Monday, January 30, 2017

8 Option Moves to Boost My Investment Income

dividend growth investing, option strategy, call option, put option, income investing
Lowe's Companies (LOW), Becton, Dickinson & Company (BDX), Visa, Inc. (V), McCormick & Company (MKC), Nike, Inc. (NKE), V.F. Corporation (VFC) 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.  

Well the pace of my options activity finally slowed down.  Although there were still 8 different moves that I made during the past week so it didn't slow down that much.

Lowe's Companies, Inc. (LOW) - Buy to Close Put Option

Lowe's is one of those companies that keeps trading near the high end of my purchase range without quite getting into it.  The best way I've found to play those, especially when I have lots of capital on hand, is to sell puts when the numbers work out.

dividend growth investing, income investing, option strategy, put option
Lowe's Companies, Inc. (LOW) Feb 24 2017 Put Option - Closed

The net profit on this Lowe's put worked out to $63.91.  Based on the $6,850 of capital "at risk" that's a 0.93% return.  Since the return was earned in about a week that's a 76.00% annualized return.  I was able to capture 73.5% of the max profit in just 16.2% of the days to expiration.

Becton, Dickinson & Company (BDX) - Buy to Close Put Option

Becton, Dickinson & Company is a company that I've utilized multiple times to be able to scalp some option premium at the risk of purchasing shares at a fair price.  Prior to this put option I had previously sold and closed 3 put options on Becton, Dickinson for a net profit of nearly $300.  Well, this one makes 4.

dividend growth investing, income investing, option strategy, put option
Becton, Dickinson & Company (BDX) Feb 2017 Put Option - Closed
This put option generated a total profit of $109.91 which is a 0.67% return based on the $16,500 of capital used to secure the option.  When accounting for the time that the profit was generated in that's a 124.41% annualized return.

I left quite a bit of juice in this option in the form of premium; however, if the markets give me a chance to close out a position in just 12.50% of the days while locking in 56.38% of the max premium, I'm going to take it.

Visa, Inc. (V) - Buy to Close Put Option

Visa is another company that I've repeatedly sold put options on over the past few months.  Prior to this put option I had opened and closed 5 put options for a total profit near $450.   

dividend growth investing, income investing, option strategy, put option
Visa, Inc. (V) Feb 10, 2017 Put Option - Closed
The total profit on this option worked out to $105.91.  On the $8,000 in cash required to secure the put option that's a solid 1.32% return.  On an annualized basis that's a 40.93% annual rate.  I was able to capture 75.68% of the maximum profit in exactly 50% of the days to expiration.

McCormick & Company (MKC) - Buy to Close Put Option

I've had my eye on McCormick & Company for a while now as a company that I want to add to my portfolio.  It's one of those few companies that is truly dominant in their market and rarely sees dips in their business due to the staple nature of their products.  The valuation was starting to get to where I'd like to buy shares, but wasn't quite there so I went to the options chain.

dividend growth investing, income investing, option strategy, put option
McCormick & Company (MKC) Feb 2017 Put Option - Closed

The net profit on this put option came to $80.91.  Based on the $9,000 in capital required to secure the option that's a solid 0.90% return.  Even better is that the return was earned in about 1.5 weeks so that's a 43.79% annualized return.  With McCormick's share price rallying higher after announcing earnings last week I was able to lock in 77.09% of the maximum premium in just 30.00% of the days to expiration.

McCormick & Company (MKC) - Buy to Close Put Option

No that's not a typo.  I had stacked 2 different put options in McCormick.

dividend growth investing, income investing, option strategy, put option
McCormick & Company (MKC) Mar 2017 Put Option - Closed
This put option provided a net profit of $94.91.  Based on the $8,500 in capital necessary to secure the put option that's a solid 1.12% return.  That was earned in just over 3 weeks so the annualized return came to 20.24%.  I was able to capture 82.57% of the maximum premium in just 30.99% of the days to expiration.

Lowe's Companies, Inc. (LOW) - Put Option Expired OTM

I typically close out my put options early if I can capture at least 50% of the premium in less than 50% of the time.  However, sometimes I let the option go all the way to expiration if it's well out of the money and there's not a big difference between the premium capture % and the time %.

dividend growth investing, income investing, option strategy, put option
Lowe's Companies, Inc. (LOW) Jan 27 2017 Put Option - Closed
Since the share price of Lowe's was higher than the strike price the option expired out of the money and I was able to keep the full option premium of $82.95 as profit.  That's a 1.20% return based on the $6,900 of capital to secure the put option.  Since the return was earned in about 35 days that's a solid 13.28% annualized return.

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

Nike keeps trading just slightly higher than where I would prefer to add shares.  My preference is to purchase shares below $50 and Mr. Market just hasn't cooperated.  There's no worries though because that just means that there's opportunities to sell options.

dividend growth investing, income investing, option strategy, put option
Nike ,Inc. (NKE) Mar 2017 Put Option - Opened
If Nike's share price falls below $52.50 then I'll have to purchase 100 shares at the strike price.  However, since I received the premium payment my effective purchase price would be reduced to $51.23 per share.  That's about a 3.7% discount from the current share price.  

At that purchase price the TTM valuation would look slightly expensive at 22.6x.  The forward estimate based on the current fiscal year that ends in May pegs the valuation at 22.0x.  The yield on cost based on the current annual dividend would be 1.41%.

If Nike's share price remains above $52.50 then I'll just keep the option premium as profit.  Based on the $5,250 of capital required to secure the put option that's a 2.42% return.  If held to expiration that would be a 17.9% annualized return.

V.F. Corporation (VFC) - Sell to Open Call Option

These shares were acquired via a put option that I had previously sold on V.F. Corporation.  That put option ended up in the money so the shares were put to me at $55 per share.  However, I had received $1.80 per share in premium so my cost basis was reduced to $53.20.  I sold a covered call against these shares with the hopes of just collecting the premium, but in a worst case scenario I'll sell the shares at a solid gain.
dividend growth investing, income investing, option strategy, put option
V.F. Corporation (VFC) Feb 2017 Call Option - Opened
If V.F. Corporation's share price remains below the $55 strike price then I'll get to keep the option premium as profit.  That will be a solid 1.09% return or approximately 17.2% on an annualized basis.

If V.F. Corporation's share price climbs higher than $55 then I'll have to sell 100 shares at the strike price.  Although since I received the premium my effective sale price would be $55.60.  Compared to the share price when the contract was written that's a 6.7% return or about 158.5% on an annualized basis.

Conclusion
  
Even though I receive the option premium up front when selling options, I don't count the premium as profit until I close the position or it expires.  

Thus far in January I've been able to generate $1,629.39 in profit via closed/expired options.  It's obviously early into 2017, but in less than 1 month I've already collected nearly 60% more total premium than I did across the last 4 months of 2016 combined.

I don't expect to close out any other positions during January although I am looking forward to finding some new put options to put on.  I currently only have about $36k tied up in put options which is a bit light for where I've typically been running.  

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

Do you utilize an option strategy to generate investment income in addition to the dividends your positions provide?  

Please share your thoughts below!

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4 comments:

  1. Fantastic blog and write-up! Very nice trades. Keep going man!

    ReplyDelete
  2. Those are all solid underlying companies. It's great when your downside is getting assigned something like that.

    ReplyDelete
    Replies
    1. FV,

      I agree. It's a bit capital intensive but I much prefer selling puts to buying the shares outright.

      Thanks for stopping by!

      Delete