Thursday, November 17, 2016

Recent Option Transaction

dividend growth investing, option strategy, put option, income investing
Lowe's Companies, Inc. (LOW) December 30, 2016 $65 Strike Put Option
As part of running this blog that chronicles my journey to financial independence I like to be open and honest with all of my transactions.  Typically that revolves around buying shares of high quality companies that I deem to be at fair value or less.  And occasionally there's a sale of a company like when I closed one of my positions earlier this month.  Being open about the moves I make allows for better discussion with all of you and helps spread ideas around.  If it creates my own "investment journal" to detail why I made the move and my expectations, well that's even better.  

Just yesterday I wrote about different plans on how to invest my 401k rollover funds.  I still haven't ironed out the exact details yet although I've narrowed it down to 2 options.  One big part of both choices is to use some amount of the capital for writing put options to generate income/profits now or buying shares at a discount.  

I've been quite active in the put selling department and on Tuesday I just couldn't help myself and wrote another one.  Over the last week or so I've written 6 put options representing over $50k worth of purchases.  Yikes!  So yeah I'm going to slow my roll a bit until I can get some of these closed for solid profits.

This latest put option is on a Dividend Champion with a streak of raises over 1/2 a century long, 54 years to be exact.  Even better is that despite that lengthy streak the dividend payout ratios are still relatively low between 30-40% of earnings or free cash flow.  That's impressive and really speaks to the growth this company has undergone although the growth isn't necessarily done and dividend growth should remain strong.

Lowe's Companies, Inc. (LOW) - Sell to Open Put Option 

Company: Lowe's Companies, Inc. (LOW)
Transaction: Sell to Open 1 Put Option
Date Opened: 11/15/2016
Expiration Date: 12/30/2016
Strike Price: $65.00
Price of Contract: $1.25
Premium Received less Commission/Fee: $124.95

I really like put options as a way to essentially set a limit order and get paid for it to hit.  This works wonderfully if you've done your homework on the company and are comfortable purchasing the shares.  The big risk is something unexpected happening that alters your investment thesis, although I'd venture to guess that with many of the blue chip dividend growth companies that doesn't happen that often.  That's why I consider put options to be the best of both worlds.

So how can this move play out?
dividend growth investing, income investing, option strategy, put option
Lowe's Companies, Inc. (LOW) December 30 2016 $65 Put Option
If the share price remains above $65, the option won't be executed and I'll just keep the premium as profit.  The premium return is pretty solid at just under 2% in about 1.5 months time.  On an annualized basis it's a very strong 16.71% return.  

If the share price declines below $65 then I'll be forced to purchase 100 shares at the strike price less the option premium.  That works out to an effective purchase price of $63.75 which gives about 7.9% downside protection from where shares were trading, ~$69.20, when the contract was sold.  

At that purchase price the yield on cost would be 2.20% compared to the current yield of 2.09%.  Based on the earnings estimate for the current fiscal year, ending 1/31/17, of $4.00 that would represent a P/E ratio of 15.9x.  For the following fiscal year, ending 1/31/18, the average earnings estimate is $4.66 giving my purchase price a 13.7x forward P/E.

When I was choosing which option to write I was kind of limited due to wanting to receive the next dividend if the shares are put to me.  So that means the expiration date needs to be prior to the ex-div date which is on 1/23/17.  I would have preferred the January 2017 puts from a date perspective, but the strikes and discount wasn't quite as attractive as this one.  So here we are.

Conclusion

One thing I really need to remind myself to do is always check the earnings date.  I completely neglected to do that when I sold this put contract and very likely would have waited until after the earnings release this morning to write a put option.  

No harm no foul though since I'd still be quite happy to buy shares of Lowe's in the low $60's, although I might have been able to get a bigger discount/premium yield.  It's been just over a year since I did a full write up on Lowe's, but back then the low $60's represented an attractive price and I'm sticking with that as a target entry price.

Yesterday also brought some more action on the options front within my FI Portfolio.   

I had to do a bit of position maintenance on the call option that I had written on Target Corporation (TGT).  They announced what I considered a kind of blah earnings release considering the estimates had been taken way down, yet the share price jumped up around 8% and well above the $74 strike on the call option.  So it was necessary to roll it out and up.  I also closed another call option with just 2 days left until expiration.  What was I thinking?  

I'll highlight both of these tomorrow.

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

What do you think of Lowe's Companies, Inc. as a long term investment?  Do you think the risk/reward is good enough with this put option? 

Please share your thoughts below!

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6 comments:

  1. Like the Lowe's Trade! I think you will do quite well either way.

    ReplyDelete
    Replies
    1. FV,

      Regarding LOW I'm definitely happy with either way this works out. Although if it's going to expire I hope to see LOW move back higher relatively quickly so I can close it out for a solid gain and release that cash for other put selling activity. But I'm happy to buy shares below $65.

      Time will tell.

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  2. Although I have yet to enter a Lowe's, I really liked their Rona acquisition. There are 3 Rona's within 15 mins of my house, and it's a loved brand in Quebec.

    Good luck with the option!

    ReplyDelete
    Replies
    1. DiH,

      Of the top of my head I don't think Lowe's has their actual stores in Canada, although I could be wrong. I honestly don't know what my preference is for this option. One on hand I'd love to buy shares at $63.75, but on the other I'd love to cycle through a few put options to generate income and then have a put option execute. Either way though I'll be a happy camper.

      Thanks for stopping by!

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  3. Great trade JC. I've been sidelined a bit, only selling calls right now. I'm still nervous about a rate cut and this whole Trump thing.

    ReplyDelete
    Replies
    1. IH,

      I think this was a good put option from a risk/reward. Shares were already priced at a point where I might consider a small starter position, but the put option gives nearly 8% downside protection and over a 16% annualized premium return. That's a solid trade in my opinion.

      I still don't have many positions in which to sell calls although if some of these puts are triggered in my Rollover IRA then I'll likely turn around and start selling covered calls. No commissions and no taxes makes it a great strategy for tax advantaged accounts.

      Thanks for stopping by!

      Delete