Friday, May 5, 2017

22 Option Moves to Boost My Investment Income


dividend growth investing, option strategy, call option, put option, income investing
Option Activity for the Week of April 28th
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.  


Going into last week I didn't expect to make a whole lot of option moves; however, there was one thing going for me that I had forgotten about: earnings season.  Earnings releases means higher implied volatility which means richer option premiums.  The successful earnings plays really helped to boost up the profits for the month.

*Obligatory Affiliate Link*

TastyWorks is really geared toward options traders with $1 per contract commissions and $0 to close; however, even for just long term dividend growth investors it's an intriguing choice.  For stock purchases commissions are $5 to open and $0 to close which is still much lower than just about every brokerage out there.  If you're interested in opening an account with TastyWorks I'd appreciate it if you do so through this link.

There's plenty of moves to recap for last week so without further ado let's get into the trades.

Opening Positions:

Bank of America (BAC) - Covered Call

During April's monthly option expiration my put option on Bank of America ended up in the money.  That meant I now owned 100 shares of Bank of America at my strike price, $23, less the premium received, $44.95, or $22.55.  Since I already have a decent amount of exposure to Bank of America within my other accounts that mean it was time to start selling call options against these shares.
dividend growth investing, income investing, option strategy, put option
Bank of America (BAC) May 26 2017 Covered Call - Opened
If Bank of America's share price is above $24 at expiration then I'll have to sell my shares at an effective sale price of $24.46.  That's just fine by me if that happens because that would be an excellent 8.47% return.

If Bank of America's share price is below $24 at expiration then I'll get to keep my shares and the option premium would be profit.  The $45.95 in option premium would be a 1.91% return based on the $24 strike price which would be a 24% annualized return.  My cost basis on these shares would effectively be reduced to $22.09.

Pfizer (PFE) - Covered Call

Much like my new Bank of America position I was assigned shares of Pfizer via an in the money put option that expired on April 21st.  That meant I now owned 100 shares of Pfizer at an adjusted cost basis of $33.78.  While I don't mind owning Pfizer, I would love to own it at a much lower price point so I decided to sell calls against these shares to reduce my basis and if they are called away then so be it.
dividend growth investing, income investing, option strategy, put option
Pfizer, Inc. (PFE) May 12 2017 Covered Call - Opened
If Pfizer's share price is above $34 at expiration then I'll have to sell my shares for $34.29.  That would be a decent 1.50% return in about 1 month's time.

If Pfizer's share price is below $34 at expiration then the option premium would be profits and I would get to then sell additional call options to keep lowering my cost basis.  The $28.95 option premium would represent a 0.85% return based on the $34 strike price or 19% annualized.  My adjusted cost basis on my Pfizer shares would be reduced to $33.49.

Cisco Systems (CSCO) - Covered Call

Noticing a trend here?  These shares were acquired on March 31st via, you guessed it, a put option that ended up in the money.  My adjusted cost basis on these shares is $33.62.
dividend growth investing, income investing, option strategy, put option
Cisco Systems (CSCO) May 2017 Covered Call - Opened
If Cisco's share price is above $34 at expiration then I'll have to sell my shares at $34.43, the strike price plus the premium received.  That would be 2.41% return on my current position.

If Cisco's share price is below $34 at expiration then I'll get to keep my shares as well as the premium.  The $42.95 in option premium would represent a 1.26% return based on the $34 strike price.  The premium would then go towards reducing the cost basis on my shares to $33.19.

Gold Miners ETF (GDX) - Put Option

I've been using the gold miner ETFs quite frequently in order to try and generate option premium because they typically have fairly high implied volatility which means rich option prices.  
dividend growth investing, income investing, option strategy, put option
Gold Miners ETF (GDX) May 2017 Put Option - Opened
If GDX's share price is above $21 at expiration then I'll get to keep the full option premium as profit.  The $62 of option premium would be a hefty 2.95% return based on the $2,100 of capital securing the contract.  Through expiration that would be equivalent to a 58% annualized return.

If GDX's share price is below $21 at expiration then I'll have to buy 100 shares of GDX at an effective purchase price of $20.38.  I didn't note where the share price was trading at around the time the contract was executed but currently GDX is at $21.10.  From yesterday's closing price I would purchase shares for a 3.4% discount.

