Friday, December 20, 2013

Recent Option Transactions

I mentioned in my post about adding to my position in HCP that I had made some option transactions as well.  I had a 2 open put options that were scheduled to expire in the money at the close of today's trading but decided to roll them out until a later time.  I was probably a bit hasty with these moves, but with the weakness in the markets that we were seeing in the early parts of December I was kind of caught with my pants down without much free capital should there be continued weakness.  All the more reason to keep a larger cash buffer.  Of course, the Fed then announced this week that they were scaling back the latest round of QE to "only" $75 billion in purchases per month, and the markets rejoiced.  Even though the trades were probably done with a bit more emotion than I should have allowed, I think things will still turn out alright as I'll lower my overall cost basis' for each of the options.

I originally sold a put option on Realty Income (O) back in May that was set to expire today.  With the talks of tapering by the Fed and the supposed higher interest rates to come with that, REITs, including O, have sold off pretty hard the second half of the year.  The original put option was at a $45 strike price and I received $281.26 in option premium.  Well, the share price of O continued to tumble since then and is currently around $38.  I decided to buy back that option and sell another one expiring in March 2014 with a $40 strike price.  I took a hit on the option premium as it cost me $828.73, for a net loss of $547.47.  Ouch.  That's partially offset by the $391.26 I received for the $40 option, but it's still a net loss.  Accounting for the drop in strike price and the net proceeds from all of the option premiums, my new cost basis should the option be executed will be $41.56 instead of the original $42.19.

The second option that I had closed out was the $22 strike option on Cisco (CSCO) also expiring today.  I initiated the position back in October and received $71.01 in option premium.  In order to close out the position I had to buy to close the option for $1.62 costing me $170.13 after commission and fees, and a net loss of $99.12.  I then sold the March 2014 $22 option for $2.10 which brought in $201.26 in option premium after commission and fees.  Despite the loss on the original option, my per share cost basis if executed decreased from $21.29 to $20.82, or 2.21%.

I feel better about the move on the Cisco option than I do about the Realty Income trades, as the Cisco moves gave a net profit should the option expire worthless whereas the Realty Income one does not.  I should have sold the $45 strike option on O again instead of dropping to the $40, but the $40 offered a better cost basis on an option that is most likely to execute.  Overall though, I'm glad I was able to further lower my cost basis' so that will work just fine as well as provide some more capital should the markets have some weakness to close out 2013 or to kickoff 2014.

My total option premium income received in 2013 remains at $1,754.96 as I consider these options to still be open until it is completely closed through either expiration, execution, or by my own doing.

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

Remember to check out my review of Kanwal's Simply Investing Course and if you haven't done so already, either comment or use the contact form on the right side of the page to let me know your name, why you 'd like the course, and what your goals are to enter for a chance to receive a free value package of the course.  The deadline is tonight at midnight.  All entries will be accepted and the winner will be selected at random.

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