No one I talk to about investing had heard of this strategy of planning to sell stock at a loss and I knew that I wasn’t the first person to think of this so I went on the internet and found that a related strategy exists called In-The-Money Covered Call’. It is listed in “theoptionsguide” website as “a good strategy to use if the options trader is looking to earn a consistent moderate rate of return.” which certainly fits me to the letter although it doesn't quite fit in that I am buying the stocks specifically to sell the In-The-Money covered call. In ‘Born to Lose’ I wrote about three covered calls (2 for INTC and 1 for EMR that were likely to be exercised in the days after the post was published. All three options were exercised and I immediately went about looking for new buying opportunities. When my January 6th option for 300 shares of Intel was called I bought 300 more shares at 36.70 and sold the option at a strike price of $36 expiring on February 17th. The premium of 1.46 per share I received on the option would leave me a profit of over $200 if the option was exercised five weeks later. The option was exercised on February 17th and as a bonus I got an extra $78 when Intel declared their quarterly dividend of 26 cents a share for stockholders as of February 3rd. The entire transaction netted me $280.76 or 2.55% over 38 days (23.85% annually) which to me was much better than a ‘moderate rate of return’.
|1/19/2017||Buy 300 INTC @36.6959||-11016.72|
|1/19/2017||Sell 3 INTC Option @36 (1.46)|
|2/3/2017||.26 dividend payable 3/1/2017||+78.00|
|2/17/2017||Sell 300 INTC @36.00|
(option was exercised)
My next option buys was another favorite Emerson (EMR) who I worked for and can personally attest to their commitment to their bottom line. On January 12th I bought 100 shares at 57.15 and received $3.25 a share to sell the option at a strike of $55 expiring March 17th. Two weeks later I made a similar play and on January 26th I bought 100 shares at $60 per share, and collected $3.10 a share to sell the option at a strike of $57.5 also expiring on March 17th. I was counting on collecting the .48 cent dividend on February 15th but the stock hit a huge upswing and with a price of 64.14 both options were exercised the day before the dividend would be mine, leaving me with smallish profits of $85.23 (1.49%) and $37.61 (.63%) over 34 and 20 days respectively which could be described as moderate.
|1/12/2017||Buy 100 EMR @57.15||-5722.952|
|1/12/2017||Sell 1 EMR Option @55 (3.25)|
|2/15/2017||Sell 100 EMR @55.00|
(option was exercised)
|1/26/2017||Buy 100 EMR @57.9761||-6005.56|
|1/26/2017||Sell 1 EMR Option @57.5 (3.10)|
|2/15/2017||Sell 100 EMR @57.50|
(option was exercised)
My third option purchase was for Exxon (XOM),another old favorite which has wild fluctuations in prices depending on the various states of unrest in oil producing nations. On February 15th I bought 100 shares of Exxon at $82.925 and collected $223 for the option at a stike of $82.50 expiring April 21st. On March 30th, Exxon had taken a roller coaster dip from $83.87 to $81.84 in one day and the price of my option plummeted so I bought the option back for $1.10 a share and immediately sold another option at the same strike price of $82.50 only expiring a month later on May 19th for $1.80 a share. Less commissions I collected an extra $60 or .71% to extend the option out an extra month and there is the possibility of collecting a 75 cent a share dividend for Exxon in early May.
|2/15/2017||Buy 100 XOM @82.925||-8300.45|
|2/15/2017||Sell 1 XOM Option @82.5 (2.32)|
|3/30/2017||Buy 1 XOM Option @82.5 (1.10)|
|3/30/2017||Sell 1 XOM Option @82.5 (1.80)|
|5/19/2017||Sell 100 XOM @82.5|
(if option is exercised)
All three of the options have something in common – they were for stocks I just bought and the option strike price was less than I paid for the stock with the expectation that the option would be exercised and I will sell the stock and get my money back along with a 1 to 3 percent return over a month or two. I wouldn’t feel awful if the price of Intel, Exxon, or Emerson tanked and I got stuck with the stock because these companies have been around for years, pay healthy dividends, and are bound to be back up at some point but I want the options to be exercised to I can keep cycling through my strategy for a percent or two return.
There are some stocks that I feel like I have as investments and would like to boost my earnings by selling options but I would rather not have these options exercised. The 100 shares I have in AT&T in the Found Money Fund is an example. When I went looking to sell an option for AT&T I had to think about a) what kind of return I wanted and b) what kind of price would make me OK with selling the stock. I decided that I would want the quarterly dividend payout (.49 cents a share) as a return and I would feel comfortable selling AT&T if they were at their year high. AT&T’s 52 week high was 43.89 on July 5th 2016 and I saw that I could sell an option at a strike of $44 expiring in August and get $40 but I decided to go a little longer in time and a little higher in stike price so I went for an October 21st option for a strike of $46 and collected $45 after commissions for the option. I’m only getting an annual return on the option of a little more than 2% but that’s fine because this time I’m definitely going for a ‘moderate’ return. If AT&T breaks above their year high I’ll sell the stock for $46 and be pretty happy to grab a great profit. In the month since I sold this option AT&T has gone from almost $42 to under $40 and I can buy this option back for $12, banking a profit of $28 after commissions. I am waiting until the price of the option goes to $10 so I can buy it back commission free.
I felt pretty good about this idea of collecting an extra dividend payment and possibly selling a stock at a year high so I did it again with the 100 shares of EMR stock I’ve owned since late 2014. The initial purchase price was 61.44 and the stock has gone between $50 and $65 in the interim but by collecting a healthy dividend and selling options I currently show a profit of over 13.3% (5.6% annually) on a stock whose price is virtually unchanged (61.22 on April 25th) over the 2 and a half years I’ve owned it. I’m pretty attached to these particular shares so when I decided to make a little extra money on them I went for the same strategy. Emerson’s 52 week high is 64.37 on February 10th. On March 6th I collected $58 to sell an option to sell Emerson for a $65 strike expiring June 16th. At the time Emerson was trading at $60 and last Friday it is selling at $59 with the price of the option dropping to $14. I am following the same strategy as T and will buy the option back if the price goes down to $10 so I can save the $5 commission.
Since I've brought up the commission a few times I should mention that earlier this year Fidelity lowered their commission for trading stocks on their site from $7.95 a trade to $4.95 a trade. The $3 savings per trade is a significant factor in options as the payouts are smaller and the commission percentage is larger and it is a nice bonus for a small fish like me that only trades an option or two at a time. If I was trading 10 or 20 options at a time the commission would be no issue since it would be less than a penny a share.
My new option strategy of having some keeper stocks that I am only willing to sell high and will accept less in options premiums along with stocks that I buy in order to collect more money for options that I expect to be exercised makes it seem like I have a bit of a split personality disorder as I read this post a day after writing it. I see it as a process of getting familiar enough with options to use them in different ways. I started out by selling short term options that would guarantee me a profit if exercised as a way of making extra profit on a stock transaction. Then I discovered a way to make a short term profit on cash by buying a stock and selling the option at a lower price than I paid in order to again make a short term profit. Now I am playing more of a long game by squeezing an extra percent or two out of stocks I have as long term investments by selling options for high prices way out in the future. All three strategies have their place in my toolbox and all three fit my profile of wanting to maximize my profits without taking undue risks.