Wednesday, August 21, 2013

Recent Option Transactions

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.

4 comments:

  1. I too have been looking at a position for IBM. I won't have enough for any covered option trades but I'll get there.
    Thanks for the option selling information.

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    Replies
    1. Pulling Myself Up,

      I actually started a position today, although it's only 10 shares. I don't foresee any covered option moves in the future with this position either, nor selling puts which I much prefer to calls. The price per share is just too high that it makes it prohibitive to use options. I'm hoping that it'll be added to the mini-options list but so far it hasn't. Either that or a split, even though a split doesn't really mean anything it makes it easier to acquire 100 share lots or use puts to get 100 share lots.

      Thanks for stopping by!

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    2. Have you had good luck with mini options? I like the idea of them and they are slowly catching on but the open interest levels aren't all that great with them (yet).

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    3. Pulling Myself Up,

      I haven't looked much into the mini-options mainly because the only company I'd seriously consider is GOOG. The rest of the candidates just aren't appealing to me. I have read that they've been a bit prohibitive due to low open interest, but if you are able to set the strikes/premiums right then it shouldn't be an issue, whatever your goal with options are. I try to target strikes and premiums that will give a 10% annualized return or a cost basis where I'd be purchasing anyways, I haven't looked closely enough to determine how that would change with the mini-options yet and will do more research if they ever add companies that I really want to invest in.

      Thanks for stopping by!

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