Tuesday, January 7, 2014

Recent Option Transaction

My hopes with every option contract that I enter into is to let it go until expiration; however, sometimes other opportunities come up or you can close it out early for a profit.  I really like using both calls and puts as a means to add extra income from your investment capital.  Especially put options as you essentially get to set a limit order and get paid if it doesn't execute by a certain date.  Not exactly a bad situation.  If you're new to options or want calculator to run some different scenarios check out my Learning Center page or this link straight to the spreadsheets.

In early/mid December I had rolled out my open put option on Cisco.  If the option would have gone until expiration I would have lowered my cost basis by another 2.2% to $20.82 from the original put option that was set to expire in December.  I was sitting on a net loss of $99.12 with the first option, but since I received $201.26 when I sold the March 2014 option things were looking like I could turn a profit on the trade or receive a lower cost basis.

Well my goals for the year have changed and so I took the opportunity to close out the put option by buying to close for $0.83.  After commission and fees this cost me a total of $90.99.  For the March option by itself, things turned out much better than the first time around and I was able to make a $110.27 profit which is good for a 5.01% return in less than a month.  Not too shabby as that's a 73% annualized return.  If only investing was that easy.  That return's based off a cash secured put option, but I now sell all my puts using margin as a line of credit.  This allows for less cash to be held to keep the option position current and can juice returns.  The margin requirements were around $620 during the time it was open, so it was closer to a 17% return in less than a month.  

The numbers look a lot worse when you include the entirety of the trade.  As I mentioned earlier, I was sitting on a $99.12 loss from the first put option that was set to expire in December.  So my total return came out to be $110.27-$99.12 or a measly $11.15.  Normally I'd have let this option ride until closing or seek out a larger return, but my goals have changed slightly.  I really want to purchase at least one rental property in 2014 and hopefully 2.  I've got a few in mind that can provide some really solid cash flow and in the neighborhood of 8-12% cash on cash returns which is like the dividend yield for a stock.  So I needed to de-leverage a bit in order to fund the downpayment for a rental property purchase if I want to move forward in January or early February.  

Overall I'm happy with the move as it's letting me pursue a rental property and I was still able to turn a profit, albeit not much.  I still like Cisco long-term as a portion of my portfolio, but exposure there would be limited.  I'm hoping to get my 2013 goals recap and 2014 goals posted sometime next week but there's my regular monthly posts to get out of the way as well as a stock analysis coming out later this week.

I've updated my Option Summary page to reflect this change.

2 comments:

  1. Nice, definitely looking forward to seeing how you progress in your pursuit of rental real estate. I think rental income can be a phenomenal supplement to anyone's passive income portfolio. As they say, you make your money on the purchase, not the sale. Keep us posted on how you plan on evaluating properties, from the location to the cost. I know I'll be interested in reading about it.

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  2. I still plan to use options to my advantage this year but I also would like to add another rental. I think a balanced mix of equities/real estate work well together. I look forward to your results.

    I'm almost caught up on my posts with my goals recap and yearly options post finished. There's not enough time to blog and still work!

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