That's How I Roll

dividend growth investing, option strategy, call option, put option, income investing
Target Corporation (TGT), United Parcel Service (UPS) 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 mentioned in yesterday's post that there were still a couple of other option moves that I made last week that required further explanation.  Frankly I was running out of time and the post was getting long anyways so it was best to split it into 2 posts.  

Target Corporation (TGT) - Rolled Put Option

I had originally sold a put option on Target back on January 19th.  Target's share price had gone through an epic run to the downside taking it's share price from around the mid-$70s to the mid-$60's in relatively short time.  My original intention/thesis with this trade was that I didn't mind adding more shares of Target at nearly a 3.80% yield, but that we would see Target's share price rebound allowing me to book a profit on the trade.  

Well, that's not exactly what happened.  Target's share price has drifted a bit lower than when I originally wrote the put option and was in the money as of last week.  That led me to question whether I truly wanted to own more shares of Target since I currently own 128 shares of the company.  It wouldn't be the worst thing in the world so instead of just buying to close the position I rolled it out in time to collect more credit.

So here's how thing stand now.

dividend growth investing, financial independence, income investing, option strategy, put options
Target Corporation (TGT) Rolled Put Option
When I sold the original put option I had collected $114.95 via option premium.  However, to roll the position that cost me $202.04.  Since time has a value I was able to move the contract out by about 2 extra weeks and collected $276.95.  All told the net credit I received on the roll was an additional $0.75 per share bringing the total credit received up to $1.90 per share.

The effective purchase price on the original contract was $63.85, but since I received an additional credit on the roll my new effective purchase price, or break-even price, is $63.10.  That's an additional 1.2% of downside protection to move out in time by 2 weeks.

Should the new March 3 put option expire out of the money I'll have collected a total of $189.86 in option premium.  That would represent a 2.92% return from the premium or 27.71% on an annualized basis.

In hindsight I probably shouldn't have made the roll decision just yet.  The share price was trading around $63.50 to $64 last Thursday which was in the money.  However, there was still about 2 weeks left in the contract at that time.  Since options see the time value come out of the price the closer you get to expiration exhibiting some patience would have been the better route.  Live and learn I guess.  Although I can't really complain about getting further downside protection should the contract remain in the money or if the share price does get a bit of a bounce up above $65 then I can potentially earn an even better return than the original contract.

United Parcel Service (UPS) - Rolled Put Option

I didn't get a chance to even report opening this position before having to make an adjustment.  Such is life sometimes.  On January 30th I entered into a put option contract with a $115 strike price expiring on February 10th.  Since UPS was announcing earnings on January 31st and should be announcing a dividend increase sometime around expiration I figured it was a reasonable play to capture some premium since the share price was sitting around $117 when I entered the position.  

Apparently that was a wrong move.  United Parcel Service missed earnings estimates by $0.06 per share, although they still showed solid growth year over year.  Unfortunately, market participants crushed the share price the following day two days taking the price down to just over $103.  That's an 11% down move in a very short time.  

Whenever I write options contracts the goal is always to structure them such that I'm comfortable owning shares should they be executed.  While I was just fine owning shares of UPS for just under $114 per share it's a bit hard to stomach when you see the current share price down around $103/4.  

So I decided to roll out the put option to buy me a bit more time and also improve my break-even point.

dividend growth investing, financial independence, income investing, option strategy, put options
United Parcel Service (UPS) Rolled Put Option
The original put contract brought in $104.95 via option premium.  Although with the share price seeing a massive decline that did little to help things out.  I bought to close the February 10th contract which cost me $997.04, ouch!, but I did receive $1,067.93 when I opened the new contract expiring February 17th.  I received a net credit of $0.71 per share to roll the contract out a week in time and in total I've received credits of $1.76 per share.  

The effective purchase price of the first contract would have been $113.95.  However, since I received an additional credit to move out a week in time my new break-even price is $113.24.  That's an additional 0.6% of downside protection to move out 1 week in time.

Should the new February 17th put option expire out of the money the premium return would be 1.53%.  On an annualized basis that works out to a 36.06% return.  Although I don't consider this to be too realistic considering the share price is currently sitting at $106.95 and is still about $8 in the money.

My plan going forward is to just kick the can down the road as long as I can to improve my situation.  It might not be the most efficient use of capital since the $15,000 will be tied up as long as the contract is open, but with the contract currently well in the money I won't be able to do much in the way of call option premium to improve my situation.  That $6+ per share loss would be hard to overcome.

I would typically have looked to roll further out in time, but the way the markets were working it would have been essentially the same credit to move to March 3rd as it would have been to move out to February 17th.  I decided to take the $0.70 per share on the 1 week roll out and with the goal to roll out once again to sometime during March for another credit.  If the share price cooperates then I'd even be willing to roll the strike price down for a smaller credit or for even money.

