Wednesday, July 9, 2014

Recent Trade

On June 21, 2014, My naked put on RCI.B at $44.00 strike price was assigned. You can read about that trade here.  Since them, I tried to write a cover call but the limit order did not go through. 

Recently, I decided to place another limit order with a premium of  $0.68 for a put option on Roger's Communications.   This was  a 2nd "sell to open"  put option, which means if the order goes through I am paid a premium.  Since 1 contract represents 100 shares, I was paid $57.05 after commissions. I am paid a premium as I make a  "promise" that I will buy 100 shares of RCI.B at the strike price of $42.00 if the stock price falls below $42.00 and it is assigned.

Click to enlarge

3 possible outcomes :

            (1) If the stock goes up,  I made $57.05 without putting up any money.

            (2) If the stock goes sideways and the stock doesn't fall far enough, I made $57.05.

           (3) If the stock goes down below the strike price of $42.00 and his assigned, then my cost basis is lowered.

What is my adjusted cost base if put is assigned?

ACB= # of contracts*100 shares*strike price - [option premium - option premium commission]   +commission for option being assigned.
                                  = 1*100*$42.00 -[$68.00 -$10.95]+$24.95

RCI.B currently pays an annual dividend of $1.83/share.   YoC=1.83/41.6790=4.391%

How is this different if I bought the shares outright without an option?
     Cost of 100 shares  =$4200
     Commission = $4.95
     ACB/share =  $42.05
     YoC=   1.83/42.05 = 4.352%

The yield on cost is greater where a put was sold and assigned over just buying the stock outright. This means my money is now working harder for me. Selling a put option allows me to get paid while I am waiting for the price of a stock to go down to a point that I am comfortable buying it.  The other option is to put in a limit order to buy the stock at $42.00 and wait.

NOTE:  Selling puts is deemed to be risky, as the stock can go to zero or decrease in value really quick.

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

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