Month: August 2018

Seriously, this was really a busy week for trading and wasn’t exactly what I had in mind when launching LEAPtoProfit.

At least that’s not what I had in mind as representing a typical week.

Certainly, using the Option to Profit strategy, this would have been a normal or maybe even a relatively quiet week, but for the longer term outlook strategy, there isn’t supposed to be that much trading.

LEAPtoProfit, though, is in that awkward phase.

You remember middle school, don’t you?

As we are just getting the portfolio off the ground and going through a planned transition from initiating positions and then migrating them from single lots to perhaps multiple lots and ultimately with longer term short calls written against the underlying stocks, there is activity.

If you have been following the new weekly “Scorecard,” all you have to do is scan the page and look for any item highlighted in “Yellow” to see where income was added.

That includes premiums and it includes dividends generated during the week.

With the market moving to new closing highs on the S&P 500, this was a good time to pick up cover for any uncovered positions, to the point that there are no uncovered positions at the moment.

Currently, the portfolio is overweighted in Consumer Discretionary and also in shorter term dated options, but an assignment or two of those shorter term positions opens the way for both realization of gains and establishment of greater diversification.

The doubling down on L Brands (LB) this week is part and parcel of a Leapfrogging strategy and with eyes actually set on 2020 with both current lots of those shares.

While I was happy to pick up additional shares at $28.02, it was still painful to see the decline that brought about that opportunity, considering that I already owned shares at a (much) higher price.

Back in the Option to Profit days I would have fretted about the decline in the price of at least one of those existing lots, but with a longer term horizon, I am just happy to collect the dividends and wait another few months in anticipation of another opportunity to generate some option related income.

I don’t expect next week to be as busy, although there is still cash to round out the portfolio, which I would like to eventually contain 10-15 positions.

At present there are 6 open positions, so we are about at the half way mark and with hopefully more income generating opportunities to go.

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August 8, 2018

Normally you put a post-script to an article at its end, but I like to put them at the beginning, to increase the chances that it’s read and to get some thoughts going.

So here is the post-script: In this case, two days ahead of the ex-dividend date, Royal Dutch Shell “A” had a strong day, only to finish off of its highs.

At its peak for the day, shares were as high as $67.53.

That put shares a full $0.59 above the price where it might make sense for an option holder of the $66 calls to consider exercising their option.

As expected, there wasn’t too much advantage to be gained by considering to roll the short option position over and extending its term by a week, as the resultant additional net premium would have only been about $0.15. That’s because, as mentioned in the article below, the dividend was larger than the units at which strikes were offered.

As it turns out, shares closed at $66.90.

Ideally, shares would stay about there as the closing bell chimes in tomorrow, leaving us with the dividend and then in much better position to either roll that position over or to see the shares get assigned.

Stay tuned.

The August 9, 2018 post-script appears where a post-script normally appears

 

 

A long time ago, more than 6 years, to be exact, I published one of my most popular articles on Seeking Alpha and the philosophy followed by Option to Profit very much searched for opportunities to discover pricing inefficiencies in options that were related to dividends.

That article was called Double Dipping Dividends and even though I understand that dividends are nothing more than a return on capital, when there is an inefficiency, it may be worth exploiting.

While that’s still the case for LEAPtoProfit, it just won’t be the case that often.

Today, however, I was looking at 2 different stocks going ex-dividend this week and did pull the trigger on one of them.

The two were Starbucks and Royal Dutch Shell “A”.

I finally decided to go with the Royal Dutch, because I already had too many consumer discretionary stocks in the LEAPtoProfit portfolio and since it was designed to hold fewer stocks than did the Option to Profit portfolio, I do keep a closer eye on that sort of thing.

Anyway, for the uninitiated, the larger the dividend, particularly if it exceeds the  strike pricing units, the less the inefficiency in pricing happens to be.

So in that regard, the $0.94 dividend, when options are being priced in $0.50 increments is pretty fairly priced, whereas the $0.36 dividend for Starbucks is more likely to be associated with pricing inefficiencies in its options.

But, diversity.

Anyway, with a $0.94 dividend, and with the ex-dividend on Thursday, the likelihood of an early assignment by the purchaser of the call options that I sold, is very small until the share price reaches or exceeds $66.94.

In fact, the greatest likelihood is that the price would have to exceed $66.94 and at that point it’s a question of by how much and how many days are left on the contract.

With 2 days left on the contract after its ex-dividend date, an option holder is likely to want to see a share price approaching $67 or maybe even higher.

Why doesn’t the option buyer just exercise and grab the dividend away from you, the option seller?

Good question, with some easy answers.

First, option buyers like leverage. What they don’t like is laying out a lot of cash to own shares, when they think they can make a good profit with just a small fraction of that layout.

Second, and perhaps even more important, is that even as option buyers may have a bit more interest in “gambling,” they are not idiots.

They know that if they take ownership of those shares, they may wake up the next morning, that is the day after the ex-dividend date and see those shares decline in price, above and beyond the decline the previous day by virtue of having gone ex-dividend.’

In other words, if Royal Dutch Shell “A” hits $66.94 the evening before the ex-dividend date, the next morning the share price will be adjusted downward to $66.00 in reflection of the dividend.

