Tuesday, October 22, 2013

Recent Option Transaction

Well the third Friday of October rolled around and that means that it's expiration day for those that dabble in options.  I had originally sold a call option on 100 shares of HAL which I purchased through the ESPP program at work back in August.  I chose the $48 call option and sold it for $1.43 which netted me $135.01 in option premium to use as I pleased.

Since expiration day rolled around and shares of HAL were trading higher than $48 I had to sell 100 shares for $48 each, even though shares had closed on Friday at $52.47.  My effective sale price was $49.35 when you include the option premium, which generated a neat little doubling of my money given a cost basis of $24.31.

If you look back at the previous post where I had sold this call option you'll see that I had actually closed out a previous call option on these shares due to a large run up in price.  At the time it made sense because I could turn a larger profit on the same shares by closing the first call option.  It worked out nicely as it gave me an extra $3.00 per share after factoring in the cost to close the first call.  In total my sale price ended up are $46.25 and I think I might have left some money on the table as I probably could have closed out the call during the government induced dip in the markets.

Overall though I'm happy with this move as it let me turn a nice profit and I can put the proceeds to work towards better dividend growth companies.  I'm sitting on a decent size cash position and any further weakness in the markets will allow me to capitalize on some better bargains.

So far this year I've received $1,434.41 in profit from selling options.  I only include option premium from closed/expired positions in my premium total as the goal when I sell an option is to either purchase the shares for cheaper or to collect the premium.

I've updated my Option Summary and Portfolio pages to reflect this change.

6 comments:

  1. PIP,

    I like the strategy of selling covered calls. I have not done it in a while, mostly because it takes a lot of my time if I am going to do it. Noticed the BAC leap you bought, looks good so far. When do you plan to sell, or are you going to exercise? I really like buying leaps on stocks I'm bullish on, but I've previously been not as successful as I hoped, mainly because I did it during rough markets in the past. The success I've had I sold early once I had a profit. Been thinking about jumping back into leaps. Are any other bloggers you follow into covered calls?

    -RBD

    ReplyDelete
    Replies
    1. RBD,

      I'm not as big of a fan of covered calls for most of my positions as there's a risk that I could lose the shares. Even though using covered calls is fairly conservative as it forces you to take a profit and can provide additional yield on the shares, I much prefer using puts to enter positions and generate extra yield on my capital. More than one way to skin a cat I guess, but puts are my preference. With my HAL shares though I prefer to use calls as they force me to sell of some shares since I'm purchasing more every 3 months through the ESPP program at work.

      LEAPs are generally pretty good if you're looking at the very long term because you will lose out on the dividends but you can get them fairly cheap most of the time. I was hoping to exercise both of the BAC calls but I'm not sure that I'll be able to due to no capital since it's in my Roth and I won't be able to make a contribution this year. I'm tempted to sell off a bit of some NSC to allow me to exercise at least one of the calls. I still have some time to make up my mind though.

      I'm not too sure of others that are big into covered calls, but All About Interest likes to sell puts like me. And he does use calls every now and then.

      Thanks for stopping by!

      Delete
  2. PIP,
    Great work. Thats a healthy amount of money from selling options. Ive recently started selling covered calls over the past couple of months and its a nice complement to the dividend income.

    ReplyDelete
    Replies
    1. Roadmap,

      If you think I've made a good chunk from options, check out All About Interest, he's killing it with his option income as well as dividends. Covered calls are generally a very conservative method to generate extra income, but for most of my holdings I won't sell calls on the shares because I purchased at what I deemed to be good prices. If I'm unsure of a position or wouldn't mind exiting then I'll start selling calls on the shares. I prefer puts to enter positions though, which is where most of my option income has come from.

      Thanks for stopping by!

      Delete
    2. PIP,
      I have been following All About Interest's progress over the months as well. He sure is killing it...I need to get in on that! I am only able to write covered calls as most of my assets are in registered accounts (RRSP and TFSA - equivalent of 401K and IRA) which prevents me from writing put contracts. I am planning on opening a margin account to start writing put contracts.
      You are right - covered calls only make sense on holdings that I dont mind selling. I have a couple of holdings which havent been growing dividends over the years and instead of selling them outright, Ive decided to write covered calls and generate some income meanwhile.

      Delete
    3. Roadmap,

      Gaining access to margin can really juice the return prospects; however, just be sure to not go overboard. It's very easy to get over-leveraged. I wish some of my earlier positions were larger lot sizes so I could have written covered calls on them once I wanted to exit the position. WM would have been a great candidate as the yield was still juicy and the price didn't move too much so repeated covered call sales could have yielded some nice results.

      At some point I'm going to try and build up a set amount of capital solely dedicated to serial put/call options to enter/exit positions to see what the returns are like. You have to be a bit more active with them as there's opportunities to close the positions for profit and better opportunities, but I think there's some decent companies to do this with. CAT, INTC, DOW come to mind.

      Thanks for stopping by!

      Delete