Today I bought more FPL at $52.90. I already had 2% of my portfolio in this stock; this purchase brings my position to 5%. FPL is an electric utility company with two parts; one a regulated public utility and one an unregulated private energy producer. FPL has not participated in the broader market rally, up only 12% from it's March 2009 lows.
I also bought January 2012 $50 calls on JNJ for $14.70. Since I bought the calls, this means I have the right to buy JNJ at $50 per share any time between now and 2012. JNJ is currently trading at $64.
If I exercise these calls, I'll be buying JNJ for $50 + $14.70 = $64.70. The calls will increase in value if JNJ rises. I'll break even if JNJ is at $64.70 at the expiration date. If JNJ is below that price, my loss on the position will increase until JNJ drops to $50, for a maximum loss of $14.70 per share (i.e., the calls expire worthless). If JNJ is above $64.70 per share, I make a profit. There is no cap to the profit on this strategy. Since JNJ could theoretically increase to infinity, my profit is theoretically infinite, too. In practice, JNJ's record high is around $70 and I'd be surprised (if delighted) to see that height again. In that best case scenario, my profit would be around $15 per share ($70 - 50 - $14.70) if I exercised the contracts.
I could also resell the contracts, later. The price would depend on the time remaining until expiration, and JNJ's price at that time.
Showing posts with label Puts. Show all posts
Showing posts with label Puts. Show all posts
Thursday, January 7, 2010
Thursday, November 5, 2009
Bought EBIX, closed WAT puts
I bought more EBIX at $56, completing my 6% target allocation in this stock.
I closed my OTM Nov $50 puts on WAT for $0.10/share; I also have a long position in this stock.
I closed my OTM Nov $50 puts on WAT for $0.10/share; I also have a long position in this stock.
Tuesday, October 20, 2009
Bought LNN, EBIX, Wrote MDT puts
I put 3% of my portfolio in LNN at $32, and another 3% in EBIX at $61.64. Sold 2 Jan $36 puts on MDT for $1.70.
Monday, October 19, 2009
October 19, 2009 Options expirations.
The $30 covered calls I sold on AVY expired ITM, so my shares were called away. The stock was trading at $38 today, so someone made money.
The $36 puts I wrote on MDT expired unexercised; I still want the stock, but I'll look to write more puts or buy on dips.
The $36 puts I wrote on MDT expired unexercised; I still want the stock, but I'll look to write more puts or buy on dips.
Bought more ANF puts
ANF has been up since October 8th on better-than-expected same store sales. SSS dropped by 18%; analysts were expecting -20.4%.
Share price increased over 5% on the news. Since the $34 puts are now in-the-money, the cost decreased sharply. I paid $3.70/share for 3 more $34 ANF Feb2010 puts, which slightly changes my profit/loss picture.
I used the spread between the $27 puts I sold and the $34 puts I bought to bring my net cost down. Net, I paid $3.44 for the right to sell ANF at $34.
I have the right to sell at $34, but must buy at $27. I make a profit starting when ANF is ($34 - $3.44) = $30.56, and the profit increases until ANF is at $27. This limits caps my maximum profit to ($30.56 - $27) = $3.56 per share.
I have now paid an additional $3.70 for the right to sell an additional 300 shares of ANF for $34. Since I sold no puts to pay for this, my profit potential is different. I make a profit starting when ANF is ($34 - $3.70) = $30.30. My profit increases until ANF reaches (theoretically) $0, for a maximum profit of $30.30 per share. I don't think this is likely to happen, but it's nice to dream.
Share price increased over 5% on the news. Since the $34 puts are now in-the-money, the cost decreased sharply. I paid $3.70/share for 3 more $34 ANF Feb2010 puts, which slightly changes my profit/loss picture.
I used the spread between the $27 puts I sold and the $34 puts I bought to bring my net cost down. Net, I paid $3.44 for the right to sell ANF at $34.
I have the right to sell at $34, but must buy at $27. I make a profit starting when ANF is ($34 - $3.44) = $30.56, and the profit increases until ANF is at $27. This limits caps my maximum profit to ($30.56 - $27) = $3.56 per share.
I have now paid an additional $3.70 for the right to sell an additional 300 shares of ANF for $34. Since I sold no puts to pay for this, my profit potential is different. I make a profit starting when ANF is ($34 - $3.70) = $30.30. My profit increases until ANF reaches (theoretically) $0, for a maximum profit of $30.30 per share. I don't think this is likely to happen, but it's nice to dream.
Sunday, October 4, 2009
ANF spread
I bought 3 Feb 2010 $34 puts on ANF for $5.60 and sold 3 Feb 2010 $27 puts on the same stock for $2.16.
This means I paid $5.60 for the right to sell ANF at $34 any time between now and February of next year. I also was paid $2.16 for my promise to buy ANF for $27 in the same time frame. The stock was trading at around $31 when I made the trade. This is a more complicated option trade, and has several possible outcomes.