United Parcel Service (UPS) - Sell to Open/Buy to Close Put Option

I opened this additional put option in United Parcel Service as a defensive move for the previous $115 put option that moved well in the money.  The idea behind the move was that the selling pressure was likely done and the worst case scenario would see me add an additional 100 shares of United Parcel Service for a much lower price.  In that scenario I would have owned 200 shares of UPS at $107.95 as opposed to $100 shares at $113.95.  That would have been a little bit easier of a hole to dig out of than if I didn't try and get offensive with my defense.

dividend growth investing, financial independence, income investing, option strategy, put options
United Parcel Service (UPS) Feb 24 Put Option - Closed
By itself this put option generated $57.91 in net profit.  Based on the $10,300 required to secure the contract that's a decent 0.56% return.  That was earned in just one day so that annualized return jumps way up to 675.09%.  If I get a chance to capture 55% of the maximum profit in only 5% of the time I'm going to take it.

Since this put option was opened for the purposes of defense of the original $115 put option I need to report a slight change to the rolled contract situation from above.  

dividend growth investing, financial independence, income investing, option strategy, put options
United Parcel Service (UPS) Rolled Put Option - Revised
I've now received a total of $2.34 per share in credits surrounding United Parcel Service.  The $1.76 from the rolled put option as well as the additional $0.58 credit from the closed $103 put option.  

Accounting for all credits received my effective purchase price will be $112.66 compared to the $113.95 had I done nothing.  That's an additional 1.1% cost basis improvement compared to the original set up.

That's still not ideal since the current share price is around $107, but it's getting better.  Moving forward my plan is still to look for opportunities to roll out the $115 strike put option for a credit or to roll it down and out to a lower strike price if I can get it for even money or a credit.  I'll also be on the search for opportunities to enter into at most one more put option at a time to try and improve my cost basis much like the $103 strike put option that I just closed.

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 February I've been able to generate $249.68 in profit via closed/expired options.  Year to date I've collected $1,879.07 in option premium profit.  

Also, I've changed how I'm going to report contracts that I decide to roll.  I had originally been including the profit/loss at the time any contract was closed; however, since the position is still technically open it doesn't give a good picture of the monthly profit/loss.  From here on any contracts that are rolled, including the Target and United Parcel Service put options, will not have any of the gains/losses reported until the entire position is closed and will be reported in that months tally.

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

If you sell put options have you been in a situation where the share price falls hard through your strike price and your break-even?  Did you take an active approach to defense of the position or did you just take the shares?   

Please share your thoughts below!

Image source


  1. Thanks for the description of these transactions. Have you used or do you use credit spreads to reduce the amount you have to hold during the time the positions are open? The credit spreads generate less net credit but significantly reduce the amount required to be held to the difference between the strikes * number of shares.

    1. Phaedrus,

      I've toyed with credit spreads a little bit, but haven't really gone too deep in them for a couple of reasons. One is that my trading costs at my current brokerage are too high so it doesn't make sense. You just can't get enough profit/credit after the roundtrip commissions. And two, I'm primarily executing these options in my Rollover IRA and eventually want to build up some core positions as opposed to strictly generating options income. Likely in 2018 I'll be exploring some other low cost brokerage firms so I can be a bit more active with options trading and employ spreads.

      If you're referring to essentially buying a put further out of the money to create the spread and reduce capital requirements I've thought of doing that, but in the end I don't see enough value there to do so. I might try just to see but it would fall more under the more active options trading route as opposed to alternative ways to enter positions. It's something I've thought about, but decided in the end it probably wasn't for me within my IRA.

      Thanks for stopping by!

  2. JC -- thanks for the rundown on your options trades. I like your thinking about kicking the can down the road. I've rolled a few options myself (now that it is not costing me so much!) and will report on these trades soon. It is good that more DGIs are getting into options trading -- this allows us to trade ideas.

    Take care!

    1. Ferdi,

      With the UPS put it was the only real option with the share price tanking as hard as it did. I probably should have waited a bit longer before making the decision about the Target put but I was able to collect a nice credit on the roll so I went with it.

      A few years back I was using options, rather sparingly, but still generating $1k of additional income per year. Then I had to take the time off because of "life" and low available capital. But now that I have my 401k rolled over it's awesome. I agree it's good to see other bloggers/investors using options.

      Thanks for stopping by!

  3. Hi, I took the short put with target too. The share price dropped one day after the opening of the short put. I do not take any action in my option trading. I let the numbers play out themself.
    What i am going to do is only sell another short put at a lower strike price to decrease my average share price. After this I sell covered calls till I get assigned again.

    best regards

    1. ED,

      I think I was too early with making the decision regarding the Target put, but I can't complain because I was able to collect a decent credit. Normally I would probably just let it go closer to expiration, but I was a bit "overexposed" via put options so I wanted to buy myself a bit more time. I was able to collect a good credit on the roll, an additional ~1%, so I'm still happy with that decision.

      Thanks for stopping by!


Post a Comment