Monday, December 19, 2016

Busy As A Bee

dividend growth investing, option strategy, call option, put option, income investing
Styker Corporation (SYK), Johnson & Johnson (JNJ), Nike (NKE), Visa (V) & Lowe's Companies (LOW) Option Activity
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 had spent much of the early part of last week closing out some put options to book profits as well as lower my exposure to having those shares put to me.  Well, I just couldn't help myself and started opening some new positions back up.

My strategy for the lump sum from my 401k Rollover is to generate investment income by effectively setting limit orders to purchase companies at discounts or generate returns via the option premium.  There's several reasons for me going this route, but the big one is that there isn't a whole lot of value that I see in the market right now among the companies I want to buy and hold for the next 20+ years.  So that leaves me with either sitting in cash in the hopes of a big selloff or putting some of the capital to work by "risking" purchasing shares at a discount.  

I opened 5 new positions which is quite a bit and altogether represent $42,500 of capital potentially being put to work.  Yikes!  I strayed a bit from my typical 10%/10% strategy for put options in the hopes of generating a bit more investment income right now.  I look to close out the positions at a profit prior to expiration with a 50%+ premium capture these put options are likely to go closer to their expiration date since they are closer to being in the money, barring a decent increase in their share prices.

I'll run through these pretty quick since there's a lot to update.

Stryker Corporation (SYK) - Sell to Open Put Option

I've been a fan of Stryker for a while now and what's not to like.  Health care is continuing to grow and they've paid and grown dividends for 20+ years.  Of the 5 put options that I opened up, the Styker one is the only one that is close to my 10%/10% strategy.
dividend growth investing, income investing, option strategy, put option
Stryker Corporation (SYK) $110 Jan 20, 2017 Put Option - Opened
If the share price falls below $110 then I'll have to purchase 100 shares of Stryker for the strike price less the premium received.  That works out to an effective purchase price of $108.75.  Currently the share price is trading at $118.75 so my effective purchase price would be at a 8.4% discount.

At that purchase price my yield on cost would be 1.56% based on their newly raised quarterly payout of $0.425.  That would represent a pretty good value based on the analyst estimates with a 18.8x P/E on 2016 earnings and 17.0x P/E on 2017's earnings estimates.

If the share price stays above $110 then I'll get to keep the option premium as profit.  Based on the capital at risk that would represent a 1.14% return in just over 1 month.  On an annualized basis that's a solid 11.8% return.   

Johnson & Johnson (JNJ) - Sell to Open Put Option

Johnson & Johnson needs no introduction to dividend growth investors and is one of the premiere investments out there with over 50 consecutive years of growing dividends.   
dividend growth investing, income investing, option strategy, put option
Johnson & Johnson (JNJ) $115 Jan 20, 2017 Put Option - Opened
If the share price falls below $115 then I'll have to purchase 100 shares of Johnson & Johnson for the strike price less the premium received.  That works out to an effective purchase price of $113.17.  Currently the share price is trading at $115.88 so my effective purchase price would be at a 2.3% discount.

At that purchase price my yield on cost would be 2.83% based on the current annual dividend.  That would represent a pretty good value based on the analyst estimates with a 16.8x P/E on 2016 earnings and 15.9x P/E on 2017's earnings estimates.

If the share price stays above $115 then I'll get to keep the option premium as profit.  Based on the capital at risk that would represent a 1.59% return in just over 1 month.  On an annualized basis that's a solid 16.9% return. 

Nike, Inc. (NKE) - Sell to Open Put Option


Nike's been pretty good to me for option income.  In December alone I've closed, opened and then closed again 2 put option contracts that have generated over $90 in profit.  That's the same amount of dividend income that 125 shares of Nike would generate in a year.  So I've gone back to the Nike well once again.

dividend growth investing, income investing, option strategy, put option
Nike, Inc. (NKE) $50 Jan 13, 2017 Put Option - Opened
If the share price of Nike falls below $50 then the put option would move "in the money" and could be executed.  If executed I would be forced to purchase 100 shares of Nike for the strike price ($5050) less the premium received ($82.95/100) or $49.17.  Nike closed trading on Friday at $50.92 so my effective purchase price would be at a 3.44% discount to the current price.

At that purchase price my yield on cost would be 1.46% based on the current annual dividend.  That would represent a pretty good value based on the analyst estimates with a 22.9x P/E on 2016 earnings and 20.9x P/E on 2017's earnings estimates.

