Wednesday, May 15, 2013

Recent Option Transaction

Yesterday the markets continued their run higher bringing along Halliburton (HAL), my employer and therefore source of ESPP shares along with it.  I'm still way overweight my company's stock and with another 198 shares hitting long-term capital gains treatment on January 1, 2014 I decided to sell a long-term call to go along with it.  I'm hoping to get a chance to use this as more of a trading vehicle to try and juice the option premiums that I receive but if they get called away that's fine by me as well.  
I sold the January 18, 2014 $46 Call for $3.10 on May 14, 2013 for $3.10.  After commission and fees I received $301.26 in premium to my account.  I don't typically aim to sell this far out but it gives me a chance to buy it back on weakness on the stock and get a bit more premium to go with the larger capital appreciation from a out of the money call option.  This call can work out one of three ways.

(1) If HAL is trading below $46 on expiration, then I'll get to keep the full premium as profit.  The return is calculated as $301.26 / $4,600 = 6.55% which is annualized to a 9.60% return.

(2) If HAL is trading above $46 on expiration, then I'll be forced to sell 100 shares of HAL for $46 each.  However, I get to add the premium to the sale price so my final sale price would be $46 + $301.26 / 100 - $7.95 / 100 = $48.93.  Since I purchased these shares through the ESPP program at work and received a discount, my cost basis is $24.19.  So this would be a smooth 102% gain.  I'll also receive 3 more dividend payments $0.125 each based on their historical record dates.  This would be another $37.50 in profit.

(3) If HAL trades lower than $46 between no and expiration, I can buy to close the call option for a profit less than in case 1.

I recently devised a strategy where I'll try and maximize the option premium by trading opening and closing call option positions while waiting for the next set of shares to reach long-term capital gains treatment.  And then will sell lower strike price calls to try and get the shares called away.  Since I receive a pretty hefty 15% discount on the shares and they now hit my account every 3 months I think this strategy will be a great way to maximize option income and still diversify out of my ESPP holdings.

Currently I have 3 calls that are set to expire in July and all three are in the money by a good margin.  This is the pitfall with selling call options.  If the share price makes a big move up you can lose out on some of the upside.  I'm not too worried about that because as I mentioned these are ESPP shares and I need to diversify out of them anyways.

If all 4 of my calls are executed, my sale prices will be $41.20, $41.04, $43.13, and $48.93.  

I've updated my Option Summary page to reflect this change.


  1. I really like this options strategy, especially since your employer keeps handing you shares. We get restricted stock units so I can't do any kind of fancy options plays with them. I just wait three years and cash my check.

    1. MyFIJ,

      I think it's a great way to maximize the investment by getting additional option income and then selling some off. That sucks that you get RSU's and not the actual shares. But I guess it takes some of the decision making out of the process once it's started.

      Thanks for stopping by!

  2. This is interesting. I have no experience with owning company's stock you work for. Not sure how that works, but I guess you are not allowed to sell right away but must wait some time before you can sell, so selling options can be a good way how to unload some shares (when selling calls). But that's just my guessing here.

    1. Martin,

      With the plan my employer offers I receive a 15% discount on the lowest price between the 1st and last trading day of the period. I can sell right away if I want to but thanks to the tax code there's some quirks to it. If I sell right away then the discount is taxed at regular income rates. If I sell between day 1 and 6 months then the discount is taxed at regular rates and the gains are ST. If I sell between 6 months and 12 months after hitting my account then the discount is taxed differently but any gain/loss is taxed as ST. 12+ months and I think everything, discount too, is taxed as LTCG so there's a tax break. That's the wonderful US tax system at work.

      I need to brush up on this again now that I'm going to actually start selling off some shares. Taxes are going to be fun next year.

      Thanks for stopping by!