Friday, November 11, 2016

Recent Options Transactions: Part Deux

dividend growth investing, option strategy, put option, income investing
Stryker Corporation (SYK) and Becton, Dickinson & Company (BDX) Put Options Transactions
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.  


I recently moved my 401k into a Rollover IRA, with 500 free trades to boot, and am ready and willing to deploy that capital.  I was quite busy Tuesday afternoon and Wednesday morning opening 4 different positions.  The first two, a buy/write and a put option, were covered yesterday, but let's move on to the other two.

Stryker Corporation (SYK) - Sell to Open Put Option

The second move that I made early Wednesday was for a company I've eyed for a while.  For those that don't know Stryker is a medical device and equipment maker especially with orthopedics such as joint replacements.  Stryker's current dividend yield of 1.3% leaves a lot to be desired; however, the growth makes up for it.  With a big demographic tailwind behind them Stryker should continue to do well in the future.

Surprisingly, to me at least, Stryker sold off about 6% in early trading on Wednesday and that caught my eye.   

Company: Stryker Corporation (SYK)
Transaction: Sell to Open 1 Put Option
Date Opened: 11/9/2016
Expiration Date: 3/17/2017
Strike Price: $95.00
Price of Contract: $1.40
Premium Received less Commission/Fee: $139.95

I really like put options as a way to essentially set a limit order and get paid for it to hit.  This works great 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.

It's been nearly a year since I did a full write up on Stryker; however, the story hasn't changed but the share price has.  Although with the way this put option is structured I might be buying shares in the low to mid $90's which is fine by me.

So how can this move play out?
dividend growth investing, health care, income investing, option strategy, put option
Stryker Corporation (SYK) March 2017 $95 Put Option
If the share price remains above $95, the option won't be executed and I'll just keep the premium as profit.  The premium return isn't really anything to get excited about at just 1.47%.  Even on an annualized basis it only works out to a 4.26% return.  I'll take it since that works out to over 3x the current yield.  

What I am excited about is the downside protection that this put option provides me.  If the share price declines below $95 then the option will be executed and I'll have to buy 100 shares at $95 less the option premium.  That comes to an effective purchase price of $93.60 or 18.6% downside protection from where the shares were trading at the time the position was opened.

At that level the yield on cost would jump to 1.62% compared to the current yield of 1.32%.  Plus as an added bonus Stryker should be announcing a dividend raise in December to juice the yield even more.  Based on 2016's earnings estimates the P/E ratio would be 16.2 and looking forward to 2017 the P/E ratio would be just 14.6.  

I would normally prefer to strike a better balance between downside protection and premium yield; however, in this case I felt it was surprisingly good premium yield for that much downside protection.  Normally with almost 20% downside the annualized premium yield is in the 1-2% range or less yet this was up over 4%.

Becton, Dickinson & Company (BDX) - Sell to Open Put Option

This was the last move that I made on Wednesday.  Becton, Dickinson & Company really needs no introduction to dividend growth investors, although like Stryker, their dividend yield is typically on the low side.  I've owned a very small position of Becton, Dickinson & Company in my FI Portfolio for around 1.5 years and have been looking for chances to build it up.

Company: Becton, Dickinson & Company (BDX)
Transaction: Sell to Open 1 Put Option
Date Opened: 11/9/2016
Expiration Date: 12/16/2016
Strike Price: $160.00
Price of Contract: $1.10
Premium Received less Commission/Fee: $109.95

So how can this move play out?
dividend growth investing, health care, income investing, option strategy, put option
Becton, Dickinson & Company (BDX) December 2016 $160 Put Option
If the share price remains above the $160 strike price then I'll just keep the option premium as profit and move on to other opportunities.  That's only a 0.69% return from the premium, although given the short duration it works out to nearly a 7.0% annualized return.

If the share price dips below the $160 strike price then I'll be purchasing 100 shares for $160 less the option premium or $158.90 per share.  That works out to around a 9.2% discount to the share price when I opened the position which is pretty solid.  

What has me excited though is the prospects of adding this truly excellent company at fair valuations.  Based on my purchase price the P/E ratio based on 2016's earnings estimates would be 18.6.  Looking forward to 2017 the P/E ratio would be 16.7.  

That's fantastic valuations for a quality company such as Becton, Dickinson.  Especially on a relative basis considering they are trading at lower valuations than companies such as General Mills (GIS) that are struggling to find real growth.  

Even though Becton, Dickinson's dividend yield is on the low side I'll take my chances of a great company with the tailwinds of the healthcare sector that still generates real growth that is trading at decent valuations.

Conclusion

It's great getting to be active in the markets after a long hiatus of big activity.  Although with this quick flurry of moves this week I need to slow down a bit and take a more patient and measured approach to getting the capital invested.  

In less than 24 hours I invested or am on the hook for over $37k of possible investments.  Yikes!  That's truly astonishing when I sit back and think about it.  Despite that much capital being "put to work" I feel good about conservatively-aggressive approach that I took.  

I will likely slow down the pace of my moves in the Rollover IRA because it's not like they give awards out for investing capital quickly.  You earn your rewards via returns by being patient and remaining focused on value.  

