03-15-2014, 01:22 PM
As I was working on re-balancing my portfolio recently (see the portfolio thread), I decided to use some options to juice my yields.
I've had good results selling cash-secured puts over the last few years either collecting some relatively huge premiums when volatility was high or getting better prices on assigned stocks than buying them outright. Typically it's been close or below the market low price in the purchase time frame.
However, the only covered call I sold, EMR, was called away during a big market move even though I thought the stock was at the high end of its valuation at the time. Because of this, I've been leery of selling covered calls for fear I'd miss out on a big run up when they were called away.
I'm not an options expert and most of the terms options traders use to discuss evaluating options are foreign to me. For me, it's always been about getting some free money on a wishful bet or into a position I wanted with a slightly lower cost basis.
I usually don't go much past a 60 day strike date since, for cash-secured puts, I don't like my money tied up for much longer. You never know when a bargain someplace else appears. Likewise, if a stock with a covered call starts a steady climb upward, I don't want it called away prematurely.
That being said, these are the trades I made and my reasoning. Wondering what others think. Is my strategy sound?
I've owned a lot of INTC since 2010 with an average cost basis a hair under 20 with all the reinvested dividends. I've already trimmed it twice near the highs at the time but I still need to get rid of 100 shares to bring it where I want it for now. I sold 1 call at $25 a month ago (about 2 months out) for $69. I think it won't get much above that without a catalyst. If it expires, I'll net $58.22 in premium which should work out to a 2.3% gain ($58.22/$2500) over 2 months which annualizes to around around 12%. Am I thinking correctly here? In which case, I turn around and do it again if the premium is sufficient. If it is called, net proceeds will be $25.37 or a gain on those 100 shares of 27% using the average cost basis.
I've owned ABBV since 2011 when it was still part of ABT and kept it after the split. It's still yielding about 3.3% and has good prospects in the pipeline but it will be 2-3 years before any of their major new products come to market. In the meantime, it's relying on Humira and the rest of the off-patent stable to keep the cash flowing. I only really need to get rid of 10-20 shares to bring it in balance with the rest of the portfolio but thought I'd try my hand at some extra income first. With a trailing P/E around 20 and it trading near the highs over the last year, I don't think it's going to jump up much in a month. I sold a call at $52.50 for net proceeds of $109.22 which should yield 2% ($109.22/$5250) in just over a month or about 11-12% annualized. If it's called, the capital gains would be in the 80% range and then I'd go back and sell some puts to put it back in the portfolio. It's a position that I want to hold for the longer term.
Lastly, my gambling itch. Sold a 60 day put on MAT for $36 with net proceeds of $124.22. The balance sheet is pretty good with debt to cash of $1.6B/$1.04B, debt/equity of around 50%, current ratio of around 3.3. Income statement is not bad y-o-y, they were just slammed with Barbie being out of favor over Christmas. They are yielding around 4% with a 55% payout ratio. I wouldn't mind holding it for a value play and then selling for some gains. Their dividend track record hasn't been as good as HAS but the company has been around for a loooooong time and is probably experiencing a temporary setback that they'll figure a way out of. If it expires, I'm expecting to gain 3.5% ($124.22/$3600) over 2 months or around 20% annualized. If exercised, I'll have 100 shares with a net cost basis of $34.96 that I can either sell immediately for a gain of 6% net of commissions or start selling covered calls for more premium. In the meantime, I can collect the 4% dividend while I wait for it to leave the portfolio.
So, is my logic reasonable?
I've had good results selling cash-secured puts over the last few years either collecting some relatively huge premiums when volatility was high or getting better prices on assigned stocks than buying them outright. Typically it's been close or below the market low price in the purchase time frame.
However, the only covered call I sold, EMR, was called away during a big market move even though I thought the stock was at the high end of its valuation at the time. Because of this, I've been leery of selling covered calls for fear I'd miss out on a big run up when they were called away.
I'm not an options expert and most of the terms options traders use to discuss evaluating options are foreign to me. For me, it's always been about getting some free money on a wishful bet or into a position I wanted with a slightly lower cost basis.
I usually don't go much past a 60 day strike date since, for cash-secured puts, I don't like my money tied up for much longer. You never know when a bargain someplace else appears. Likewise, if a stock with a covered call starts a steady climb upward, I don't want it called away prematurely.
That being said, these are the trades I made and my reasoning. Wondering what others think. Is my strategy sound?
I've owned a lot of INTC since 2010 with an average cost basis a hair under 20 with all the reinvested dividends. I've already trimmed it twice near the highs at the time but I still need to get rid of 100 shares to bring it where I want it for now. I sold 1 call at $25 a month ago (about 2 months out) for $69. I think it won't get much above that without a catalyst. If it expires, I'll net $58.22 in premium which should work out to a 2.3% gain ($58.22/$2500) over 2 months which annualizes to around around 12%. Am I thinking correctly here? In which case, I turn around and do it again if the premium is sufficient. If it is called, net proceeds will be $25.37 or a gain on those 100 shares of 27% using the average cost basis.
I've owned ABBV since 2011 when it was still part of ABT and kept it after the split. It's still yielding about 3.3% and has good prospects in the pipeline but it will be 2-3 years before any of their major new products come to market. In the meantime, it's relying on Humira and the rest of the off-patent stable to keep the cash flowing. I only really need to get rid of 10-20 shares to bring it in balance with the rest of the portfolio but thought I'd try my hand at some extra income first. With a trailing P/E around 20 and it trading near the highs over the last year, I don't think it's going to jump up much in a month. I sold a call at $52.50 for net proceeds of $109.22 which should yield 2% ($109.22/$5250) in just over a month or about 11-12% annualized. If it's called, the capital gains would be in the 80% range and then I'd go back and sell some puts to put it back in the portfolio. It's a position that I want to hold for the longer term.
Lastly, my gambling itch. Sold a 60 day put on MAT for $36 with net proceeds of $124.22. The balance sheet is pretty good with debt to cash of $1.6B/$1.04B, debt/equity of around 50%, current ratio of around 3.3. Income statement is not bad y-o-y, they were just slammed with Barbie being out of favor over Christmas. They are yielding around 4% with a 55% payout ratio. I wouldn't mind holding it for a value play and then selling for some gains. Their dividend track record hasn't been as good as HAS but the company has been around for a loooooong time and is probably experiencing a temporary setback that they'll figure a way out of. If it expires, I'm expecting to gain 3.5% ($124.22/$3600) over 2 months or around 20% annualized. If exercised, I'll have 100 shares with a net cost basis of $34.96 that I can either sell immediately for a gain of 6% net of commissions or start selling covered calls for more premium. In the meantime, I can collect the 4% dividend while I wait for it to leave the portfolio.
So, is my logic reasonable?
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan