Thursday, July 23, 2020

Expired Options (July 2020)

Last Friday was options expiration day. Following options expiration, I post an article summarizing all expirations and any actions I took. If relevant, I also present potential replacement trades for expired options.

I had several options that expired on Friday, 17 July. Most were out of the money, which means I didn't need to take protective actions to avoid assignment. There was one option, though, that was in the money. I decided to roll forward that option to avoid assignment.

As usual, I'll report on my other options trades in an upcoming article.

Background 


The obligations I have related to options that expire, expire with those options.

For expired covered calls, my shares cannot be called away anymore, and for expired puts, I can't be forced to buy shares anymore. Also, the margin that was set aside as collateral gets released. The options income associated with expired options becomes secured

When options expire I can consider replacement trades, provided the investment thesis remains intact and I can collect a reasonable premium.

Recap


Here is a summary of my options that had an expiration date of 17 July, as presented in June's Options Update article:

 July 2020:

#4842020-06-30:-1×PEG 17 Jul 2020 $50.00 P $       185.00 ( $ -0.35 )→ Out of the money with a  5% safety margin 
#4822020-06-25:-1×LYB 17 Jul 2020 $61.00 P $       335.00 ( $ -0.25 )→ Out of the money with a  13% safety margin  
#4702020-05-28:-3×CMCSA 17 Jul 2020 $35.00 P $       150.00 ( $ -2.21 )→ Out of the money with a  20% safety margin  
#4682020-04-17:-1×LOW 17 Jul 2020 $90.00 P $       702.00 ( $ -0.66 )→ Out of the money with a  57% safety margin    
#4442020-01-15:-1×D 17 Jul 2020 $82.50 C $       267.00 ( $ -0.30 )→ Out of the money with a  9% safety margin   
#4432020-01-15:-2×CMCSA 17 Jul 2020 $47.50 C $       402.00 ( $ -1.50 )→ Out of the money with a  12% safety margin  
#4302019-12-12:-2×TROW 17 Jul 2020 $120.00 C $    2,209.00 ( $ -1.64 )→ In the money by  10% — caution!   

The covered call trade on T. Rowe Price Group, Inc (TROW) was deep in the money, with TROW trading well above $130 per share. I decided to roll forward the covered call, choosing the $135 strike price and the 15 January 2021 expiration date. The trade realized a net loss of $397.

 TROW 17JUL20 120.0 C 
 2020-07-16 
   2 
 -2,600.00 
 -0.29 
 TROW 15JAN21 135.0 C 
 2020-07-16
 -2 
2,202.00 
 -0.34 

TROW's price has continued to climb higher, closing at $136.20 per share on 22 July. This means my $135 strike covered call is back in the money, so we'll see how this one goes!

All the other options expired, allowing me to secure options income totaling $2,036.

Let's consider these in turn and see if there are suitable replacement trades available.

Possible Replacement Trades


Public Service Enterprise Group Incorporated (PEG)

#4842020-06-30:-1×PEG 17 Jul 2020 $50.00 P $       185.00 ( $ -0.35 )

PEG closed at $55.08 per share on options expiration day, about 10% above the strike price of the put option I'd sold. I sold the $50 put hoping for an assignment, as PEG made June's top 10 list of dividend growth stocks, ranking #8.

Now trading at $52.99, PEG still looks interesting to me. The yield of 3.70% remains attractive, and PEG has a quality score of 22, which I rate Fine. PEG is the second-highest ranked Utilities sector stock after NextEra Energy, Inc (NEE).

I'm considering selling the $55 put option on PEG expiring in September. 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 $3.90, which would generate an annualized options yield of 48% for a dividend boost factor of 12.94. If exercised, I'd be buying shares for about 3.6% below the current price.

By selling an in the money put option, I'm really saying I want to buy 100 shares!

LyondellBasell Industries N.V. (LYB)

#4822020-06-25:-1×LYB 17 Jul 2020 $61.00 P $       335.00 ( $ -0.25 )

LYB closed at $68.50 per share on options expiration day, some 12% above the strike price of the put option I'd sold. As a result, the option expired and I secured $335 in options income.

When I recently considered the Top Holdings of Dividend ETFs in the different GICS sectors, LYB was the highest-yielding Materials sector stock. At $68.37, LYB yields 6.14%, which is very attractive indeed. The only thing that gives me some pause is LYB's quality score of 16, which I rate only Decent. On the other hand, I own only one Materials sector stock in my DivGro portfolio, so it would be good to add LYB.

The September $60 put has a premium of about $2.30, which would generate an annualized options yield of 22% for a dividend boost factor of 3.56. If exercised, I'd be buying shares at a discount of about 15.6% of the current price.

Comcast Corporation (CMCSA

#4702020-05-28:-3×CMCSA 17 Jul 2020 $35.00 P $       150.00 ( $ -2.21 )
  #4432020-01-15:-2×CMCSA 17 Jul 2020 $47.50 C $       402.00 ( $ -1.50 )

On options expiration day, CMCSA closed at $42.18 per share, well above the $35 put option I'd sold and also well below the $47.50 covered call I'd sold. As a result, both options expired and I secured $548 in options income.

For selling covered calls, I think an achievable goal is to earn double the dividend yield.

