Thursday, January 5, 2017

Born To Lose

  Last September I wrote about using my self-directed 401k to dip my toe into the waters of buying Intel stock and immediately selling an option to another party to buy the same stock for less than I paid for it at a future date with the price I collect for the option netting me anywhere from 1% to 3% on my original investment after covering the loss from the sale of the stock. In my September article I told how I had bought 200 shares of my favorite Intel stock at $35.07 on August 19th, collected $1.89 a share to allow another party the option to purchase the 200 shares at $34.00 any time before October 21st and said I’d see how it all worked out on October 21st. The day I wrote that post the price of Intel went over $36 a share and on September 19th went to $38 a share. I was pretty pleased at this turn of events since it meant that it was almost a sure thing that my option would be picked up on October and I would have succeeded in getting a 2% profit for a 2 month investment.

  Intel remained between $36 and $38 a share through the rest of September the first part of October until October 18th when their quarterly earnings announcements met with the displeasure of the investing public and the stock plummeted from a high of $38.05 to $35.15 at the close of the trading on October 21st. Since the stock was trading above $34 a share, my option was exercised on the 21st and I closed this trade with a profit of $139.90 or 70 cents a share for owning a stock for 2 months that had risen by the grand sum of 8 cents!
8/19/2016Buy 200 INTC @35.0758-7023.11
8/19/2016Sell 2 INTC Option @34 (.95)
Expiring 10/21/2016
10/21/2016Sell 200 INTC @34.00
(option was exercised)

  On Monday October 24th I again went looking for another stock to buy, sell at a loss, and still make a profit by selling the option to sell at a loss. I didn’t have to look much further than the INTC page on the fidelity app on my amazing iPod. I bought 300 shares of Intel at $35.395 a share and sold an option to sell the stock for $33 a share on January 21st, 2017. I collected $2.84 a share on the option which means that if my option was exercised in January I would have a profit of $115.21 or 1.08% on my 88 day investment. It would be fair to compare this with my August-October buy/sell and notice that I was investing my money for an extra month for half the percentage. I did this for two reasons. The 8% drop of Intel in the previous week lowered the option prices and made me a little skittish myself which is why I decided to sell at $33 instead of $34 (also known as the strike price). The other reason is that Intel issues a dividend on December 1st payable to stockholders on November 3rd. This means that my profit (assuming the option isn’t called early which it was not) increased on December 1st by $78 (300 shares x a .26 dividend) to make a grand total of $193.21 or 1.82% which to me is a reasonable if not spectacular profit on a very low risk proposition that Intel will sell at or above $33 on January 21st or at least the break-even mark of $32.41.
10/24/2016Buy 300 INTC @35.395-10626.45
10/24/2016Sell 3 INTC Option @33 (2.84)
Expiring 1/20/2017
11/3/2016Dividend INTC (Payable 12/1/2016)+78.00
1/20/2017Sell 300 INTC @33.00
(if option is exercised)
Total (If option is exercised)+193.211.82%

  Intel stayed between 34 and 36 for the rest of October, dipped below 34 the week of the election but quickly rebounded over 35 once everyone realized the world wouldn’t end just because Donald Trump was elected president. After flirting with 36 on early December I decided to make another move into losing territory. On December 12th I bought 300 more shares of Intel at 35.965 and sold the option to sell the shares at $35.5 on January 6th for a premium of 98 cents a share. This is a much riskier proposition than the other option plays because the stock could easily drop under 35.5 in one day much less 4 weeks and the reward is a smallish 1.26% which looks a lot better when taking into account the short time frame. In the last 3 weeks Intel has stayed well above $35.5 so I think I will get away with this play. When I review this I’m of the opinion that it was too risky a move. Intel is a great stock to own under any circumstances but the chances of the stock finishing below the break even point of $35.07 doesn’t seem worth the 1.26% reward. The experience has given me a better handle on my risk tolerance and even if I do get away with the play I won’t be too likely to repeat this particular short term scenario.
12/12/2016Buy 300 INTC @35.9657-10797.65
12/12/2016Sell 3 INTC Option @35.5 (.98)
Expiring 1/6/2017
1/6/2017Sell 300 INTC @35.50
(if option is exercised)
Total (If option is exercised)+136.021.26%

  Another of my favorite stocks is Emerson Process Management (EMR) and that company has proven to be a much more profitable play in the short term risk scenario. Long time blog readers may remember that I bought 100 shares of this company in December of 2014 at $61.44 and while the stock has drifted below 50 in 2015 and 2016 I was able to keep my losses manageable by collecting a 47 to 48 cent dividend and selling options at a strike price of $60 or higher when possible. My current break-even point on this stock is $54.50. The stock caught a second wind in the second half of this year and has drifted in the $48-$58 range with wild swings depending on current events and analysts opinions on the status of the company. On October 12th I noticed an anomaly between the stock price and the option price and made a move, buying 100 shares of EMR at $49.995 and collecting $142 for selling the option to buy the stock for $50 on or before November 18th. The stock drifted between $49 and $51 for a few weeks and closed at $50.38 on November 7th which is an important date because on November 8th Emerson gave a 48 cent dividend. My option wasn’t picked up so I collected an extra $48 (payable on December 10th). From November 8th to November 18th, Emerson leaped over 8% from 49.85 to 54.20 a share. On November 18th my option was exercised and I sold 100 shares of Emerson that was valued at $54.20 a share for $50. I didn’t feel like much of a loser since I made $178 (3.57%) on a five week investment.
10/12/2016Buy 100 EMR @49.955-5003.45
12/12/2016Sell 1 EMR Option @50 (1.50)
Expiring 11/18/2016
11/8/2016Dividend EMR (Payable 12/9/2016)+48.00
11/18/2016Sell 100 EMR @50.00
(option was exercised)

  On the Tuesday after my EMR option was exercised I used the same money to do it all over again. On November 22nd I bought 100 shares of EMR for $54.70 and made $141 by selling the option to buy the stock at 55 on or before January 20th, 2017. In the month and half since I executed this trade Emerson’s price has vacillated between $54.40 and $58.30. If the option is exercised in two weeks I’ll have made 2.68% for a two month investment which isn’t as good as my October buy but still worth the risk.
11/23/2016Buy 100 EMR @49.955-5478.06
11/23/2016Sell 1 EMR Option @54.7011 (1.41)
Expiring 1/20/2017
11/18/2016Sell 100 EMR @55.00
(if option is exercised)
Total (if option is exercised)+146.882.68%

  I don’t write about these adventures to brag – I write about them because it helps clarifies my thoughts, it may be of use for other people to read, and I get the occasional idea I hadn't thought of delivered to my email inbox. Keep in mind I am not gambling with my rent money – I am using 401k money that I can’t touch without paying taxes and penalties and there is always the real possibility that a stock will tank and I'll be stuck holding it for years (making it super important to play this game with solid dividend paying companies). I liken this playing with the stock market very much like my picking NBA basketball games in that I am trying to find a workable system. I don’t know how this selling at a loss idea will work in a down or sideways market but as long as I am betting on solid companies with a long history of paying dividends I suspect I won’t go too wrong.