Monday, October 19, 2020

Expired Options (October 2020)

After options expire, I post an article to summarize the expirations and to discuss any actions I took. If relevant, I also present potential replacement trades for expired options.

Several options I'd previously sold were slated to expire on Friday, 16 October, including a few in the money options. To avoid assignment, I rolled forward most of those in the money options. 

But I also decided to let one put option expire. I'm quite happy to buy the underlying shares, as my effective cost basis is well below the current share price! 


Background 


When options expire, so do the obligations I have related to those options.

For expired covered calls, my shares cannot be called away anymore. And for expired puts, I no longer need to be concerned about having to buy shares, and 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 to collect more options income, provided the investment thesis remains intact.

Recap


Here is a summary of my options that had an expiration date of 16 October, as presented in September's Options Update article:

October 2020:

#518 2020-08-24 : -2 × CMCSA 16 Oct 2020 $40.00 P  $       112.00  ( $  -0.89 ) → Out of the money with a  12% safety margin   
#514 2020-08-21 : -3 × WBA 16 Oct 2020 $37.50 P  $       317.00  ( $  -2.18 ) → In the money by  3% — caution!   
#512 2020-08-21 : -1 × SPG 16 Oct 2020 $60.00 P  $       420.00  ( $  -0.68 ) → Out of the money with a  13% safety margin 
#511 2020-08-21 : -2 × PSX 16 Oct 2020 $55.00 P  $       370.00  ( $  -0.20 ) → In the money by  4% — caution! 
#508 2020-08-21 : -1 × NKE 16 Oct 2020 $95.00 P  $       117.00  ( $  -1.59 ) → Out of the money with a  38% safety margin   
#505 2020-08-21 : -1 × CVX 16 Oct 2020 $75.00 P  $       159.00  ( $  -1.10 ) → In the money by  1% — caution! 
#501 2020-07-24 : -1 × RY 16 Oct 2020 $75.00 C  $       110.00  ( $  -1.10 ) → Out of the money with a  1% safety margin   
#496 2020-07-24 : -1 × MCD 16 Oct 2020 $165.00 P  $       162.00  ( $  -0.80 ) → Out of the money with a  36% safety margin   
#489 2020-07-23 : -1 × LOW 16 Oct 2020 $125.00 P  $       222.00  ( $  -0.80 ) → Out of the money with a  39% safety margin   
#487 2020-07-23 : -1 × D 16 Oct 2020 $85.00 C  $       164.00  ( $  -1.10 ) → Out of the money with a  4% safety margin   
#486 2020-07-23 : -2 × CMCSA 16 Oct 2020 $47.50 C  $       108.00  ( $  -0.89 ) → Out of the money with a  6% safety margin   

In The Money Positions

Let's first look at the positions that were in the money.

On 14 October, Walgreens Boots Alliance, Inc (WBA) traded below $36 per share. Facing the possibility of having to buy 300 shares of WBA, I decided to roll forward two of these options. Essentially, I decided to prepare for an assignment of the remaining option and possibly having to buy 100 shares. 

As it turns out, WBA closed only 7¢ below the strike price, so the option was assigned and I bought 100 shares of WBA at $37.50 per share. I'm quite happy with this outcome! Accounting for the options premium I received, my effective cost basis is $37.50 - $1.04 = $36.46 per share. 

SYMBOL DATE/TIME QUANTITY PROCEEDS COMM/FEE BASIS
WBA 201016P00037500 2020-10-14, 12:55:33 2 -435.00 -0.72 211.05
WBA 201016P00037500 2020-10-16, 16:20:00 1 0.00 0.00 103.76
Total WBA 201016P00037500 3 -435.00 -0.72 314.82
WBA 210115P00035000 2020-10-14, 12:55:33 -2 515.00 -0.73 -514.27
Total WBA 210115P00035000 -2 515.00 -0.73 -514.27

Rolling forward the other WBA puts cost me $435.72, but I collected $514.27 for selling two 15 January 2021, $35 puts. With a lower strike price, I should have a little more manoeuvering room. We'll see how it goes.

