Still Need to Make Sense of Dow-DuPont?

The answer to that question, at least for some people is a resounding “YES.”

As we approach the expiration of the $65 January 17, 2020 LEAP that was originally purchased on shares of Dow-DuPont some people are confused as shares of DuPont, one of the successor companies is trading at around $65.

The question is whether those shares are likely to be assigned as they pull within a dollar of that strike price.

The simple answer is a resounding “NO” unless the shares of DuPont or Dow Chemical or Corteva skyrocket within the next 2 weeks.

That’s because that DuPont contract that you are short actually reflects a combination of the shares of those 3 companies, in addition to some cash that was spun off, as well.

If you look at the weekly postings of price and performance that appear each Friday after the close of weekly trading, you’ll see that the reported price of DuPont is not the same as the stock market’s price. That’s because the price that I provide is based upon what your shares are actually worth and that is tied into the adjustments that are already made in the options market.

When we sold Dow-DuPont calls, following all of the spin-offs, what was left for each 100 shares of Dow-DuPont were 33 shares of DuPont, 33 shares of Dow Chemical and 33 shares of Corteva, in addition to $51.22 in cash.

The effective price of the new DuPont is based on all of the above, so for example when DuPont closed at $63.57 and Dow Chemical closed at $54.59, while Corteva closed at $28.15, the shares of the new DuPont were really worth $48.80.

If you were to look at the options table, you would see that the adjusted strike portion of the table has the $50 January 17, 2020 option as the nearest out of the money strike, reflecting the December 27, 2019 close of the underlying shares.

So what this all means is that the greatest likelihood is that by the close of trading on January 17, 2020 you will see your portfolio include 33 shares of each DuPont, Dow Chemical and Corteva for every 100 shares of the old Dow DuPont that you owned.

If you were like me you may have bumped up holdings of any or all of those positions to leave you with an even number of shares so that options could be sold. That opens up additional opportunities for holders as the next LEAP cycle approaches.

Or some may elect to re-balance a portfolio, as I am likely to do.

I will strongly consider selling my shares of DuPont and Corteva and increasing my Dow Chemical position.

Although I like the liquidity of the DuPont options more than those of Dow Chemical, I much prefer the dividend of the latter.

I know very little about Coteva and have no compelling reason to hold or add to my position.

At the very least the confusion can end in 2 weeks or so, unless you care about the confusion that will ensue as I try to figure out how to most accurately reflect all of this in performance reports.

Not that that’s your problem.

 

Getting Ready for 2020

As we start the final full week of 2019. having been fully invested for quite a while, as cash has been building up from dividend payments, tomorrow may bring a little bit of new cash.

That new cash may be coming from the assignment of shares of Cypress Semiconductor (CY), which will be ex-dividend tomorrow.

It should be closing on a buy out offer sometime in 2020, and has barely moved a dime since the offer was first made. I had tried on a number of occasions to close out the position but was never willing to overpay to close out the option position.

With an $0.11/share dividend and with shares being nearly $6.50 in the money, it would be hard to understand how someone would not exercise and grab the dividend.

At $23.44 the option holder of a $17 strike would simply then sell the shares and probably pocket an extra penny or two on the transaction.

However, with open interest of only 600 contracts, no one is going to make a killing on the dividend arbitrage, so who knows, maybe those shares will still be in accounts tomorrow morning. It just may not be worth the cash outlay for someone to exercise their position right now.

If not, however, my eye is on shares of Cisco (CSCO), which not entirely coincidentally,  goes ex-dividend on January 2, 2020. which means that shares would need to be purchased by December 31, 2019.

At this point, Cisco’s 2.9% dividend is actually better than that of Cypress Semiconductor, but that sort of thing happens when shares go up by about 40% and the dividend goes nowhere.

With there also being a chance that Intel (INTC) shares get assigned at the end of the January 2020 cycle, I will be in the market for replacement technology positions.

Cisco is a start, but there may be need for something else, with an eye toward a position with at least a 2.5% annual dividend, which right now eliminates Microsoft (MSFT) and might even mean reluctance to rollover or re-purchase Intel shares when the time for reckoning is here.

