Dow Dupont and the new Dow

The last time we had a stock that had a merger become part of the equation it was pretty easy to make heads and tails out of the situation.

That was for General Electric and Wabtech.

This time around, it’s not as simple.

Even the names are confusing and somewhere down the line it may get even more confusing as we approach the end point of the original merger between Dow Chemical and DuPont.

When those two first merged, part of the understanding, in order to get regulatory approval for the merger of those two behemoths was that the new entity, Dow Dupont, would break up.

Merge and then break up.

The break up, though was to be into 3 separate companies.

What we just witnessed this week was the first step of that break up into two companies.

So if you owned Dow DuPont, you now own both Dow DuPont and (the new) Dow.

The formula is pretty simple.

If you owned 100 shares of Dow DuPont, you now own 100 shares of Dow DuPont (at a much lower price) and 33 shares of (the new) Dow, plus you received cash for the equivalent of 0.3333 shares of (the new) Dow.

Simple, right?

So, at Dow DuPont’s closing on Monday, ahead of the spin off, those shares were trading at $54.42.

Shares of (the new) Dow, from this point on referred to simply as “Dow,” were priced at $53.50.

That means shareholders should also have received $17.83 in cash regardless of the number of shares of Dow Du Pont that they owned.

If you had 100 shares of Dow DuPont, you woke up this morning to 33 shares of Dow and 100 shares of Dow DuPont, plus that cash.

If you had 1000 shares of Dow DuPont, you now have 1000 shares of a cheaper  Dow DuPont, 330 shares of Dow and the same $17.83 in cash.

The shares of Dow Du Pont, though, were adjusted downward to reflect the new shares of Dow and the cash.

Each one of those shares went from the previous closing of $54.42 to $36.59, representing a downward adjustment of $17.83 per share.

Here’s the math in a nutshell:

100 shares of old Dow Du Pont  was worth $5,442.00

100 shares of new Dow DuPont was worth $3,659.00

33 shares of Dow was worth $1,765.50

Put those two together and you have $5,424.50

Add to that $17.83 and you have $5,442.33

Now comes the complicated part.

The options are still priced the same.

For LEAPto Profit subscribers, that means your January 2020 $65 options are still January 2020 $65 options.

The difference is all in the deliverable.

That means that if Dow DuPont goes beyond $65 in the sum of its aggregate parts, you will be assigned.

What are the sum of its aggregate parts, you ask?

Dow DuPont, Dow and the cash.

For each contract of Dow Du Pont you are short, you have to look at the price of Dow Du Pont and add to that approximately 1/3 the price of Dow shares.

At today’s mid-day price, that would mean $37.63 for Dow Du Pont and $18.91 (one third of $56.73)

If you really want precision, it would be the price of Dow Du Pont plus the price of Dow divided by 3.3 plus $0.1783

It may get more confusing when the next spin off happens.

That means that if you have more than 100 shares of Dow after this spin off you may want to think twice about selling options on them too cheaply, because you would in essence be putting yourself on the line doubly in the event the underlying Dow DuPont got called away from you and if the Dow contracts were also at risk of their own assignment.

In essence, it would be like being short Dow shares.

So beware.




General Electric and WabTech


Just a quick note for those past Option to Profit subscribers who may still be holding shares of General Electric and also may have written call options on those shares.

Yesterday, GE completed its merger of its GE Transportation services with WabTech (WAB) and you may have noticed those new WabTech shares in your account.

The spin-off was 1 share of WabTech for each 186 shares of GE owned, at a price of $77.20 for each new WabTech share.

That means that unless you owned 18,600 or more shares of GE, you will not have received enough WabTech shares to sell calls upon.

I have decided to liquidate my WabTech shares, as I know nothing about the company and it offers a puny dividend and not much open interest on its monthly option offerings.