If, in Feb 2010, ANF is trading above $34 a share, the puts I purchased are worthless. Why would I sell it at $34 when it's on the open market for $35?
Loss: $5.60 - $2.16 = $3.44 per share, or a loss of $1,032 for my three contracts.
If ANF is trading at or below $27, I will be obligated to buy the stock at $27. I will also have the right to sell it at $34. I will buy the stock at $27 and sell it at $34.
Gain: $34 - $27 - $5.60 + $2.16 = $3.56 per share, or a gain of $1,068.
The complicated part comes if ANF is between these two strike prices; that is, if it's trading between my $34 sell price and my $27 buy price.
If it's trading at $33, I still have the right to sell it at $34--and I would do so. However, because of the $3.44 I paid to buy the put, that would not give me a profit on the position. The loss would be:
Loss: $34 - $33 - $5.60 + $2.16 = $2.44 per share, or $732 on the whole position.
So you can see, the lower the share price, the smaller my loss. This ticks over into profit if the share price is below $30.56 ($34 - $3.44):
Break-even: $34 - x - $5.60 + $2.16 = $0 (and solve for x. 4th grade algebra has been more useful than my math minor).
So if ANF is below $30.56 by the February expiration date, I make a profit on the position, which increases the lower the price goes. The limit to my profit comes when I reach my lower strike price of $27. At that point, profit stays constant at $3.56 per share. The limit to my loss comes at my higher strike price of $34. At that point, my loss is $3.44 per share. If the price is somewhere in between, my profit/loss varies between those two limits.
Okay, on to the hypotheticals. I do not need to wait until expiration to change this situation. As the price of the underlying stock decreases, the puts I bought will become more valuable; it's more attractive to sell a stock for $10 over market price than for $5 over asking price. ANF has dropped by $1 per share since I made this trade, so the same puts I bought for $5.60 are now trading for $6.00. You can sell options just like you can sell stocks. Right now, I could sell the option I bought for more than I paid for it (but not enough more to make it worth the trade). Likewise, the puts I sold have decreased in value; it is less attractive to buy a stock for $5 below market price than for $10 below market.
Both options will decrease in value as they approach expiration; options are hedges against uncertainty, and the future 6 months from now is more uncertain than next month. So, I may close one or both of these positions early if I can do so profitably.
I also didn't need to do a one-for-one sale or purchase of these options. I could have bought just one put, for a net cost of $560, and still sold three puts, for a net gain of $648. Then, the cost of the puts I bought would be completely covered by the income from the puts I sold. This would change my profit/loss outlook.
That is, if ANF is trading above $34, the puts I'd bought expire worthless. However, I still made (300 * $2.16) - (100 * $5.60) = $648 - $560 = $88 on the trade.
If ANF is at or below $27, I'm obligated to buy 300 shares at $27, but can sell only 100 shares for $34. So, I would have paid $8100 for all three hundred shares. I'd be able to sell 100 shares for a total of $3400. I would be left with two hundred shares at a net cost to me of $4700; that's $23.50 per share. If ANF is trading at $23.50, I can sell the shares for a profit/loss of zero. If it's trading above $23.50 I can sell them for a profit. If it's trading below $23.50, I could sell at a loss.
So you can see how you can mix and match options to suit your purposes. This can get very complicated, and it's easy to overlook something and open yourself up to risks you weren't expecting. I like writing out the outcomes of each possibility ("if p happens, the effect on my trade is q"), especially when I'm learning a new option strategy
This means I paid $5.60 for the right to sell ANF at $34 any time between now and February of next year. I also was paid $2.16 for my promise to buy ANF for $27 in the same time frame. The stock was trading at around $31 when I made the trade. This is a more complicated option trade, and has several possible outcomes.
If, in Feb 2010, ANF is trading above $34 a share, the puts I purchased are worthless. Why would I sell it at $34 when it's on the open market for $35?
Loss: $5.60 - $2.16 = $3.44 per share, or a loss of $1,032 for my three contracts.
If ANF is trading at or below $27, I will be obligated to buy the stock at $27. I will also have the right to sell it at $34. I will buy the stock at $27 and sell it at $34.
Gain: $34 - $27 - $5.60 + $2.16 = $3.56 per share, or a gain of $1,068.
The complicated part comes if ANF is between these two strike prices; that is, if it's trading between my $34 sell price and my $27 buy price.
If it's trading at $33, I still have the right to sell it at $34--and I would do so. However, because of the $3.44 I paid to buy the put, that would not give me a profit on the position. The loss would be:
Loss: $34 - $33 - $5.60 + $2.16 = $2.44 per share, or $732 on the whole position.
So you can see, the lower the share price, the smaller my loss. This ticks over into profit if the share price is below $30.56 ($34 - $3.44):
Break-even: $34 - x - $5.60 + $2.16 = $0 (and solve for x. 4th grade algebra has been more useful than my math minor).