With some trepidation about overall market return for 2020, as the bull market is really long in the tooth and with election uncertainties looming, I also plan to stick with real blue chips in the coming year, so there’s not much interest in speculating when it comes to looking for new positions, especially in the technology sector.

POSTSCRIPT: OK, that was still a surprise, despite the small open interest.

This morning all of my Cypress Semiconductor shares are still there and the dividend is mine.

With the dividend now out of the way there may be a better opportunity to close out the position, perhaps at a cost of just a couple of cents, thereby opening up opportunity to invest that money into something else that will pay a dividend soon, like Cisco.

That would be a good Christmas present.

 

 

Keeping Your Hard Earned Dividend

One of the really nice things about having settled, more or less, into a life of LEAPS, is that I don’t write very much anymore.

There’s just not that much to write about.

I suspect that will change as we head into the end of the LEAP cycle with many positions expiring in just a month from now. There may be a flurry of writing activity as new positions are being established or old positions are being rolled over.

One of the issues that does arise is what to do about positions that are going to expire, but are going ex-dividend just a few weeks before that expiration?

That’s really not an issue if there’s a lot of time remaining on the contract. For the most part if there is time, even deep in the money positions will likely not get assigned in order to have the dividend captured.

Part of my ROI projection is based on capturing all of the dividends for the term of the LEAP contract and in some cases that fourth dividend is put at risk, as it is these coming weeks.

I fully expect my shares of Cypress Semiconductor (CY) to get assigned early as it goes ex-dividend on December 24, 2019.

It has basically traded flat these past few months as it awaits its buyout.

I’d have liked to have closed that position, but couldn’t get a satisfactory price on the combination of sale of shares and buying back the short call options. So it has been dead money for the past few months other than the most recent dividend payment.

But in the case of the Van Eck Vectors Gold Miners ETF (GDX) which goes ex-dividend on Monday, December 23, 2019 and Bristol Myers Squibb (BMY), which goes ex-dividend on January 3, 2020, both are reasonably in the money and both are at risk of being assigned early.

In the case of GDX, it pays only a single dividend for the year. It’s not much this year, but $0.195/share is something and I would rather capture it than not.

Bristol Myers Squibb, on the other hand, has a decent 2.85% dividend of $0.41/share.

In both cases, I was prepared to see them assigned at January expiration and was expected to replace the latter with Pfizer (PFE) or AbbVie (ABBV).

In the case of the Gold Miners ETF I was not really interested in rolling it over at the $26 level and wouldn’t have minded closing the position.

But, I wanted those dividends.

So yesterday I did the only thing that made sense to me.

I rolled over each of those positions, but not into new LEAPS.

What I looked for was the nearest expiring position at either the same strike or a higher strike that would, even if assigned early, still give me a premium that was at least as large as the dividend that I would lose.

In these cases, I rolled over the GDX to the same $26 strike, by an additional month for an extra $0.34/share option premium.

I’m OK with losing it at the end of trading today if it gets assigned early.

I did the same for the BMY, rolling it over one additional month to the same strike, but for a $0.75 option premium.

So I’ll find out soon enough whether that strategy will work, but unless shares plummet between now and February, no matter what, it is a winner.

At this point, with additional option premiums in hand and in excess of the dividends, I wouldn’t mind if the two positions were now assigned early.

If they were, I would consider getting an early start on some replacement positions and could get an additional month of option premium and perhaps even find a worthy new position going ex-dividend within the next month, potentially squeezing 5 ex-dividends dates over the course of the coming year.

For those who were still paying attention, I did the same with Las Vegas Sands (LVS) last week, but decided to roll over for an additional year.

What you may have noticed with that is that I elected to use the same strike price on the LVS, as well.

This year, instead of selecting strike prices that are in the 10% to 20% range above share price, I’m looking to maximize income and downside protection and plan to use strikes that are in the 0-5% range.

Some of that is related to uncertainty with regard to the political climate.

But regardless, the idea continues to be to get some combination of downside protection, added income and some capital appreciation.

I hope your 2019 was a good one and I’m looking forward to a good 2020, as well.

Not too much trading. Not too much writing. Just a good year.