Phillips 66 (PSX) trade well below the $55 strike price of the puts I'd sold, so I rolled forward the puts to the 15 January 2021 expiration date, simultaneously lowering the strike price to $50. Buying back the options cost me $729.33, but I collected $889.31 for selling the January $million $50 puts: 

SYMBOLDATE/TIMEQUANTITYPROCEEDSCOMM/FEEBASIS
PSX 201016P000550002020-10-16, 10:49:222-730.00-0.67370.20
Total PSX 201016P000550002-730.00-0.67370.20
PSX 210115P000500002020-10-16, 10:49:22-2890.00-0.69-889.31
Total PSX 210115P00050000-2890.00-0.69-889.31

Chevron Corporation (CVX) traded below $73 on options expiration day, so I rolled forward the option I'd sold to the 18 December expiration date, simultaneously lowering the strike price from $75 to $70. Buying back the option cost me $151.37, but I collected $351.36 for selling the December $70 put: 

SYMBOLDATE/TIMEQUANTITYPROCEEDSCOMM/FEEBASIS
CVX 201016P000750002020-10-16, 10:53:591-152.00-0.63157.90
Total CVX 201016P000750001-152.00-0.63157.90
CVX 201218P000700002020-10-16, 10:53:59-1352.00-0.64-351.36
Total CVX 201218P00070000-1352.00-0.64-351.36

Out Of The Money Positions 

One of my short positions were out of the money by a small margin of safety. 

Comcast Corporation (CMCSA) traded above $45 per share, about 5% below the $47.50 covered call options I'd sold. With much of the options income secured, I decided to roll forward the CMCSA covered call to the 18 December expiration date, simultaneously increasing the strike price to $50. Buying back the $47.50 covered calls cost $1.58 and I collected $139.28 for selling the December covered calls:

SYMBOLDATE/TIMEQUANTITYPROCEEDSCOMM/FEEBASIS
CMCSA 201016C000475002020-10-16, 10:36:242-2.00-0.42107.11
Total CMCSA 201016C000475002-2.00-0.42107.11
CMCSA 201218C00050000 2020-10-16, 10:36:24-2140.00-0.72-139.28
Total CMCSA 201218C00050000-2140.00-0.72-139.28

On Monday, 14 September, the $55 put option I'd sold on PEG got assigned. As a result, I had to buy 100 shares of PEG at $55 per share while shares were priced around $52.48. That looks like a bad deal, but remember that I received $3.60 per share for selling the put option in the first place. So, my effective cost basis is $51.40 per share.

All the other options expired and allowed me to secure options income totaling about $1,299. 

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

Possible Replacement Trades


Comcast Corporation (CMCSA

#5182020-08-24:-2×CMCSA 16 Oct 2020 $40.00 P $       112.00 ( $ -0.89 )

CMCSA closed at $45.56 per share on options expiration day, about 14% above the $40 puts I'd sold. As a result, the options expired and I secured about $111 in options income. 

It looks like I can sell two $40 puts expiring on 15 January 2021 for about $190, which would give me an annualized options yield of 8.68%. If assigned, I'd be buying 200 shares of CMCSA at a discount of about 14% to the current share price. 

For selling puts, I aim to earn an options yield at least five times that of the underlying stock's dividend yield. Alternatively, I'd like to see a discount of at least 10% in case the option gets exercised. While the boost factor of this trade is 4.26 (lower than 5), the discount exceeds my 10% threshold. 

CMCSA has a quality score of 18, which I rate Decent.

Simon Property Group, Inc (SPG)

#5122020-08-21:-1×SPG 16 Oct 2020 $60.00 P $       420.00 ( $ -0.68 )

SPG closed at $64.82 per share on options expiration day, about 8% above the $60 put I'd sold. As a result, the option expired and I secured about $419 in options income. 

It looks like I can sell two $50 put expiring on 18 December 2021 for about $162, which would give me an annualized options yield of 7.57%. If assigned, I'd be buying 200 shares of SPG at a discount of about 24% to the current share price. 

