By Mark Bern, CPA CFA
If you are new to this series of article I recommend that you take the time to read at least the first article in this series which explains the strategy in detail. If you are interested in how we got to this point with Teva or other quality companies used please refer to my concentrator blog which contains links to all the previous articles in the series.
I'd like to begin with a little summary information about how the strategy is doing overall before I get into the details about Teva (TEVA). After eight months we have collected 12.2 percent of our initial portfolio of $150,000 from selling puts. The total amount collected is $18,354. We have paid a total of $584.50 in commissions and fees, including the recent exercise fee on the put transaction to purchase Teva shares. That results in a total return of 11.85 percent in our first eight months. We own a total of only 100 shares of stock in Teva at a cost of $44.16. Our cost basis for tax purposes is $44.07. The stock closed on Friday, May 18, 2012 at $38.90, so we'll have to sit back, collect the dividend and wait for a recovery. There is support for the current S&P 500 index at about three percent lower, so we'll have to see if that holds. Our buy-and-hold portfolio of stocks currently has a gain of 9.2 percent, including dividends compared to the S&P 500 which has gained 9.1 percent, including dividends, over the same period.
We currently have 31 open put contract positions with a total of $153,500 in cash required to secure those positions. We also have $9,769.50 in excess cash in the account that we need to put to work to create more income. The total amount in the Enhanced Income portfolio is $167,159.50, including the value of the Teva stock we now own. We need to remember to reinvest our accumulated excess premiums as we get enough piled up to do so or we will not get the returns we otherwise could.
The buy-and-hold portfolio holds a total of 3,300 shares of stock in 23 companies with a current value (as of Friday, May 18, 2012 close) of $153,902.50 plus cash of $9,932.40, including dividends collected thus far in the amount of $2,228.90, for a grand total of $163,834.90.
Of course, I should also point out that we have written several put contracts that are currently under water. If we were to buy back and close all our positions at the present time we would still be ahead, but not to the extent noted above. That is the nature of trading options contracts. By the time each of the current options positions expire the picture will likely look much different, better or worse. I'll keep you abreast of how things turn out as the market that gives also takes away. This is a long-term exercise, so don't be too frustrated with our current positions. I'm not. In 30 days the picture will probably be much different.
We'll probably pick up a few more stock issues in this downturn if it lasts through June. However, if the markets recover before the next expiration date passes we may find ourselves looking to sell more puts again. So far, we have generated more income than originally promised and I expect we will be in decent shape when the current market turmoil subsides. If we didn't have most of our money tied up at the moment this would probably be a great time to sell more puts.
Now let's look at Teva and assess how we stand here. In the previous Teva article you will recall that we sold one May Teva put contract with a strike price of $45 for a premium of $0.93 per share (or $93 for one contract, which equals 100 shares). If the contract had expired worthless we would have had a 1.9 percent return in just over one month. But, as it turned out, we ended up being put the stock at the strike price of $45 per share when the contract expired in the money. Thus, we were obligated to purchase 100 shares of Teva for $4,500 at contract expiration and we also had to pay an exercise fee of $15. The stock, as pointed out above closed at $38.90 per share last Friday and currently pays a dividend of $0.78 per share yielding 2.0 percent. Since September 22, 2011, we have sold two puts and collected a total of $213 in premiums, or $2.13 per share. That doesn't put us in great shape, but it does help cushion the blow a bit. Teva is a very well-managed company with excellent earnings growth prospects with its leading position in generic drugs as several blockbuster drugs are coming off patent over the next few years. I don't get too concerned over the short-term fluctuations. I just try to keep my eye on the longer term prospects. In five years I expect Teva to trade near $60 per share and provide us with a rising dividend stream of income. After the dust settles on the current market correction and stocks have an opportunity to rebound a bit, I will begin to sell calls option on Teva to enhance the total return from holding this quality stock. In total I expect a total return over the next five years of at least 12 percent compounded annually.
I hope that everyone is enjoying this series enough to stick around as I intend to keep publishing articles as needed to keep up with the transactions over a minimum of two years. That takes us through the end of September 2014. As always I enjoy comments and will attempt to answer all questions posed in the comment stream of this and all articles I write.