Sunday, May 19, 2013

Option Expiration Friday and a Closed Option

The 3rd Friday of May just rolled around.  What?  Already?  And with that comes option expiration.  Two of the puts that I sold expired this past Friday and I also closed one out late last week.  Work's been busy and the satellite has been very shady so the report for the closed option is just now getting done.


Closed Option:

I originally sold a $37 put on Wells Fargo (WFC) back on March 12th and received $154.81 in premium.  On Thursday, May 16th I bought to close the put option for $0.38.  After commission and fees this cost $45.98 and brought the option premium profit to $108.83.  The return is calculated as $108.83 / $3,700 = 2.94%, good for an annualized rate of 16.53%.

I was debating closing the put early but went ahead and closed it out as the markets continue to climb higher every day.  I'm hoping for a pullback in the markets so I wanted to free up more capital in case that comes.  This freed up the margin requirement that averaged close to $1,100 over the time the option was open, so the return was actually $108.83 / $1,100 = 9.89%, although for tracking purposes I'll calculate as if it was a cash secured put.

Option Expiration 1:

On March 11th I sold a $37.50 put option on Lorillard (LO).  When I sold the put I received $122.01 in option premium after commission and fees.  Since Lorillard closed trading above $37.50 the put option expired worthless to whoever owned it, but worked out nicely for me since I earned a solid $122.01 / $3,750 = 3.25% return in just over 2 months.  This is equivalent to a 17.48% annualized rate.

Since this put was also sold on margin, the cash held to cover the margin requirement is now freed up again.  My margin requirements for this put averaged around $850 while it was open so the actual return was closer to 14.35% based on the cash that was set aside.

Option Expiration 2:

On May 10th I sold $21 strike put option on Cisco (CSCO) and received $47.01 after commission and fees.  Since Cisco closed trading above $21 on expiration I got to keep the full option premium as profit.  This worked out to a nice $47.01 / $2,100 = 2.24% return in just over a week which was good for a 102.20% annualized return.  This put was also sold on margin and the margin requirements averaged around $400 so the actual return was closer to 11.75%.

Cisco was reporting earnings 5 days later and I was expecting them to beat estimates and guide well so I sold the $21 put option since it still gave a solid cost basis if the earnings report was negative or the stock sold off.  My thesis was spot on for this trade as Cisco beat on earnings and the shares jumped over 10% the next day.  Too bad I didn't go heavier into this position because I could have had a solid profit.  I wish I had at least made a small purchase of some shares of Cisco before earnings but such is life.  The yield is now down around 2.80% and while I still feel it's undervalued I'd like to purchase with over a 3.00% yield.

My total option premiums from closed and expired options in 2013 are now up to $935.37.  It's pretty exciting to see the premiums piling up while the dividends have been subpar for where I'd like them to be.  I'm glad that I'm comfortable with options because they allow me to still grow my investment income when the markets are a bit overheated like they are currently.  The option close and 2 expirations freed up around $2,250 in total capital that was being set aside to satisfy the margin requirements of these puts.  I haven't yet decided if I want to keep some of this capital on the sidelines or try to get it invested again through puts.  The markets just seem like their due for a retraction, although I've been feeling that for about 3 months now and it hasn't come.

I've updated my Option Summary page to reflect these changes.

12 comments:

  1. Nice work on the options JC! Almost at that $1,000 mark for the year!

    I am a big fan of CSCO and the direction they are currently heading. The world's need for their "backend" support is only increasing. Coupled with a strong commitment to increasing their dividends, a strong holding in my opinion. Certainly something to be considered on a dip in price!

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    1. W2R,

      It's great because that's an extra $1,000 in investment income in half the year. It'll end up being about the same as my dividend income for the first half as well.

      I like CSCO for all the reasons you stated. I really like their cost cutting initiatives that they've done as well as realizing the shift to cloud/mobility/networking and really pushing hard to provide the best service/equipment out there to provide the data consumption habit. What really amazed me was that only around 1/3 of the global population has access to the internet. It makes sense when you think about it, but that's still a lot of networking that needs to take place to get everyone connected. Not saying that's gonna happen anytime soon, but there's still room for growth if that comes. I'm hoping for a dip in price again. We'll see though.

      Thanks for stopping by!

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  2. Landed on your blog. Nice one.
    I am new to options. Would you let me know why you had to buy the puts back , you said - "On Thursday, May 16th I bought to close the put option for $0.38. " ?
    Thanks
    Inq

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    Replies
    1. inq,

      Glad you found and hopefully you enjoy it.

      For the WFC put option I could have let the option stay open but I decided to close it out early. With options, just like with regular stock purchases, if you want to get out of a position you have to buy to close the position for puts or sell the shares if it's stock. It's just the terminology is different. In my case I only sell/write options meaning that I'm giving up my right to make the decision on the shares while the option is open but I receive the premium. The option can be closed by either the expiration date arriving, buying to close the option, or in some cases early execution of the option (although that's not very common).

      I chose to take my profit and run in hopes of better opportunities.

      Thanks for stopping by and keep on coming back!

