Category: Articles

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.

 

 

 

 

Views: 34

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.

Frequently Asked Questions

Views: 36

So let’s look at the very first official LEAPS trade made.

I don’t generally think too much about the fundamentals of a company and I don’t spend too much time dwelling on things like P/E

I do care about where a stock’s price has been and where it currently resides and what kind of periodicity a stock’s price has exhibited.

In general, I like to add new stocks or new positions when a stock’s price is somewhere at or below the mid-point of its recent range.

While I do say that I’m not a technician and I certainly don’t draw lots of lines, I do like to look at that periodicity and I do like to look at past behavior.

In the case of L Brands, a stock, like so many that I follow, I have traded in its shares many times.

Looking at the chart above, it does appear as if the price has plateaued at its current level, which is well off the near term highs.

Now, let’s look at two trades involving L Brands that were made today:

The first was made in the morning and it represented the first purchase of new shares since the launch of LEAPtoProfit.

The shares were purchased for $36.81 and I elected to sell a 6 month long call option contract at a $40 strike.

If those shares are assigned on or before January 18, 2019 the expiration date, the ROI (return on investment) would be 8.7% for that 6 month period.

Now, let’s add the premium received for having sold those options.

The premium was $2.36.

That represents an additional 6.4%

Now, there’s also a dividend to take into consideration and for L Brands, it is a very good dividend of $0.60 per share, with ex-dividend dates expected in September and December.

The funny thing about dividends and time remaining on option contracts is that even if shares are deep in the money, the more time remaining on the contract, the more likely that those options will not be assigned.

But, in the event that there is some thought to those shares being lost early, there is always the thought of rolling over those options to gain more premium and perhaps even keep the  dividend.

Anyway, if those shares are assigned in January 2019, the accumulated return would be $6.75 or 18.3% for 6 months.

Another way to look at it is that your break-even on the shares is $34.45.

I liked this trade and was happy to see it be the first LEAP trade made.

But there was another trade to be made, as well, that was part of the Option to Profit legacy.

In that trade, the news preceding it wasn’t very good as it involved shares originally purchased on February 2, 2018 at $48.24.

To date, that position, prior to today had generated only $4.43 in option premiums and dividends.

Ouch, but in the bigger picture of trades in L Brands that bad trade has been just a blip and today came an opportunity to scratch back some of what has been lost by making a “DOH” trade.

Sure, just $0.25/share but that is for allowing someone the right to purchase shares at $39 for only 5 days.

If the price moves away from me and I’m at risk of losing those shares, then the next step is to roll those contracts over in an effort to get more option premium while trying to ride out the price increase or to select a longer term time frame that would also allow the strike price to be increased.

Those kind of trades require more attention than the LEAP trades, but any opportunity to bring in income from existing positions is always welcomed by me, even as I want to do less and less trading these days.

 

Views: 45

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.

Views: 16

After a hiatus of a year from writing articles for anyone, I recently had the good fortune of getting re-acquainted with some long time readers of these pages.

A new reader was less than welcoming and had some serious questions about performance, which included the use of non-standard metrics, with a particular emphasis on the impact of tax rates.

I’m all about non-traditional, but I bristled a bit when considering the thought of being compared to a standard that no one else was using or to try and normalize individual considerations, such as trading in a tax deferred account versus a taxable account or using a discount brokerage versus a more costly one.

Over the years, I’ve been far more interested in the generation of a return in excess of what the market could offer and was always happy to pay taxes on any good fortune or to take advantage of existing tax laws and benefit from the use of strategic losses.

For me, having retired from a pretty lucrative profession at a relatively early age, “return” was a very tangible concept and not a paper construct.

I wanted and I needed cash. I also wanted and needed it in a reasonably reliable stream.

Continue reading on Seeking Alpha

 

 

 

 

 

 

Views: 23

One’s definition of “loss” or “gain” may be a very personal one.

In business courses I had taken while in public health school, there was always an emphasis on “opportunity costs,” and some than 30 years later that concept constantly inserts itself as I look at and measure outcomes.

The “opportunity cost” is a simple concept. It basically asks the question “What did it cost you by not investing in an alternative?” Often, to standardize that question, the alternative investment is selected to represent something of low risk and high liquidity.

You generally don’t prove your point or disprove someone else’s point by selecting a non-standard, or little known alternative or an outlier.

Additionally, you don’t prove your point by selecting a specific or narrow period of time, which itself, may be an outlier.

What prompts my thoughts this week is a disagreement with a reader over a number of tenets of investing in which I believe, had incessantly practiced and had  expressed in  an article last week, “Re-Thinking Buy and Hold.”

But also, another reader had shared his own experiences with early assignment of “In The Money” call options just prior to the ex-dividend date and that prompted my response in general about dividends and early exercise, but then with specific details of a trade that same week in shares of General Motors (GM).

That purchase of General Motors turned out to be very timely for telling a story.

Continue reading on Seeking Alpha

 

 

Views: 15

I had been a classical “Buy and Hold” investor for years.

Part of it had to do with what used to be the exorbitant costs of trading back in the days when either you listened to what E.F. Hutton had to say or you took the advice of one of his competitors.

You surely couldn’t do it on your own.

Needing to achieve a 10% price rise just to cover your round-trip trading costs made frequent trading basically impossible for most, especially early in their careers.

But I did listen to E.F. Hutton and I happened to have been one of the lucky ones who took a cold call from a young stockbroker, as they were called back then, who turned out to be a wonderful ally in support of my financial interests and those of my parents.

He was “Buy and Hold” all the way, even when it was an entirely commission based relationship. He traded more often when we went to a managed account and trading costs weren’t directly my costs.

Then he died.

I never micro-managed my accounts with him, but I always kept an eye on them from day to day and used to wonder why we didn’t trade more often, as noting the frequent ups and downs and all of the lost opportunities.

It was sort of like holding that perfect banana.

How long do you hold it before the rotting process kicks in?

Hindsight is great.

Continue reading on Seeking Alpha

 

 

 

 

 

 

 

Views: 22