So if ANF is below $30.56 by the February expiration date, I make a profit on the position, which increases the lower the price goes. The limit to my profit comes when I reach my lower strike price of $27. At that point, profit stays constant at $3.56 per share. The limit to my loss comes at my higher strike price of $34. At that point, my loss is $3.44 per share. If the price is somewhere in between, my profit/loss varies between those two limits.
Okay, on to the hypotheticals. I do not need to wait until expiration to change this situation. As the price of the underlying stock decreases, the puts I bought will become more valuable; it's more attractive to sell a stock for $10 over market price than for $5 over asking price. ANF has dropped by $1 per share since I made this trade, so the same puts I bought for $5.60 are now trading for $6.00. You can sell options just like you can sell stocks. Right now, I could sell the option I bought for more than I paid for it (but not enough more to make it worth the trade). Likewise, the puts I sold have decreased in value; it is less attractive to buy a stock for $5 below market price than for $10 below market.
Both options will decrease in value as they approach expiration; options are hedges against uncertainty, and the future 6 months from now is more uncertain than next month. So, I may close one or both of these positions early if I can do so profitably.
I also didn't need to do a one-for-one sale or purchase of these options. I could have bought just one put, for a net cost of $560, and still sold three puts, for a net gain of $648. Then, the cost of the puts I bought would be completely covered by the income from the puts I sold. This would change my profit/loss outlook.
That is, if ANF is trading above $34, the puts I'd bought expire worthless. However, I still made (300 * $2.16) - (100 * $5.60) = $648 - $560 = $88 on the trade.
If ANF is at or below $27, I'm obligated to buy 300 shares at $27, but can sell only 100 shares for $34. So, I would have paid $8100 for all three hundred shares. I'd be able to sell 100 shares for a total of $3400. I would be left with two hundred shares at a net cost to me of $4700; that's $23.50 per share. If ANF is trading at $23.50, I can sell the shares for a profit/loss of zero. If it's trading above $23.50 I can sell them for a profit. If it's trading below $23.50, I could sell at a loss.
So you can see how you can mix and match options to suit your purposes. This can get very complicated, and it's easy to overlook something and open yourself up to risks you weren't expecting. I like writing out the outcomes of each possibility ("if p happens, the effect on my trade is q"), especially when I'm learning a new option strategy
Friday, September 25, 2009
Closed OTM puts
Today I closed October puts on FLS and TUP which were way out of the money, for $0.10 a share. All other things being equal, I'd let the puts go until expiration. With the current market drop, I want the cash ready to reinvest in discounted stocks.
Tuesday, September 22, 2009
Bought WAT
I bought a partial position (4%) in WAT today; I also have Nov $50 puts outstanding. WAT has been moving steadily upward since I opened my options position, and I am not sanguine about having the shares put to me. If WAT drops to my $50 strike price or below, it will be 5.3% of my portfolio (including the shares I just bought outright). If it stays above $50, at least I'll have my 4% and can later write more puts to hopefully fill the 5% target at a better price.
Monday, September 21, 2009
Bought ORCL
Today I put 3% of my portfolio in ORCL @ $21.50; I plan to add another 2% later, hopefully at a lower price.
A bunch of puts expired unexercised over the weekend;
4 $20 KCI, $2.20 premium
6 $15 JKHY, $0.65 premium
1100 $10 GTI, $1.60 premium
1 $65 PCP, $3.10 premium
for a total of $3,340 in income. I still want all these stocks, so I plan to write puts again to buy at a more desirable price. The exception is PCP; my targeted position in this stock is already partially filled, and it has increased dramatically in price since my initial purchase and I am reluctant to buy more at these prices.
A bunch of puts expired unexercised over the weekend;
4 $20 KCI, $2.20 premium
6 $15 JKHY, $0.65 premium
1100 $10 GTI, $1.60 premium
1 $65 PCP, $3.10 premium
for a total of $3,340 in income. I still want all these stocks, so I plan to write puts again to buy at a more desirable price. The exception is PCP; my targeted position in this stock is already partially filled, and it has increased dramatically in price since my initial purchase and I am reluctant to buy more at these prices.
Thursday, September 17, 2009
Sold more MOS puts
Today I sold 3 MOS $50 puts for $3.80/share. My previous $45 MOS puts expired un-exercised last month. I still want MOS, since I like the company and I no longer have an agriculture position since I sold Agrium also last month). I compared MOS and AGU as long term investments.
