Tuesday, April 9, 2013

Recent Option Transactions

I have 2 option trades to announce from yesterday.  I closed out another call option on Halliburton, my ESPP shares, and I also sold a put option on ExxonMobil.  I try to announce every single move that I make for my portfolio to help everyone that follows along get an understanding of my reasoning behind any change.  Plus it gives me a record of what I was thinking at the time of the trade and I can then analyze go back and analyze my reasoning and determine whether the original investment merits are still in place.
Option Trade 1:  Sold to Open $87.50 XOM May put option

I have a target entry price for ExxonMobil of $89.25 and this option gave me a good chance to either pick up shares well below that level or to just collect the premium while it expires.  I wanted to get a better entry price so this was a great route to go.  I sold the $87.50 strike put option expiring in May for $1.65 which after commission and fees brought $156.71 to my account to do with as I please.  This trade can go one of three ways.

(1) If XOM is trading above $87.50 on May 18th, I'll get to keep the full option premium as profit. This would represent a 1.79% return over the length of the option which would be a 16.34% annualized return.

(2) If XOM is trading below $87.50 on May 18th, I'll be forced to purchase 100 shares of XOM for $87.50 each.  However, since I received the option premium my cost basis would be $86.01 which would be a 2.65% YOC based on the current annual dividend of $2.28.  This would add $228 to my annual dividends before any future increases.  My cost basis would be 3.63% below my target entry price.

(3) I can close out the put option early for a total profit less than in case 1.

I sold this put on margin instead of going the cash secured route.  Instead of having to hold $8,750 in my account to secure the put I only need to hold $2,228.25.  I'm okay with selling naked puts and using margin to secure the put since I'm not charged any margin interest and won't be subject to a margin call as long as I meet the margin requirements for all open naked puts.

If I had my choice, I'd go with case 3 for how the XOM put to plays out.  I like the purchase price because I feel it's at a solid discount to it's fair value but would prefer to have a higher starting yield.  We'll see how this one works out.

Option Trade 2:  Bought to Close $40 HAL June call option

I originally opened this position back in late March so this was a much shorter holding period than normal.  When I sold the option I received $191.26 in premium and then bought to close the call yesterday for $1.12 which after commission and fees netted me $71.28 in profit for the trade.  This ended up being a 1.78% return which is annualized to 46.49% over the time the option was open.

I now have just over 200 shares that I can continue to write calls on and have decided on a strategy that I will look to employ on the next up day for the markets and then going forward as more shares are purchased through the ESPP program.  With the shares that I currently have I will be pretty aggressive with the call strike prices in hopes of trying to get some shares called away, so I will be selling calls that are further in the money.  Going forward my plan will be to sell and close out a call option to try and maximize premium income until the next batch of 100 shares hits long term capital gains treatment, every 3-6 months.  Once a new batch hits LTCG I will then sell a deeper in the money call and let it go until expiration to avoid becoming overweight my employer's shares.  I think this will be a good strategy going forward to generate more income through options and to diversify into other positions.

I was very close to initiating a position in Johnson and Johnson (JNJ) after the analyst rating cut, but decided against it after the XOM put went through and the price just didn't come down to the level I wanted.  With earnings season kicking off yesterday I'm hoping for some more volatility to both increase the option premiums and give us all a chance to pick up some shares in great companies.

So far in 2013 I've collected $405.87 in option premium.

I've updated my Portfolio and Option Summary pages to reflect both of these changes.

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