My Options Strategy: Q3 2016

by: Integrator

Another quarter has ended. Here is the latest update on my option strategy.

I only had one option which had an expiry in Q3, and that was a put option that I had sold on General Electric (NYSE:GE) stock earlier in the year. The put had a strike price of $28, which meant it expired without being exercised, like the option that I wrote on BP Plc (NYSE:BP) earlier in the year.

While I had very few options that expired in Q3, I wasn't sitting by ideally in terms of my option strategy. In fact, I actually wrote a number of options in Q3 that were generally long-dated sales of put options on a variety of securities.

I am doubling down on my strategy to ensure that I buy attractive stocks at attractive prices. In general, I've now shifted my option writing strategy away from dividend stocks towards the stocks that I have already bought and that I'm accumulating for my long-term growth portfolio otherwise known as project 1 million.

My thinking here is that I've already done the hard work in terms of identifying the stocks that I'm most comfortable to hold for a period of 10 years. These are growth-focused businesses that are experiencing solid top line revenue growth, good cash flow generation and have minimal debt and strong competitive advantages.

The missing piece of this equation is acquiring these businesses at the right price. While I was able to nab some high-quality businesses during the market lows of January and February, I realize now that I probably didn't grab as much as I wanted to.

I was keen to not extend myself too much at the time. However, my cash flow will continue to grow over the next few years as debt gets retired and income streams build up from my various assets.

There will be excess capital generation, which I am keen to put to good use in acquiring more high-quality businesses. I was previously considering deploying some of this excess cash back towards an accelerated retirement of our mortgage. However, in retrospect, I feel that cash will be put to better use through acquiring more growth assets that will only increase and compound in value over the next decade.

In terms of how that relates to my option strategy, I'm writing long-term out-of-the-money puts on these high-quality growth assets. I'm writing the puts in such a way that if they were exercised, I would be acquiring shares of these companies at prices I would be happy to pay.

In the event that these options don't get exercised, I'm simply just pocketing put premiums which will be leveraged for when the time to purchase is right. If these puts don't come to pass, it just means that prices for high-quality businesses just didn't make it into my strike zone. That's okay too, because I don't need to take a swing at everything at any cost.

With that said, here's what I have on the books.

  • MA Sep 2017 80 Put
  • BABA Jan 2018 75 Put
  • FB Jan 2018 110 Put
  • VWO March 34 Put
  • UA Jan 35 Put
  • SBUX Jan 2017 52.5 Put
  • MNST Jan 2018 140 Put
  • CELG Jan 2018 90 Put

I am looking at close to $6,000 in premiums on all of these positions. I do, however, expect that a certain percentage of these positions will get exercised and I'll be required to purchase the stock.

I anticipate at this stage that close to 50% of these positions will probably be put to me. However, I'm prepared to buy them all, if required. My expectations are that any stock being put to me will occur closer to expiry dates, given the time value of the option.

However, if there's a major crash that occurs beforehand in the markets or in any of the individual positions, then these companies may get put to me earlier.

Given the recent check price appreciation that's occurred between when I wrote a number of these puts and the current market prices of these positions, many of these puts are now well out of the money.

In fact MasterCard, Alibaba, Facebook and Celgene exercise prices are almost 20% or more below the current stock prices. When factoring in put premiums, this would mean I would be acquiring stock in these high-quality businesses at almost 30-40% below current market prices.

That strikes me as a pretty good deal, should I be forced to acquire stock in any of these companies at those sort of prices. In fact, I consider the current trading prices of these companies, in particular, to be quite attractive, so buying stock at prices 30-40% below these levels would be a major windfall.

I will continue to keep all of you updated on how these options pan out.