AGU:
P/E ratio | 10.22
revenue / employee | $ 1.18 million
dividend yield | 0.21%
price / tangible book | 1.996
price / sales | 0.8293
price / free cash flow | 15.46
return on equity | 19%
return on assets | 16.89%
leverage | 2.166
current ratio | 1.953
debt / capital | 0.2679
net profit margin | 9.05%
Annualized 5Y revenue growth | 31%
YOY Revenue growth | 90%
Gross margin | 26%
EBITA margin | 9.5%
cash/share 2.29
MOS:
P/E ratio | 10.98
revenue / employee | $ 1.428 million
dividend yield | 0.28%
price / tangible book | 3.032
price / sales | 1.946
price / free cash flow | 19.05
return on equity | 30.87%
return on assets | 19.19%
leverage | 1.493
current ratio | 3.273
debt / capital | 0.1289
net profit margin | 9.22%
Annualized 5Y revenue growth | 34%
YOY Revenue growth | 4.9%
Gross margin |30%
EBITA margin | 28.3%
Cash/Share | 6.08
The two companies have very similar numbers, and either would make a good investment. For me, the deciding factor was the cash reserves held by MOS. MOS has a better current ratio, more cash per share, and is less leveraged. This cash hoard gives MOS more flexibility in its response to changing market conditions; it can afford to expand, buy a distressed rival, or hunker down in lean times.
In the ag space, I also really like Terra Nitrogen. However, I'm still trying wrap my head around their M.C. Escher business model Terra is both TRA (selling nitrogen products) and TNH (which owns a nitrogen manufacturing facility). Here's an excerpt from their website which attempts to clarify the relationship:
"[TRA]directly or indirectly holds approximately 75% of the outstanding common units of [TNH], which are traded on the New York Stock Exchange, and the remaining 25% of [TNH]’s units are held by the public. In addition to operating the [TNH] manufacturing facility in Verdigris, [TRA] also owns and operates five other North American manufacturing facilities, and has a 50% interest in an ammonia facility in Trinidad and 50% interest in GrowHow UK Ltd., a United Kingdom joint venture. [TRA] also has a deep-water terminal in Donaldsonville, Louisiana, and 50% interest in Houston Ammonia Terminal near Pasadena, Texas. "
TRA and TNH both have great management; ROE is 38% and 152% (!) respectively. However, while I can keep an eye on them, what about these little private companies? If GrowHow UK Ltd. accidentally vents ammonia gas, TRA will also be sued, whether or not they're actually responsible. Are these shipping arrangements in LA and TX bringing in income or are they just an expense? What if TRA decides to raise capital by selling it's 75% stake in TNH?
AGU:
P/E ratio | 10.22
revenue / employee | $ 1.18 million
dividend yield | 0.21%
price / tangible book | 1.996
price / sales | 0.8293
price / free cash flow | 15.46
return on equity | 19%
return on assets | 16.89%
leverage | 2.166
current ratio | 1.953
debt / capital | 0.2679
net profit margin | 9.05%
Annualized 5Y revenue growth | 31%
YOY Revenue growth | 90%
Gross margin | 26%
EBITA margin | 9.5%
cash/share 2.29
MOS:
P/E ratio | 10.98
revenue / employee | $ 1.428 million
dividend yield | 0.28%
price / tangible book | 3.032
price / sales | 1.946
price / free cash flow | 19.05
return on equity | 30.87%
return on assets | 19.19%
leverage | 1.493
current ratio | 3.273
debt / capital | 0.1289
net profit margin | 9.22%
Annualized 5Y revenue growth | 34%
YOY Revenue growth | 4.9%
Gross margin |30%
EBITA margin | 28.3%
Cash/Share | 6.08
The two companies have very similar numbers, and either would make a good investment. For me, the deciding factor was the cash reserves held by MOS. MOS has a better current ratio, more cash per share, and is less leveraged. This cash hoard gives MOS more flexibility in its response to changing market conditions; it can afford to expand, buy a distressed rival, or hunker down in lean times.
In the ag space, I also really like Terra Nitrogen. However, I'm still trying wrap my head around their M.C. Escher business model Terra is both TRA (selling nitrogen products) and TNH (which owns a nitrogen manufacturing facility). Here's an excerpt from their website which attempts to clarify the relationship:
"[TRA]directly or indirectly holds approximately 75% of the outstanding common units of [TNH], which are traded on the New York Stock Exchange, and the remaining 25% of [TNH]’s units are held by the public. In addition to operating the [TNH] manufacturing facility in Verdigris, [TRA] also owns and operates five other North American manufacturing facilities, and has a 50% interest in an ammonia facility in Trinidad and 50% interest in GrowHow UK Ltd., a United Kingdom joint venture. [TRA] also has a deep-water terminal in Donaldsonville, Louisiana, and 50% interest in Houston Ammonia Terminal near Pasadena, Texas. "
TRA and TNH both have great management; ROE is 38% and 152% (!) respectively. However, while I can keep an eye on them, what about these little private companies? If GrowHow UK Ltd. accidentally vents ammonia gas, TRA will also be sued, whether or not they're actually responsible. Are these shipping arrangements in LA and TX bringing in income or are they just an expense? What if TRA decides to raise capital by selling it's 75% stake in TNH?
Tuesday, September 15, 2009
Sold KCI puts
Sold 4 Dec $35 puts on KCI for $1.85. That's a 5.3% gain in 3.2 months, 1.7% per month, 20% annualized. I've already written $20 puts on KCI, which will expire this month.
