My Seagate Technology Trade

It is impossible to know what kind of reaction an earnings report will get and such was the case yesterday with Seagate Technology (STX) when they reported earnings after the close of the market.  It is still unclear exactly what will transpire as a result of this information since the market hasn’t opened today.

But regardless of what happens, I always want to be prepared and able to make adjustments whether the stock decides to go up, down, or sideways.

Seagate Gets My Attention

Seagate initially got my attention in November of last year as a stock that was paying a decent dividend of over 4%.  I thought it would be an important component to my dividend plan for my retirement account.  Ultimately, being able to manage a portfolio of dividend stocks will be some great knowledge to have so that I don’t have to deplete principal during retirement and can live off the generated income instead.

When I purchased STX, I was able to buy it for under $18 per share.  Since then, I have more than doubled my position and sold calls and purchased puts so that my current basis for the entire position in STX is $23.41 as of this moment.  Because the stock took a major hit earlier this month, I was concerned about the earnings report.  So yesterday, I purchased the May $25 puts for $0.68 per share.

Because I also wanted to benefit from a possible positive reaction especially with the DOW over 13,000 again, I bought back the April $26 calls that I had sold leading to the current net basis.  Now I still have many April $28 calls and May $28 calls outstanding so those April calls could easily get exercised this week if the strength continues.  But I could still buy back the stock next week to get the $0.25 dividend.

Guaranteed Profit

The best thing about this entire series of transactions is that, no matter what, I have a guaranteed profit of $1.59 in May even if the stock drops to $10 per share.  The protective puts assure me of that.  It still works out to a return of $1.59/$23.41 = 6.79% for 6 months worth of time.  Certainly not a bad return at all.  Plus I have the previous dividends which I don’t count in the basis at all.

Should I end up selling all the shares at $28 in April and May, the return would jump to $4.59/$23.41 = 19.6%!  It would actually be even better because I still have a few calls that I could sell between now and then to lower the basis a bit more.

But You Missed Out!

Now some of you might be thinking that I missed out on a big time gain if the stock went from sub-$18 to over $28.  And you would be right.  But how did I know in November that it would happen like this.  I didn’t!  And anybody who says otherwise is a liar!

Because I don’t know which way the market will go after purchasing a stock, I want to avoid big losses rather than hit home runs.  I know that in the long run I will be better off.

Maybe someday I will explain how I purchased GME at $25.82, sold it at $24 and made over 4% annualized profit.  But that’s a subject for another post or even an ebook.

In the meantime, I will be curious to see what happens with STX over the next several days and weeks.

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