Wednesday, May 24, 2017

Option Positions From The Week of May 15th


dividend growth investing, option strategy, call option, put option, income investing
Option Activity for the Week of May 15th
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.  


Last week was a bit slower week in terms of new options positions with 10 new or adjusted positions.  That might seem like a lot although compared to the activity of the last few weeks that was actually a slow down.  Although there were still plenty of moves made last week with 20+ positions being close in addition to all of these opening positions.

With that many trades to report on I'm once again breaking the weekly option recap post in two.  Today's post will cover all of the opening or rolled positions.

*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 brokerage 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.

Opening Positions:

Union Pacific (UNP) - Put Option

Sometimes the markets cooperate and give you the chance to scalp some profits and then quickly lay the same option position back out with just as compelling of an opportunity.  That's exactly what happened here as I closed my previous June put option on Union Pacific earlier last week and then sold it back out after the markets sold off.
dividend growth investing, income investing, option strategy, put option
Union Pacific (UNP) Jun 2017 Put Option - Opened
If Union Pacific's share price is below $105 at expiration then I'll have to purchase 100 shares at en effective purchase price of $103.43 or approximately 3.9% lower than the current share price.  The YOC at that cost basis would be a decent 2.34% with an okay valuation of 20.4x 2016's earnings and 18.0x 2017's estimates.

If Union Pacific's share price is above $105 at expiration then I'll get to keep the full option premium received as profit.  The $156.95 would be a solid 1.49% return on the $10,500 in capital securing the contract which equates to a 19.8% annualized return.

Advanced Micro Devices (AMD) - Put Option

I decided to lay out another put option on AMD because there's compelling option premium to be had.  I don't want to take these shares so if the shares are put to me my plan will be to aggressively sell call options against these shares in order to have them called away.
dividend growth investing, income investing, option strategy, put option
Advanced Micro Devices (AMD) Jun 2017 Put Option - Opened
If AMD's share price is below $11 at expiration then I'll have to purchase 100 shares for $10.56 per share.  This put option offers a potential purchase of shares at a 10.7% discount to the price AMD was trading at position open.

If AMD's share price is above $11 at expiration then the contract would be OTM and I would get to keep the full option premium as profit.  The $43.95 in option premium would represent a solid 4.00% return on the $1,100 in capital securing the contract.  If held through expiration that would equate to a 61.1% annualized return. 

Facebook (FB) - Put Broken Wing Butterfly

I really like the broken wing butterfly position as an add on to the standard spread trades.  The broken wing butterfly's can be done for a net credit which means there's no risk to the opposite side of the trade, i.e. if the underlying's share price moves higher in the case of a put BWBF then everything is OTM and you keep the credit received at order entry.  What really intrigues me though is the fact that the position has a built in sweet spot where the profit potential accelerates.
dividend growth investing, income investing, option strategy, put option
Facebook (FB) Jun 9 2017 Put Broken Wing Butterfly - Opened

I received $15.42 in option premium to open this position.  The maximum potential profit on this trade is $115.42 with a maximum possible loss of $84.59.  At expiration the breakeven point would be Facebook trading at $145.85.

If Facebook is trading above $145 at expiration then all of the contracts would be OTM and I would just keep the option premium at profit.  

If Facebook is trading below $142 at expiration then I will realize the maximum loss on this trade.

If Facebook is trading at $144 at expiration then I will realize the maximum potential profit on this position.

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

General market valuations are stretched and in my opinion seem to be baking in a lot of the campaign promises as certainty when they are far from it.  Plus a healthy 5-10% pullback in the markets wouldn't be a bad thing or unexpected given the moves of the last 6 months.  For that reason I decided to place a bearish bet on the market with a call credit spread.
dividend growth investing, income investing, option strategy, put option
SPDR S&P 500 ETF (SPY) Jun 30 2017 Call Credit Spread - Opened
The max potential profit on this trade is the credit received at order entry of $30.71.  The maximum potential loss is the width of the spread less the credit received or $69.29.