For book-keeping purposes I have treated the spin-off as a dividend of $0.415 per GE share and included that in the ROI calculations

In the event that you had sold options contracts, as I had sold January 2020 $13 contracts recently, the new deliverable, if assigned, will be:

1) 100 General Electric Company (GE) Common Shares
2) Cash in lieu of approximately 0.5403 fractional WAB shares

That means that if the GE shares are assigned at $13 dollars, you will have to deliver 100 shares of GE per contract, as well as the cash value of 0.5403 shares of WabTech as of the date of the assignment.

At its current price of $77.20, that would mean a cash payment of $41.71 for each contract assigned.

So How’s It Been Going?


Good question, although it’s a little self-serving to both ask and answer the question.

LEAPtoProfit has now been available to subscribers for 4 full months.

Previous subscribers to OptiontoProfit will notice one immediate difference. That being that I hardly write anymore.

You’re welcome.

Instead of twice daily and weekly blatherings, there’s not much else going on besides posting trades as they are being made.

Oh, and there are far fewer trades than ever before.

If you read carefully, or maybe not even so carefully, neither of those should come as a surprise.

The idea has been to create a diversified portfolio that settles into the use of LEAPS to generate additional income and to do so without much fanfare or trading activity.

I’m older. I’m tired. I want to do things other than write and be glued to my computer and the ticker.

But I do still want cash flow and I don’t want mediocrity.

I could also do with less excitement, even as I welcome the return of volatility.

So while I’ve been settling in to a more subdued lifestyle, along the way there were some articles written regarding the actual process of doing just that, and as I now look at the LEAPtoProfit portfolio I see that every position still open is with short options written against those positions has a January 2019 time frame.

Well, that part of the mission is accomplished.

That means that the remaining open and covered positions are going to be pretty low maintenance for the next 3 months, at a time that we might expect continued volatility, as has been the case over the past 6 weeks.

That suits me just fine.

Option premiums, upside potential with strike prices and dividends while I wait.

Here is what the summary since July 1, 2018 looks like (click image to enlarge):

So a quick glance shows that there are 9 open positions and 6 that have been closed.

After 4 months I am closing in on the total number of open positions that I would like to have, which is in the 10-15 range.

What is missing is some diversification, as this snapshot demonstrates (click image to enlarge):

But that may change as the next few positions are established, but let’s dissect the performance statistics, starting with the 2 stinkers that are both currently uncovered.

Those are Bed Bath and Beyond (BBBY) and US Steel (X).

As with most of the positions opened since LEAPtoProfit’s inception, the initial trade was with short term call option sale.

As has been the case with the 6 closed positions, the idea is to start somewhere and either add shares and migrate to a longer term option or get out of the position with some profit in hand.

Good intention, but so far, bad execution for those 2 positions, although it may soon be time to add shares to one or both of those positions and Leapfrog the way toward January 2019.

Not so elsewhere, though, where the things to look at include the actual return on investment (ROI %) and the relative return on investment.

That relative return is a comparison to the performance of the S&P 500 for the time period of holding. In other words, if a particular position has been open for 92 days, as has been a position in General Motors, I’m looking at the S&P 500’s return for those same 92 days.

Looking at that latter metric, both BBBY and X are still doing poorly, but for now, of the 15 positions opened, those are the only 2 laggards.

In total, assuming equal weighting of positions (and that is not a valid assumption), the various positions have had a 0.9% ROI.

Not great, but still actually 3.3% better than having deployed money into the S&P 500 on the same dates as the 15 trades.

On the other hand, if you just placed all of the money into the S&P 500 on July 1, 2018, then your rate of return would have been 0.2%.

If you added in dividends on that S&P 500 holding, the returns would be roughly equivalent, though, so that means more work needs to be done on the existing portfolio.

As I look at the portfolio, I do, however, feel pretty optimistic in terms of how it will hold its value in the event of further volatility, as well as the opportunities to take advantage of that volatility with higher priced options.

When I think back to the 2007 – 2011 period, which seems like an eternity ago, there was a great set of opportunities that began with lowering stock prices and higher volatility and then ending with capital appreciation.

