Tuesday, February 26, 2013

Recent Transaction

On Monday, February 25th I sold a put option on Microsoft.  I chose the $27 strike price since it offered a compelling premium return combined with giving a execution price that is over a 14% discount to my fair value calculation.  I sold the April 20th put option for $0.58.  After commission and fees of $7.99 I had received a total of $50.01.

If MSFT is trading above $27 on April 19th, I will get to keep the full premium of $50.01 as profit.  This would represent a 1.85% return over the length of the option which is annualized to a 12.52% return.

If MSFT is trading below $27 on April 19th, I will be forced to purchase 100 shares of MSFT at $27 each.  However since I received an option premium in exchange for the right to the shares, we have to account for that in the cost basis.  My cost basis on execution after accounting for commission and the premium will come out to $26.50.  As I mentioned above, that's a 14% discount to my fair value calculation.  Based on the current annual dividend of $0.92, this would be a 3.47% YOC.

Unfortunately, thanks to the late day sell off I could have received an extra 2% in annualized premium return had I sold the put closer to the end of the day.  But I'm happy with the two ways this option can play out.  This leaves me a little lighter on cash than I'd like, but if the markets give us a great opportunity, then I'll cash flow some extra money to my brokerage account earlier than expected.  

I've updated my option summary page to reflect the latest trade.

2 comments:

  1. Great blog you have here, came across it while on Dividend Mantra's. Question for you? I'm looking to get into Options trading myself. Do you have any advice for a good place to learn it? Were you self taught?
    -Jersey Jerry

    ReplyDelete
    Replies
    1. JJ,

      I'm pretty much self taught on options. I have a few posts that cover the basics of options and what I look for when selling options.

      http://www.passive-income-pursuit.com/2012/06/option-strategy.html

      http://www.passive-income-pursuit.com/2012/06/put-options-explained.html

      If those aren't enough, then I would recommend looking through some of my posts to see what I was thinking for the trades. My strategy is pretty simple , I mainly stick with just selling puts and calls right now. At the bottom of my blogroll page I have a link to a Google spreadsheet that runs through the calculations for selling calls and puts. So that could be helpful.

      You can check out these blogs that I know of that talk about options. Brick by Brick Investing had a pretty good series covering options and All About Interest is heavy in to options.

      Glad to have you aboard and thanks for stopping by and commenting!

      Delete