Friday, May 3, 2013

Recent Option Transaction

I'm finally getting a chance to write about the put option I tweeted about on Lorillard that I had sold on Wednesday, May 1st.  The markets continue to be a bit overheated so I've been focusing a bit more on selling puts in order to have some return on my cash other than the piddly interest rate that's offered through my brokerage.  Although I haven't tried to get fully invested because I'm hopeful the markets will finally have that elusive pull back, of course only time will tell on that one.

I sold the $40 put option expiring September 21, 2013 for $1.86.  This netted me $177.26 after commission and fees and can work out one of three ways.

(1) If LO is trading above $40, I will get to keep the full $177.26 option premium as profit for a return of $177.26 / $4,000 = 4.43%.  Through expiration this would represent an 11.31% annualized return.

(2) If LO is trading below $40, I will most likely be forced to purchase 100 shares at $40.  However, since I've received the option premium my cost basis will be $40 - $177.26 / 100 + $7.95 / 100 = $38.31 which is 4.50% below my current position's cost basis and would lower my overall LO cost basis by 3.00%.

(3) If LO moves higher between now and expiration, I can buy to close the put option for a profit less than in Case 1.

I think Case 1 or 3 is what will end up playing out, but we'll see what kind of mood Mr. Market wants to be in.  I wouldn't mind Case 2 occurring because as I mentioned earlier the markets haven't exactly been all that cooperative for the value-oriented dividend growth investor.  Due to this, I haven't made nearly as many purchases this year as I was expecting to and my cash has been building up.  I can't just continue to build cash so it needs to be deployed in some fashion and I feel that selling puts is a great way since I'm essentially setting a limit order for a company I'd like to own and if it doesn't get executed at least I earned some kind of return.  I typically try and pick strike price/premium combinations that allow for a 10%+ annualized return and a purchase price that I'm comfortable purchasing at, so it's the best way to go for now, although I would much rather have preferred to make more outright purchases so far.

I've been pretty absent from the blogosphere this week because I had to take my mom to the emergency room where she was the admitted to the hospital.  Everything's fine and under control now as it was just a bacterial infection coupled with dehydration.  She should hopefully be released tomorrow but will still need to take things pretty easy for another week or so.

My Option Summary page has been updated to reflect this new trade.

Is there anything out there that has caught your eye for potential purchases?  I'm running low on ideas right now due to the markets continuing to climb higher.

6 comments:

  1. Sorry to hear about your Mom. Glad to hear that she's doing better and will be out of the hospital soon.

    ReplyDelete
    Replies
    1. She was actually released today. I was expecting it to be Sunday. I know she's glad to be back home because she was tired of being cooped up in the hospital room.

      Delete
  2. Sorry to hear about your mom as well. Glad she's well.

    What do you think the price movement will be in a major market pullback this month? That would be my only concern - a full correction of 10% or more. Otherwise, solid trade!

    ReplyDelete
    Replies
    1. She's back home now after being released earlier than I thought. So all is well again. Now she just needs to take it easy for about a week and keep hydrated and take her prescriptions.

      If the markets and LO both trade down 10% I'd be just fine with that because my cash has been piling up and I want to get it working for me. 10% from Friday's close of $42.73 would be $38.46 which would still be higher than my cost basis if the option is exercised so I'll be happy with that. If that does happen I wouldn't be opposed to selling another put around the $38 level giving a cost basis probably in the $35 range. I only sell puts when the strike/premium combination gives me a solid annualized return and a cost basis if executed at a price point I'd be buying anyways.

      I need to work out how I want to play a potential pullback because it could end up a being a relatively swift one that sees a bounce back in a short timespan. I guess the question comes down to how quickly to invest my free capital. Since I haven't really been making many purchase I could see myself "making it rain" for my portfolio and scooping up everything in sight. While that would be fine I know I'll miss some of the downside and subsequent lower cost basis/higher yield.

      Thanks for stopping by!

      Delete
  3. Sorry to hear about your mom - glad she is doing well.

    ReplyDelete
    Replies
    1. Evan,

      Thanks! She's home now and getting better every day and I know she's glad to be back home and out of the hospital.

      Delete