Recent Sale

 On October 1, 2018, I purchased 100 shares of Telus Corporation (T.TO) inside my margin account.  I purchased with the attention of selling covered calls.  A covered call is when you sell (or write) a call option when you own the corresponding number of shares for said contract.

When selling covered calls, the individual is obligated to sell their shares at or on expiration date.  For this obligation, the seller of the call option is paid upfront an option premium.  The option seller gets to retain this premium regardless if the stock moves up, down or sideways.  If the price of the stock is $0.01 above the strike price at expiration the option will be assignment.

The initial cost basis of the shares is $4743.30.

Total dividends received = $109.00
Total Options received = $78.10 ( $44.05 and $34.05 on 2 trades )
Option Assignment Fee = $24.95
Strike Price = $48.00

When a covered call is assignment, the premium is added to the proceeds of sale resulting in a larger capital gain or capital loss for tax purposes.

When the covered called is not assigned, the gross proceeds of sale is the premium received and the outlays and expenses is the commission for the option trade by your brokerage.  The adjusted cost basis is $0.00.


Summary:

Net profit on assignment = # of contracts * strike price * 100 shares + net premium - assignment fee
                                         = 1* $48 *100 + $34.05 - $24.95
                                         = $4809.10

For total return we use all the money received

Total return =[ (net profit on assignment + other premium received + divys )  / ACB on purchase]  - 1
                    = [($4809.10 + $44.05 + $109.00)  / $4743.30]  - 1
                    = 4.62%

The total return is not that high. In the past month, T.TO increased to over $50.00 per share and then retracted to mid $49.00.

Telus currently pays an quarterly divided of  $0.545.  This option assignment reduces my annual dividend income by $218.00 

I will update my investing tab spreadsheet in early May to reflect this transaction.


Disclosure:  - Own 24 shares of T.TO in my TFSA
                        - Long T.TO

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.

Dividend Income Update: February 2019

      

        The month of February 2019 is another month of dividend income landing in my accounts. This money is used to help pay my expenses if it is needed. If the money is not needed, it is ALL used to purchase new investments to further increase my cash flow.

       

 Non-registered Accounts

• Bank of Montreal (BMO) - $35.00
• Cineplex  (CGX) - $14.50
• Emera (EMA) - $58.75
• Enerplus (ERF)  -$ 5.58
• Shaw Communications (SJR.B)  - $19.75

Subtotal :  $133.58

TFSA

• A&W Royalties Income Fund (AW.UN) - $5.43
• Boston Pizza Royalties Income Fund   (BPF.UN) - $26.91
• Cominar REIT (CUF.UN) - $12.84
• Dream Office REIT   (D.UN)  - $14.00
• Killam Properties REIT (KMP.UN) - $  16.11
• Royal Bank Of Canada (RY) - $19.60

Subtotal:  $94.89

Total = $228.47

    I received a total of $228.47 in dividend income for the month of February 2019.  This represents a 5.88% increase from 3 months ago and 14.86% decrease year over year.  

    

    I received $102.10 from option premiums within my investment accounts in February 2019.

    I will update my dividend income tab with the new amount I will include my option premium income also.  It is great to see money from passive income sources deposited into my brokerage account every single month.

How was your dividend income for February 2019?

Disclosure : Long all securities above.

Photo Credit: www.mipaq,co.za

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.

Recent Option Trade

     When an individual buys a piece or real estate, they purchase insurance to protect them against huge financial burdens.  When a person buys a vehicle, they have to have insurance.  In fact, a person must show proof of insurance before they are even allowed to register the vehicle.  This has become a new norm in Canada over the past several years and assuming this will become the norm in other countries.

      Can you insure you retirement accounts?  More often that not, retirement accounts deal with mutual funds.  So these accounts are often not insured.  

       Can you buy insurance for your stocks?  The simple answer is yes.  If you own 100 shares of a stock, you can BUY a put option contract at a future expiration date and strike price.  Just like when you have car or home insurance, you pay a premium for this protection.  If no claim is made, you do not get the premium paid back to you.  

        The other side of  buying put option contracts is the put option seller.  The put option seller is the "insurance company" for stocks.   The seller of the option is paid a premium by the option buyer.  The seller of the put option is obligated to BUY a hundred shares of a stock for each put option contract that was sold on or before expiration date.  If the price of the stock stays above the strike price, the put option will not be assigned.

 

    The put option seller gets to keep the premium regardless if the stock goes up, down or side ways.  If the option is assigned, the option seller is put the stock at a lower adjusted cost basis.  This is because of the following formula:

 Adjusted cost basis = # of contracts*100 shares* strike price - net option + premium assignment fee 

     Not all brokerages charge an option assignment  or exercise fee.  Interactive Brokers does not charge this fee.

