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.

 

Views: 89

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.

 

 

Views: 69

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.

 

 

Views: 56

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.

 

 

 

Views: 45

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.

Views: 48

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.)

Views: 43

What a Busy Week

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.

Views: 33

About Dividends

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

How Important is the Short Game?

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

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Dissecting a Trade

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.

 

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