At the moment, and who knows how long things will last, we are seeing what appear to be some bargain stock prices along with heightened option premiums.

I love that environment, even as capital appreciation may be harder to come by.

My guess, at this point, is that if there will be opportunities to roll over some of those positions with short calls expiring in January 2019, I will probably look at either 6 month or 12 month durations for the next trade.

In doing so, I will also likely look to try and attain a total annual return of 12% for each position, as a combination of dividends, premiums and capital appreciation.

If I were more optimistic about the market moving higher, I might set my sights on a higher return, placing more emphasis on capital gains, but for now, I would like to optimize premiums.

What that means is that if there are opportunities to roll positions over, I would look at strike prices that if the positions are exercised would end up offering that return objective. If volatility declines and price appreciation seems attainable, then I would settle for less premium cash flow.

No matter what the market’s rate of return, I could be very, very happy with a year in and year out return of 12%

So, it is early, but so far, even as the market has been net flat for the first 4 months, I’ve been pretty pleased.

I hope you have, as well.

Feel free to let me know your thoughts.

Feel even more free to subscribe, although the subscriptions are not free.

That’s clear, right?

ADDENDUM  November 5, 2018  11:00 AM

This morning was certainly not reflective of a typical morning, but here is an example (as subscribers would see it on the “Most Recent Trades” page), of the trades made in support of the LEAPtoProfit portfolio:

One trade, Hewlett Packard Enterprises (HPE) replaced shares that were assigned away the previous Friday at the same strike price. In this case, I once again purchased shares and sold short term in the money calls on the position.

In this case, I was willing to secure a 1.3% ROI for the week, even if shares fell as much as 1.6% during that time period.

This is now the third position in HPE since July 1, 2018. I am actually looking to possibly add new or additional shares prior to next month’s ex-dividend date, but after November’s earnings release.

Additionally, with some strength in US Steel (X), the previously reported “stinker,” I sold January 2019 calls, taking advantage of that price strength to move the strike price up to $35, whereas previously it had stood at $34.

(As a side note, the “Ex-Dividend” column includes legacy trades from Option to Profit positions for those past and continuing subscribers.)

Tracking Results

I’d like to think that investing in stocks is not really very akin to betting on horses.

I’d like to think that.

But really, the only way to know is to track your results.

While I’ve been using spreadsheets to do so for years, going all the way back to VisiCalc. I’ve never been very sophisticated in the manner that I track positions.

All I really want to know is how well each position performed relative to the default action, which for me, has always been the S&P 500.

Back in the days of “Option to Profit” I used to update spreadsheets for subscribers daily, but eventually went to weekly when it became pretty clear that no one was looking at the details of the trades.

That’s what they were paying me for, I suppose.

I also kept and still do, summaries of all of the trades in individual positions. Those can be found by clicking on the “Results” tab and then looking for an individual stock.

Starting today, I’ve added a very simple graphic that will be updated nihtly and am calling it the “Scorecard.”

Unlike the old weekly summary sheets of Option to Profit, there won’t be 60 stock lots to follow at any one time. By the time the portfolio matures, I expect to have 10-15 stocks and anticipate one or two new positions each month, with hopefully one of those maturing into a LEAP position each month.

Instead, the bare bones information will be summarized, including the “Relative ROI (%)” and the “Theoretical ROI (%).”

The Scorecard makes use of color coding in order that the end user can easily distinguish between open and closed positions. Additionally, color coding is utilized to indicate uncovered positions, as well as activity for the week, which may include outright purchases of shares, option premiums or dividend accumulation.

Those are the qualitative issues at hand.

The quantitative issues are relatively straightforward.

At this point, all I want to track is my share cost, my accumulated premiums and dividends and how the S&P 500 has been performing during the holding period for each position.

Just as the daily closing prices of positions may change and just as premiums and dividends may accumulate and change, so too, will the ROI calculations.

