Friday, August 11, 2017

Buy High, Sell Low

  When I last wrote about my adventures in the stock market using my self-directed 401K and cash I get from side jobs (the Found Money Fund or FMF) I focused on buying stocks and collecting an immediate return by selling the option to sell the stock at a lower price than I paid for it. This strategy is called an ‘In-The-Money Covered Call’. My last post mentioned that in the case of Emerson (EMR) the stock price rose just before the date stockholders would receive a dividend which caused the option I sold to be exercised the day before I was due to receive the dividend.

  Companies that declare dividends usually issue them like clockwork each quarter. Emerson and Exxon issue the dividend to stockholders on the second week of February, May, August, and November with the dividends paid the second week of the next month. Intel uses the same months and issues the dividends on the first week of the month payable on the first day of the next month. The day the dividend is issued the stock goes down by the same amount as the dividend. Meanwhile options are sold that expire each week but the bulk of options expire on the third Friday of every month.

  The timing of the dividend date and the monthly options date got me thinking that if I timed my options sells to expire just after the dividend issue date I would either get my option covered early and received an increased yield because I wasn’t holding the ‘in the money stock’ as long or I would pick up the dividend and still have a couple of weeks for the stock price to rebound so the option would be picked up and I would get my agreed-on profit with the bonus of a dividend.

  My first attempt came in early May. A week before Emerson was going to issue their 48 cent per share dividend I scooped up 200 shares at $58.14 a share including commission and took $303 by selling the option to purchase these shares at $57.50 on June 16th. The stock climbed over $59 a share over the next week and closed at $58.85 on May 9th. I fully expected my option to be called in the next day before the dividend was issued and leave me a $170 profit for a six-day investment (1.45% or 88.1% annual). To my dismay the option wasn’t called and I picked up the $96 dividend. Over the next five weeks Emerson bounced between $57.25 and $61.30 and was at $60.68 on June 16th when my option was called and I sold my 200 shares as agreed upon for $57.50. So, I bought a stock on May 4th at $58.14 and sold it for $57.50 when its market price was $60.68. This sounds like idiocy but when the option price and dividend are factored in I made $264 for a 43-day investment which comes to 2.27% or 19.3% annually.
5/4/2017Buy 200 EMR @58.1251-11629.97
5/4/2017Sell 2 EMR Option @57.5 (1.55)
Expiring 6/16/2017
5/10/2017.48 dividend payable 6/10/2017+96.00
6/16/2017Sell 200 EMR @57.50
(option was exercised)

  A wise guy friend of mine pointed out that if I had just bought the EMR stock at $58.14 on May 4th and sold it on June 16th for $60.68 I would have still collected the dividend and made $606 or more than double what I made. This is true but I am not trying to buy low and sell high – I am buying high and selling low in order to maximize my chances of grabbing a percent or two in return. In baseball terms I’m choking up on the bat to hit singles and keep the ball in play instead of taking big swings which can either be home runs or strikeouts.

  In my April post I wrote how I had bought 100 shares of Exxon (XOM) stock for $83 a share on February 15th and sold and bought back and re-sold options to sell the stock at $82.5, always taking a small profit on the buyback of the option and then reselling the option with a later expiration date. On May 3rd, I was showing a profit of $282, the stock was safely below the $82.50 option price, and the Exxon dividend was going to be issued on May 10th. I bought the May option I had sold for $95 less than I sold it for at the end of March and sold a new option expiring on June 16th for $135. My idea was that if the Exxon price skyrocketed in the next week I would have my option called before the dividend was issued but the stock price stayed stubbornly below $82.50 and I collected the dividend on May 10th (payable June 9th). On the option expiration date of June 16th, XOM jumped from $82.26 to $83.49 and again my option was called. To recap I bought 100 shares of XOM for $83 on Feb 15th and sold it for $82.50 on June 16th even though the market price was $83.49. Just like my EMR adventure it looks like lunacy in action until we factor in the $77 dividend and the profit I made from selling and reselling the options which shows a profit for my 4-month investment of $360 which is 4.3% and 13% annually! And to my wise guy friend who pointed out I could have doubled my profit on EMR by buying and holding I would point out that the same strategy with XOM would have left me with a profit of $127 or almost two thirds less than I managed with a little care and effort.
2/15/2017Buy 100 XOM @82.925-8300.45
2/15/2017Sell 1 XOM Option @82.5 (2.32)
Expiring 4/21/2017
3/30/2017Buy 1 XOM Option @82.5 (1.10)
Expiring 4/21/2017
3/30/2017Sell 1 XOM Option @82.5 (1.80)
Expiring 5/19/2017
5/3/2017Buy 1 XOM Option @82.5 (.75)
Expiring 5/19/2017
5/3/2017Sell 1 XOM Option @82.5 (1.41)
Expiring 6/16/2017
5/10/2017.77 dividend payable 6/9/2017+77.00
6/16/2017Sell 100 XOM @82.50
(option was exercised)

  I played this game with XOM with a different price point in May. On May 5th (5 days before the dividend issue date) I bought 200 shares of XOM for $81.81 and collected $1.81 a share for the option to sell the stock at $81 on June 23rd. I expected the option to be called the next week and leave me with a $200 profit for a 5 day investment but the option wasn’t called on May 10th even though the stock was above the $81 strike price at $81.54 so I was issued the dividend. As I mentioned above XOM skyrocketed to $83.49 on June 16th but the option on the $81 sell still wasn’t called. Exxon plummeted the next week and on June 23rd closed at $81.61 when the option was exercised. This was the happiest ending yet – I bought 200 shares on May 5th at $81.81, sold it 49 days later for $81 and pocketed a $341 profit which is 2.1% and 15.5% annually. If I had done a buy and hold like my wise guy friend has suggested I would have shown a profit of $99 which was again two thirds less than I received with some active management.

5/5/2017Buy 200 XOM @81.79-16362.95
5/5/2017Sell 2 XOM Option @81.00 (1.81)
Expiring 6/23/2017
5/10/2017.77 dividend payable 6/9/2017+154.00
6/23/2017Sell 200 XOM @81.00
(option was exercised)

  When my options were called the stocks were sold and I had all my cash back plus my profit. So what did I do with my money now that it was back in the form of cash? I turned around and did the same thing all over again but this time using the expiration date of August 18th which is a week after XOM and EMR again issue dividends. I’ll report on the outcome in a few weeks. I think my buy high and sell low strategy is a low risk way to get sizable returns. I believe my strategy is better in a down or sideways market than the current bull run since I am limiting my upside in the case of a stock skyrocketing. I am also limiting my down side in case of a crash since even if my chosen stocks go down a percent or more I have a good chance of getting the option called and my cash back along with my profit and even if I get caught having to hold a stock that is in a downtrend I only do this with top shelf stocks that pay a solid dividend so I am paid for my ‘patience’ while I wait for the stock to go back up again. Buying and holding seems like more of a gamble to me since I simply do not know enough about the stock market, the effects various world events will have on stock prices, the impact of electric cars and sugar taxes on stock prices, etc...., etc.… Playing my option games and locking in my profit seems like more of a sure thing to me.

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