Tuesday, May 2, 2017

Option Trade



        The big banks in Canada have falling in value recently. This decrease in value can be the result of a lot of things currently.  We are due for a recession in North America ,as historically, we have had a recession every 8-10 years.  Currently, right now Alberta is in a recession all of its own in Canada.  The province of Alberta major employer is the oil and gas industry.  The oil and gas industry involves drilling companies, production companies, oilfield service companies and companies whose derive a lot of business due to indirectly serving the oil and gas industry.  My previous employer made machined parts for the oil and gas industry and had one major client.

        A major issue in central Canada is the housing situation in Ontario in their largest city which is Toronto. Toronto and its adjacent areas such as Mississauga are part of what is known as the GTA.  The prices of houses here extremely high due do the population.  The mayor of Toronto and some members of their provincial government are concerned about a possible housing correction as they believe many people will not be able to afford their homes. Our interest rates are extremely low right now.  When they start to rise, the will mean higher mortgage payments eventually for the people.

       The other major city in Canada with similar high priced homes is Vancouver.  Vancouver is located in British Columbia. 

      So on May 2, I sold a put option in TD with a May 26, 2017 expiration day.  I collected a premium of $41.05 after commissions.


Strike Price: $62.50
Total Premium Received : $41.05
Days to Expiration: 24
Current Annual Dividend = $2.40
 Option Assignment Fee = $24.95

Scenario #1 :  Option not assigned

Total Return = $41.05 / (1*100*$62.50)
                     = .0066
                     = 0.66%

The total return for 24 days is 0.66%.  The annualized return is 9.99%.  For comparison, my interest savings accounts pays an annual interest of 0.80%.

Scenario #2:  Option is Assigned 

Adjusted Cost Base  per share= [1*100*$62.50- $41.05 +$24.95] / 100
                                                = $62.34

Yield on Cost = $2.40/$62.34*100 %
                       = 3.850%

 What would the yield be if shares purchased directly at $62.50 using a limit order?

Commission = $4.95

ACB/per share = [1*100*$62.50+$4.95 ] / 100
                         = $62.55

Yield on Cost = ($2.40/ $62.55) * 100%
                       = 3.837%

Disclosure:  Long 100 shares of TD.TO in my margin account.

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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