Saturday, February 2, 2013

Recent Transaction

I've been on a bit of an option selling frenzy the last week or so, but that happens when there's not as much value available in the market.  Hopefully a bit of a correction will start rearing it's head and allow some actual purchases to be made, but in the meantime I'll sell my options and collect the premium while keeping an eye out for deals on DG stocks.



On Thursday, I sold an $11 put option on Bank of America (BAC) for $0.52.  The option will expire on April 20th.  After commission and fees I collected a total of $44.00 to sell someone the right to sell me 100 shares of BAC at $11.00.  I'm fine with adding to my position in Bank of America since it's a bit of a speculation play that I think will reap great rewards given a few years.

If BAC is trading above $11 on expiration then I'll get to keep the full $44 as profit.  This would represent an even 4.00% return on the $1,100 that is set aside for the put.  A nice 18.48% annualized return.

If BAC is trading below $11 on expiration then most likely I will be put the shares or forced to buy 100 shares of BAC for $11.00 each.  Since I received $44 after commission and fees, my effective cost basis on these shares will be $10.56.  I would have preferred getting shares a little bit closer to the $10.00 mark, but I'm fine with a $10.56 cost basis.  This will give me a YOC of 0.38% based on the current annual dividend of $0.04 per share.  However, this is more of a play on the future since it's my speculation play.  I fully expect that within the next few years the dividend will be pushed back up to at least a $0.60 annual dividend which would be a 5.68% YOC.

I'm happy with either way this trade turns out so now I'll just sit back and wait to see what happens.


6 comments:

  1. I wish that BAC would start paying real dividends again. But the fact that it hasn't probably indicates just how much trouble it's in.

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    1. While I think there's still some short term pain, they should start getting approval to increase their dividend. My guess is sometime this year we'll get an increase, although it would be nice if they would have made one increase already. WFC's made I think 3 since the worst of the financial crisis passed.

      Thanks for stopping by!

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  2. I think this is an awesome trade and you will benefit regardless of the outcome!

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    Replies
    1. Marvin,

      I'll be fine with almost an 18.5% return or the $10.56 cost basis. Either one is a win in my book. Especially when the markets are as heated as they are right now and the values are much harder to find.

      Thanks for stopping by!

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  3. Great trade. I just had my BAC shares assigned away from me and really did not fully understand the rolling out/up strategies which I have since learned. With my new found knowledge would I have tried to keep them? Not sure but would have been good to have the full toolbox of tricks at my disposal!

    I think a dividend rise may come this year

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    Replies
    1. Gareth,

      I hear you on the full toolbox for options. I try to stick with the basics, just selling calls/options but I never knew enough about the strategies for rolling out/up an option that I just let my BAC shares get called away last year. I try to make sure that when I sell an option either outcome, expiration or execution, is fine by me.

      I hope there's a dividend raise this year. I expect it to happen during 2013, hopefully during the first half.

      Thanks for stopping by!

      Delete