I tweeted about all these trades as they were executed but am just now getting a chance to get official write-ups going. On Tuesday, May 21st I sold 2 put options one on Cisco and one on Clorox. And yesterday May 22nd I bought to close the put option I had sold on Aflac. I'm excited about the 2 new positions since they will allow me a solid return if the markets continue on their merry way or entry prices that I'd be very interested in making a purchase at. The closed option was more of a play to lock in solid profits and free up some extra capital.
Put Option 1: Cisco
I sold to open a $23 put option on Cisco that expires August 17, 2013 for $0.84. I received $76.01 in option premium after commission and fees to use as I see fit for the time being. The put option can work out one of three ways.
(1) If Cisco is trading above $23 on expiration and therefore expires worthless, then I'll get to keep the full option premium as profit. This would be a $76.01 / $2,300 = 3.30% return in about 3 months which would be equivalent to a 13.71% annualized return.
(2) If Cisco is trading below $23 on expiration, then I will be forced to buy 100 shares of Cisco at $23 each. However, since I received the option premium I get to back that out of strike price to calculate my cost basis. The cost basis would then be $23 - $76.01 / 100 + $7.95 / 100 = $22.32. Based on the current annual dividend of $0.68 per share I would be receiving an extra $68 in annual dividends and the position would carry a yield of 3.05%.
(3) If Cisco makes a big move higher I can close out the position early for a profit less than in case 1.
I really like Cisco's prospects going forward and wish I had purchased before the latest earnings release when I could have locked in a 3.30% yield on cost. I think the potential for sustained double digit dividend increases for the next several years is there and this could really allow for some great returns. My purchase price $22.32 if executed would get me shares at essentially my target entry price based on my stock analysis of Cisco. Despite my belief that Cisco has a good chance to be a consistent dividend grower, the history just isn't there and it is a technology company which is much more subject to sudden change than a company like Colgate-Palmolive. I couldn't really tell you any time that there was some sweeping change in the toothpaste industry, especially one that was proprietary. For this reason I don't want to get too heavily invested in technology companies.
Put Option 2: Clorox
I also sold to open a $85 put option on Clorox that expires on July 20th. In exchange for selling the option I received $160.51 in option premium after commission and fees.
(1) If Clorox is trading above $85 on expiration, then the position will just expire leaving the full option premium as profit for me. This would be a $160.51 / $8,500 = 1.89% return. Since this position will be open for just under two months this would be equivalent to a 11.49% annualized rate.
(2) If Clorox is trading below $85 on expiration, then I will have to purchase 100 shares of Clorox for $85 per share. As before I get to back out the option premium from my purchase price, so my cost basis becomes $85 - $160.51 / 100 + $7.95 / 100 = $83.47. Based on the current annual dividend of $2.84 per share this position would carry a yield on cost of 3.40%.
(3) If Clorox shares trade higher between now and expiration I can close out the position early for a profit less than in case 1.
While there are some issues with Clorox I still feel that this price provides a solid entry price. They recently increased the dividend by another 10.90%. My purchase price would still be on the high end of the calculated valuation range for Clorox but historically purchasing shares for less than a 20 P/E ratio has yielded good results. Dividend Growth Investor has a good post discussing the current valuation of Clorox. While it's on the higher end of the typical ranges, I don't foresee anything coming along and completely shutting Clorox down and that they'll continue to bring in more revenue and share more profits with shareholders year in and year out.
Closed Option: Aflac
I originally sold to open a $50 put option on Aflac back on March 25th and received $326.26 in option premium after commission and fees. The option was set to expire on November 16th so there was still lots of time left on the option. Since Aflac has moved higher since I initiated the position, this has pushed the price of the option lower and I bought to close for $1.45. After commission and fees it cost me $152.98 to close out the position.
For the whole trade I received a profit of $173.28 in about 8 weeks. The return is calculated as $173.28 / $5,000 = 3.47%. Over the period that the option was open this amounted to a 21.82% annualized return. In total I was able to collect approximately 53% of the premium in only 25% of the days until expiration so I took the opportunity to close the position to lock in solid profits and free up some extra capital for purchases and margin requirements.
So far this year I've received $1,108.65 in profit from my option trades. Not bad considering that most of the capital would have just been piling up on the sidelines with the markets neverending climb higher. Although yesterday afternoon the markets did sell off a bit so maybe this will be the start of the pullback we've all been waiting for.
I've updated my Option Summary page to reflect these changes.