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Olin: At 4 Years, My Longest Running Option Trade

Jan. 05, 2012 9:51 PM ETOLN, MMM, CB2 Comments
Tom Armistead profile picture
Tom Armistead's Blog
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As I was going over my January expirations, I noticed that my Olin (OLN) LEAPS trade has been going for almost 4 years. Options are usually a short term proposition, trying to catch a sudden move on earnings, good news, or rumors. But it's possible to keep a trade going indefinitely, and it can produce consistent profits. Here are the trades:


Basically, the trade involves using LEAPS as a substitute for share ownership, and selling covered calls against the position.

If shares remain unchanged as of the January 21 expiration, the position will have an annualized rate of return of 33%, with the position value roughly equal to the profits. Not shown, commissions total $775.18, or 5.85% of the profits.

While I did take profits from time to time, I held all the way through the financial crisis, rolling down and then up, and selling covered calls whenever the premiums available looked attractive.

For the past year, the position has been relatively stable, long the 12.5 strike and short mostly the 22.5 strike. Volatility is not that high, and returns are only about 20% for the static case. It works primarily because the LEAPS are so cheap. Between the dividend and the low volatilty, the time value for the deep in the money calls is very reasonable, so most of the income that can be realized by selling covered calls is profit.

Taxes are a chore. The income from selling covered calls that expire worthless is taxed as ordinary income, while any losses incurred while rolling the long calls are deferred as wash sale adjustments until the trade is actually closed. I use TradeLog software which does a good job tracking wash sales, and it can download trades from my brokerage account, so there is very little data entry.

By way of comparison, buying and holding the shares would have returned 6.9% annualized. As a practical matter, the options strategy requires a definite amount of work, to track market movements and adjust the position as things change.

I have a number of other trades that have been running for over two years, and the ones that have reliably generated profits are low beta dividend payers, such as 3M (MMM) and Chubb (CB). Higher beta stocks, such as life insurers MetLife (MET) and Prudential (PRU) have been extremely profitable at times, but a lot of those profits evaporated during the debt ceiling debate and the ongoing Eurozone crisis.

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