I have two more option trades to report from yesterday. I recently bought to close the $39 call option that I had sold on HAL that was expiring in April for a nice little profit. Since this freed up 100 more shares to sell a covered call on I did just that. I had purchased 45 shares of AFL back in February and would like to increase my stake in AFL some more but at some better prices than are currently available in the market, so I sold a put option to effectively set a limit order and get paid while I wait.
Option 1: $40 Call HAL June 22, 2013.
As I mentioned previously, since I closed out the previous call on HAL shares, this freed them up to sell another call option. And I did just that. I sold to open the $40 call expiring June 22, 2013. In exchange for selling the call I received $200 less commission and fees of $8.74. This gave me $191.26 deposited into my account today. This trade can work out one of three ways.
(1) If HAL is trading below $40 on expiration, I will get to keep the full option premium as profit. This would be a 4.78% return which is annualized to 19.61% through expiration.
(2) If HAL is trading above $40 on expiration, the shares will be called away and I will be forced to sell 100 shares of HAL for $40 each. My final sale price will be $40.00 + $191.26 / 100 - $7.95 / 100 = $41.83. Considering my cost basis is sub-$30, that's a nice 43% gain. HAL is my employer and I receive these shares through the ESPP. Since I get a 15% discount on the price I have no problem selling shares since more will be coming every 3 months now.
(3) If HAL makes a large move down between now and expiration I can close out the position for a profit.
I now have 3 open calls on HAL shares, this one expiring in June and the other two expiring in July. If all three options are executed, my sale prices will be $41.20, $41.83, and $43.68. I'm not looking to completely maximize the gains on these shares because I will keep purchasing more each quarter and I'm way overweight in HAL, especially since they are also my employer. If I had my way, I'd have 2 of the calls get executed and 1 expire worthless giving me the chance to continue to sell calls on the shares and redeploy the proceeds from the sales into more DG stocks.
Option 2: $50 Put AFL November 16,2013
I'd really like to own some more shares of AFL and while I still think they are undervalued, I'd like to pick up some more shares around the 3.00% yield level. I can either wait until that time comes, which based on the current dividend of $1.40 would be the $46.67 level, or I can sell a put option and wait get paid to wait for that price. With the opportunities being pretty sparse in the market currently, I decided to sell the put option. In exchange for selling the put option, I received $335.00 less commission and fees of $8.74 for a total of $326.26. This trade can go one of three ways.
(1) If AFL is trading above $50 on expiration, I will get to keep the full option premium as profit. This would represent a 6.53% return through expiration or a 10.09% annualized rate.
(2) If AFL is trading below $50 on expiration, I will be forced to buy 100 shares for $50 each. However, since I received the option premium I get to back that out from my cost basis giving me a $50 - $326.26 / 100 + $7.95 / 100 = $46.82. These shares would provide an extra $140 in annual dividend and carry a 2.99% YOC based on the current annual dividend of $1.40 per share. If I have to buy the shares, my overall cost basis would be lowered by 4.79% and my YOC would increase to 2.92%. If executed, then this is a great chance for me to average down my cost basis in Aflac.
(3) If AFL makes a large move up in price, I can buy to close the put to close out the position.
I sold this put on margin which allows me to not hold the full $5,000 in my account to secure the put. Instead I only need $1,451.25 to meet the margin requirements. I'm fine with either way this trade works out because I'd love to own some more shares and increase my dividends but a 10%+ annualized return is just fine by me as well.
I've updated my Option Summary page to reflect these trades.