Tuesday, September 8, 2009
Sold WAT puts
Today I wrote 3 $50 November puts on WAT for $2.24 each. Waters makes basic (and very expensive) lab instrumentation, and provides service contracts for their instrumentation. I believe Waters will benefit from future economic recovery; these instruments are useful in quality control for many industries. In the meantime, WAT will earn more through service agreements, as companies make more frequent and more expensive service calls to help their old equipment limp along until they're able to replace it.
Tuesday, September 1, 2009
MDT, PCL
Today I put 5% of my portfolio into PCL (Plum Creek Lumber) at $30/share. I chose to buy now because Plum Creek has not participated in the current rally; it's above it's March lows, but is currently trading near its April stock prices. The stock has a 5% yield and I believe lumber and mineral rights are an excellent hedge against inflation.
I also wrote four October $36 puts on MDT, paying $0.85 per share. I had puts on MDT expire un exercised last month; if the stock dips in the next six weeks, I may get it at a desirable price. If not, I'll continue to write puts for it; I want the stock, but not enough to pay $38/share for it.
I also wrote four October $36 puts on MDT, paying $0.85 per share. I had puts on MDT expire un exercised last month; if the stock dips in the next six weeks, I may get it at a desirable price. If not, I'll continue to write puts for it; I want the stock, but not enough to pay $38/share for it.
Monday, August 24, 2009
Aug 22 2009 Options expirations
I had several options positions expire over the weekend. Puts I wrote on PCL (Plum Creek Lumber) MDT (Medtronic) and MOS (Mosaic) all expired un-exercised. That capital is now free to be used in new trades. I plan to sit on it for a while until the market dips.
Shares of SLV were put to me; I immediately used these to write Jan2010 calls at a $17 strike price. I was paid $0.50 a share for these, for a total of $450 income on the 9 contracts. If un-exercised, my return will be 2.9% for the trade or 0.6% per month--negligible compared to puts, but acceptable for a covered call since the risk is significantly less. As detailed below, SLV is in my portfolio only to generate income via puts and calls.
I had written covered calls against VZ (Verizon) and MCK (McKesson). VZ was called away, fairly close to my $31 strike price. My MCK calls, however, had a strike of $45--when my shares were called away, I could have sold them on the open market for $56!
That's the risk of covered calls; you may not make as much money as you could have. My initial buy price on MCK was $23.70, so when it was at $44, I was happy to agree to sell it for $45. I never dreamed the price would increase so dramatically in less than two months.
Shares of SLV were put to me; I immediately used these to write Jan2010 calls at a $17 strike price. I was paid $0.50 a share for these, for a total of $450 income on the 9 contracts. If un-exercised, my return will be 2.9% for the trade or 0.6% per month--negligible compared to puts, but acceptable for a covered call since the risk is significantly less. As detailed below, SLV is in my portfolio only to generate income via puts and calls.
I had written covered calls against VZ (Verizon) and MCK (McKesson). VZ was called away, fairly close to my $31 strike price. My MCK calls, however, had a strike of $45--when my shares were called away, I could have sold them on the open market for $56!
That's the risk of covered calls; you may not make as much money as you could have. My initial buy price on MCK was $23.70, so when it was at $44, I was happy to agree to sell it for $45. I never dreamed the price would increase so dramatically in less than two months.
Friday, August 14, 2009
LNN puts
I finally wrote puts on LNN. I wrote one contract December $35 puts, for $1.90/share. These puts will pay 5.4% [(1.90/35.00)*100 = 5.4]. I'd be happy to buy this stock at $33.10 ($35 - $1.90 = $33.10). It's currently trading around $43 after a recent price run up. This is a small cap (it's market cap is only around $525 million!) so it's price is extremely volatile. I think the market currently overvalues the stock, so I'm not willing to buy it outright.
Tuesday, August 11, 2009
A trade purely to generate income
One of my stop-loss orders triggered today. I used the proceeds to secure a new put position. I "sold to open" 9 contracts (900 shares) in SLV (iShares Silver Trust). These were $14 puts which I sold for just $0.25 each. They expire August 22, so this 1.78% return is generous for an 11 day commitment. The stock is trading at $14.09 now, so there's a good chance I'll get the shares. If I'm put the shares, I will immediately write covered calls on them. This is an income trade; I expect to make money by selling puts and calls on this stock, not capital gains from the stock itself.
The equivalent in real estate would be buying a house in a part of town where I don't expect property values to increase significantly. I would buy that house purely for rental income, not with plans to sell it later for a profit. If you aren't going to be writing covered calls on this stock, it isn't worth buying.
In addition, I'm making only $225 on the puts; a nice return for an eleven-day wait, but not huge (especially considering transaction costs). If I wasn't buying a large number of contracts, I would just buy the shares outright. For a smaller trade, it isn't worth the trouble or the wait.
The equivalent in real estate would be buying a house in a part of town where I don't expect property values to increase significantly. I would buy that house purely for rental income, not with plans to sell it later for a profit. If you aren't going to be writing covered calls on this stock, it isn't worth buying.