      Delete
  3. Great review and it looks like you had a great month. I like your current returns in options and if we add dividends to it there is no better vehicle out there to accumulate our gains. If someone tells me that bonds are better I won't stop laughing. I have a few covered calls expired this Saturday collecting nice gains, but whats even better is that I will be seeling new calls tomorrow collecting even better premium than originally when opening the trade. Thanks to the options income and dividends my account beats the benchmark and I bet yours too!

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    1. Martin,

      I won't be complaining about almost $280 in option income while the markets continue to rise and my dividend income is only about $88 for the month. I can't wait to get more of my capital invested because my cash just keeps piling up.

      I only invest in bonds through my 401k and it's only 5% right now. I think bonds, especially mutual funds/ETFs, will get crushed when the interest rates start to rise and even more so if they rise quickly.

      I tend to stay away from selling covered calls, except for my HAL shares, because when I enter the position I plan to hold forever because I usually purchased with a significant discount. Although if it's a position you don't feel quite as strongly about then it's definitely the way to go since every expiration out of the money is just profit for you. It's going to be interesting though how things might change with the markets returning to more normalized times after the deep discounts from the 2009-12.

      I looked at my returns last year in comparison to the SPY and I was beating on one account and lagging on the other. I think a lot of the disconnect came from assuming that the cash in the hypothetical SPY was invested the day the cash hit my accounts rather than the day that I actually made a purchase with it. When I get a chance I'll have to go back and try to reanalyze it based on the days I made the purchases.

      Thanks for stopping by and keep up the good work!

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  4. Pursuing Financial FreedomMay 20, 2013 at 3:37 PM

    I've just discovered your blog and am very glad I did. Good job on the CSCO options. I currently benefit from their ESPP and the bump was very nice. I just started my own DGI portfolio, with a few positions (CVX,AFL,DPS,XOM,CAH,MTGE,CSCO). I noticed you are in the same situation of having a large amount of company stock. I am coming to the end of my holding period on July 2, 2013. I'm wrestling with selling some stock to diversify. My cost basis is $13.48 on some 1,000 shares. Unfortunately, there are few undervalued stocks to choose from and my inside knowledge makes me very bullish on Cisco in the future. Any thoughts on keeping the Cisco stock with its growing yield and then just focus on adding positions slowly as more options become available? How do you plan to manage your allocation of your Halliburton stock in the future?

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    1. PFF,

      Glad you found my blog. I hope to be able to educate the average joe about dividend growth investing because the principles are very simple. You can invest and sleep well at night.

      I really like the ESPP program especially if you get a discount on the purchase. I try to avoid having too much allocation to my employers stock because if something goes wrong you can lose your paycheck and you investment. Thats not a pretty situation to be in. As a general rule I'd say to not have more than 10% and probably closer to 5% of your portfolio tied to your employer. Now when you're building the portfolio the numbers get skewed you need to sit down and figure out how much money you'd be willing to lose. If its $10k then don't keep more than that in your employers stock.

      The way I'm approaching it is to sell call options so I can collect the premium while I wait fir the price to get there. If it takes longer than expected for the shares to be called away then I'll lower the strike price. I think this is a good approach to both try and maximize the return and to diversify your holdings. If you check my option summary page and check the option positions for HAL you can see what I've been doing.

      While there isn't a whole lot of value out there, I still think its prudent to take some off the table and diversify your holdings. Its more just fir a safety thing because as I mentioned earlier if some black swan event like the BP oil spill came along for Cisco you could be in an ugly situation really quick. It really comes down to whatever you're comfortabke with.

      Thanks for stopping by and keep on coming back. If you have any questions feel free to comment or send me an email.

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    2. Pursuing Financial FreedomMay 21, 2013 at 1:02 PM

      PIP: Thank you for the reply. I have a basic understanding of using options and will investigate further. I believe this would be an ideal strategy for me since I will have quite a few shares and don't mind getting call away. Plus, it would be nice to have a little dry powder just in case a few of the stocks on my watchlist become fairly/undervalued. Because I am just starting out, I would love a nice correction so I could establish positions. Again, thanks for the reply and keep the content coming!

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    3. PFF,

      You and me both. I'd love a good 10% pullback in the markets. I think the only really acceptable routes to go with an ESPP program is to either sell right away to instantly diversify or to go this route. I still cant believe how a lot of the workers at Enron had 50% and more allocated to company stock. Thats just way too much risk for me. Once new shares are purchased I would sell calls and then lower the strike a level every time it expires worthless. I have a writeup on options on my blogroll and learning center page or just check out the posts on my HAL calls and i cover the calculations and some of my thinking behind each trade.

      Thanks for stopping by!

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  5. Thanks. So you bought the puts before expiration so that you do not have to buy the shares in case the price of the stock drops below your strike price at which you sold the puts.
    Is that correct?

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    1. Inq,

      Right. It was more of a precaution and I was able to lock in the profits. I was a bit overleveraged with my open puts that were sold on margin so I chose to close the put early to deleverage and free up capital in case of a potential pullback in the markets.

      Delete