Closing Puts and Testing Out New Strategies
|Stryker Corporation (SYK), Becton, Dickinson & Company (BDX), Medtronic plc (MDT), Starbucks Corporation (SBUX) & Realty Income (O) Option Activity|
The last two trading days have seen lots of action within my portfolio. My strategy is to be a bit more active in the options market to generate extra income now and purchase shares at a discount since I have a large amount of capital due to my 401k Rollover.
There's lots to report with 3 positions being closed and 2 new option positions being opened. The 2 new positions are new to me in several ways since they stray from my typical strategy of just selling covered calls or puts.
Stryker Corporation (SYK) - Buy to Close Put Option
On Friday, December 9th I closed out the open put option that I had on Stryker Corporation. If you recall I opened the position on November 9th and received $139.95 of premium upfront in exchange for giving someone the right to sell me 100 shares of Styker. Well, Stryker's share price is still solidly above the $95 strike price of the put option, meaning it's out of the money, so I decided to buy the option back to close it out.
|Styker Corporation (SYK) $95 Mar 17, 2017 Put Option - Closed|
I could have let this put option go on longer and held out for more profit; however, I figured it was better to lock in a solid profit and use that capital for other opportunities should they come up.
Becton, Dickinson & Company (BDX) - Buy to Close Put Option
Friday was a pretty active day for me as I closed out another put option that I had open. Becton, Dickinson & Company, and the health care sector in general, has been quite volatile over the last month. BDX's share price has been all over the place since this option was opened trading over $175, then 2 days later it was at $162, 3 days after that $173, then was steady for about a week and then traded back down to $163 and then worked it's way back over $166 on the day I closed the position. That's some pretty big swings although the put option never once moved in the money.
|Becton, Dickinson & Company (BDX) $160 Dec 16, 2016 Put Option - Closed|
In total I was able to generate a $64.91 net profit or 0.41% return based on the capital "at risk". On an annualized basis that return represents a 5.05% return.
I was tempted to let this option go through to expiration; however, with as much craziness that the share price had seen I decided it was best to close it out and lock in the profit.
Medtronic plc (MDT) - Buy to Close Put Option
Apparently the last few days have been a health care put option closing bonanza. This was one of the shorter trades that I've done and it thankfully it worked out wonderfully.
On November 22 Medtronic's share price sold off as much as 10% intra-day after announcing earnings and lowering their guidance slightly. That was a huge move and in my opinion it was unwarranted considering the change to their guidance wasn't significant, although it was a decrease to their prior guidance.
|Medtronic plc (MDT) $73.50 Dec 16, 2016 Put Option - Closed|
In total I was able to generate a net profit of $94.91 or 1.29% based on the capital "at risk". Since the option was only open 20 days that works out to a 26.40% on an annualized basis. That's more like it.
Starbucks Corporation (SBUX) - Sell to Open Call Credit Spread
I've never used a call or put spread before; however, I've been researching the strategy for the past few weeks. I've got a good grasp on the concept although there's nothing like opening a position in order to really learn about it.
The basis of a call credit spread is a bearish directional bet on the underlying security. It entails buying a call option and selling a lower strike call option on a security for a net credit. The bad thing about credit spreads is that your profit is defined when the position is opened, although so is your risk. So you know when you open the position the most you can make and the most you can lose.
|Starbucks Corporation (SBUX) Jan 2017 $57.50/60 Call Credit Spread - Opened|
Let's start with the easy ones. The maximum risk or loss that I can take is $128.54 and which would happen if Starbucks' share price is at $60 or higher. The maximum profit I can make is $121.46 which would happen if Starbucks' share price is at $57.50 or lower.
Between those 2 levels though things vary depending on what price Starbucks is trading at on expiration. The important level to know within this range is the break-even price which is the price that Starbucks must be trading lower than in order for me to start generating a profit. Based on this call credit spread that works out to $58.71.
As I mentioned earlier this is a directional bet that between now and expiration date Starbucks will trade lower than $58.71 in order for me to start generating a profit which is just about where the share price currently sits. Ideally the share price would move well below the $57.50 level. My target to exit this position is capturing 50% of the max profit or ~$60.
Realty Income Corporation (O) - Sell to Open Call Credit Spread
I wasn't satisfied with making just one call credit spread; I just had to make another one. The second one was opened on dividend favorite Realty Income.
|Realty Income Corporation (O) Jan 2017 $55/60 Call Credit Spread - Opened|
Between the two strike prices the important price to know is the break-even price, i.e. the price that the shares must be trading lower than in order for you to start making a profit. In this case that's $56.80.
Currently the share price is trading at $56.18 so the position is currently profitable. I think this is a pretty solid move considering the likely move in Realty Income's share price is lower rather than higher.
As in the Starbucks call credit spread I'll look to close out the position if I can capture 50% of the maximum profit or ~$90.
Overall I'm happy with how the 3 health care put options worked out as they generated solid income via option premium profit over a relatively short time. Thus far in December I've generated $278.74 in option profits and since September I'm currently +$505.15.
Even better is that includes the Target Corporation call option that went horribly wrong and is currently showing over a $320 loss. Excluding that loss since there is still a portion of that trade open since I rolled it up and out brings the profits since September up to $828.89.
I'm not sure how the call spreads will end up working or whether I'll continue to use them in the future although I'm willing to give them a chance to see how they do as far as generating extra income. There's a lot more that I need to learn regarding options trading in regards to credit spreads specifically with probabilities. Although I figure that it's best to jump in with one foot on the shore and one foot in the water in order to test out a new potential option strategy.
I've updated my Option Summary page to reflect this change.
What do you think of these options moves? Do you use put options to effectively set limit order on companies you want to purchase? Have you used call or put credit spreads to make directional bets on a specific security?
Please share your thoughts below!