Thursday, May 22, 2014

Recent Option Transactions

It feels great to get back to sense of normalcy.  I was off work for 2.5 weeks although originally it was just supposed to be 1.  The first part of my time off was great since I got to hang out with some great buddies of mine and we went to Vegas for a bachelor party.  However, all of the fun ended on Tuesday when I found out my grandfather had fallen and broken the head of his left femur and left humerus.  Not good at all for a 93 year old.  It's been a huge emotional roller coaster ever since he went into the hospital but they were finally able to do surgery on his left on Tuesday and we're all hoping for a great recovery.  I've had very little sleep the last 1.5 weeks so I'm kind of glad to get back to work and back into a routine.  Things are starting to get back to normal so it's time to catch all of you up on what's been going on with my portfolio, namely some options updates in this post and a new position in an upcoming post.

On May 7th, I bought to close the $39 put option I had sold on Coca-Cola (KO).  I bought back the option for $0.54 which cost a total of $61.99 after commission and fees.  When I sold the put option back in late January I received $260.25 in option premium.  My total profit for this option came to $198.26 which amounted to a 5.08%.  Not bad for a little over 3 months.  That's equivalent to a 19.34% annualized return.

Later in the day on May 7th I also took the opportunity to close out my $82.50 strike put option on Phillip Morris (PM) which cost me $438.74 after commission and fees.  When I opened the position in late January I received $941.24 in option premium so my profit on this transaction came to $502.50.  That's a 6.09% return or a 23.17% annualized rate.

The returns above are calculated as if the put options were cash-secured.  I prefer to use margin when I can to leverage up a bit although that does bring on added risk.  However I feel the risk is mitigated by only selling put options on companies I want to own and prices that I'd be willing to purchase anyways.  Margin allows you to have less cash required to secure the put option but the best part is that you aren't charged margin interest.  When selling naked put options the margin acts more like a line of credit reducing the cash needed in your account.  So my returns were actually much higher than reported based on the cash needed to satisfy the margin requirement but that changes every day so it's just easiest to calculate the returns as if it were a cash secured put.

I wanted to take the opportunity to de-leverage a bit because I continue to expect to see a pullback over the summer months.  Well, maybe it's hoping for a pullback.  By closing out these options I now have no margin requirements to keep some of my capital tied up and have full access to make outright purchases should the opportunities present themselves.

So far in 2014 I've received $1,161.33 in profit my option activity.  That's 77% of the way towards my goal of $1,500 this year so I'm off to a great start so far.

I've updated my Option Summary page to reflect these changes.

Also, if you want real-time updates of purchases or option transactions make sure you follow me on Twitter @JC_PIP.




12 comments:

  1. Hi PIP,

    Sad to hear about your grandfather. Just recently my grandmother had the exact same. On the bright side, after five months of revalidation she now feels again like never before!

    Furthmore, great performance on the option side. Haven't dived into that corner of investing just yet, but I have taken it upon me to learn the ins 'n outs in the coming months. It seems like a nice way to generate some additional capital to invest in great companies.

    Best,

    DW

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    1. D&W,

      That's great that your grandmother is feeling better than before! I hope to be saying the same about my grandfather in a few months.

      I like options for when the markets aren't going your way. Selling puts allows you to still generate solid returns when you find the right strike/premium/expiration combo. They've been pretty good to me so far.

      Thanks for stopping by!

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  2. I was wondering how you've been PIP. Glad to hear your grandfather has stabilized. I hope the Vegas trip was awesome. Good work on those options trades. We'll get our pullback, eventually :)
    -Bryan

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    1. Bryan,

      It's been a really crazy last few weeks and the whole family is glad he's doing better now. I'm sure the nurses will love and hate when he gets out of ICU because he's quite a character whenever he's feeling right. I heard today has been much better and when he's been awake he's been telling the nurses stories about WW2.

      I hope we get that pullback soon. I'm ready to put some more money to work!

      Thanks for stopping by!

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  3. Best of luck with your gramps. He is on a long run!!! That is a good option strategy for puts. I have only done covered calls and your moves has me interested for more!

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    1. A-G,

      Things are looking better today it's just been such a huge emotional roller coaster and I plan on writing a bit more about it later.

      I really like selling puts, much more so than selling calls. I know selling calls is a time-tested winning strategy but if I purchased shares and nothing's changed I want to keep owning that company. Puts are pretty great, especially once we get a bit of volatility in the markets to juice up the option premiums. Typically I look for strike/premium/expiration combos that give a 10%+ annualized return if held through expiration or a solid entry price if executed. So far it's worked fairly well. If you have any questions feel free to ask or check out All About Interest because he uses options a lot more than I do. I have a calculator for options on my Learning Center page so that could help you out too.

      Thanks for stopping by!

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  4. Options trading has always intrigued me but I know nothing about how it all works. So until then, I'll just live vicariously through your transactions. :) It does appear that you are doing well. Best wishes for continued success! AFFJ

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    1. AFFJ,

      I don't really trade them per se, it's more that I sell them and if they move to a solid enough profit point it makes sense to close out the position and free up capital since I sell naked puts (i.e. margin). I know it seems complicated but it really is fairly easy. I have a spreadsheet on my Blogroll/Learning Center page that you can access to run your numbers and I know there's others that will give you a nice graph too for those visual learners. Every bit helps and being comfortable with options gives me another weapon in my arsenal.

      Thanks for stopping by!

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  5. The profit on PM is really good! I like it. I have to check it out to see and might add it to my options watch list.

    I also prefer selling puts than calls as I do not want to give up my dividend paying stocks and I am not always lucky finding a good stock candidate for write-buy trade.

    Hope your grandpa gets well soon!

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    1. Martin,

      I'm not sure what PM is like in a more normalized environment. I sold the put when there was the emerging markets scare in late Jan/early Feb which brought down anything heavily tied to EM's.

      I haven't done many buy-writes but I do like them when I can find a good situation. Just haven't been on the lookout for them lately.

      Things are looking much better and hopefully Tuesday he'll be moved into a physical therapy/rehab center.

      Thanks for stopping by!

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  6. Hi JC, nice job with your recent investments. Options are something I've been interested in for a while, as they've been mentioned in several of Jim Cramer's books but I haven't researched them any further. Do you have any suggestions on resources to learn more and get started with options?

    Best wishes,
    SFZ

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    Replies
    1. SFZ,

      I'll have to get back to you on the resources to look at for learning about options. I have a GoogleSpreadsheet on my Blogroll/Learning Center page to help with the calculations so that's a start. You can also check out the Option Strategy label where I talk about each option trade I've made. I try to give as much detail as I can so it makes it easy to understand for those that aren't familiar with options.

      Once I find some of the good resources I'll either post them here or email them to you. As always, if you have any questions feel free to ask.

      Thanks for stopping by!

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