dividend yield of 6.27%, it is not possible to double that yield without selling a covered call below my cost basis of $80.22. So there is not an appropriate replacement trade at this time.
Summary
Seven options I'd previously sold expired on 19 June, six puts, and one call. It looks like I'd be able to replace the expired puts by selling similar ones expiring in September or December. In all cases, if assigned, I'd be able to buy the underlying stocks for discounts of at least 10%. In the process, I should be able to generate options income of about $700.
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Hi Ferdi, great summary again and your reasoning behind each trade is a fantastic guide. For the call option of PM closing was below $100 so that the option expired,seems 118.92 is an error.
ReplyDeleteThanks for alerting me! I actually caught that myself and thought I corrected it in the text! I first looked up PG instead of PM's closing price...
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