Last Friday was the third Friday of the month and that means option expiration for those that use them. I like when expiration Friday rolls around because it means I'm getting to purchase shares in quality companies or getting to turn a nice profit for waiting. In general I look to achieve a 10% annualized return if the option expires out of the money or a cost basis that is at a price I'd be willing to purchase anyways. That's why I like options because as the name implies there's multiple outcome possibilities.
Back in late May I sold a $23 put option on Cisco and received $76.01 in option premium after commission and fees. Since Cisco traded higher than $23 for pretty much the whole time the option was open and closed trading on expiration higher than $23, I get to keep all of the option premium as profit. This represents a $76.01 / $2,300 = 3.30%. On an annualized basis that's a 13.71% return over the approximately 3 months the option was open. I still feel that Cisco is undervalued and would like to get some exposure to them as well as IBM in the technology sector.
Earlier this month I bought to close the $41 call option that I had open on shares of HAL because due to the run up in price I could receive more total return despite taking the loss on that trade. I've already diversified much of my investment capital away from my employer by selling off shares to fund the down-payment for our upcoming house purchase, so I didn't feel the need to sell more shares when I could receive more return out of them. I took the opportunity to sell a really short dated call on HAL on August 8th that expired this past Friday. I had received $15.01 in option premium which was a 0.32% return, equivalent to a 12.95% annualized return.
With the most recent call on HAL from above expiring, I sold another call yesterday to try and extract some more return. This time I sold the $48 October call option for $1.43. After commission and fees I received $135.01 in option premium that I can use now as I see fit. This call option can go one of three ways.
(1) If HAL shares are trading below $48 on expiration I'll get to keep all of the premium as profit. This will be a $135.01 / $4,800 = 2.81% or a 17.11% annualized return.
(2) If HAL shares are trading above $48 on expiration I'll be forced to sell 100 shares for $48.00 each. However, my sale price including the option premium I've received will be $48.00 + $135.01 / 100 - $7.95 / 100 = $49.27. Not bad considering shares are currently trading in the $47.30 range and the markets have shown some weakness lately.
(3) If HAL shares take a big dip in price I can buy to close the call option for a profit less than in case 1.
Despite the loss that I took on the $41 HAL call option I still feel that I made the right decision in this situation. If I had let that call expire in the money, shares would have been called away and my effective sale price would have been $43.21. Counting the premium from the recent call expiration and the new $48 one, my new effective sale price will be $46.32. That's still lower than shares are currently trading for but if I can churn one more call option either through closing this one or having it expire then I should be able to get back to near the current market price after making up for the earlier loss.
So far in 2013 I've received $1,434.41 in profit from options.
I've updated my Option Summary and Portfolio pages to reflect these changes.