In addition, I'm making only $225 on the puts; a nice return for an eleven-day wait, but not huge (especially considering transaction costs). If I wasn't buying a large number of contracts, I would just buy the shares outright. For a smaller trade, it isn't worth the trouble or the wait.
Monday, July 20, 2009
When your chickens come home to roost, remember to collect the eggs.
I was put 100 shares of FLS from a put I wrote in May. The command was "sell to open 1 contract of FLSSN. Premium $5.90/share. Strike $70/share. Expiration July."
My income from this put was $590. The stock price was approximately $68/share when the contract expired, so I bought the shares at $70/share ($64.10/share including the premium, $70 - $5.90).
Naturally, I turned right around and wrote calls on my new FLS stock. I wrote 1 contract January 2010 FLS calls at a strike price of $80, for $4.20/share. The period of the call is about 6 months, which is about as long as I'm comfortable with. So, at this point I have bought FLS for $70/share, and I have earned $10.10 ($5.90 + $4.20) on my stock. That's a 14% return (I'm rounding down to keep it simple and account for transaction fees, which vary by which broker you choose). If my shares are called away in January, I will have made a 28.7% return ($80 strike - $70 purchase price = $10. $10 profit + $5.90 put income + $4.20 call income = $20.10 total income. $20.10/$ 70 = 0.287 ). If my shares aren't called away in January, I'll still have the premiums, plus my shares. Here I am not including the dividend, which is a 1.7% yield at current prices.
I have also written August $45 puts on Mosaic. At 36 days, this is a shorter term than I would usually consider (I like a term from two to six months). I chose this option because a)I would be content to buy MOS at $45 and b) this put offered an unusually good return relative to longer-termed options. I would consider $40 and $45 puts on this stock (currently trading at $48).
Compare the August, September, and December puts, at 33 days (1.1 months), 64 days (2.13 months) and 155 days (5.17 months) respectively.
As you can see in the screen cap, the percentage return per month (premium / share price = percentage return. Percentage / time period (in months) = percentage return per month) is unusually attractive for one option; the August $45 put.
Even though the dollar value for the December $45 puts is the highest, the August $45 puts offer the best value. Since I also would be pleased to purchase this stock at that price, I wrote that put. If I wasn't willing to pay $45 for the stock, I wouldn't consider it no matter how nice the return looked.
FLS: When your chickens come home to roost, remember to collect the eggs. When you get income from puts, and then the shares are put to you at your strike price, consider adding to that income by writing calls. Be sure you would be willing to sell at your call's strike price.
MOS: It's your percentage return, not the dollar amount of the premium, that should draw your attention to the stock. No put has value to me if I'm unwilling to buy at the put's strike price.
For both: Write calls only on stocks you'd be happy to sell at that strike price. Write puts only on stocks you'd be happy to buy at that strike price. I write options as a way to generate income within my overall investment strategy, not as speculation.
My income from this put was $590. The stock price was approximately $68/share when the contract expired, so I bought the shares at $70/share ($64.10/share including the premium, $70 - $5.90).
Naturally, I turned right around and wrote calls on my new FLS stock. I wrote 1 contract January 2010 FLS calls at a strike price of $80, for $4.20/share. The period of the call is about 6 months, which is about as long as I'm comfortable with. So, at this point I have bought FLS for $70/share, and I have earned $10.10 ($5.90 + $4.20) on my stock. That's a 14% return (I'm rounding down to keep it simple and account for transaction fees, which vary by which broker you choose). If my shares are called away in January, I will have made a 28.7% return ($80 strike - $70 purchase price = $10. $10 profit + $5.90 put income + $4.20 call income = $20.10 total income. $20.10/$ 70 = 0.287 ). If my shares aren't called away in January, I'll still have the premiums, plus my shares. Here I am not including the dividend, which is a 1.7% yield at current prices.
I have also written August $45 puts on Mosaic. At 36 days, this is a shorter term than I would usually consider (I like a term from two to six months). I chose this option because a)I would be content to buy MOS at $45 and b) this put offered an unusually good return relative to longer-termed options. I would consider $40 and $45 puts on this stock (currently trading at $48).
Compare the August, September, and December puts, at 33 days (1.1 months), 64 days (2.13 months) and 155 days (5.17 months) respectively.
As you can see in the screen cap, the percentage return per month (premium / share price = percentage return. Percentage / time period (in months) = percentage return per month) is unusually attractive for one option; the August $45 put.
Even though the dollar value for the December $45 puts is the highest, the August $45 puts offer the best value. Since I also would be pleased to purchase this stock at that price, I wrote that put. If I wasn't willing to pay $45 for the stock, I wouldn't consider it no matter how nice the return looked.
FLS: When your chickens come home to roost, remember to collect the eggs. When you get income from puts, and then the shares are put to you at your strike price, consider adding to that income by writing calls. Be sure you would be willing to sell at your call's strike price.
