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Friday, November 27, 2020

Expired Options (November 2020)

Friday was options expiration day. This article provides a summary of what happened to my expiring options. It also provides details on any actions I took to avoid assignment.

As usual, I discuss potential replacement trades for the expired options. 

This month, I decided to roll forward two in the money options to avoid assignment. But I also decided to let one put option expire in order to buy the underlying shares. That assignment happened one day before the options expiration day. 


Background 


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

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. And for expired covered calls, my shares cannot be called away anymore. The options income associated with expired options becomes secured

When options expire I can consider replacement trades to collect more options income, provided my investment thesis remains intact.

Recap


Here is a summary of short options that had an expiration date of 20 November, as presented in October's Options Update article:

November 2020:

#549 2020-10-21 : -2 × AFL 20 Nov 2020 $37.00 P  $       344.00  ( $          -0.68 ) → Out of the money with a 12% safety margin  
#537 2020-09-29 : -1 × LOW 20 Nov 2020 $170.00 C  $       575.00  ( $          -0.67 ) → Out of the money with an 8% safety margin    
#534 2020-09-29 : -1 × IBM 20 Nov 2020 $135.00 C  $       105.00  ( $          -1.09 ) → Out of the money with a 13% safety margin  
#533 2020-09-29 : -2 × GILD 20 Nov 2020 $70.00 C  $       154.00  ( $          -0.88 )
→ Out of the money with a 13% safety margin 

#532 2020-09-29 : -2 × CSCO 20 Nov 2020 $42.00 C  $       162.00  ( $          -2.48 ) → Out of the money with an 8% safety margin    
#522 2020-09-21 : -1 × ORCL 20 Nov 2020 $55.00 P  $       118.00  ( $          -0.79 ) → Out of the money with a  3% safety margin    
#519 2020-08-27 : -2 × LLY 20 Nov 2020 $125.00 P  $       365.00  ( $          -1.60 ) → Out of the money with a 17% safety margin     
#516 2020-08-21 : -2 × XOM 20 Nov 2020 $35.00 P  $       218.00  ( $          -0.90 ) → Out of the money with a  5% safety margin    
#513 2020-08-21 : -1 × TXN 20 Nov 2020 $105.00 P  $       125.00  ( $          -0.65 ) → Out of the money with a 21% safety margin  
#456 2020-03-09 : -3 × BEN 20 Nov 2020 $22.50 P
 $    1,366.00  ( $          -1.44 ) → In the money by  7% — caution!   

In The Money Position

Let's first look at the only position that was in the money.

On 19 November, Franklin Resources, Inc (BEN) traded below $21 per share. Facing the possibility of having to buy 300 shares of BEN, I decided to roll forward two of these options. Essentially, I decided to prepare for an assignment of the remaining option and having to buy 100 shares. 

As it turns out, the option was assigned on 19 November, one day before expiration. So I bought 100 shares of BEN at $22.50 per share, whereas the stock's closing price was $20.85 per share.

I'm quite happy with the outcome! Accounting for the options premium I received, my effective cost basis is $22.50 - 454.41/100 = $22.50 - $4.54 = $17.96 per share. 

Symbol Date/Time Quantity Proceeds Comm/Fee Basis
BEN 20NOV20 22.5 P 2020-11-19, 15:44:36 2 -351.00 -0.27 910.15
BEN 20NOV20 22.5 P 2020-11-19, 16:20:00 1 0.00 0.00 454.41
Total BEN 20NOV20 22.5 P 3 -351.00 -0.27 1,364.56
BEN 18DEC20 20.0 P 2020-11-19, 15:44:36 -2 91.00 -0.27 -90.73
Total BEN 18DEC20 20.0 P -2 91.00 -0.27 -90.73

Rolling forward the other two BEN puts to the 18 December expiration date and simultaneously lowering the strike price to $20, cost me $351. However, I collected $91 for selling the December puts. With the lower strike price, I should have a little more manoeuvering room. We'll see how it goes.

Out Of The Money Positions 

All the other options expired and allowed me to secure options income totaling about $2,267. 