I do have to admit that both Altria (MO) and CVS Health (CVS) interest me at these levels and I might find a way to get some exposure to one or both.  Altria would likely be in the form of a put option while CVS Health would probably be an outright buy.  

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

Have you been buying anything the last 2 days as some portions of the markets have gone haywire?  What do you think of the 2 put options that I opened up?  

Please share your thoughts below!

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10 comments:

  1. Stryker and Beckton are definitely two healthcare giants that I wouldnt mind owning myself. I used to own MDT but decided to sell after the inversion and my broker would make me pay div withholding taxes. Stryker seems like a great alternative to MDT. BDX seems a bit rich for my taste - but its been something that I occasionally revisit and reevaluate but never been able to pull a trigger.

    R2R

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    1. R2R,

      I still own my MDT and have just a tiny position in BDX. For the longest time I was avoiding some of the lower yielding companies because I wanted the cash flow to be a bit higher than they provided. However, these companies are seeing REAL growth which is more than I can say for many of the DG favorites and they have a great demographic tailwind.

      I guess that's what makes a market because I think BDX at 18.6x TTM and 16.7x forward seems like a decent valuation. It's not a backup the truck and take out a margin loan valuation, but considering you have some of the consumer staples companies trading at 22-23x it's a decent relative and overall valuation.

      Thanks for stopping by!

      Delete
  2. Agree with MO. Would think about writing puts here, or waiting for it to come down to high 50's before pulling trigger. :)

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    1. Greg,

      I was pretty close to writing some more put options but changed my mind at the last second to let cooler heads prevail. My price target to purchase shares is below $60 which jives with where you'd like. I currently have a put option open on MO that expires in December with a $57.5 strike so I'm hoping to get some more downward movement to write another one somewhere in the $50/52.5 strike range.

      Thanks for stopping by!

      Delete
  3. Sounds great buying at $95, but with the premium it's only $93.xx. So when you write an option, what's the determine factor of the premium? Who determine the premium?

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    1. Vivianne,

      The premium when you write an option is entirely derived via the market. So just like how when you buy or sell shares there's a bid/ask that shows what people are bidding for shares or asking for their shares the options market works the same way.

      In the Stryker put option the premium doesn't reduce the price all that much; however, to properly analyze that you have to take into account where the shares are priced right now compared to the strike price less the premium. In the case of Stryker the share price was around $114/115 so there's a big discount to the current price.

      If you have any other questions feel free to ask.

      Delete
  4. I like to get at least double digit (closer to 12%) annualized return for the "if not executed scenario" when I sell puts.

    My thinking goes like this:

    Selling a put has the same risk profile as owning the stock outright (if the stock goes to zero...you lose everything less the premium received...which is nominal).

    But selling a put does not have the same upside potential as owning the stock outright (premium received is fixed...upside of a long position is unlimited).

    So by selling a put, I take on a potential risk of 100% loss, but can only expect a limited return. I imagine a world where I only sell puts and never get assigned the shares of the underlying stock. In this world, my only profit comes from the put premiums which are the limited return that was traded for 100% risk. In that scenario the limited return had better be worth it.

    I define "worth it" as handily beating the US equity market average, which is in the ~8% range depending on what index/timeframe you use.

    In other words: this is a lot of work, what with the picking stocks, coming up with a fair value, playing in the derivatives market, etc. You deserve to earn a better annualized return than a passive index fund...right?

    On the other hand, you're getting a ton of downside protection with these trades which isn't nothing...but downside protection only really pays off if you end up getting assigned the shares (your "if executed" scenario).

    At a minimum the annualized premium returns should at least exceed the annual dividend, which these trades do. You've definitely improved your return by selling the put rather than just buying shares.

    So long story short (pun intended?), I tend to be a little more greedy than this in terms of premiums. 4.3% and 7% annualized (if not executed) is too light IMO.

    That's not to say they aren't good trades. I like downside protection too...just not that much.

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    1. catfish,

      I agree I typically aim for a more balanced approach between downside protection and premium return. Obviously though I decided that more downside protection was desirable in these scenarios for several reasons. One being the fact that I have a big chunk of capital now via my 401k Rollover so I was okay with slightly lower premium return in exchange for downside protection. Also since these are in a tax advantaged account taxes won't be a drag on the returns which gives a slight boost to the premium return compared to the same move in a taxable account. These puts were closer to the setting a limit order scenario but getting paid until it triggers.

      I'm also generally bearish on the markets as a whole, but I'm not naive enough to think that I can time the market. So with my overall feel for a bearish tilt to the market I wanted to be able to capture some of that downside by writing further OOTM puts. I didn't want to be caught in a situation where the markets happen to tank and I'm buying shares significantly higher than the market price although I'm comfortable adding at those price levels in a true market collapse situation who knows how things will play out.

      I'm bullish on SYK and BDX even in some kind of market event or economic recession although the healthcare overhaul that is likely to happen will change things a bit but I don't think it will fundamentally change things for these excellent companies.

      Thanks for sharing your thoughts.

      Delete
  5. I like the SYK option. I wouldn't mind owning share of this one. Congrats on the premium.

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    Replies
    1. OH,

      Well the numbers look a bit better if you decide to move in since the share price has come down a bit more.

      Thanks for stopping by!

      Delete