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After Options Expiration

This past Friday, there were several happenings with my retirement portfolio as options expiration happened.  I had several calls expire, a few that were exercised and some puts that were exercised as well.  So let’s quickly run through the activity and explain what I plan to do for each of the positions in the portfolio.  I will start with the simple and work toward the more complex.

Expiring Call Options

I had several call options expire.  Some of the outstanding calls for Seadrill (SDRL), AK Steel (AKS), Seagate Technology (STX), DryShips (DRYS), and Intel (INTC) expired.  The plan will be to sell some more on a day when the market is showing a little bit of strength.  I already have some outstanding in-the-money calls on SDRL, AKS, and STX from when I felt that I should be a little defensive and raise some cash.  So I will likely sell some out-of-the-money calls in case the market is able to hang on into May.  Right now it is a little difficult to tell which way it will go, but I have a few weeks to see what happens.

I will also need to sell some calls on INTC when I get a chance.  I am using the stock as part of my dividend plan for 2012, but want to enhance the return by getting a little extra cash.  I am thinking that the stock has made a great run since August when I first purchased it and may be in for some sideways action.  Again, it is just one of those things that it may be worth sitting back for a week or so to see what happens.  If the stock drops some more, I could add to my position and pick up more dividends in the process.

Exercised Call Options

I did have some call options that were exercised on Friday.  Some of my stock in DRYS was sold at $3 and in STX at $28.  I was already able to buy some of the DRYS stock back yesterday at $3 so I managed to keep all the premium and not change my position on those shares.  I still have to buy some more back, but will be seeing what happens this week.  If it shows some strength, I might be able to sell some $3.50 calls.  If not, then I will sell some May $3 calls and try to pick up more shares at $3.

With STX, I still have quite a few shares and am counting on the dividends so I will be wanting to re-purchase those shares in the next few days.  I will probably sell some calls right away when I do since I will want to lower my basis.  This is a volatile stock in which I have already locked in a profit by purchasing May $25 put options.  So I can feel confident that whatever decision I make will only help and not hurt me.

Exercised Put Options

This is one of the more interesting trades to discuss, and I suppose the most complicated although it really isn’t that difficult.  I own shares of Silver Wheaton and have been trading it up and down over the past 14 months.  I am currently negative in the position due to a few rolls that I made so I am working to decrease the basis.  I had some April $36 and $35 calls expire meaning I kept some decent premium.

However, the stock has performed poorly enough as of late that my April $30 puts ended up being exercised.  Yesterday, I bought some May $25 puts and began getting back into my previous position.  I purchase some shares at $28.50 and a few more at $28.  That means those shares were sold at $30, and I was able to buy back at a discount.  As long as I am getting shares below $30, I am making a profit on that portion of the transaction.

The plan is to purchase a few shares here and there while seeing what the stock will do.  When I have a decent sense of what is happening, I will sell some covered calls to profit on that portion of the transaction and buy some more shares.  Ultimately, I will likely end up with more shares than I had started with for the same amount of cash expense.  Plus I will still have protection below $25 in case the bottom drops out.

If I can sell some May $29 or $30 calls and fill out the remainder of my position under $30 per share, I should end up ahead of where I otherwise would have been.  I will retain some shares against which I haven’t sold calls just in case there is a big run up in the stock as well.  Ultimately, I am needing to trim about $6 per share from the basis to get back into the black.  It will simply require a little bit of patience.  In the meantime, I can collect a few dividends on the stock.

So, do you have any investing plans heading into the summer?  Feel free to share or comment.

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4 comments - What do you think?  Posted by Cash Flow Mantra - April 24, 2012 at 9:04 am

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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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6 comments - What do you think?  Posted by Cash Flow Mantra - April 18, 2012 at 8:19 am

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Executing the Defensive Plan by Selling Covered Calls

On Monday, I stated that I was concerned about the stock market and listed several reasons why I thought I should assume a more defensive posture with regards to my retirement portfolio.  Well yesterday, I began to execute my plan by selling covered calls on several of the stocks that I own.

In effect, selling a covered call is taking a bearish position on a stock since there is some benefit from a declining stock price.  The premium received from selling a call option is added to the cash portion of the portfolio and can be kept regardless of the price of the stock at expiration.  If the price of the stock is less than the strike price, then the stock can be kept and additional call options sold once the first contracts have expired.

Covered Calls Sold

I ended up selling covered calls on several stocks yesterday, bringing in cash to my accounts.  I plan on using this cash to either purchase additional shares when prices are low or to use to purchase put options after the March expiration cycle.

The calls that I sold were for the April expiration date which occurs in a little over six weeks so there was a fair amount of time premium to be had.  Here is a list of those that I sold followed by some rationale:

  • AKS–Sold the April $7 calls
  • SDRL–Sold the April $38 calls
  • SLW–Sold the April $35 calls
  • DRYS–Sold the April $3 calls
  • INTC–Sold the April $26 calls

As you can see I was quite busy today.  I feel that the market is going to be concerned about European debt and slowing growth in China.  The prospect of a worldwide recession will be increasingly in the outlook so I suspect that many of these stocks will be hit.  All of the calls were either at-the-money or even in-the-money when sold.  I am preparing for a continued decline into April.

So What If I am Wrong?

That is the beauty of selling calls.  I can be wrong and it won’t hurt me that much.  I had previously sold higher strike calls when the stocks ran up in January and February.  Of the stocks listed, I have outstanding March calls on SDRL at a strike of $42, SLW at a strike of $40, DRYS at a strike of $3.50, and INTC at a strike of $26.  I would expect the calls for the first 3 to expire since I really don’t anticipate a rebound of 20% in the next eight trading days.

Once those calls expire, I might have a little more information that would suggest which way the market might start to trend.  Then I can decide how to proceed.  If the stocks rebound, I sell some higher priced calls or just let it ride.  If the stocks continue to decline, then the current strikes will be out-of-the-money, and I can sell more to raise additional cash for purchasing more shares later.  After all, the goal is to buy low and sell high.

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6 comments - What do you think?  Posted by Cash Flow Mantra - March 8, 2012 at 5:20 am

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