A Tale of Two Apples

  When I last wrote about my adventures using my self-directed 401K to buy stocks and write covered calls against them it was the end of September and my purchases of Exxon (XOM) and Apple (AAPL) were stuck in limbo as their stock prices had dipped so far below the purchase price and option stock price that I felt compelled to sell an option for Exxon with an expiration date four months into the future to generate cash flow while my 100 shares of Apple was showing a loss of over $400 despite my having collected over $400 in selling options on the stock over a 5 week period.

  In the intervening three months the stock market has risen upwards. The Dow Jones Industrial Average has gained 10% and most of my favorite stocks have gone along for the ride. Exxon burst past my option strike price of $82.50 in October and flirted with $84 days before the dividend date of November 10th. I was expecting my January 2018 option to be called in order for the buyer to collect the dividend but to my surprise the option was not exercised and I received a bonus of $154 on December 10th. With a month to go before the option expires, Exxon is in a band between $82 and $84 and it seems to be a close call as to whether the option gets exercised. Whether it gets called or not I only consider this a minor win since being stuck with the stock for an extra 4 months my ROI is 9% on an annualized basis which is good but not great and could be considered downright poor considering the length of time I had to hold the stock.

  

6/19/2017	Buy 200 XOM @83.005	-16605.95
6/19/2017	Sell 2 XOM Option @82.5 (2.06) Expiring 8/18/2017	405.65
8/2/2017	Buy 2 XOM Option @82.5 (.05) Expiring 8/18/2017	-10.08
8/18/2017	Sell 2 XOM Option @82.5 (.85) Expiring 10/20/2017	+163.66
8/10/2017	.77 dividend payable 9/11/2017	+154.00
8/28/2017	Buy 2 XOM Option @82.5 (.10) Expiring 10/20/2017	-20.08
9/5/2017	Sell 2 XOM Option @82.5 (.80) Expiring 1/1/2018	+153.65
11/10/2017	.77 dividend payable 12/11/2017	+154.00
	Total (If option is exercised)	+889.60	5.36%

  I has a much happier time with Apple. A week after my post the stock crept over $155 and I took the opportunity to collect $170 by selling another option to sell the stock for $162.50 on November 3rd. I could have done much better by waiting a week or two since Apple continued to gain momentum throughout the month and broke over $168 on October 30th. I knew that AAPL’s dividend date was on November 3rd and the risk of the stock sliding back under $162.50 was minimal so I bought my option back on October 30th at a high price and sold the same option only expiring on November 17th, picking up $60 in the exchange. The new option was exercised a week early on the dividend date of November 10th so I was happy to have an extra $60 in return for a weeks worth of patience and overall the investment gained $750 over three months for an annual return of 19.45% which I consider very good.

  

8/15/2017	Buy 100 AAPL @161.7053	-16175.48
8/15/2017	Sell 1 AAPL Option @162.5 (.88) Expiring 8/18/2017	+83.00
8/17/2017	Buy 1 AAPL Option @162.5 (.10) Expiring 8/18/2017	-10.04
8/17/2017	Sell 1 AAPL Option @162.5 (.84) Expiring 8/25/2017	+79.00
8/257/2017	Buy 1 AAPL Option @162.5 (.04) Expiring 8/25/2017	-4.04
8/25/2017	Sell 1 AAPL Option @162.5 (.90) Expiring 9/1/2017	+85.00
8/30/2017	Buy 1 AAPL Option @162.5 (1.86) Expiring 9/1/2017	-191.64
8/30/2017	Sell 1 AAPL Option @162.5 (3.65) Expiring 9/15/2017	+359.35
9/14/2017	Buy 1 AAPL Option @162.5 (.03) Expiring 9/15/2017	-3.04
9/15/2017	Sell 1 AAPL Option @162.5 (.70) Expiring 9/22/2017	+65.00
9/20/2017	Buy 1 AAPL Option @162.5 (.10) Expiring 9/15/2017	-10.04
10/3/2017	Sell 1 AAPL Option @162.5 (1.75) Expiring 11/3/2017	+169.35
10/30/2017	Buy 1 AAPL Option @162.5 (6.05) Expiring 11/3/2017	-610.64
10/30/2017	Sell 1 AAPL Option @162.5 (6.75) Expiring 11/17/2017	+669.34
11/10/2017	Sell 100 AAPL @162.50 (option was exercised)	+16244.67
	Total	+749.79	4.64%