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

Possible Replacement Trades



Aflac Incorporated (AFL)

#549 2020-10-21 : -2 × AFL 20 Nov 2020 $37.00 P   $ 344.00   ( $ -0.68 )

AFL closed at $43.85 per share on options expiration day, about 19% above the $37 puts, I'd sold. As a result, the options expired and I secured about $343 in options income. 

AFL is currently trading around $45.27 per share. 

It looks like I can sell three $35 puts expiring on 19 February 2021 for about $105, which would give me an annualized options yield of 14.72%. If assigned, I'd be buying 300 shares of AFL at a discount of about 23% 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. This trade's boost factor is 5.95 and the discount also exceeds my 10% threshold. 

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


Lowe's Companies, Inc (LOW)

#5372020-09-29:-1×LOW 20 Nov 2020 $170 C  $ 575.00  ( $ -0.67 )

LOW closed at $149.93 per share on options expiration day, about 12% below the $170 covered call I'd sold. As a result, the option expired and I secured about $574 in options income. 

LOW is currently trading around $154.78 per share. 

It looks like I can sell one $170 covered call expiring on 15 January 2021 for about $165, which would give me an annualized options yield of 14.08%. If assigned, I'd be selling 100 shares of LOW for a gain of about 87% on my cost basis. 

For selling covered calls, I aim to double the underlying stock's dividend yield. With a yield on cost of 2.59%, that means this trade has a boost factor of 5.43 (14.08%/2.59%).

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


International Business Machines Corporation (IBM)

#5342020-09-29:-1×IBM 20 Nov 2020 $135 C  $ 105.00  ( $ -1.09 )

IBM closed at $116.94 per share on options expiration day, about 13% below the $135 covered call I'd sold. As a result, the option expired and I secured about $104 in options income. 

IBM is currently trading around $124.35 per share. 

It looks like I can sell one $140 covered call expiring on 19 March 2021 for about $175, which would give me an annualized options yield of 4.21%. If assigned, I'd be selling 100 shares of IBM for a gain of about 2% on my cost basis. 

As mentioned before, I aim to double the underlying stock's dividend yield when selling covered calls. Given my yield on cost of IBM of 4.71%, it is not possible to get a boost factor of at least 2 at this time. Instead, the boost factor of this trade would be only 0.89. 

Nevertheless, I think I'll do this trade as it quite unlikely that IBM would trade above $140 per share by 19 March 2021. 

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


Gilead Sciences, Inc (GILD)

#5332020-09-29:-2×GILD 20 Nov 2020 $70 C  $ 154.00  ( $ -0.88 )

GILD closed at $60.11 per share on options expiration day, about 14% below the $70 covered call I'd sold. As a result, the option expired and I secured about $153 in options income. 

GILD is currently trading around $60.03 per share. 

It looks like I can sell two $70 covered calls expiring on 19 February 2021 for about $122, which would give me an annualized options yield of 3.86%. If assigned, I'd be selling 200 shares of GILD at about breakeven. 

Given my yield on cost of GILD of 3.85%, it is not possible to get a boost factor of at least 2 at this time. Instead, the boost factor of this trade would be only 1.00. 

Nevertheless, I think I'll do this trade as it quite unlikely that GILD would trade above $70 per share by 19 February 2021. 

GILD has a quality score of 19, which I rate Fine


Cisco Systems, Inc (CSCO)

#5322020-09-29:-2×CSCO 20 Nov 2020 $42 C  $ 162.00  ( $ -2.48 )

CSCO closed at $40.97 per share on options expiration day, about 2% below the $42 covered call, I'd sold. As a result, the option expired and I secured about $160 in options income. 

CSCO is currently trading around $42.70 per share. 

It looks like I can sell two $45 covered calls expiring on 15 January 2021 for about $108, which would give me an annualized options yield of 10.33%. If assigned, I'd be selling 200 shares of CSCO for a gain of about 11% on my cost basis. 

Given my yield on cost of CSCO of 3.50%, the boost factor of this trade would be 2.95. 

CSCO has a quality score of 24, which I rate Excellent


Oracle Corporation (ORCL)

#5222020-09-21:-1×ORCL 20 Nov 2020 $55 P  $ 118.00  ( $ -0.79 )

ORCL closed at $55.70 per share on options expiration day, about 1% above the $55 put I'd sold. As a result, the option expired and I secured about $117 in options income. 

