Saturday, March 10, 2018

Recent Option Trade

         Over the past several months, WestJet Airlines have made announcements to try to grow as a company.  One of the announcements is the start up of their no frills ultra low-cost airline called Swoop. Swoop is suppose to start flying in June, despite the issues with the union.
        WestJet Airlines started in 1996 with 3 planes and is based out of Calgary, Alberta. Almost all of WestJet employees own shares in WJA.TO, as the company always believes "Owners Care".
         The price of fuel with oil over $60 a barrel, the union thinking different hiring practices for Swoop, and getting Swoop off the ground has been a negative for the stock in recent months.  The shares have faced resistance around $27 per share.  During the last week, WestJet CEO Gregg Saretzy retires unexpectedly. Gregg Saretzy has led WestJet for nearly a decade.

         At the market opening on Friday, the price of WestJet dropped to $23.00 per share.  I decided to take advantage of this.  I sold 2 WJA,TO April 20 2018 $23 put options at $0.70 per contract.


   My brokerage charges an option assignment/exercise fee of $24.95. Not all brokerages charge this type of fee.  I know for sure, Interactive Brokers does not charge this fee.

Premiums received minus commissions = $140.00 - $11.95 = $128.05
Option Assignment Fee = $24.95
Annual Dividend = $0.56 per share
Strike Price = $23.00
Expiration Date: April 20 2018
Days to Expiration : 42

Scenario One : Option not assignment 

Total Return = [$128.05 / $4600]*100
                     =  2.78%

 This represents the return for 42 days.  This return sure beats the interest rate on high interest savings accounts.

Annualized return = 2.78% * (365/42)
                              = 24.19%

 The amount of capital required in a margin account is 20% of break even. So, now lets calculate the return on capital

Return on Capital = $128.05 /(0.20*(4600-128.05)) *100
                              = 14.32%

This ROC of 14.32% is the return on capital for 42 days.

Annualized ROC = 14.32% * (365/42)

Option Two - Option is Assigned 

Adjusted cost basis = $4600-$128.05 + $24.95
                                = $4496.90

Yield = dividend rate / ACB per share
          = $0.56 / ($4496.90 / 200 )
          = 2.491%

For comparison, I calculated the yield if I just bought 200 shares at $23.00. My brokerage charges $4.95 commission.

Yield = dividend rate / ACB per share
          = $0.56 /[ ($4600+$4.95) / 200]
          = 2.43%

Edit: Option trade was made on Friday not Monday

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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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