MOS: It's your percentage return, not the dollar amount of the premium, that should draw your attention to the stock. No put has value to me if I'm unwilling to buy at the put's strike price.
For both: Write calls only on stocks you'd be happy to sell at that strike price. Write puts only on stocks you'd be happy to buy at that strike price. I write options as a way to generate income within my overall investment strategy, not as speculation.
Wednesday, July 8, 2009
LNN price movements
The puts on LNN I wrote that original e-mail about are paying well again. The stock price was $32 and December puts were paying $4.70 at that time. The stock price shot up to $36 when LNN released earnings; the puts no longer paid well. Now that the price has dropped, the puts are moving back to the $4.60--4.70. I, personally, will wait in hopes of LNN moving even lower. I may write puts at $25 at that time.
Thursday, July 2, 2009
Writing puts
Today I wrote the following puts:
Medtronics (MDT): 3 contracts at $1.55/share, strike price of $34, expiring in August (51 days)
Precision Castparts (PCP): 1 contract at $3.10/share, strike price of $65, expiring in September (79 days)
Income from MDT: 300 shares * $1.55/share = $465
Return from MDT: ($1.55/$34)*100 = 4.5% over 51 days.
Income from PCP: 100 shares * $3.10/share = $3.10
Return from PCP: ($3.10/$65)*100 = 4.8% over 51 days.
These percentage returns are about what I aim for for shorter term puts (two to three months until expiration).
For longer term puts (four to six months) I aim for at least 7% returns.
Medtronics (MDT): 3 contracts at $1.55/share, strike price of $34, expiring in August (51 days)
Precision Castparts (PCP): 1 contract at $3.10/share, strike price of $65, expiring in September (79 days)
Income from MDT: 300 shares * $1.55/share = $465
Return from MDT: ($1.55/$34)*100 = 4.5% over 51 days.
Income from PCP: 100 shares * $3.10/share = $3.10
Return from PCP: ($3.10/$65)*100 = 4.8% over 51 days.
These percentage returns are about what I aim for for shorter term puts (two to three months until expiration).
For longer term puts (four to six months) I aim for at least 7% returns.
Saturday, June 27, 2009
LNN discussion
The following is from a discussion I had about a new purchase; the other party is new to options. The stock was trading at $31--32 per share; it's currently at $34. The options trade I discuss has not, as of this writing, been accepted by a buyer. Since the stock price has increased, it is no longer as attractive (as valuable) to a buyer to ensure he can sell his stock for $30. This is a small cap stock and thinly traded; I'm keeping my order open in anticipation of LNN decreasing in price. If it continues to climb, I'll let it go; there's no profit in chasing diminishing returns.
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I think it would be a good idea to make some long stock picks before getting into options; without understanding how to buy a stock for long-term investment, it's tempting to use options to speculate, which is a bad idea. Just because an option pays a 10% premium doesn't mean it's a good buy! Anyway, here's information on the option order I put in today. This was a pick from Motley Fool Pro.
I've put in this trade, but it has not yet been accepted by a buyer. The stock is Lindsay Corporation (NYSE: LNN). The stock traded at about $32/ share today. I want this stock to end up as about 4% of my portfolio, which is currently about $225,000. So, 4% of $225,000 = a maximum of $9000 I can use to secure this put.
I would be happy buying this stock for $30 a share, but it wouldn't break my heart if I never owned shares, so I'm selling puts with a strike price of $30 a share. With my target allocation of $9000 in mind, that means I'm selling puts on 300 shares, which equals 3 contracts (each contract is for 100 shares, unless otherwise noted in the options chain. All orders are placed by contract rather than by share. I always double check to make sure I haven't accidently added an extra couple zeros!)
I write options in a time window of three-to-six months expiration time. That means today I'm looking at puts expiring in August, September, and December.
August $30 puts are currently paying $2.25 per share (that is, $225 per contract of 100 shares), September is at $2.95/ share, and
December is $4.70 per share.
That means the August puts will pay 7.5% ($2.25/$30),
September puts pay 9.8%, and
December puts pay 15.7%.
Puts have better payouts for longer expiration times; this is because you're "insuring" the stock for the buyer for a longer period of time. If something happens to the stock between now and, say, December, the buyer has limited his downside (he can sell at $30 a share no matter what) without limiting his upside (if the stock goes to $60, he reaps the benefits).
I've decided to write $30 puts expiring in December (the command is "sell to open"). I check to make sure I have enough cash in my account to secure the put, then click on the December $30 option (ticker +NRRXF ) in the option chain screen, which brings me to the screen for this option; it shows me the last buying and selling price for this option.
In this case, the last sale was at $4.80/ share on Thursday the 25th (today). It isn't unusual for no options to be traded for days on a small stock! The current bid for this option is $4.70/ share. The ask is $5.10/share; at least one person is willing to write this option for $5.10/share.
