Wednesday, May 10, 2017

Option Trade

          The big banks in Canada have falling in value recently. In particular, Royal Bank of Canada (RY.TO) has falling from it's 52 high of $99.90 from a few months ago.  RY.TO is currently trading at  $93.33 per share.

       The major topic in the news in Canada is the company called Home Capital Group (HCG.TO).  The company provides high interest savings accounts for savers at low interest rate and then writes mortgages with a higher interest rate, and basically makes money off the difference.  This business model has been failing as savers have been pulling there money out in droves.  The savers are doing this as they do not feel comfortable having their money there due to recent events happening to HCG.TO.  HCG.TO has recently gotten a $2 billion line of credit from Health Care of Ontario Pension Plan, which they have used approximately 1.4 billion dollars of to stay a float.

       In Canada, there is high cost of housing in Vancouver, Toronto, Edmonton, Calgary and Fort McMurray.  The highest of these costs and in Vancouver and Toronto.  Some people are talking about a possible housing correction, so this has caused the bank stocks to trade lower as of late and slightly offset with investors chasing yield by purchasing shares in the banks.

      So on May 10, I sold a put option in RY with a May 19, 2017 expiration day.  I collected a premium of $41.05 after commissions.


Strike Price: $92.00
Total Premium Received : $36.05
Days to Expiration: 9
Current Annual Dividend = $3.48
 Option Assignment Fee = $24.95

Scenario #1 :  Option not assigned

Total Return = $36.05/ (1*100*$92.00)
                     = .00392
                     = 0.392%

The total return for 9 days is 0.392%.  The annualized return is 15.89%.  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*$92- $36.05+$24.95] / 100
                                                = $91.89

Yield on Cost = $3.48/$91.89*100 %
                       = 3.787%

 What would the yield be if shares purchased directly at $92.00 using a limit order?

Commission = $4.95

ACB/per share = [1*100*$92.00+$4.95 ] / 100
                         = $92.05

Yield on Cost = ($3.48/ $92.05) * 100%
                       = 3.781%


      From Scenario #2, we can see the yield on cost would be roughly the same although receiving a net premium of $36.05.  The option assignment fee of $24.95 greatly reduces the difference between the yield on cost of option assignment to that of purchasing shares out right.  Not all brokerages have an option assignment/exercise fee.

     As of this time, I do not plan to open an account with Interactive Brokers. I will open an account with Interactive Brokers in the future.

Disclosure: Currently do not own any shares of RY.TO in any accounts.

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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