CMCSA yields 2.16% at $42.57 per share. It looks like I can sell two $47.50 covered calls expiring on 16 October for about $112, which would give me an annualized options yield of 7.3% for a boost factor of 2.62.

Last month, I sold three $32.50 puts on CMCSA that expires in August, so I don't want to sell more puts ono CMCSA at this time.

Lowe's Companies, Inc (LOW

#4682020-04-17:-1×LOW 17 Jul 2020 $90.00 P $       702.00 ( $ -0.66 )

LOW closed at $143.84 per share, about 60% above the $90 put option I'd sold. As a result, the option expired and I secured $701 in options income.

A suitable replacement trade seems to be selling the $125 put expiring on 16 October, for options income of about $234. That trade would generate an annualized options yield of 6.82% for a dividend boost factor of 4.61. If exercised, I'd be buying shares at a discount of about 17%.

LOW has a quality score of 21, which I rate Fine

Dominion Energy, Inc (D

#4442020-01-15:-1×D 17 Jul 2020 $82.50 C $       267.00 ( $ -0.30 )

D closed at $78.58 per share, about 5% below the $82.50 covered call I'd sold. As a result, the options expired, and I secured $267 in options income.

In announcing a deal in which Berkshire Hathaway (BRK.A, BRK.B) will buy D's Gas Transmission & Storage segment assets, D indicated that its dividend will be reduced by about 33.5%. I'm not too thrilled with this announcement, so I wouldn't mind selling my shares at the right price!

The October $85 covered call could generate options income of about $150. This would give me an annualized options yield of 8.9% for a boost factor of 1.72. If exercised, my overall gain would be about 19%.

Summary


Six options I'd previously sold expired on 17 July, four puts, and two calls. Additionally, I rolled forward an in the money covered call on TROW for a net loss of about $397.

It looks like I'd be able to replace all but one of the options that expired. Expiration dates in September and October should generate reasonable options income of about $1,233.

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4 comments :

  1. Hi FerdiS

    Thank you for sharing your trading in stocks and options. It is of great interest and help to me.

    I started following along your options trading a couple of months ago, and it seems like a great way of boosting the dividend income. As I am not used to leverage, the leverage seems scary to me. Because of that I started selling cash covered put options.

    To me, it looks like your total exposure to the market, as of 16th of July, through options is around 461,600.00 USD (number of contracts x 100 x strike price). I did not differentiate between covered calls and puts, so please bear with me in terms of the math.

    This is 47% of your total worth of the stock portfolio (461,600.00/984,951.00). I have read that your broker is requiring 20 %, but I guess you have a buffer on that.

    Could you please elaborate on how much leverage you use on your options trading? And how you make sure not to be wiped out if the market falls significantly?

    Further, to understand it correct. Could you please elaborate on your Total Options Income and Secured Options Income? As I see it, your Total Options Income (74,273.85) is what you have got in premiums for the "insurances", but the Secured Options Income (42,392.85) is what you have earned on trading options, the difference of 31,881.00 is the essentially money lost, or am I wrong?

    Happy trading!

    Greetings from Denmark.

    Kind Regards
    Magnus


    ReplyDelete
    Replies
    1. Hi, Magnus -- thanks for your comment and questions.

      I'm happy to try to answer!

      Leverage carries risk, and it is important to realize that. Your concerns are not invalid or unwarranted. As far as the amount of leverage, you're in the general ballpark with your math.

      Interactive Brokers (IB) have a generous margin policy. As mentioned, put options sellers have put aside 20% of the potential exercise amount as collateral. But IB also allows for leverage up to 4x on large accounts. I never go above 2x, allowing for a theoretical market drop of up to 50% before I would be facing a margin call.

      IB charges a reasonable interest rate on the margin loan amount, which I'm comfortable with paying. And IB's commissions on options trading is very competitive, less than $1 in many cases.

      As for shorting put options, I generally sell deep out of the money puts on stocks I wouldn't mind owning (almost exclusively dividend growth stocks). That provides a reasonable buffer. Should share prices of several underlying stocks fall in concert, I do have the opportunity to roll forward some of the options to "postpone" having to buy too many stocks at the same time. Interestingly, that rolling forward action can often generate even more income, as the increased volatility increases options premiums.

      The bottom line, though, is selling put options on margin carries risk. Your approach of selling cash-secured puts is, of course, safer.

      Finally, total options income is all moneys received (in premiums) for selling options. That's the amount of money I could immediately use to buy more dividend growth stocks to earn extra dividend income.

      When I sell an option, I have a potential obligation, which lasts until expiration day unless I buy back the option earlier. I consider the premium associated with existing short options "unsecured". Like a loan, it is not mine to keep until my obligation expires. Once expired, though, the money is mine to keep. So secured options income is the portion of total options income that's mine to keep. The difference is not money lost, as you think, but options income I still consider as a temporary loan... because of potential obligations that have not yet expired.

      As for losses, I don't track that specifically, though it would be possible to calculate losses from my spreadsheet that tracks all options transactions.
      Losses occur on occasion when I have to buy back options for more than the premiums I received for selling them.

      Delete
    2. Hi FerdiS

      Thank you for your detailed explanation, very useful.

      Kind regards
      Magnus

      Delete

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