Sunday, June 23, 2013

Expiration Friday

The third weekend of each month brings about expiration Friday for anyone that uses options as part of their investment strategy.  Some people like to use covered calls to generate extra income, but I'm not a fan unless I'm trying to exit the position.  I just don't want to lose my dividend income and solid entry price for a bit of extra income.  I prefer to sell puts since it's either setting a limit order for a company I want to own at a price I'd be purchasing or I get to collect some extra premium if it expires.

I had originally sold a $20 put option on Cisco (CSCO) on May 6th and received $35.01 in option premium after commission and fees.  I was actually hoping this one would have executed since it would have given me a great entry price on a company I think has plenty of room for dividend growth in the future.  I was tempted to close out the position early, but with lower strike and shorter duration puts the premium is lower meaning the commission to close was going to take a big chunk out of my premium.  I wasn't needing the cash to be free since the markets just continued to climb higher so I rode this one out until expiration.

As I mentioned, I received $35.01 in option premium.  This was a $35.01 / $2,000 = 1.75% return over the approximate 1.5 months the trade was open.  That's equivalent to a 13.60% annualized return.  So far in 2013 I've received $1,143.66 in option premium from closed or expired positions. Not bad considering that's more than the dividend income I've received so far.

I had sold this put on margin so my cash outlay was actually less than the $2,000 as if it was sold as a cash-secured put.  The margin requirements for this position averaged around $400 so the return was much higher on a cash-on-cash basis.  I don't like to calculate my returns off the margin requirements because it skews the values much higher and the margin requirements change daily based on the price movement of the underlying security.

In July I only have one put option set to expire and it's looking like it will probably be executed.  No worries though, Clorox (CLX) is a great company and one I'd love to own a small piece of.

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

2 comments:

  1. Passive,

    I, too, love the idea of selling Puts to enter a position at a discount. If I really, really want in and the price is right, I'll buy the position, or at least half of it. I then feel more patient selling puts to increase the position later. As a buy and hold investor, this is my favorite, simple strategy.

    I also agree with you regarding the risk of selling call options. I don't want to be called out of a good holding either.

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    1. Rentals,

      I'm with you on puts. I love it especially when you can get a solid return or a good entry price. I try to target a 10%+ annualized return if it expires worthless or a solid entry price.

      Thanks for stopping by!

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