Junior Gold Miners ETF (GDXJ) - Put Option

I just can't stay away from the gold miners, especially the junior, when it comes to option plays.  Although based on the action from the past week or so my positions are hurting dearly.  
dividend growth investing, income investing, option strategy, put option
Junior Gold Miners ETF (GDXJ) June 2017 Put Option - Opened
If GDXJ's share price is above $31 at expiration then I'll get to keep the full option premium as profit.  The $149.35 in option premium would be a 4.82% return based on the $3,100 in capital securing the contract.  If held through expiration that would be equivalent to a 40% annualized return.

If GDXJ's share price is below $31 at expiration then I'll have to purchase shares at an adjusted cost basis of $29.51.  Once again I didn't note the share price GDXJ was trading at so I don't have the discount that would represent.  

Junior Gold Miners ETF (GDXJ) - Put Credit Spread

This was a trade in my new TastyWorks account and yet another play on the junior gold miners.  With limited capital to work with that meant defined risk trades only so I went to the put credit spread which is a bullish to neutral strategy.
dividend growth investing, income investing, option strategy, put option
Junior Gold Miners ETF (GDXJ) June 2 2017 Put Credit Spread - Opened
The maximum profit I can make on this trade is the credit received at the position open less commissions of $62.71.  The maximum capital at risk is therefore the $2.00 width of the spread, $200, less the premium received of $62.71, or $137.29.

If GDXJ's share price is above the $31 strike of the short put then both options will be OTM and I'll reach the maximum profit.  The $62.71 would be a 31% return on the $200 ($2.00) width of the spread.

If GDXJ's share price is below the $29 strike of the long put then both options would be in the money and I will realize the maximum loss of $137.29.

At order entry the probability of profit for this trade was around 68%.  Although if you've followed GDXJ's price movement over the last week it's not looking too good.

Visa, Inc. (V) - Put Credit Spread

I'd love to build up my position in Visa, but at much lower price levels than where it's currently trading.  Since it seems like Visa's share price can only go up I decided to put on a limited risk put credit spread to try and ride that trend higher.  
dividend growth investing, income investing, option strategy, put option
Visa, Inc. (V) June 2 2017 Put Credit Spread - Opened
The maximum profit that I can realize on this spread is the credit received at order entry or $34.71.  The maximum capital at risk is the $1.00 width of the spread less the credit received or $65.29.

If Visa's share price is above $91.50 at expiration then I'll realize the maximum profit.  The $34.71 credit would be a hefty 34% return based on the $1.00 width of the spread.

If Visa's share price is below $90.50 at expiration then I'll realize the maximum loss of $65.29.

At order entry the probability of profit for this trade was around 63%. 

SPDR S&P 500 ETF (SPY) - Call Credit Spread

Defined risk trades are nice because you know the most you can make and lose on the position when it's opened as opposed to the undefined risk trades which are inherently undefined.  These are ideal for accounts such as my Roth IRA that have limited capital.

The call credit spread is the same thing as the put credit spread; however, with call credit spreads the position is bearish to neutral.  
dividend growth investing, income investing, option strategy, put option
SPDR S&P 500 ETF (SPY) June 2017 Call Credit Spread - Opened
The maximum profit I can make on this spread is the $50.71 credit received at order entry.  The maximum capital at risk is the $2.00, $200, width of the spread less the credit received or $149.29.

If SPY is below $243 at expiration then I'll realize the maximum profit.  The $50.71 credit would be a 25% return on the $2.00 width of the spread.

If SPY is above $245 at expiration then I'll realize the maximum loss of $149.29.

At order entry this position had a 74% probability of profit which is the probability of making at least $0.01 on the trade. 

Rolled Positions:

Starbucks Corporation (SBUX) - Put Option Earnings Play

With earnings season in full swing that means the implied volatility is elevated for the companies releasing their results.  With that high implied volatility comes higher option prices and the chance to made good profits in a short time frame if things work out right.
dividend growth investing, income investing, option strategy, put option
Starbucks Corporation (SBUX) Apr 28 2017 Put Option - Rolled
Unfortunately for me the original put option wasn't looking too good after Starbucks' share price declined below the $60 strike of my put option.  That meant I had to decide if I wanted to take the shares then or roll the position out in time which is what I decided to do.  Although in hindsight I could have realized the maximum profit on this trade since Starbucks closed trading on Friday at $60.06.  Hindsight's 20/20 though so I can't look at things through a rearview mirror.

I'm still happy with how this has worked out because the post earnings decline allowed me to collect a hefty $0.61 in additional option premium by rolling the put out in time by about 3 weeks.  That brings the total credits received on this position to $1.16.