If SPY is trading below $243 at expiration then I will realize the maximum profit on this trade.  The $30.71 profit would be a 44.3% return on the capital at risk on this position.

If SPY is trading above $245 at expiration then I will realize the maximum loss on this trade of $69.29.

My goal is to close this position early at 50% of the credit received.

SPDR Gold Trust (GLD) - Put Credit Spread

I still remain bullish on gold at these levels both for the short term and the intermediate term.  While I'm not a fan of gold as a long term investment, that doesn't mean it can't be used as a way to generate investment returns.
dividend growth investing, income investing, option strategy, put option
SPDR Gold Trust (GLD) Jun 2017 Put Credit Spread - Opened
The maximum potential profit on this trade is the $29.71 credit received at order entry.  The maximum possible loss is the width of the spread less the credit received or $70.29.

If GLD is trading above $118 at expiration then I will realize the maximum profit on this position.  The $29.71 profit would be a 42.3% return on the $70.29 of capital at risk.

If GLD is trading below $117 at expiration then I will realize the maximum loss of $70.29.

My target is to close the position early at 50% of the credit received.

Apple (AAPL) - Put Broken Wing Butterfly

My previous put broken wing butterfly on Apple worked out well and generated a solid return so I laid out another one to try and take advantage of any potential down move in Apple's share price.
dividend growth investing, income investing, option strategy, put option
Apple (AAPL) Jun 23 2017 Put Broken Wing Butterfly - Opened
I received $13.42 in option premium to open this position.  The maximum potential profit on this trade is $113.42 with a maximum possible loss of $86.59.  At expiration the breakeven point would be Apple trading at $147.87.

If Apple is trading above $150 at expiration then all of the contracts would be OTM and I would just keep the credit received as profit.  

If Apple is trading below $147 at expiration then I will realize the maximum loss on this trade.

If Apple is trading at $149 at expiration then I will realize the maximum potential profit on this position.

Lowe's Companies (LOW) - Put Ratio Spread

I can't really figure out some of the rules regarding trading options in an IRA.  Take this position for example.  I can sell a put broken wing butterfly with the broken wing way OTM to create a synthetic put ratio spread, but I can't sell a put ratio spread outright.  Or I can sell 2 put options and buy the higher strike one in separate transactions to create the same position, but I can't do it all in one even if everything is still held as cash secured.  Thus the need to do this put broken wing butterfly as a synthetic put ratio.
dividend growth investing, income investing, option strategy, put option
Lowe's Companies (LOW) May 26 2017 Synthetic Put Ratio Spread - Opened
I received a net credit of $53.82 upon opening this position.  The maximum potential profit on this trade is $153.82.

Since I'm treating this as a synthetic put ratio rather than a broken wing butterfly things play out a bit differently.

If Lowe's is trading above $83 at expiration then all of the contracts will expire OTM and I'll just keep the premium received as profit.

If Lowe's is trading at $82 at expiration then I'll realize the max profit of $153.82 at expiration.

If Lowe's is trading between $82 and $83 then I will realize a profit somewhere between $53.82 and $153.82.

If Lowe's is trading below the $80.46 breakeven point then I'll close out the put debit spread that would reach the max profit of $100 and let the other put contract be executed.  That would put my effective purchase price for 100 shares of Lowe's at $82 - $1.00 - $0.5382 = $80.46.

Rolled Positions:

Overall I've been quite successful with using options as means to generate investment income; however, not every position is a winner and that means rolling the position out if possible.

iShares Silver Trust (SLV) - Put Option

This put option was originally part of a covered strangle I had sold on my SLV shares that were put to me.  Since SLV had declined significantly since opening this position the call expired OTM and I was left with the decision of whether I wanted to take ownership of 100 more shares of SLV or roll the contract further out in time.
dividend growth investing, income investing, option strategy, put option
iShares Silver Trust (SLV) May 2017 Put Option - Rolled
I wasn't able to pick up much in the form of additional credit on this trade because SLV was well below the $17 strike of the put option.  By extending the duration of this trade by about 1 months time I received an additional $0.03 per share in option premium.  That brings the total credits received to $0.48.  My breakeven was reduced to $16.52 from $16.55 or 0.2%.

