Tuesday, January 17, 2017

9 Option Moves To Boost My Investment Income and 1 Lottery Ticket

dividend growth investing, option strategy, call option, put option, income investing
Johnson & Johnson (JNJ), Visa, Inc. (V), Starbucks Corporation (SBUX), Halliburton Company (HAL), Realty Income (O), Coca-Cola (KO), Lowe's Companies (LOW), Volatility (VIX) 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 expected the second trading week of 2017 to slow down a bit compared to the blistering pace that the first week had set.  Although I guess technically it did with only 9 options moves being made last week compared to the 14 moves from the prior week.  

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

Johnson & Johnson is one of those few companies that just about every loves.  They're stable, they grow consistently and they pay AND grow their dividend every year and for the value investors out there Johnson & Johnson is looking pretty solid at these levels too.

dividend growth investing, income investing, option strategy, put option
Johnson & Johnson (JNJ) Feb 2017 Put Option - Opened
If Johnson & Johnson's share price falls below $113 then I'll have to purchase 100 shares at the strike price.  However, since I've already received the premium payment my purchase price would be reduced by the premium received lowering the purchase price to $111.68 which is 2.55% lower than the price that shares closed trading at this past Friday.  

The valuation at that purchase price looks pretty good.  For the most recent year, which ended 12/31/2016, shares would be trading at a 16.6x valuation based on the analyst estimates.  On a forward basis analysts expect Johnson & Johnson to earn $7.13 for the current year putting the forward valuation at just 15.7x.  The yield on cost at that purchase price would be 2.87%.

If Johnson & Johnson remains above $113 then I'll just keep the option premium as profit.  Based on the $11,300 of cash required to secure the put option that's a 1.17% return.  On an annualized basis that works out to a 15.2% return.

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

Visa is a company that I keep revisiting for option plays.  The shrea price continues to be at "okay" levels, but isn't quite down to where it'd be ideal to purchase shares.  I currently have one put option open on Visa that will likely expire out of the money and have previously opened and closed 3 positions for total profit of $246.73.  I went back to that well again last week.

dividend growth investing, income investing, option strategy, put option
Visa, Inc. (V) Feb 2017 Put Option - Opened
If Visa's share price falls below $80 then I'll likely have to purchase 100 shares of Visa at $80 a piece.  Since I received the option premium of $129 that will reduce my purchase price to $78.71 which is approximately a 3.03% discount from the price Visa is currently trading at.

At that price the trailing valuation, based on analyst estimates for 2016's earnings, would be 27.7x.  Looking forward to the analyst estimate for 2017 of $3.29 the forward valuation would be 23.9x.  The yield on cost based on the current dividend payout would be 0.84%.

If Visa's share price remains above $80 then I'll keep the $129.00 option premium as profit.  Based on the $8,000 required to secure the put option that's a 1.61% return or 23.2% on an annualized basis.  

Since this put option is in my taxable margin account and doesn't necessarily need to be cash secured the return actually looks better.   The current margin requirement to maintain the position is $2,052.25 which increases the returns to 6.29% and 121.5% on an annualized basis.

This put option was opened as a bit of an accident.  No I don't mean that I'm not happy with it, rather I just happened to open it in the wrong account.  I prefer to use my IRA account right now since I have free trades and most importantly plenty of excess cash as opposed to my regular taxable account where cash is much more limited.  So I'll likely be a bit more aggressive with closing this put option in order to free up my cash unless Visa moves significantly higher in the meantime. 

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

No that's not a typo and yes I told you I liked this put option set up.  Since the previous Visa put option was done in my taxable account I wanted to get one opened in my Rollover IRA as well.  Since I'll likely be closing the taxable account put option for a lower profit I wanted to get one on in my Rollover IRA that I can use to maximize the profit potential.  Even better is that I was able to take in even more premium with a higher contract price and a much lower commission rate.  

dividend growth investing, income investing, option strategy, put option
Visa, Inc. (V) Feb 2017 Put Option - Opened
If Visa's share price falls below $80 then I'll have to purchase 100 shares at $80 a piece.  Since I've received the option premium already my purchase price would be reduced by $139.95 lowering the per share cost basis to $78.60.  That's around a 3.2% discount from where shares closed trading this past Friday.