I place my own order; "sell to open three (3) contracts of +NRRXF, limit at $4.80/ share." That's $480 per contract, for a total return of $1440. Currently, that order is just sitting waiting for someone to accept it--like a stock order that has not yet reached your limit price.If someone accepts the contract, here's what will happen; my account will be immediately credited $1440. $9000 will be frozen, unavailable for withdrawal or stock purchases. However, it will remain in my money market account.
At the options expiration date, there are just two possibilities; either the stock will be selling at or above $30 in the open market, or it won't. If the stock is selling above $30/share, nothing happens; the option expires worthless to the buyer (except for the peace of mind it brought him) and I keep the options premium. If the stock is selling below $30, I still keep the premium, and the $9000 that was securing that put will be used to purchase 300 shares (3 contracts) of the stock. I don't have a choice there; if the stock has dropped to $5, I'm still obliged to buy it at $30.
The options premium can be considered as income, or as subsidizing the purchase of the stock. If the option expires, I'll pay $30 per share, but I was paid (hopefully) $4.80 per share; my net cost per share is $25.20 per share--compare this to purchasing out-right today for $32! The downside is the potential opportunity cost; if LNN jumps to $60 by December, I'll kick myself for not buying at $30. This is what I was talking about when I recommended using options with an investment mindset, rather than for speculation. It's important to know the company you're writing options on, so a significant change in share price won't be a surprise (barring a black swan event).
<>
I think it would be a good idea to make some long stock picks before getting into options; without understanding how to buy a stock for long-term investment, it's tempting to use options to speculate, which is a bad idea. Just because an option pays a 10% premium doesn't mean it's a good buy! Anyway, here's information on the option order I put in today. This was a pick from Motley Fool Pro.
I've put in this trade, but it has not yet been accepted by a buyer. The stock is Lindsay Corporation (NYSE: LNN). The stock traded at about $32/ share today. I want this stock to end up as about 4% of my portfolio, which is currently about $225,000. So, 4% of $225,000 = a maximum of $9000 I can use to secure this put.
I would be happy buying this stock for $30 a share, but it wouldn't break my heart if I never owned shares, so I'm selling puts with a strike price of $30 a share. With my target allocation of $9000 in mind, that means I'm selling puts on 300 shares, which equals 3 contracts (each contract is for 100 shares, unless otherwise noted in the options chain. All orders are placed by contract rather than by share. I always double check to make sure I haven't accidently added an extra couple zeros!)
I write options in a time window of three-to-six months expiration time. That means today I'm looking at puts expiring in August, September, and December.
August $30 puts are currently paying $2.25 per share (that is, $225 per contract of 100 shares), September is at $2.95/ share, and
December is $4.70 per share.
That means the August puts will pay 7.5% ($2.25/$30),
September puts pay 9.8%, and
December puts pay 15.7%.
Puts have better payouts for longer expiration times; this is because you're "insuring" the stock for the buyer for a longer period of time. If something happens to the stock between now and, say, December, the buyer has limited his downside (he can sell at $30 a share no matter what) without limiting his upside (if the stock goes to $60, he reaps the benefits).
I've decided to write $30 puts expiring in December (the command is "sell to open"). I check to make sure I have enough cash in my account to secure the put, then click on the December $30 option (ticker +NRRXF ) in the option chain screen, which brings me to the screen for this option; it shows me the last buying and selling price for this option.
In this case, the last sale was at $4.80/ share on Thursday the 25th (today). It isn't unusual for no options to be traded for days on a small stock! The current bid for this option is $4.70/ share. The ask is $5.10/share; at least one person is willing to write this option for $5.10/share.
I place my own order; "sell to open three (3) contracts of +NRRXF, limit at $4.80/ share." That's $480 per contract, for a total return of $1440. Currently, that order is just sitting waiting for someone to accept it--like a stock order that has not yet reached your limit price.If someone accepts the contract, here's what will happen; my account will be immediately credited $1440. $9000 will be frozen, unavailable for withdrawal or stock purchases. However, it will remain in my money market account.
At the options expiration date, there are just two possibilities; either the stock will be selling at or above $30 in the open market, or it won't. If the stock is selling above $30/share, nothing happens; the option expires worthless to the buyer (except for the peace of mind it brought him) and I keep the options premium. If the stock is selling below $30, I still keep the premium, and the $9000 that was securing that put will be used to purchase 300 shares (3 contracts) of the stock. I don't have a choice there; if the stock has dropped to $5, I'm still obliged to buy it at $30.
The options premium can be considered as income, or as subsidizing the purchase of the stock. If the option expires, I'll pay $30 per share, but I was paid (hopefully) $4.80 per share; my net cost per share is $25.20 per share--compare this to purchasing out-right today for $32! The downside is the potential opportunity cost; if LNN jumps to $60 by December, I'll kick myself for not buying at $30. This is what I was talking about when I recommended using options with an investment mindset, rather than for speculation. It's important to know the company you're writing options on, so a significant change in share price won't be a surprise (barring a black swan event).
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