  A few days before the Apple option was due to be exercised my 401k had become cash rich because my favorite stock Intel (INTC) had jumped from a multi-year high of $40 a share to over $47 a share from October 20th to November 3rd. I decided to cash out much of my Intel holdings because while I like the company and believe I understand the company I think that the price has grown too much too fast and I’d rather not be left holding the bag when their price once again drops because all stocks rise and fall. I kept my profit in the form of Intel stock but had the initial capital and went looking for new covered call option opportunities.

  My first purchase was with Apple which is becoming one of my new favorite option stocks because of its volatility and the seemingly eternal optimism of its stockholders. On November 7th I bought 100 shares of APPL near its all-time high of 174.70 and sold the option to sell the stock for 172.50 on November 10th for $258. My thought was that I would make $30+ for a three day investment and if the stock dropped below 172.50 I would collect a $63 dividend on the 10th. The stock stayed well over 172.50 and on the 9th I traded options, buying back my November 10th option and selling the same option for November 17th. The trade netted me an extra $64 and as a bonus the option was not exercised on the 10th which gave me $63 in dividends for a total of $159 in profit if the option was exercised the next Friday.

  IF. Unfortunately, Apple took a tumble the next week and dropped past $172.50 on its way to $169.64 a share by November 17th. I bought back my option for $4. I could have sold a new option for $50 for the next week but since I had at this point collected almost $400 on this particular stock purchase I decided to gamble a little and sold an option expiring in 2 weeks on December 1st but at a strike price of $175 instead of $172.50. I collected $70 for the option and there was the promise of another $250 if the option was exercised. Apple rose over $175 on the 27th and 28th before dropping below $170 once again on November 30th and December 1st. I bought back my option for $10 on the 30th and when AAPL jumped over $171 on the 1st I sold another option to sell the stock for $175 in two more weeks (on the 15th) and collected another $120.

  In the succeeding two weeks Apple’s share price never got to $174 a share much less the 175 strike price. I bought my option back on the 14th for $10 and got $79 for the option to sell the stock at $175 on December 22nd. This week Apple set a new all-time high stock price and climbed over $177 on Monday before settling in between $174.50 and $175.50 on Tuesday and Wednesday. At this point it is a coin flip as to whether my option will get called or not. If the option does get called I will have collected a profit of over 3.7% on my 45 day investment which works out to over 30% annually. If the price stays below 175 and I still own the stock come Monday I think I will start selling the option at a strike price of $177.50. While the stock may crash in the next week or so I consider this a big win so far.

  

11/7/2017	Buy 100 AAPL @174.655	-17470.45
11/7/2017	Sell 1 AAPL Option @172.5 (2.65) Expiring 11/10/2017	+258.35
11/9/2017	Buy 1 AAPL Option @172.5 (2.25) Expiring 11/10/2017	-230.64
11/9/2017	Sell 1 AAPL Option @172.5 (3.00) Expiring 11/17/2017	+294.65
11/10/2017	.63 dividend payable 11/16/2017	+63.00
11/17/2017	Buy 1 AAPL Option @172.5 (.04) Expiring 11/17/2017	-4.04
11/17/2017	Sell 1 AAPL Option @175 (.80) Expiring 12/1/2017	+75.00
11/29/2017	Buy 1 AAPL Option @175 (.10) Expiring 12/1/2017	-10.04
11/30/2017	Sell 1 AAPL Option @175 (1.25) Expiring 12/15/2017	+119.35
12/14/2017	Buy 1 AAPL Option @175 (.10) Expiring 12/15/2017	-10.04
12/14/2017	Sell 1 AAPL Option @175 (.84) Expiring 12/22/2017	+79.00
	Total (If option is exercised)	+658.89	3.77%