If Starbucks' share price is above $60 per share at expiration then I'll get to keep the full option premium as profit.  The $116 would be a 1.93% return based on the $6,000 in capital securing the contract.  

If Starbucks' share price is below $60 per share at expiration then I'll have to purchase 100 shares at an adjusted cost basis of $58.84.  That's not ideal, but it's still a 1.0% improvement over the $59.45 cost basis of the original position.

Closed Positions:

SPDR Gold Trust (GLD) - Put Credit Spread

The low commission/fee schedule at TastyWorks makes spreads much easier to trade and generate profits from.  With most brokers this exactly trade would have cost me somewhere around $10 in commissions/fees which comes straight out of the profits; however, at TastyWorks the total cost for this trade was just $2.58.  That's more like it.
dividend growth investing, income investing, option strategy, put option
SPDR Gold Trust (GLD) May 2017 Put Credit Spread - Closed
I was able to realize a profit of $18.42 on this spread.  That's a solid 11% return on the $161.29 capital at risk on this position.  I was able to capture nearly 50% of the maximum profit potential in just 32% of the days until expiration.

SPDR S&P 500 ETF (SPY) - Put Credit Spread

I wanted to experiment with some different spread types.  So I went with a wider spread that was further out of the money at order entry.
dividend growth investing, income investing, option strategy, put option
SPDR S&P 500 ETF (SPY) May 2017 Put Credit Spread - Closed
This spread generated net profits of $34.82.  That's a solid 10% return on the $338.09 capital at risk on this position.  I was able to realize 56% of the maximum profits in just 34% of the days until expiration.

Pfizer (PFE) - Put Option

I was a bit on the fence with whether to roll this contract out in time or to take the shares, but ultimately decided to just close it out.  Even with earnings due out the following week there just wasn't much premium to be had via call options or much credit for rolling out in time.  
dividend growth investing, income investing, option strategy, put option
Pfizer (PFE) Apr 28 2017 Put Option - Closed
I was able to realize profits of $22.91 on this put option.  The $22.91 in profits is a 0.67% return on the $3,400 of capital securing the contract and is equivalent to a 6.5% annualized return.  I was able to capture 50% of the maximum potential profit in 93% of the days until expiration.

Apple (AAPL) - Put Credit Spread

My thought process behind putting this trade on in early April was that Apple's share price would continue to trend higher leading up to earnings the earnings release in early May.  Luckily for me that's exactly what happened which allowed me to close out the position for a decent profit.
dividend growth investing, income investing, option strategy, put option
Apple (AAPL) Apr 28 2017 Put Credit Spread - Closed
This put spread generated realized profits of $31.82 which is a 19% return on the $164.09 capital at risk on this position.  I was able to capture 89% of the maximum profits in 86% of the days until expiration.

AT&T (T) - Put Option Earnings Play

With earnings season in play that means there's the possibility of making quick profits which is exactly how this one played out. 
dividend growth investing, income investing, option strategy, put option
AT&T (T) Apr 28 2017 Put Option - Closed
I was able to realize profits of $28.91 with this put option which is a 0.73% return on the $3,950 of capital securing the contract.  When earnings trades go right you're able to realize profits quickly and since these profits were earned in just 1 day that's the equivalent of a 1,334% annualized return.  If only I could do that all the time!  I was able to capture 88% of the maximum profit in 33% of the days until expiration.  Thank you post earnings volatility crush!

Cisco Systems (CSCO) - Put Option

I originally opened this put option as more of a defensive play against the shares that were going to be assigned to me.  Cisco's share price had dipped down so I wanted a chance to reduce my cost basis with shares purchased at a lower price or to generate more option premium.
dividend growth investing, income investing, option strategy, put option
Cisco Systems (CSCO) Apr 28 2017 Put Option - Closed
I was able to realize profits of $37.91 on this put option.  Based on the $3,350 of capital securing the contract that's a 1.13% return.  That's equivalent to a 17% annualized return.  I was able to capture 81% of the maximum potential profit in 93% of the days until expiration.