Visa's fiscal years end at the end of September.  Based on fiscal year 2016's earnings of $2.84 that puts the trailing valuation at 27.7x.  On a forward basis analysts expect Visa to earn $3.29 for 2017 pegging the valuation at 23.9x.  At that purchase price shares would have a yield on cost of 0.84%.

If the share price stays above $80 then the $139.95 option premium will turn into pure profit.  Based on the $8,000 in cash necessary to secure the contract that would represent a 1.75%.  On an annualized basis that works out to a 25.4% return.

Starbucks Corporation (SBUX) - Buy to Close Put Option

I opened my put option on Starbucks back at the end of 2016 and last week seemed like a good time to close it out.  

dividend growth investing, income investing, option strategy, put option
Starbucks Corporation (SBUX) Jan 27 2017 Put Option - Closed
The net profit on this Starbucks put option worked out to $56.91.  Based on the $5,450 in capital required to secure the put option that's a solid 1.04% which is equivalent to a 37.2% annualized return.

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

Becton, Dickinson has been very good to me over the last few months.  In that time I've opened and close 3 put options on the company taking in a total profit of $299.73.  

dividend growth investing, income investing, option strategy, put option
Becton, Dickinson & Company (BDX) Feb 2017 Put Option - Closed
The net profit on this trade worked out to $149.91 or 0.94% based on the $16,000 required to secure the option.  I lucked out with the share price moving quite higher over the days that the put option was open significantly reducing the cost of the option and allowing me to close it out.  On an annualized basis this is an excellent 134.3% return.

Halliburton Company (HAL) - Buy to Close Call Option

I don't sell many call options on shares that I own; however, my Halliburton position is a different beast.  For tax purposes, the shares were acquired via an ESPP program, I need to make sure that I sell shares at a certain profit level or potentially have to pay taxes on money that I didn't actually realize.  

Since I think many companies related to oil are still undervalued compared to where they will likely be in a few years I've been a bit more aggressive with closing the call options that I've cycled through.  I've now opened and closed 3 call options on these shares generating a total profit of $106.03.  In others words whenever I do end up selling my shares the option premium that's been generated effectively boosts my sale price by $1.06 per share.

dividend growth investing, income investing, option strategy, call option
Halliburton Company (HAL) Jan 2017 Call Option - Closed
The net profit on this call option came to $31.01 or 0.53% based on the strike price of the call option.  On an annualized basis that's a 32.1% return.

The Coca-Cola Company (KO) - Buy to Close Call Option

Well, look at that another call option closed after talking about how I rarely use them.  

dividend growth investing, income investing, option strategy, call option
Coca-Cola Company (KO) May 2017 Call Option - Closed
The net profit on this call option worked out to $44.01 or a 1.00% return based on the strike price of the call option.  On an annualized basis that's a 4.0% return.

Considering that the last dividend payment from Coca-Cola was $0.35 per share that's a solid return.  If all I do is collect Coca-Cola dividends the rest of this year that's like receiving 4 payouts from the company and an extra 1.25 payouts from the options market.

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

I was a bit more aggressive with closing this put option since I currently have another put option that's working and this one was hovering around the strike price for the contract.  In hindsight I probably should have seen what happens since I would be able to collect the next dividend should the shares be put to me.  Oh well, it's closed now.

dividend growth investing, income investing, option strategy, put option
Lowe's Companies (LOW) Jan 2017 Put Option - Closed
The net profit on this contract worked out to $59.91 which, for all intents and purposes, met my 50% threshold.  Based on the $7,250 required to secure the put option that's a 0.83% return.  The annualized return works out to 10.9%.

Realty Income (O) - Close Call Credit Spread

This wasn't the most successful moves I've ever done; however, I think that largely stems from not setting up the trade correctly.  I honestly did not see shares of Realty Income climbing much higher than the $55/6 range over the 5 weeks or so that the position would be open if held through expiration.  Yet, here we are with Realty Income's share price sitting around $59 per share.

dividend growth investing, income investing, option strategy, call credit spread
Realty Income Corporation (O) Jan 2017 $55/60 Call Credit Spread - Closed
This call credit spread ended up generating a $209.08 loss.  Based on the $5.00 wide spread that's a 41.8% loss.  Yikes!  