  I made two other option plays with my Intel capital as well as the cash I am accumulating from the covered call options. Both were incredibly successful thanks to an email from a blog reader suggesting that I could increase my profit by playing this option game with stocks on the low end of their yearly cycle and selling the option at a strike price close to or over the purchase price instead of looking for a small profit by selling the covered calls below the current selling price. The idea made sense to me. Buying quality stocks at yearly lows is normally a good policy anyway and collecting option money and profiting by a stock price increase is a win-win while getting stuck holding a quality stock purchased at a low price isn't an awful situation. AT&T (T) seemed like a likely candidate for me. It is a mainstay of my FMF (Found Money Fund) and has increased their now 50 cent a share dividend for 34 consecutive years. The stock was also near its 52 week low due to the uncertainty over whether the government will challenge or stop its purchase of Time-Warner. On November 9th I bought 200 shares of T for 33.87 and collected $157 for the option to sell the stock at $34 a share on December 15th. After bouncing between $33 and $34 for most of November, AT&T went over $36 a share on November 29th and over $38 a share on December 12th. My option was exercised and I sold the stock on December 15th for $34 as agreed upon for a total profit of $172.20 for a 36 day investment which works out to a return of 2.5% and 25.75% annually. Yes, I could have made more money by holding the stock and not selling the option but that was not apparent on November 9th and I am happy to have made a great return with little risk of a big loss.

  

11/9/2017	Buy 200 T @33.877	-6780.35
11/9/2017	Sell 2 T Option @34 (.82) Expiring 12/15/2017	+157.66
12/15/2017	Sell 200 T @34 (option was exercised)	+6794.89
	Total	+172.20	2.54%

  My other play in November was with another FMF standout, Phillip Morris (PM). PM is the foreign tobacco and cigarette arm of Marlboro and has provided a steadily increasing dividend for the last 10 years since it spun-off from its parent company Altria. PM was over $120 a share earlier this year but a strong dollar had depressed its earnings and was sitting at a 6 month low of 103 when I made move on November 10th, buying 100 shares at 103 and collecting $95 for the option to sell the stock at the same $103 a week later on November 17th. This ride was similar to my apple adventure. PM bounced between 101 and 103 a share for the next week and on the 17th I was able to buy back my option for $9. I immediately sold an option to sell the shares for $104 expiring 2 weeks later on December 1st for $70. I was leaving some money on the table in the expectation that if PM went over $104 a share I would collect a better profit when the option was exercised. PM never got to 104 and on November 28th I was able to buy back my option for $10 and sell another $104 option expiring on December 15th for an additional $81. On December 4th PM went over 104 and didn’t look back. It hit $110 on December 15th and my option was exercised, leaving me with a $316 profit which works out to 3% (32% annually) over 35 days. Again I could have made more by holding the stock once again I am happy to take a outstanding return with for a low risk.

  

11/10/2017	Buy 100 PM @103.005	-10305.45
11/10/2017	Sell 1 PM Option @103 (1.00) Expiring 11/17/2017	+94.95
11/17/2017	Buy 1 PM Option @103 (.09) Expiring 11/17/2017	-9.04
11/17/2017	Sell 1 PM Option @104 (.75) Expiring 12/1/2017	+70.00
11/28/2017	Buy 1 PM Option @104 (.10) Expiring 12/1/2017	-10.04
11/28/2017	Sell 1 PM Option @104 (.86) Expiring 12/15/2017	+81.00
12/15/2017	Sell 100 PM @104 (option was exercised)	+10394.80
	Total	+316.22	3.07%

  As pleased as I am with my recent option results, I can't help but think that the stock market is so high right now that it is primed for a big fall. When? No one knows and certainly not me. That is why I continue to stick with solid companies that have a decades-long history of paying and raising dividends. Even when I get stuck with XOM and APPL like I did in September I am stuck with a top quality stock that makes money and pays dividends. The higher this market goes the more inclined I am to keep my option plays of a shorter term so I can hopefully get out before the bubble breaks but in the meantime I am riding the ups and downs like a surfer and enjoying the ride.