  

SUMMARY

   On August 23 2018, I sold 2 put option contracts in WestJet Airlines (WJA,TO).

number of contracts  : 2

Strike price : $17

Expiration Date :  September 21 2018 

Days to expiration:  30

Current Annual dividend : $0.56

Net premium received : $28.05
Option Assignement Fee:  $24.95

Scenario #1 - Option Not Assigned

Return =  $28.05 / ($3400)

            = 0.825%

At first glance, this return seems small.  This return represents the return for 30 days.  The annual return on my high interest savings account is 1.25%.

Annualized return = ($28.05 / $3400  ) *(365/30)

                               = 10.04%

Scenario #2:  Option Is Assigned

Adjusted cost basis = # of contracts * 100 shares * strike price -net premium + assignment fee
                                =2*100*17 - 28.05 + 24.95
                                = $3396.90

Yield = $0.56 / ($3396.90/200)
          = 3.297%

Let's compare this yield to the yield of purchase shares at $17 without an option.

My brokerage would charge a commission of $4.95 for 200 shares of stock.

Adjusted cost basis = $3400+$4.95

Yield = $0.56 / (3404.95/200)
          = 3.289%

Disclosure:  - Own 200 shares of WJA.TO
                    - Long WJA.TO

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.

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

Recent Option Trades

       Options can be used for income or protection.  Investors and traders sell options of income and buy options for protection.

      For example, an investor owns a 100 shares of stock "ABC"and is scared the stock may drop in price.  The type of option to be bought would be a put option.  An investor  buying a put option has right but not the obligation to sell their shares at the strike price prior to or at expiration.  In this case, the buyer of the put option is buying a put as insurance.  If the price of the stock dropped a large amount, the buyer can exercise the option and will be able to sell the stock at the strike price.   The option seller is obligated to buy100 shares of stock "ABC" at the strike price if the option is in the money at expiration or is exercised by the buyer prior to expiration.  For this obligation by the option seller, he or she is paid a premium upfront.  When the option seller is assigned the stock, he or she is "put" the stock.
   
    The stockholder who owns 100 shares of stock can also sell a covered call option.  The covered call allows the investor or trader to be paid a premium upfront for the obligation to sell their 100 shares of stock at the strike price on or before the expiration date.

      An individual can also buy options without owning stock. In this case, options are a form of leverage without using debt. When an investor is bullish on the stock, he or she can BUY a call option contract(s) at a strike price and expiration day.  The opposite of this for when a person is bearish on a stock, the person can BUY a put option contract(s) at a strike price and expiration date.  In both these cases, the option buyer pays a premium.

Recent Option Trades

  My 2 recent option trades involve covered calls.

Option Trade Number 1

    On June 5, I sold 2 covered call option contracts on my position in Rogers Communications Class B Non-Voting (RCI.B.TO) stock

 Net Premium Received =  $20.05
Option Assignment Fee = $24.95
Current Annual Dividend = $1.96
# of days to expiration = 46
Strike Price = $ 65.00

 Return = premium received / money received from selling at strike price
             = $20.05 / $13000
             = 0.00154
             = 0.154%

This return is for 46 days

Annualized return = 0.154% *(365/46)
                              = 1.222%

    These returns are small.  The annualized return of 1.222%  is slightly higher than the interest on my high interest savings account of 1.1%.  The annualized return is rather low, but this is due to selling the option deep out of the money.

     If this option is assigned, the capital gain would be slightly if I sold the stock at the strike price without an option.  This is due to the net option premium received is less than the option assignment fee.

Capital gain = # contracts*100 shares*strike price + net option premium  - option  assignment  fee                                        -    (adjusted cost base of stock purchase)

Option Trade Number 2

    On June 8, I sold 1 covered call option contracts on my position in Restaurant Brands International (QSR.TO ) stock.

 Net Premium Received =  $34.05
Option Assignment Fee = $24.95
Current Annual Dividend = $1.80 US
# of days to expiration = 43
Strike Price = $ 82.00

 Return = premium received / money received from selling at strike price
             = $34.05 / $8200
             = 0.00415
             = 0.415%

This return is for 43 days

Annualized return = 0.415% *(365/43)
                              = 3.52%

  This annualized return is much greater than the interest on my high interest savings account of 1.1%.  I sold this covered call option contract with the option being deep out the money.  The annualized return is higher the the first covered call as QSR.TO stock price is more volatile than RCB.B.TO.  

Summary:

       The return on these positions is small as I sold these option contracts deep out the money.  This is still a possibility of these options being assigned before or at expiration day. I wrote (sold) covered call options on these positions to get some more money out of the markets.

Disclosure:  Long QSR.TO, RCI.B.TO

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.

Option Assignment

     

    I recently wrote about selling 2 put contracts in WestJet Airlines (WJA.TO) at a strike price $23 and expiration date of April 20, 2018.

    Fast forward to Monday April 23, I was "put" 200 shares of WJA.TO as the share price was below $23 at the close on April 20th.  Puts can be exercised by the buyer anytime prior to expiration.  For example, if WJA.TO dropped to $21 per share then the buyer will likely notify there broker than they want to exercise (sell to close) their put contracts. Exercising a option involves notifying your broker and not the traditional way by clicking "Sell"".  At expiration, if your short option is $0.01 in the money then it is suppose to be automatically assigned.

