Channelling Ludacris

dividend growth investing, option strategy, put option, income investing, covered call
Target Corporation (TGT), Halliburton Company (HAL) & Visa, Inc. (V) Options 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.  

Target Corporation (TGT) - Rolling a Covered Call

On Wednesday, Target Corporation (TGT) released their latest earnings report and while I though the results were kind of blah Mr. Market loved it sending shares higher by over 7%.  In one day.  Normally that wouldn't be an issue, but when you have an open covered call option expiring in about a week that doesn't bode well.

Prior to that big jump higher the call option was still out of the money, but not anymore.  On October 14th I sold a covered call option on Target with a $74 strike price.  At the time the share price was just over $68 and the strike price represented over an 8% increase before the call would move in the money.  

That's a risk with writing covered calls and I was left with a few choices.  I could do nothing and likely lose the shares come expiration date assuming the share price doesn't fall back below $74 to move back out of the money.  The other choice was to channel my inner Ludacris.

I decided that instead of doing nothing I would roll my call option out and up.  This move allowed me to gain more option premium while also simultaneously moving the strike price higher.  Unfortunately that was only possible by moving farther out on the calendar.  

To roll out a covered call option that requires you to buy back the original call option, likely at a loss, and then selling another call option.  

Let's look at the trades since there's been a lot of moving parts in order to keep these shares.

dividend growth investing, income investing, option strategy, covered calls
Target Corporation (TGT) Rolling Out and Up of Covered Call
The original call option netted me $20 after commission; however, after the big jump on Wednesday the shares were well in the money with just over 1 week until expiration.  That $74 call option had appreciated quite a bit and the premium was now trading around $3.35.  I had to buy to close the $74 call which cost me $343.74.  Ooops!

I could have just called it a day there and been done with it; however, I wanted to try and recapture some of that "lost" premium and sold to open another call on Target at a later expiration and a higher strike price.  

I'm not all that excited about this trade because even after rolling up/out the call option I only gained $30 of net premium compared to the call I had to buy back.  One more downside to this is how far out I had to go on the calendar to do that.  I pushed this trade out until April of next year.  Sheesh, that's a long time.  

This clearly wasn't ideal, but that's the risk of selling calls which is why I much prefer selling puts instead.  Looking forward this position will likely need more maintenance to generate a profit while keeping the shares.  

Halliburton Company (HAL) - Buy to Close Covered Call

There was a bit more position maintenance that happened on Wednesday and oddly enough another covered call was involved.  As many of you know or have figured out, I worked for Halliburton and received shares via the employee stock purchase plan (ESPP).  

The ESPP was a great way to boost my income up a bit, especially when oil was booming and so was the share price.  However, these are some legacy shares that I still own at a higher cost basis than the current price.  The average cost basis for my entire Halliburton position is around $46.02 and due to the tax rules on ESPP shares I need to sell them for at least a 15% gain which gets me back to break-even with the discount I received when I purchased the shares.  

My thought with the original covered call was to choose something that was well out of the money while not expecting any big moves higher.  The strike price on the call was $49 and unfortunately the share price was trading right around $49 and the expiration date was this coming Friday.  

Since the sale price wouldn't have been over $54 I had to try and find a way to around this.  I decided to just buy to close this call option at a profit rather than rolling it out.  

dividend growth investing, income investing, option strategy, covered call
Halliburton Company (HAL) $49 November 2016 Covered Call
When I wrote the call back at the end of August I received $81 of premium net of fees.  To buy the call option back on Wednesday I had to pay $42.99 after fees.  

Overall it was a decent move to sell the call option.  I generated extra return via the option premium and still own the underlying shares and can write another covered call to try and generate even more premium.  

There's not a whole lot of call options that I'm excited about at this time so I wouldn't expect anything soon although I'll keep scouring the option chain for possibilities.

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

Thursday brought another option that I closed, although this time it was a put option on Visa.  If you remember on Monday of this week I sold to open a $77.50 strike put option on Visa expiring on December 16, 2016.  

The share price of Visa sold off nearly 5% on Monday for no apparent reason which opened up the opportunity to sell a put on Visa.  Normally I don't set out to write a put and close it just a few days later; however, the opportunity came for a solid gain and I went ahead and locked it in.  

dividend growth investing, income investing, option strategy, put option
Visa, Inc. (V) Buy to Close Dec 2016 $77.50 Put Option
I have no complaints about this trade at all, I mean who can really complain about making a profit?  That's a 1.47% return in about 3 days.  Now I just need to find the secret to doing that every 3 days and I'll never have to worry about anything again.  At a 490.89% annualized return $1 would grow to just under $1.5 M in 8 years.  I'm under no illusion that I can repeat this on any kind of consistent basis, but for 10 years that would be almost $52 M.  

I normally would let the put option move further along to start eating more into the time value of the contract; however, in this case I clearly felt comfortable closing it early.  While I was fine with having over $50k committed via put options in my Rollover IRA I also wouldn't mind lightening that up if I can extract at least half of the premium from a put option.

In total my options activity thus far isn't all that impressive with just a $48 gain despite multiple winning trades.  Much of that is due to the Target covered call that I rolled forward.  I don't account for my options activity until a position is closed or expires.  Excluding Target, since technically the trade is still open via rolling the option, my total gains jump up to $372.27.

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

Are you using options to generate additional income from your investments?  Do you prefer to sell calls or puts?  

Please share your thoughts below!

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  1. I do use options to generate additional income. I always start with fundamental analysis to id a stock I want to own. From there the question is buying the shares or buying a deep in the money option. If I buy the stock, I will consider selling an out of the money call. You have to be selective when doing this. The premium strike combination has to be such that you are compensated well.

    1. Josh,

      That's pretty much my go to move. First and foremost it's all about the fundamentals of the business and whether it's something I want to own over the long term. It's pretty rare that I put on positions without the intention of holding the shares long term if need be.


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