If SLV is trading above $17 at expiration then the contract will be OTM and I would be able to keep the full credits received as profit.  The $0.48 of option premium would be a 2.82% return on the $1,700 of capital securing the contract.  The annualized return from the date the original contract was opened would still be a hefty 16.3%.

Colgate-Palmolive (CL) - Covered Call

My original plan with this position was to acquire shares prior to the last ex-div date and sell calls against the shares to have them called away and free up some capital.  That hasn't quite worked as planned as the 2 call options I've written against the shares have been OTM, but that's fine by me too since I've been able to reduce my cost basis from $73.74 to $71.65.  

Word came out last week that Colgate's CEO would be willing to sell the company for $100 per share which would be about a 30% premium to the current share price.  The share price popped about $2 per share on that news.  While I'd like to free up that capital for other opportunities, I'm also just fine holding the shares, writing calls and reducing my cost basis to levels that I'm comfortable owning shares at.  

I didn't expect to be able to roll this call out for this hefty of a credit especially since I was able to do so while also rolling the contract up in strike.
dividend growth investing, income investing, option strategy, put option
Colgate-Palmolive (CL) May 2017 Covered Call - Rolled
I was able to pick up an additional $0.80 per share by extending this trade by one month's time while simultaneously picking up an additional $1.50 in intrinsic value should the contract be ITM.

The original position's effective sale price was $74.24.  After accounting for the additional option premium and higher strike, the new effective sale price would be $76.54 which is about a 3.1% improvement.

If Colgate's share price ends below $75 at expiration then the contract would be OTM and I would get to keep the full option premium as profit.  The $1.54 per share in option premium would represent a 2.05% return based on the new $75 strike of the call option.  That would be equivalent to an annualized return of 17.5%.  This would also further reduce my cost basis to $70.11.

Junior Gold Miners ETF (GDXJ) - Put Option

With the rebound in the junior gold miners last week I took the opportunity to roll this put credit spread further out in time.  If you recall I had rolled it the prior week, but had a bit of a mishap and rolled it for a debit so I was looking for a chance to roll the position again for a credit.
dividend growth investing, income investing, option strategy, put option
Junior Gold Miners ETF (GDXJ) Jun 2017 Put Credit Spread - Rolled
I was able to pick up an additional credit of $16.42 by rolling this position out in time by about 3 weeks.  That brings the total credits received to $47.55 after accounting for the original credit received, the debit on the first roll and the credit received on this roll.  This reduces the capital at risk on this position to $152.45.

If GDXJ is trading higher than $33 at expiration then both contracts would be OTM and I would realize the max profit on this trade.  The $47.55 profit would be a solid 31.2% return on the capital at risk.

If GDXJ is trading lower than $31 at expiration then I will realize the max loss on this position.

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.

The first 2 weeks of May have been fairly profitable in terms of option profits despite a few hiccups.  Through the first 2 trading weeks of May I've generated profits of $1,075.17.  Year to date I've realized net profits of $7,213.71.

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!


Image source


2 comments:

  1. JC - How would you suggest learn about option? The simple call and put I think I can do, but the other option seem like a zoo. Can suggest any books, or training programs ( is it worth spending money on program or mentor. ) Thanks, Jason

    ReplyDelete
    Replies
    1. Jason,

      I've heard that "Options As A Strategic Investment" is a good book to learn about options, but I haven't read any books about them. I keep trying to find that book but can't ever find it at a used book store so I'm still waiting.

      I've pretty much self taught myself via online resources. Option Alpha has a good strategy guide that's free that covers the ideal environment to place different strategies as well as the underlying thesis of each trade. I also listen to the TastyTrade podcast, Option Alpha has one as well.

      If you're interested in getting into some of the other strategies the vertical spread is pretty much the most basic. If you're bullish you use puts and if you're bearish you use calls. Both strategies are the same in terms of set up where you sell an OTM option and then buy a further OTM option to define the risk.

      If you have any other questions feel free to ask away.

      All the best.

      Delete