Monday, July 22, 2013

Expiration Friday

The third Friday of July came and went meaning it's option expiration time.  Three different options expired on Friday with my 2 call options on Halliburton (HAL) being in the money and my put option on Clorox (CLX) expiring out of the money.  So I had to sell 200 shares of HAL but got to keep the full option premium on CLX as profit.

Clorox actually took a big dip not long after I had sold the option back in late May and until the last 2 weeks or so I was pretty sure the put option would be exercised.  Mr. Market is a fickle beast though and pushed Clorox up over 5% since the beginning of July and back over the $85 strike price.  I had recently been closing out some put options due to my expectation of the Clorox put being executed and my need to build cash savings for a house downpayment later in the year.  I didn't see Clorox's rise coming or I would have left the others open because I felt I was leaving some profit on the table, but a profit is still a profit.

When I sold the $85 strike put option on Clorox, I received $160.51 in option premium after commission and fees.  This is a very solid $160.51 / $8,500 = 1.89% return which is annualized to a 11.49% rate over the time the option was open.  I had sold the put on margin so my cash requirements were only around $2,800 leading to an even better 5.73% return on a cash-on-cash basis.

The other two options were both calls that I had sold on Halliburton (HAL).  I purchase the shares through the employee stock purchase plan that's offered to me so you can see my need to diversify away from my company stock.  Investments and income tied to one source is no bueno, just ask the folks at Enron.

The first call option on HAL was sold back in mid-January with a $40 strike.  After commission and fees I received $128.00 in option premium.  Since HAL was trading higher than $40 on the expiration date the option was executed meaning I had to sell 100 shares of HAL for $40 each.  Although I also received the option premium so my effective sale price was $40.00 + $128.00 / 100 - ($7.95 + $0.07) / 100 = $41.20.  The returns are really skewed since I get to purchase the shares at a 15% discount through the ESPP program but this was a 64.53% gain excluding dividends received on the shares.

The second call option on HAL was sold back in late April at a $39 strike price.  I received $212.26 in option premium after commission and fees.  Like before HAL was trading higher than $39 on expiration so the shares were called away from me.  My effective sale price was $39.00 + $212.26 / 100 - ($7.95 + $0.07) / 100 = $41.04.  This ended up being a 39.93% gain excluding dividends received on the shares.

Both of the Halliburton call options called away shares that were under long-term capital gains so I get to pay the lower 15% tax rate rather than the 28% rate for short-term capital gains.  The taxation on shares purchased through an ESPP program becomes much more difficult than just regular purchases in a taxable account.  For more detail on the calculations for ESPP taxation you can check out this post here.

Even though I didn't get the greatest sale prices on the Halliburton shares I was still able to get solid gains, build up cash for a downpayment, diversify away from my employer, and increase the YOC of my portfolio although the forward 12-month dividends has now dropped to $2,932.65.  Sadly it's back under $3,000.

So far in 2013 I've received $1,645.86 in option premium from closed or expired positions.

I've updated my Portfolio and Option Summary pages to reflect these changes.

*I've added a spreadsheet you can use to input your own numbers and the income and capital gains portions are calculated.  A link is also provided on my Blogroll and Learning Center page.

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