Union Pacific (UNP) - Put Option Earnings Play

This was another earnings play where I was looking to generate some quick profits after earnings were released.  I left some profits on the table since I went conservative with just the $107 strike put option; however, that was a tradeoff I was willing to make because I wanted the higher downside protection that this contract offered.
dividend growth investing, income investing, option strategy, put option
Union Pacific (UNP) Apr 28 2017 Put Option - Closed
This earnings play produced net profits of $62.91.  That's a 0.59% return on the $10,700 of capital securing the contract; however, since it was earned in just 1 days that's a whopping 750% annualized return.  I was able to capture 93% of the maximum profit potential in 50% of the days until expiration.

Qualcomm (QCOM) - Put Option

This put option was originally opened as a quasi-hedge/earnings play with my other Qualcomm put option that has since been rolled out in time.  
dividend growth investing, income investing, option strategy, put option
Qualcomm (QCOM) Apr 28 2017 Put Option - Closed
Since Qualcomm was far away from my $50.50 strike price I decided to just let this one expire OTM instead of buying it back.  I was able to realized 100% of the profit potential on this trade.  The $53.95 in profits represents a 1.07% return on the $5,050 in capital securing the contract.  Based on the entire time the contract was open that's equivalent to a 27.5% annualized return.

Colgate Palmolive (CL) - Call Option

Things haven't worked out with Colgate Palmolive as I had planned; however, I can't really complain about the results either.  Since Colgate's share price was below my strike price this contract just expired out of the money.
dividend growth investing, income investing, option strategy, put option
Colgate Palmolive (CL) Apr 28 2017 Call Option - Closed
I was able to realize profits of $139.95 on this call option thanks to the elevated option premium due to earnings being released last week.  Based on the $73.50 strike price that's a 1.90% return.  I was able to capture 100% of the maximum profits in 100% of the days until expiration.  

Microsoft Corporation (MSFT) - Put Option Earnings Play

I have to say I'm liking earnings season and the possibility to make solid profits in a short amount of time.  
dividend growth investing, income investing, option strategy, put option
Microsoft Corporation (MSFT) Apr 28 2017 Put Option - Closed
I was able to realize profits of $75.95 on this put option in just 1 days time.  You've got to love when things work out right for you.  Based on the $6,650 of capital securing this position that's a 1.14% return or 6,230% annualized.  

Microsoft Corporation (MSFT) - Put Credit Spread Earnings Play

Since I put on 2 different earnings plays that had the same underlying thesis, bullish to neutral, you can really tell the difference between undefined and defined risk strategies.  The put credit spread provided a much higher return on capital while the put above put option produced much higher profits.  That's the tradeoff between the two.
dividend growth investing, income investing, option strategy, put option
Microsoft Corporation (MSFT) Apr 28 2017 Put Credit Spread - Closed
I was able to realize profits of $26.57 on this put spread.  Since there was $72.29 in capital at risk that's a 27% return on capital.  I was able to capture 96% of the maximum profit potential in 100% of the days until expiration.

Health Care SPDR ETF (XLV) - Iron Fly 

This trade hasn't exactly been going as planned and since I had two positions on, user input error, I figured it was best to take one off at a small profit and use the capital elsewhere.
dividend growth investing, income investing, option strategy, put option
Health Care SPDR (XLV) May 2017 Iron Fly - Closed
I was able to realize profits of just $6.84 on this trade.  Since there was $203.58 in capital at risk that's just a 3% return.  

Currency Shares Euro Trust (FXE) - Iron Butterfly

This is another trade where things weren't really going as planned and I honestly kind of messed things up on order entry.  The implied volatility in FXE, the USD:EUR exchange, was quite high leading up to the French run-off election last week.  However, where I messed up was the fact that should things go as expected with the run-off the FXE was likely to increase.  On order entry I centered my iron fly, but in retrospect I should have skewed it a bit to the upside for the expected scenario to play out.  I can't complain about making a profit though.
dividend growth investing, income investing, option strategy, put option
Currency Shares Euro Trust (FXE) May 2017 Iron Fly - Closed
I was only able to realize profits of $5.84 on this trade primarily due to the post election results volatility crush.  Since there was $218.58 in capital at risk on this trade that's just a 3% return on capital.  

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.

April was by far my best month ever for options trading although a good chunk of that came from successful earnings plays.  I don't really care though how the profits come as long as they keep doing so.  In April I generated net profits of $2,071.79 via options trades.  Year to date my realized profits are $6,864.94.

I've updated my Option Summary page to reflect these changes.

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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1 comment:

  1. You have been a busy beaver! I'm with you on not counting chickens before they are hatched. I report for blog purposes premiums earned AFTER expiry.

    ReplyDelete