Recent Option Trade

 In May 2018, the pilot's union voted 91% in favor of strike action.  As a goodwill gesture to WestJet passengers, the pilots said they would not strike during the Victoria Day long weekend in May.  One of the major issues was that WestJet planned on hiring pilots from over seas for their new ultra low cost carrier Swoop.  Swoop launched on June 20 in Canada.  The pilot's union and WestJet came to an agreement the SWOOP planes will be piloted by WestJet pilots.  As a result of this agreement, a strike was averted even before the 72 strike notice was even given.  The pilot's union and WestJet continue to talk to have other issues addressed. but the possibility of a strike as been basically eliminated.  

  

Before the agreement over SWOOP being piloted by WestJet pilots, passengers were hesitant to book due to the possibility of a strike.  WestJet did come out and state that they will 100% refund any flights that were cancelled due to the strike.

WestJet lost millions of dollars as some of their potential passengers chose to book with their competitors as they did not want the worry of a strike hanging over their heads.

The price of the stock has fallen a lot over the last couple of months. Below is a 6 month chart of WestJet.

Click to Enlarge

Over the last week, a WestJet plane was grounded for 60 hours in London, England due to a mechanical problem.  The flight that was delayed was from London, England to Toronto, Canada.  The passengers on this flight could get compensation from WestJet.  

To Take Action or Not?

I currently own 200 shares of WestJet Airlines.  The company currently pays a $0.56 per share annual dividend.  WestJet (WJA.TO)  has not raised their dividend since the first 3 months of 2015.

I did not have a large amount of cash available. In fact, I do not have any cash available so the purchase would be entirely on margin. My current interest rate on my margin account in 6.95%.  The stock is trading at a dividend yield that is less than half of this amount.

I decided to sell 2 $17.00 put contracts with a July 20 2018 expiration day for a net premium of $68.05 including commissions.  As the option seller, I get to keep this premium regardless if the price of the stock goes up, down, or sideways.   

If the option is assigned before or at expiration, I would be buying the stock at a cheaper price and therefore a higher starting yield.

Summary:

annual dividend = $0.56

net premium received = $68.05

Strike Price = $17.00

number of contracts = 2

days to expiration = 23
option assignment fee = $24.95

Scenario 1: Option Not Assigned

Total Return = $68.05 / ($3400 -$68.05)

                     = 2.04%

This return of 2.04% is for 23 days. For comparison, the interest on my high interest savings account is 1.1% per year.

Annualized Return = [ $68.05 / ($3400 -$68.05)]  * 365/23

                               = 32.41%

Scenario 2:  Option Assigned 

I currently own 200 shares of WestJet. These shares were actually result of an assignment of short put option, which you can read about here.

Previous adjusted cost base = 4496.90

ACB = prev  ACB+ # of contracts *100 shares*strike price - net premium + option assignment fee 

         = $4496.90 + 2 *100*$17.00 - $68.05 + $24.95
         = $7853.80

ACB per share = $7853.80 / 400
                         = $19.63 per share

Yield on cost = $0.56 / $19.63
                       = 0.0285
                       = 2.85%

Conclusion: 

WestJet's biggest shareholder is a UK-based hedge fund.  Recently, the hedge fund added to their position below the $20 per share level.  The hedge fund is not demanding changes to WestJet and believes WestJet is a great company and is trading at a good value.

The share price recently dipped below $17 per share for a bit but quickly rebounded to close on Friday June 29 slightly above $18 per share.

I will be adding cash to my margin account when available instead of TFSA.  This will lower my margin.

Do you use options in your investing?

Disclosure:  Long WestJet

Photo Credit: www.westjet.com

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