The performance and thought behind the eight different options suggested with an original expiration date in June will be reviewed. Three of the options resulted in assignment; three positions were closed as a risk management strategy while the remaining two positions expired worthless.
The three assigned options were: Molson Coors (TAP) June 88 puts for an effective purchase price of $86.75, Tractor Supply (TSCO) June 60 put for an effective purchase price of $57.85, and United Parcel Service (UPS) 105 call for an effective sale price of $106.40. The options closed were: Archer Daniels Midland (ADM) $43.00 call, General Motors (GM) $33.00 put and CME Group (CME) $115.00 put. The two options that expired worthless; General Electric (GE) June $27.00 put and the Molson Coors June $95.00 call.
United Parcel Service was suggested as a covered call candidate on May 10 at $104.93 with a sale of the June 16, 105 call at $1.40. The shares traded ex-dividend in the amount of $0.83 on May 11. Therefore, the investor could have realized a 2.19% total return over 37 days or 21.33% annualized, excluding transaction costs. The shares closed June 16 at $110.59.
Ideally, all trades would work out this well but they do not as you will see below.
Tractor Supply was weak and on May 16, with the weakness seen as an opportunity to sell the June 16, $60.00 put for $2.15 that would result in an effective purchase price of $57.85. The shares closed June 16 at $55.47. Therefore, the shares were assigned. The shares are owned and the sale of a covered call will be considered in the near future. The trade did permit purchasing the shares at a better price than when the put was sold but the premium was insufficient to cover the loss in value of the shares.
Tractor Supply recently increased the quarterly dividend from $0.24 to $0.27 making the dividend yield on the $57.85 purchase price 1.86%. Management provided a $3.44 EPS guidance in March. The sale of a covered call can increase the income earned while waiting for the shares to rebound. It may take some time to recover the loss via the sale of options.
Molson Coors had weakness and on June 8, was seen as an opportunity to sell the $88.00 put for $1.25 that would result in an effective purchase price of $86.75. The shares closed June 16 at $86.85. Therefore, the shares were assigned. The trade was a wash and a covered call will likely be suggested in the near future. Molson Coors currently pays a $0.41 quarterly dividend for a 1.89% yield on the purchase price.
General Electric on May 30, the June 16 $27.00 put was suggested to be sold at $0.29 or a 1.07% return on the strike price. The shares closed June 16 at $29.00. Therefore, the put option expired worthless.
This trade worked out well as the entire option premium was earned. Will look at selling another put option to earn the premium or purchase the shares at a discount to the current price. General Electric currently pays a $0.24 quarterly dividend for a 3.3% yield.
On May 24, the sale of Molson Coors June 16, $95.00 call at $0.95 was suggested for a 1.00% return on the strike price. The shares closed June 16 at $86.75. Therefore, the call expired worthless. While the call option expired worthless, the ideal trade would have seen the shares called or assigned.
Closed Option Trades
A covered call was suggested on Archer Daniels Midland on May 16 with the sale of the June 16, $43.00 call at $0.52 and was suggested to be closed on June 7 at $0.10, for a 0.98% return on the strike price. The shares closed June 16 at $42.56.
The trade was closed as the majority of the option premium had been earned. In addition, on June 12, the sale of the July 21 $43.00 call at $0.75 was suggested.
General Motors June 16 $33.00 put suggested to be sold on May 9 for $0.50 was suggested to be closed on June 7 at $0.10, for a 1.21% return on the strike price. The shares closed June 16 at $34.29. The trade was closed as a risk management strategy.
CME Group June 16 $115.00 put was suggested to be sold on May 24 at $0.80 and was suggested to be closed on June 9 at $0.05, for a 0.65% return on the strike price. The shares closed June 16 at $126.18. The trade was closed as a risk management strategy as the majority of the option premium had been earned and to free up capital.
Thoughts on the option trades
Some might say that the closed options trades could have, or should, have been left to expire. That is a valid point. However, the risk management strategy employed is on most occasions to attempt to close options at $0.10 or less as a risk management strategy and to free up capital for other short put opportunities.
The General Electric $27.00 put, and the Molson Coors $95.00 call were not closed out early as the shares were too far from the strike price. In the case of GE, the purchase of shares under $27.00 was seen as attractive. And the sale of Molson Coors above $95.00 was seen as attractive.
The United Parcel covered call worked well as the returned expected when the trade was established occurred. In hindsight, one might say that money was left on the table, and it was. However, if a covered call can general 2% a month, then I would be happy to leave money on the table for others.
The Molson Coors $88.00 put sale was a wash compared to where the shares closed. And given the desire to increase holdings of Molson Coors, the outcome was satisfactory. The sale of a covered call will be looked at in the near futures.
The Tractor Supply $60.00 put sale turned out to be sub-par. However, the shares of Tractor Supply were seen as attractive, so the assignment of shares was not disappointing even though the share price closed lower than the effective purchase price. The sale of a cover call and or straddle will be considered in the future.
The sale of put options (cash secured) can be a way to generate portfolio income and or purchase shares at the discount to the current share price. The sale of put options generally takes place after a sharp price pullback. The strategy is not for everyone and has its risks. Ideally, the put option will be sold on shares an investor/trader wants to own.
Disclosure: I am/we are long ADM, TAP, TSCO, GE, GM, CME, UPS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: May also have short put and or call position for income or to add or reduce exposure.