ORCL is currently trading around $57.76 per share. 

It looks like I can sell a $52.50 put expiring on 19 February 2021 for about $106, which would give me an annualized options yield of 8.20%. If assigned, I'd be buying 100 shares of ORCL at a discount of about 11% to the current share price. 

As mentioned earlier, I aim to earn an options yield at least five times that of the underlying stock's dividend yield when selling puts. Alternatively, I'd like to see a discount of at least 10% in case the option gets exercised. This trade's boost factor is 4.93, but the discount exceeds my 10% threshold. 

ORCL has a quality score of 23, which I rate Excellent.


Eli Lilly and Company (LLY)

#5192020-08-27:-2×LLY 20 Nov 2020 $125 P  $ 365.00  ( $ -1.60 )

LLY closed at $145.49 per share on options expiration day, about 16% above the $125 put I'd sold. As a result, the option expired and I secured about $363 in options income. 

LLY is currently trading around $147.44 per share. 

It looks like I can sell a $130 put expiring on 19 February 2021 for about $142, which would give me an annualized options yield of 7.59%. If assigned, I'd be buying 100 shares of LLY at a discount of about 13% to the current share price. 

While this trade's boost factor is only 3.78, the potential discount exceeds my 10% target. 

LLY has a quality score of 24, which I rate Excellent.


Exxon Mobil Corporation (XOM)

#5162020-08-21:-2×XOM 20 Nov 2020 $35 P  $ 218.00  ( $ -0.90 )

XOM closed at $36.94 per share on options expiration day, about 6% above the $35 put I'd sold. As a result, the option expired and I secured about $217 in options income. 

XOM is currently trading around $40.19 per share. 

It looks like I can sell two $35 puts expiring on 15 January 2021 for about $116, which would give me an annualized options yield of 13.36%. If assigned, I'd be buying 200 shares of XOM at a discount of about 14% to the current share price. 

XOM yields 8.66%, which makes it impossible to get a boost factor of at least 5. However, the strike price represents a discount that easily exceeds my 10% target.

XOM has a quality score of 17, which I rate Fair.


Texas Instruments Incorporated (TXN)

#5132020-08-21:-1×TXN 20 Nov 2020 $105 P  $ 125.00  ( $ -0.65 )

TXN closed at $156.82 per share on options expiration day, about 25% above the $125 put I'd sold. As a result, the option expired and I secured about $124 in options income. 

TXN is currently trading around $158.99 per share. 

It looks like I can sell a $125 put expiring on 19 March 2021 for about $175, which would give me an annualized options yield of 3.67%. If assigned, I'd be buying 100 shares of TXN at a discount of about 22% of the current share price. 

While this trade's boost factor is only 1.43, the potential discount easily exceeds my 10% target. 

TXN has a quality score of 24, which I rate Excellent.

Summary


Of the ten short options that were scheduled to expire on 20 November, I rolled forward a pair of puts to avoid assignment. I allowed one put option to be assigned, and so bought 100 shares of BEN at an effective cost basis below BEN's current share price. 

Several short options expired and I suggested possible replacement trades for them. 

The replacement trades should earn about $1,214 in options income.

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5 comments :

  1. Hello good morning, when you say, which would give me an annualized option yield of 14.08%.
    How do you calculate it?
    Thank you very much

    ReplyDelete
    Replies
    1. Hi -- thanks for your question.

      Determine the number of days in the trade N, from selling the option to when it would expire on the expiration date. For covered calls, calculate the options yield Y by dividing the options premium by the cost basis (the stock price per share). For put options, calculate Y by dividing the options premium by the current stock price. Then the annualized options yield is Y*365.25/N.

      Delete
  2. Sorry, you could give an example, I try to do it as you say but it doesn't work the same way.
    Thanks you

    ReplyDelete
    Replies
    1. Hi, Jordi -- it appears I made a mistake in calculating the annualized yield of AFL:

      The correct annualized yield should be, with:

      Y=0.077, N=84

      then I get an annualized yield of 3.33%

      Certainly not 14.72%!

      I'm unsure how I got 14.72%...

      Delete
  3. Ok perfect, thank you very much

    ReplyDelete

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