No this post isn't about all the great investment opportunities that Mr. Market is giving us, it's about all of my recent option trading/selling activity. There's been a lot more activity on this front than I expected to be reporting. My goal is to receive $1,500 in profit from option selling this year and I'm getting off to a decent start. I've got two closed/expired positions to update all of you on as well as two new positions.
This past Friday marked the expiration date for the call option I sold on Halliburton (HAL). Every quarter I receive more shares of Halliburton through the ESPP program at work so I want to try and divest those funds into other investments. I prefer to sell calls until the shares are called away to generate extra income on top of the dividends that they provide. On January 22nd I sold the $51 strike call option expiring on January 31st. In return for selling the option I received $46.00 in option premium to do as I wanted. The shares were trading below $51 on expiration so I got to keep the full option premium as profit. This is a $46.00 / $5,100 = 0.90% return in about 1.5 weeks. That's equivalent to at 36.60% annualized return. If only I could do that every 10 days and I would be one happy investor. I expected the shares to hover around the $51 mark and would then just sell another call if the shares weren't called away, but we all know how the markets decided to end January. This brought the price of Halliburton down into the $48.50 range so in hindsight I left some money on the table. I'll still look for opportunities to sell another call option because I need the capital from those shares for other investments, possibly a rental property.
On December 4th I sold a $24 strike call option and received $65.01 in option premium after commission and fees. I never got a post written up about selling this call option and for that I apologize, but the holidays and more interesting posts kept me busy. The option was set to expire on February 22nd, but I might not have the time to wait in case there's continued weakness. Intel has struggled mightily with the adoption of the mobile platform and announced yet another quarterly dividend of $0.225. That would be seven quarters now. Not exactly a dividend growth stock but they still have until later this year to keep their streak alive.
Yesterday I bought to close the call option for $43 which cost $50.99 after commission and fees. Subtracting this from the premium I received netted me a profit of $14.02 in just about 2 months. That's a $14.02 / $2,400 = 0.58% return which is equivalent to a 3.50% annualized rate. Not exactly the best return but a profit is a profit and closing out the call option gives me the freedom to sell the shares outright or sell another call option that is further in the money. I just don't think that Intel has a place in my portfolio any longer and there's better opportunities out there. It seems that it's always the next quarter when Intel is going to take off, and then the next quarter, and then the second half of next year. I'm tired of waiting, especially if they won't give the token increase to keep me somewhat appeased.
On the continued weakness this past Friday I decided to leverage up a bit and sell two put options. The first put option was a $39 strike put on Coca-Cola (KO) that expires on August 16th. I received $2.69 which works out to $260.25 after commission and fees. This option can work out one of three ways.
(1) If shares of KO trade higher than $39 between now and expiration I'll get to keep the full option premium as profit. This would be a $260.25 / $3,900 = 6.67% return in about 7 months. That would be a 12.36% annualized return.
(2) If shares of KO are trading below $39 between now and expiration I'll be forced to purchase 100 shares for $39.00 each. However, since I received the $260.25 in option premium I get to subtract that from my cost basis. That would give me an adjusted cost basis of $36.49 per share. Based on the current annual dividend of $1.12 that would be a 3.07% YOC, but KO should be announcing an increase later this month to around $1.20. That would make the YOC 3.29%.
(3) If shares of KO trade sharply higher between now and expiration I can buy to close the option for a profit less than in scenario 1.
I sold this put on margin so the actual cash that is required to hold the position is only around $1,200 instead of $3,900 for a cash secured put. I'll be happy either way the option goes but if it's short term then I'd prefer for scenario 3 where shares trade higher rather quickly. Over the long term I'd prefer scenario 2 to get a great YOC on a great dividend growth company. However, my guess is that scenario 1 or 3 is what ends up happening.
The second put option that I sold was on Phillip Morris (PM). The weakness is PM's share price has been well documented and honestly quite surprising to me. I still want to add some shares here because over the long term I feel this is a great entry price as the yield is essentially 5.00% based on yesterday's closing price. I sold the $82.50 put option that is set to expire on January 17, 2015. In exchange for selling the option I received $941.24 after commission and fees. This option can work out one of three ways.
(1) If shares of PM trade higher than $82.50 between now and expiration I'll get to keep the option premium as profit. This would be a $941.24 / $8,250 = 11.41% return in essentially 50 weeks. That would be equivalent to a 11.86% annualized return.
(2) If shares of PM trade lower than $82.50 on expiration I'll be forced to purchase 100 shares for $82.50. However I get to subtract the option premium from the strike price which would give me a $73.18 per share cost basis. Based on the current annual dividend of $3.76 my YOC on this lot of shares would be 5.14%.
(3) If shares of PM trade sharply higher then I can close out the option for a profit less than scenario 1.
Ideally I'd like shares of PM to close at $82.49 on expiration day but we'll see how things work out. My guess is that scenario 3 works out on this option, just like the KO option above. I sold this put on margin as well so the actual cash requirement is only around $2,900 rather than the $8,250. So my returns will be much higher if I close out the position or it expires worthless.
Given the long times until expiration, I expect to close out both the KO and PM put options early once the markets move into some calmer waters. But volatility is great for the option seller as it juices up the premiums. I now have three open put options counting the two from this past Friday and the one on Realty Income (O) that I sold in early December.
I mentioned that there's plenty of other opportunities in the markets right now and of course there's the rental property that I'm very interested in getting. I'm leaning towards closing out the Realty Income put option early to try and limit my exposure to real estate in case I do move forward on the rental. I've got a post detailing the property coming up tomorrow morning so be on the lookout for that.
So far in 2014 I've received $170.29 in profits from options. I've updated my Option Summary page to reflect the changes.