Option Trades : Trade #2

      Earlier in the day, I placed second limit order to try to collect some option premium(s).  You can read about the first trade form this morning, by clicking here.  I

      I have owned 200 shares of Rogers Communications Class B stock for quite some time.  I decided to write covered calls at a $60 strike price and April 21, 2017 expiration date.  The number of days to expiration is 25.  The limit order was set for $0.30 per contract.  I collected a premium of $48.05 including commissions.
  
     

Click to Enlarge

        This is a one year chart of RCI.B.  Rogers has traded below $60 over the past year. Investors have been retreating from this stock at times. The stock has paid a quarterly dividend, but Rogers Communications has not raised its dividend for about 2 years and kept their dividend the same.  A major reason for this was due to Rogers and its competitor Shaw coming together in a partnership with Shomi.  Shomi was created to lure their customers to sign up with Shomi, instead of the titan Netflix.  Shomi ended up not being successful  and the 2 companies shut it down Nov 30, 2016.  Both Shaw and Rogers took a huge write down as a result of shutting down Shomi.

      I decided to write covered calls on my position to collect some premium.  I am slightly bearish on RCI.B at the moment.

Summary:

Scenario #1:  Option Not Assigned

Premiums after commissions: $48.05
Strike Price = $60.00
Days to Expiration = 25
# of contracts = 2

  Scenario #1 :  Option Not Assigned.

Total Return= $48.05/(2*100*$60.00)
                    = 0.40%

This return of 0.40% is for 25 days.

Annualized Return  =[48.05 / (2*100*$60) ] * (365/25)
                                = 5.85%

Scenario #2:   Option Assigned

       If the covered called is assigned before or at expiration, my capital gain would be increased by the amount of net premium collected.

Conclusion:

     An investor in the capital markets can make money 3 ways from a cash flow perspective.  These 3 ways are interest, dividends, and option premiums.  An investor can sell a covered call when they are slightly bearish on the stock and want to make some extra income.  Investors can also sell covered calls, as they would like to be paid for something they are willing to do (Sell at strike price) anyway. 

Please Note:  Rogers Communications trade on both the NYSE and the Toronto Stock Exchange.  The stock trades on the NYSE under ticker symbol RCI.  The stock trades on the Toronto Stock Exchange as RCI.A and RCI.B
   
   I will update my investment tab speadsheet in earlier April to reflect this transaction:

Disclosure:  Long RCI.B, SJR.B

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.

Company Summary : WestJet

    On February 29th, 1996 a new airline in Canada took flight.  This new airline was called WestJet  based out of Calgary, Alberta.  This company started small with only 3 planes, 5 destinations, and 220 employees. Most employees of WestJet (over 85%) own shares in WestJet though their employee stock purchase plan.  As a result, WestJet refers to their employees as WestJetters because they are actual partial owners of WestJet.

     WestJet is in it's 21th year of business.  It had grown tremendous over that time.

Some of the highlights of 2016 are7 as follows:

• 12th consecutive year of profitability
• The 4th Quarter of 2016 was the 47th consecutive profitable quarter.
• Returned appromiately  $193.2 million  dollars to shareholders via dividends and buybacks.

      Since 2010, WestJet has returned approximately $942.5 million to shareholders via dividends and stock buybacks.  WestJet share price as of March 24 is $22.63 per share.  The current annual dividend rate is $0.56 per share per year. Therefore, the current yield is 2.47%.  The dividend payout ratio based on the previous 4 quarters of net income is 22.76%. With a dividend payout ratio low, I believe WestJet will continue to pay dividends and buyback shares in the foreseeable future.

    WestJet has grown its revenue from $3.427 billion in 2012 to $4.123 billion in 2016.  This represents a compound annual growth rate (CAGR) of approximately 4.73% over the last 5 years.  Due to the nature of the airline industry and its related costs, is a good number.  

    WestJet available seat miles  as grown over the last 5 years.  Available seat miles (ASM) is a measure of an airline's passenger carrying capacity.  ASM is equal to the number of seats available multiplied by the miles flown. WestJet's ASM has grown from  approximately from 22.064 billion in 2012 to 29.298 billion in 2016.  This represents a CAGR of 7.35% over the last 5 years.  WestJet has added more planes to its fleet and added more destinations to its operations as it continues to grow.

    WestJet has increased its diluted earning per share from $1.78 per share in 2012 to $2.45 per share in 2016.  This represents a CAGR of 8.31%.  A CAGR for EPS of 8.31% over the past 5 years is quite impressive, when you take into account the recession in its home province of Alberta.  WestJet operates in 4 cities in Alberta which are Grande Prairie, Fort McMurray, Edmonton, and Calgary.  Grande Prairie and Fort McMurray are smaller cities, so flights to and from these cities involved flying from bigger airport. 

  In 2016, WestJet had an operating margin of 10.7%. Their revenue increase 2.3% Y/Y.  This increase was operating margin was driven by increase an increase in ancillary revenue which was partially offset by lower guest revenue resulting from downward pressure on their fares due to the economic downturn of the energy sector (Source:  WestJet 2016 Annual Report).   

Conclusion:

    WestJet has remain profit despite their home based province of Alberta being in the worse recession since the company was founded in 1996. Alberta has been in a recession for over 2 years.  My previous employer had approximately 98% of their business dealing with the energy industry.  As the demand was not there, my company had several round of layoffs and eventually closed its doors in late 2016.  Due to oil currently trading less than $50 per barrel, I foresee Alberta remaining in a recession in 2017.  The government of Alberta recently tabled its budget in the past 2 weeks, and they predict the price of oil to remain below $60 into 2021. 

   WestJet has expanded its destinations both nationally and internationally over the past years.  This means the company can reduce their flights in markets were the demand is not strong.  People from all over Canada work in the oil patch in Alberta, in which most of them working in Fort McMurray.  Although Alberta is in a recession, the rest of Canada is not. Therefore WestJet still has a lot of potential passengers to use their services.

   On October 28,  I purchased 140 shares of Westjet Airlines (WJA.TO) at $22.39 per share for a total cost of $3140.04 including commissions. 

6 month chart

            

   

     WestJet had traded between $20 and $24 over the last 6 months.  I am possibly thinking taking profits if the stock rises a bit here and buying back in a lower price than $22.39.

     I have never worked for WestJet, but I am happy to be a shareholder. I flew across Canada on WestJet and the their customer service was excellent.

Disclosure:  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.