A few thoughts on credit spreads.  The initial set up is where you make your money so it's absolutely crucial that you put the probabilities in your favor.  Credit spreads are inherently directional plays on the underlying security which is extremely hard to predict over the short term.  Thus the importance of the initial set up.

In the case of Realty Income it's not exactly suited for spreads because the option chain is only in $5 strike increments which severely lowers the options of your options.  See what I did there?  Also, commissions are absolutely critical to keep an eye on.  

I'd still like to try some a few call or put credit spreads again in the future to see how they work, but I'll be much more diligent in finding excellent set ups with a high probably of success.

Lottery Ticket

Back in August I strayed outside of my norm and made a bet on volatility increasing.  If you recall we were in the middle of volatility being abnormally low towards the end of the summer and the next move was likely to be higher in volatility.  

Fast forward to this past week and we see volatility, via the VIX index, at extremely low levels once again.  Not much has changed since my first long call option on the VIX index other than we now know that Donald Trump will be the next President rather than Hillary Clinton still being in the running.

dividend growth investing, income investing, option strategy, call option
VIX Long Call Option Mar 22 2017 - Opened
Between now and expiration the profit/loss graph is quite fluid and ever changing so I'll only highlight the breakeven's at the expiration date.

If the VIX index is lower than the 13 strike on expiration then I will lose my entire $318.74 investment.  

If the VIX index is higher than 13, but less than 16.19 (strike price + cost of contract) then I'll lose money on the trade since I would collect less money back than I paid to open the position.

If the VIX index is higher than 16.19 then I start to make money and the profit potential is unlimited.  

The VIX index can change quickly so if at any point in time I'm showing a gain then I should consider closing the position.  Especially with the VIX index since it can rise extremely fast over a very short time period and then settle down rather quickly too.  Timing is also extremely crucial when dealing with volatility since you can bee 100% right in your thesis, but if you're too early or too late even by a couple days you can go from showing a profit to taking a loss.

Ideally the VIX index would spike up to 20+ on March 21/22 and allow me to close out the position by doubling or more my investment.  Although in all reality I'll likely close out the position early.

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 $641.01 in profit via closed/expired options.  It's obviously early into 2017, but in less than 1 month I've already collected over 60% of the premium that I did for 2016 across 4 months.  

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

Do you use covered calls or cash secured puts to generate income?  What do you think of my lottery ticket on the VIX?  

Please share your thoughts below!

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6 comments:

  1. Thank you for all the details on your put options. I have sold a couple of covered calls on my shares. I just started doing this, so we will see how it goes.
    Have fun generating income,
    DM

    ReplyDelete
    Replies
    1. DM,

      Glad to hear of someone else using options. Once I get some of my positions built up to 100 share lots I want to start incorporating some more call options. Of course these work best in tax advantaged accounts since the option income is taxed at your short term capital gains rate and covered calls can force you to sell your shares triggering another taxable event. In my opinion covered calls work best if you feel the shares are either overvalued or at least on the high side of fair value.

      Thanks for stopping by!

      Delete
  2. I regularly play the volatility tracking issues with long dated out of the money puts. Contango in the futures markets ensures VXX, UVXY, TVIX, etc will all decay towards zero over long periods of time. I've never lost money on that trade. Worst I've every done is 16% annualized!

    ReplyDelete
    Replies
    1. FV,

      Is there information on how you go about that on your blog? I'd be interested to find out more about that. Sounds like a pretty good play and better than the long call since timing is of extreme importance to turn a profit.

      Thanks for stopping by!

      Delete
  3. I like the puts. Great stocks to own. I also like the short duration of the contracts. It allows you to get your money to work again in a short period of time.

    ReplyDelete
  4. Lot of activity... Visa is one I should start to watch.
    I also like the lottery ticket approach

    ReplyDelete