Wednesday, May 13, 2015

Option Trades

I decided to place 2 option trades today. The first trade involved collecting premium and the other option was going long.

Option Trade #1

For the first trade, I sold one (1) contract of Telus Corporation at $40 strike price at $0.46. The expiration date is June 19, 2015. Telus Corporation, whose ticker symbol is T on the Toronto Stock Exchange (TSX) is in the communications space and competes with Shaw Communications, Rogers Communications and Bell Canada Enterprises.

Scenario 1:    Option not assigned

Option Premium including commission  = $46.00 -$10.95  = $35.05
Days to Expiration :  37

Return of Capital = $35.05/(0.20*($4000-$35.05))
                             = 4.420%

Annualized Return of Capital = ROC/37*365
                                                 = 43.6%

In a margin account, an investor only has to have 20% of break even roughly for capital upfront.

Scenario 2 :

If option is assigned:
Option assignment fee : $24.95

Cost Basis  = # of contracts *100 shares*strike price - (option premium less comm)+assignment fee
                   = 1*100*$40-$35.05+$24.95
                   = $3989.90

The annual dividend rate of Telus Corporation is $1.68 per share.

Yield on Cost = 1.68/(3989.90/100))
          = 4.211%

If I placed a limit order with $40.00 price, my yield on cost will be lower. My commission would be $4.95

Yield  on Cost= 1.68/(4004.95/100)
          = 4.195%

Selling put options can reduce your cost basis. With a reduced cost basis, the yield will be greater and therefore your money will be working harder for you. Selling a put option allows you to collect income while waiting for the price to go down.

Note: Selling put options is risky. It can be used in a variety of ways. I only sell put options in stocks I am comfortable owning at the strike price.

Option Trade #2

      On May 13, the share price of Canadian National Railway (CNR.TO) was trading below $74.00 a share. I am bullish on the stock.  I recently bought shares of the stock in my TFSA, which you can read about here. I could of averaged down on the shares but I only have around $440 in this account. I wanted to take advantage of this falling share price. I decided to BUY a call option with a $74.00 strike price.  So I placed a limit order for 2 contracts of $1.90 with a June 19, 2015 expiration date.

Summary of CNR.TO Option Trade

Cost of 2 contracts : 2 * $1.90 +$11.95 = $391.95
Days to Expiration  = 37

Disclosure : I currently own CNR, SJR.B, RCI.B, BCE

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.

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