SPG currently yields 8.02% and it nearly impossible to get a boost factor of 5. However, a discount of 24% is way above my threshold of 10%.

SGP has a quality score of only 13, which I rate Poor. This would be a speculative trade, for sure. Before year's end, I'll decide if I want to continue with my SPG investment. Perhaps I'll sell my shares to do some tax harvesting!

NIKE, Inc (NKE)

#5082020-08-21:-1×NKE 16 Oct 2020 $95.00 P $       117.00 ( $ -1.59 )

NKE closed at $128.00 per share on options expiration day, about 35% above the $95 put I'd sold. As a result, the option expired and I secured about $115 in options income. 

NKE is significantly overvalued now, so I'm not interested in replacing this trade at this time:


Royal Bank of Canada (RY)

#5012020-07-24:-1×RY 16 Oct 2020 $75.00 C $       110.00 ( $ -1.10 )

RY closed at $73.70 per share on options expiration day, 1.7% below the strike price of the covered call option I'd sold. As a result, the option expired and I secured $109 in options income.

It looks like I can sell a $75 covered call expiring on 18 December for about $160, which would give me an annualized options yield of 13.44%. If assigned, I'd be selling 100 shares of RY for a gain of 6.52%.

For selling covered goals, I aim to double the underlying stock's dividend yield. With a yield on cost of 4.56%, that means this trade has a boost factor of 2.95 (13.44%/4.56%).

RY has a quality score of 22, which I rate Fine

McDonald's Corporation (MCD)

#4962020-07-24:-1×MCD 16 Oct 2020 $165.00 P $       162.00( $ -0.80 )

MCD closed at $229.37 per share, about 39% above the $165 put option I'd sold. As a result, the option expired and I secured $161 in options income.

I think a suitable replacement trade would be to sell one $200 puts expiring on 18 December, for options income of about $215. That trade would generate an annualized options yield of 5.72% for a dividend boost factor of 2.52. If exercised, I'd be buying 100 shares at a discount of about 13%.

MCD has a quality score of 22, which I rate Fine

Lowe's Companies, Inc (LOW)

#4892020-07-23:-1×LOW 16 Oct 2020 $125.00 P $       222.00 ( $ -0.80 )

LOW closed at $177.70 per share on options expiration day, some 42% above the strike price of the put option I'd sold. As a result, the option expired and I secured $221 in options income.

It looks like I can sell a $150 put expiring on 18 December for about $220, which would give me an annualized options yield of 7.55% for a boost factor of 5.55. If assigned, I'd be buying shares at a discount of about 16%. 

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

Dominion Energy, Inc (D)

#4872020-07-23:-1×D 16 Oct 2020 $85.00 C $       164.00 ( $ -1.10 )

D closed at $81.41 per share, about 4% below the $85 covered call I'd sold. As a result, the option expired and I secured $163 in options income.

It looks like I can sell an $85 covered call expiring on 18 December for about $115, which would give me an annualized options yield of 9.52%. If assigned, I'd be selling 100 shares of D for a gain of 18.48%.

With a yield on cost of 5.16%, I'm not quite getting a boost factor of 2 with this trade (9.52%/5.16% = 1.84).

D has a quality score of 16, which I rate Decent

Summary


Of the eleven short options that were scheduled to expire last Friday, I rolled forward four to avoid possible assignments (for three) and to secure options income (for one). I allowed one put option to be assigned, and so bought 100 shares of WBA at an effective cost basis below WBA's current share price. 

Seven short options expired and I suggested possible replacement trades for six of them. The exception is NKE, which is too overvalued presently for a suitable trade. 

The replacement trades should earn about $1,056 in options income.

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2 comments :

  1. Hello
    explain how you can sell CMCSA 40 put on 01/15/2021 for 190 if the price did not rise above 122

    ReplyDelete
    Replies
    1. Thanks for commenting -- I sold 2 puts for $190, or $95 each. The text is now corrected.

      Delete

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