And it could go lower.

Who wants that?

Well, maybe the seller of those options.

In my ideal world this week, by Wednesday evening, the night before the ex-dividend date, shares of Royal Dutch Shell “A” would be right at $66.94.

In that event, I received the $0.39 premium for having sold the weekly option and the $0.94 dividend and am left with a $66 share price with 2 days left to go until option contract expiration.

That leaves lots of options.

Roll the contracts over?

Yes, perhaps.

Add more shares and start Leapfrogging?

Yes, that, too. Maybe.

Take assignment and move on? Sure, why not.

Sell LEAPS?

Sounds good. With an ex-dividend date in early August, a January 2019 LEAP would likely offer at least one and perhaps two more dividend opportunities, in addition to opportunities to further rollover the January LEAP to July 2019 or January 2020, while also ratcheting the strike price higher.

Stay tuned.

August 9, 2018 Post- Post-script: I awoke this morning, August 9th, nit knowing whether the shares were exercised early, as they had closed at $67.23, putting those shares $0.29 above the break even level of $66.94, when accounting for the $0.94 dividend.

Since the weekly rollover would have resulted in only a net of about $0.10, it wasn’t worth the trade, but also with that net being so much less than the breakeven, the likelihood was that the shares would be taken away early.

And they were.

So, as it turned out, the 3 day return was 0.7%, versus a 0.6% for the S&P 500.

At its current price this morning, prior to the opening, hovering at about $66.13, I may very well buy these again.

And soon.

 

 

 

 

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I’m not a golfer, so I really don’t know too much about what most people know as “the short game.”

The very few times that I’ve been on a golf course, it has been beyond humbling on every level.

Long game.

Short game.

Locker room showers.

When I first started the transition to a covered option strategy after a long time of paper trading to test the strategy, there were no true short game options.

At that time there were monthly options, but eventually along came weekly options and changed everything.

For me, at least.

Especially during a period of high volatility, those weekly options offered really attractive premiums or at the very least offered attractive downside protection for a stock that you didn’t mind owning.

So, I evolved into a short term trader and over the course of 5 years of documented trades, actually closed out about 1,000 positions.

But as it seems like the time to evolve once again, mostly because I really want to rid myself of the yoke of the computer monitor and the need to always be trading, the idea of the monthly trade or even the annual trade became the attraction.

But as I look at a portfolio that has more and more 2019 expiration dates and even a 2020 or two date, is there really any place for the short trading game?

The answer, at least based upon the first month of LEAPtoProfit trading is “YES,” as this past week marked the closing of the very first LEAPtoProfit trades.

That’s not to say, however, that I intended for the positions in Hewlett Packard Enterprises and General Motors to end up being short term positions.

In the case of General Motors, it was actually the fifth time I had owned shares in 2018, having waited nearly 3 months for the price to get back to where I thought it worthwhile to start the process again.

In the case of Hewlett Packard Enterprises, I had only opened positions twice in 2018, but had a larger number of shares and was selling calls on a portion of those holdings at a time, as is typically done in Leapfrogging.

In fact, I was working those shares toward the sale of a LEAP contract, in that I had now 75% of those shares expiring on the same date and if they would have expired near the $15.50 strike, I would have liked to have considered a January 2019 expiration, at a strike at least 10% above the expiring strike.

That’s the ideal way to graduate a stock with which you’ve been Leapfrogging to a LEAP.

What I would have liked, for both of those positions was for their share price to have been below the strike, and if sufficiently below, I would have likely added more shares and begun the process of Leapfrogging to LEAP.

Maybe next time.

The next time for both of those shares has me with my eyes on making purchases within the next 5 weeks, as both are also going ex-dividend.

But in the meantime, the short game returned some nice premiums and profits and still feels better than having money sitting around doing nothing.

However, with that said, I do have cash as an important part of my current strategy, as well.

Even as the market continues its climb higher, I have been happy to add to my cash reserve, as long as the portion invested meets or exceeds the performance of the S&P 500.

Thus far, 2018 has been another good year in that regard and it feels especially good to have the cash available in the event that some price declines materialize.

Among the positions that I may look to add in the coming week is Bed Bath and Beyond.

I added shares back in July and was playing the short game on those shares, with the intent of accumulation, leapfrogging and the LEAPing.

It too, is ex-dividend in September and I always like accumulating the dividends, so it is in the cross hairs.

Ultimately, I do have my eyes on less and less trading, but there is always some room for the short game, with the idea that short term position may evolve into a longer term holding.

This past week it was US Steel, but if assigned, I won’t shed any tears.

I’ll count the premiums, oh and by the way, US Steel is ex-dividend this coming week and move on to the next opportunity.

Finally, if you were with me on the purchases of L Brands and Sinclair Broadcasting. you’ll notice that those were not played with the short game in mind, even though the former now offers weekly options.

“Good thing,” you say, because both of those have seen a significant price decline.

That’s the nice thing about the long game.

I don’t care too much about that near term decline, as there are still 5 months to go until option expiration and both have delivered some decent premiums and will have some decent dividends coming, as well.

Long game or short game, all that matters is making some money and not becoming a slave to the process.

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