  So my yield on cost is 2.491% with an adjusted cost base of $22.4845 per share. When short put options are assigned, the adjusted cost base for tax purposes consist of the following:

   ACB = (# of put contracts*100 shares*strike price) - (net premium received )+ (option assignment fee)

  This option assignment adds $112.00 to my annual dividend income.

   I plan to write covered calls on WJA.TO as their dividend has not been increase in the last few years.  Airline stocks are very cyclical and volatile due to the type of costs such as fuel and weather events.

Disclosure:  Long WJA.TO

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.

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.

Summary

   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)
                            =124.4%

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

Photo Credits: 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.

Option Trades Update

       May 17 was a down day on the North American markets. Investors and traders are concerned over recent events involving the President of United States Donald Trump.  Adding to this, is the low interest rates that we have currently.  Another major issue is that of Home Capital Group (ticker symbol HCG.TO).  HCG.TO, which is in the mortgage business, continues to be the major topic of discussion. Savers are continuing to withdraw their money from their high interest savings account, which is putting strain on the HCG.TO bottom line.  HCG.TO recently got a 2 billion line of credit from HOOPP, which is Healthcare of Ontario Pension Plan to try to stay a float.  HCG.TO has said in the last week, that replacing the HOOPP line of credit is a top priority due to the high interest rate on the line of credit.

       In Canada, the TSX Composite Index was down 269.65 points which represents 1.73% decrease from the day before. The S&P 500 was down 43.64 points, or 1.82%, for the day.  The Dow Jones Industrial Average was down 372.82. or 1.78%, for the day.

      I currently have to put options set to expire this month. My short put in Royal Bank is set to expire on May 19th.  The stock RY.TO closed at $91.45 today. My strike price is $92.00 and it is for a single contract.

     My other put option is in another Canadian bank, TD Bank.  My short put in TD is set to expire on May 26th.  The stock TD.TO closed today at $62.26, which is below my strike price of $62.50.  I also currently own 100 shares of TD.TO.

     Today's closing prices of these stocks are over $8.00 per share below their 52 week highs. I am not worried at all with option assignment on these stocks, as the banks have proven over the years that they are excellent companies to own.  If Royal Bank option gets assigned I will likely write covered calls as I would like my entry point to be lower. 

Disclosure: Long 100 shares of TD in margin account.

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.

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.

Summary:

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%

Conclusion:

      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.

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.

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.

Summary:

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.

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.

Option Trades : Trade #1

      Earlier in the day, I placed limit order to try to collect some option premium(s).  Investors receives option premiums in the derivatives (aka options ) markets when he or she sells an option.  If an investor is bullish on a stock, the investor can reduce their risk by buying a call option or selling a put.  The investor will receive the premium minus commissions for only do the latter.  If an investor is bearish on a stock, the investor can reduce their risk by buying a put or selling a call.  Again, the investor receives option premiums for only the latter. Selling puts or calls are the basic ways an investor can receive option premiums.  There are also different types of option  trades which are more advanced.

    I am going to talk about one of these trades below. 

    Sometimes a stock falls in price a lot which can mean a buying opportunity if you previously researched a company.  After careful research an investor can decide on a price they are willing to purchase shares of this company. Did I do this?  No, I did not.  I quickly glanced at the chart this morning.  Prior to the opening bell this morning,  Home Capital Group fired its CEO over night.  The stock price fell a lot  due to the recent past events of the company coupled with the firing of their CEO.  The stock fell approximately 10% and then rebounded to finish down 9.60% to close at $25.06 per share.

      I set a limit order, after the markets opening, to sell 2 put option contracts with an April 21, 2017 expiration date and strike price of $25.00 strike price.  I collected a total of $128.05 after commissions.

Summary:

 Scenario #1:   Option Not Assigned

Premiums collected:  $128.05
Strike Price : $25.00
# of contracts : 2
Days to expiration:  25 days

Total Return = $128.05 / (5000-$128.05) 
                      = 2.63%

This return of 2.63% is for 25 days.

Annualized Return =[ $128.05 / ($5000-$128.05)] *[365/25]
                               = 38.4%

     Currently, the interest rate on my high interest savings account is 0.80% per year.  The return on this option definitely is a lot better, plus more tax efficient.  Of course, the low interest rate on my savings account is a lot less riskier to the downside.  Can an investor protect his downside when selling a naked put option?  An investor can BUY a put option for insurance at a lower premium and a strike price that is lower.  The lower strike price would mean smaller premium out of pocket as it is more out of the money.  Buying a put option for insurance  with the premium collected from the short put, means an investor reduces risk if he or she is wrong.  I have not done this, but will definitely consider it.

Scenario #2:

     The option could be assigned on or at expiration.  My adjusted cost basis would be reduced in an amount equal to the premium collected minus commissions.  Therefore, my yield would be greater than if I just bought the stock at $25.00

Note: I will update my investing tab spreadsheet in early April to reflect this transaction

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.