Saturday, October 11, 2014

Recent Option Trades - Part 2

This is a follow up post on my two recent naked put option trades that I recently did. You can read about the 2 trades here.

For the TD put, there are 3 outcomes.

Option Premium : $82.00
Commission : $10.95
Net Option Received = $71.05

If the stock goes up, I make  money with the option premium of $71.05.
If the stock goes sideways, I still make money with the option premium if $71.05

If stock goes down and put is assigned.

Adjusted Cost basis = $56.00*100+$24.95-$71.05
                                 = $5553.90

ACB per share = $55.5390 / per share

Yield  =  annual dividend rate / ACB = 1.88/55.5390 = 3.385%

Buying the stock with no option     
Cost = $5600+$4.95=$5604.95
 Yield  = annual dividend rate / ACB =$1.88/$56.0495 = 3.354%

 I currently do not own this stock, but with the recent chaos in the market this option will likely be assigned as the price of the stock is less than the strike price.  I also have the choice to buy back the put for a loss to close the transaction.  As is shown above, the yield with the put option is higher than just buying the stock at $56.00. The option assignment fee is $24.95.

For RCI.B put option

Option premium = $70.00
Commission = $10.95
Net Option premium = $59.05

I can make this money regardless if the money goes up, down or sideways.

If stock goes up, I  keep the $59.05/
If stock goes sideways, I keep the $59.05.

If the stock goes down:
Adjusted Cost basis = $42.00*100+$24.95-59.05
                                 = $4165.90

ACB per share = $41.6590 / per share

Yield  =  annual dividend rate / ACB = 1.83/41.6590 = 4.393%

Buying the stock with no option     
Cost = 4200+4.95=4204.95
 Yield  = annual dividend rate / ACB =1.83/42.0495 = 4.352%

I currently own 100 shares of RCI.B, so if this put is assigned it will lower my cost basis for this stock. Currently, RCI.B is trading higher than the strike price so there is a chance the put will not be assigned at expiration.

Note: Selling puts can be risky as the stock can fall a lot in value.  As I plan on holding these stocks for the long term, I did not have insurance on these transactions.

Disclosure : Long TD, RCI.B

DISCLAIMER:

     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 NOT 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

4 comments:

  1. The way you trade options acts like an insurance to your portfolio, right? If the option are exercised you buy at a lower price, if not you earn an extra "dividend". Is that right?

    ReplyDelete
    Replies
    1. Trader,

      The way I am trading the options in the above scenario is that I collect the premium up from for being obligated to buy the stock at the strike price. If the price goes up, I make money. If it goes sideways I make money. If the stock goes down pass the strike price get to the buy the shares at the strike price besides receiving the premium up front. In this scenario, I was slighly bullish on the 2 holdings above.

      I didn't expect the market to pull back. So how could I protect myself if I was wrong? I buy insurance which would be BUYING a put option for less premium than the premium for selling a put option. If I bought a put option near the same strike price, but at a later expiration date, I would be protected. With TD right now, if my option is assigned I down a couple hundred dollars. If bought a put option early, I could exercise it and will be able to sell the shares at the strike price of this option in which my losses are minimalized or I make a slight profit.

      As my scenario in my post, the price of the stock could go to zero.

      Delete
  2. I meant, as you are bullish on those stocks, you wouldn't mind to buy the stocks at at that lower price. Not that you would make money any way. This is the way I see it.

    ReplyDelete
    Replies
    1. Trader,

      As an investor, I would be Ok owning the stock at the lower prices like you stated in your comment here. Selling the put options allows me to get paid if the market while waiting for the stock price to lower. I just started selling put options in the last 6 months or so.

      Delete