With a portfolio transitioning to longer term holdings, I don’t care too much about short term price gyrations, except as they may impact some new positions that only had short term options sold upon them and that may be at risk for becoming uncovered.

For those wondering, the Theoretical ROI (%) is based upon the strike price of any outstanding short positions. If none, then the strike price of the option nearest to the cost of the underlying shares will be used.

For positions that have been closed, the comparative S&P 500 level will be frozen in time, while all open positions will continually be compared to the week’s closing S&P 500 level.

Since everyone’s portfolio will be different, not only in the stocks included, but also in the relative amounts of each position, there is no attempt to “average” the returns, nor do they take into account trading costs, nor taxes.

To be totally fair in comparing results to the S&P 500, there should also be an adjustment made for the yield on the S&P 500, which has historically been about 2% each year. The Scorecard doesn’t include that adjustment, but in general, when and if I write about returns, I tend to work an estimate of that adjustment into the comparisons.


Relative ROI (%)

Relative ROI (%) is the difference between the ROI (Return on Investment) of the underlying investment and the change in the S&P 500 for that same time period.

The ROI (%) is (Current Share Price – Cost per Share + Accumulated net premiums and dividends) divided by Cost per share

It is then compared to the S&P 500 performance.

The difference, is the “Relative ROI (%), which by convention is positive if there is superior performance of the investment as compared to the S&P 500.

Once a position is closed, it’s ROI (%) will still be given in relative terms, but it’s absolute ROI (%) will also be indicated in the Theoretical ROI (%) column.

Theoretical ROI (%)

The Theoretical ROI (%) is the anticipated ROI in the event that shares are assigned at the strike price of the current outstanding short call contract. In the event that a position is not covered by the sale of a short contract, the nearest strike level above the cost of shares is used.

As premiums and dividends may accumulate, the Theoretical ROI (%) will vary, as will it with daily price fluctuation.

Closed positions will also be listed under this column, but the color code will indicate that those gains (or losses) have been realized and are no longer theoretical.

At present, the Theoretical ROI (%) is given in absolute and not in relative terms. At some future iteration, an additional column may be added to also provide the relative performance, as compared to the S&P 500.

Additionally, while I have never been a fan or annualizing results, especially with short term trades, as the portfolio moves to a longer term, there will be greater validity to presenting such data.


Our First Trade

I guess it’s at least a little exciting.

That is, making the first official trade on LEAPtoProfit

The only problem is that it’s more of an “OTP Legacy” kind of trade.

That is, it was a trade, in this case the sale of calls on a position that was opened during the days of “Option to Profit.”

Still, let’s dissect out what the thought process was behind this trade.

If you go to “How Does it All Work,” you will see the basic thought processes that are involved in making a LEAP trade.

In this case, Newmont Mining (NEM) was trading at about $38.45.

I looked at the January 2020 options, which expire in about 18 months.

That’s longer than I would generally look, but Newmont Mining is already an old position, going back about 5 years, so what’s another 18 months?

For me, i has clearly been a “Buy and Hold” position that has, to this date, exceeded the S&P performance by about 20% (about 10% when considering dividends).

I looked for a strike price about 10% higher than the current price.

What I received was a premium of $3.85/share, or approximately 10% of the current share price.

To that, I add the imputed dividends of $0.84 over the next 6 quarters, or about another 2%

That means, if the shares are assigned, the return for this trade would be approximately 22% or about 14% annualized.

Maybe that’s not much for some people, but it lets me sleep.

And it just gave me a fair amount of cash.

I can use that cash as cash or I can use it as part of PRIP Strategy if I was still in that asset accumulation phase of life.

The trade looked like this:

To Trade Alert Subscribers it came through as:

OTP LEGACY – STO Newmont Mining (NEM) 1/17/20 $42 calls $3.85 bid

Hopefully, there will be some more trades coming, particularly some new positions either going directly into LEAPS or working our way there through Leapfrogging.