If the share price stays above $50 then I'll get to keep the option premium as profit.  Based on the capital at risk that would represent a 1.66% return in about 1 month.  On an annualized basis that's a solid 22.2% return. 

Visa, Inc. (V) - Sell to Open Put Option

Much like Nike I've been using Visa to generate some good income via option premiums.  Over the last month I've opened and closed 2 put options on Visa locking in over $180 of profit.  That's equivalent to the dividend income that 275 shares of Visa would provide over a year.  

Visa continues to be one of my highest conviction companies that skew much more towards low yield/high growth.  I see a big tailwind in cashless transactions and there's even been countries moving to ban cash.  That's good for payment processors and the good thing about Visa is they don't carry the credit risk since they only operate the processing network.

dividend growth investing, income investing, option strategy, put option
Visa, Inc. (V) $77.50 Jan 13, 2017 Put Option - Opened
If the share price falls below $77.50 then I'll have to purchase 100 shares of Visa for the strike price less the premium received.  That works out to an effective purchase price of $76.52.  Currently the share price is trading at $78.35 so my effective purchase price would be at a 2.3% discount.

At that purchase price my yield on cost would be 0.86% based on the current annual dividend.  That would represent an okay value based on the analyst estimates with a 27.4x P/E on 2016 earnings and 23.3x P/E on 2017's earnings estimates although at those levels it's still requiring the growth to play out which is always risky.


If the share price stays above $77.50 then I'll get to keep the option premium as profit.  Based on the capital at risk that would represent a 1.26% return in just over 1 month.  On an annualized basis that's a solid 16.5% return. 

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

I'm very interested in adding Lowe's to my portfolio, although not quite at these levels.  My target is to add shares around the $60-65 level which isn't too far off, but it's still far enough away that the option strike/premium combinations don't quite offer a good prospect.  However, I won't be deterred and figured the best way to keep an eye on Lowe's is to have some kind of skin in the game.

dividend growth investing, income investing, option strategy, put option
Lowe's Companies (LOW) $72.50 Jan 2017 Put Option - Opened
If the share price falls below $72.50 then I'll have to purchase 100 shares of Lowe's for the strike price less the premium received.  That works out to an effective purchase price of $71.32.  Currently the share price is trading at $72.96 so my effective purchase price would be at a 2.3% discount.

At that purchase price my yield on cost would be 1.96% based on the current annual dividend.  That would represent an okay value based on the analyst estimates with a 21.6x P/E on 2016 earnings and 18.2x P/E on 2017's earnings estimates.  At those levels I should capture pretty much all of the growth of the company, but have very little if any room to reap the rewards of valuation expansion over time.



If the share price stays above $72.50 then I'll get to keep the option premium as profit.  Based on the capital at risk that would represent a 1.63% return in just over 1 month.  On an annualized basis that's a solid 17.8% return. 

Conclusion
  
I was more aggressive with these put options and didn't require my normal 10%/10% strategy so we'll see how they go.  Between the 5 put options that I opened I received a total of $606.75 in option premium the day I wrote the contracts against a potential $42,500 in capital at risk.  

My exit plan for all of these will be to capture at least 50% of the max profit.  Should the options end up in the money and the shares being put to me I'll have to then formulate a plan as to whether I'll just hold the shares long term or sell call options.  As of now though I'm leaning towards keeping the Styker and Johnson & Johnson shares and likely selling calls on the other 3 because they aren't quite at levels that I'd like to purchase shares at.  Time will tell though.

While these options have generated up front cash via the option premium, I only account for the premium in my option profit totals once a position is closed or expires.  So they aren't reflected in the totals below.

Thus far in December I've generated $425.47 in profit from option premiums and YTD, really September to date, I've earned $651.88 in total profit.  Although the YTD total does include the Target call option that is currently sitting on a loss.  Since the position is still open via being rolled up and out the loss shouldn't be reflected in the totals.  Excluding the Target call brings the YTD total to $975.62.

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

What do you think of these put options?  If you use options to enter positions do you stick with a typical strategy like my 10% discount / 10% annualized premium return strategy or do you utilize a different plan?

Please share your thoughts below!

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1 comment:

  1. A good articles always attracts many visitors, I think you can do it! I admire your talent, hope to see you again next time of the works, I wish you good luck!.

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