Written by Nick Ackerman. This article was originally published to members of Cash Builder Opportunities on October 1st, 2022.
Another option expiration is going by in what is becoming an even gloomier year. While we've had a string of trades expiring worthless, we are taking assignment of shares of Paramount Global (NASDAQ:NASDAQ:PARA). This was after a couple of trades previously had all expired worthless.
As I was looking to add this position to our Satellite Income Builder Portfolio, I'd say it worked out perfectly. Of course, with hindsight, we now know that the shares slid quite materially further than the $21 strike price assigned. We also got to collect some option premiums along the way to lower our cost basis. Interestingly, I ended up being put these shares early, the day prior to the expiration.
Overall, the market has been punishing most investors in most areas of the market. There were no positive sectors in the last month, with this last September being particularly brutal for stocks and bonds. More of the same, basically, for what has been a challenging year. We've made new lows in the broader markets in both the Dow Jones Industrial Average and the S&P 500. Energy remains the only sector positive for the year.
With essentially no place to hide, taking the assignment of shares when selling puts is going to happen. Though other readers had mentioned, they had rolled their position. Which seemed like a completely logical move as well.
It hasn't been too long since we last touched on PARA. In fact, our last post was less than a month ago. Then before that, it was only around a month earlier that we looked at the company more in-depth. As mentioned, this has now been a series of put selling trades we've completed now. With the bear market pushing the price lower and lower, it felt appropriate to keep the put selling train running.
At this point, there hasn't been anything particularly noteworthy to add for PARA. Earnings estimates remain the same. Wall Street analysts still have the same $29.10 price target as well. They've also carried on with their dividend, announcing the $0.24 right on schedule for an early January pay date.
With that, the only thing that has happened is the forward P/E has fallen simply due to price declines. The new forward P/E at this time is ~8x, from the ~10x it was previously. That doesn't look set to change unless they announce something during their earnings on November 2nd, 2022, or give any sort of early warning.
The original PARA trade was initiated on June 28th, 2022. Those expired worthless on their July 29th, 2022 expiration date. We pocketed $0.39 per contract with a strike price of $22. Over the course of 31 days, that worked out to a PAR (potential annualized return) of 20.87%.
The second trade was entered on August 1st, 2022. Once again, we went with the $22 strike price, with the expiration date set for September 2nd, 2022. We collected $0.80 over the course of 32 days, which propelled the PAR to an elevated 41.48%. Those too expired worthless.
With this latest trade where shares were now put to us, we jumped the gun and entered the trade on September 1st, 2022. That was a day before the expiration date of the previous trade. The reason for that was because that second trade looked like it was set to expire worthless (which it did), and the stock was hitting a new 52-week low.
We collected $0.58 and went with a $21 strike price. Over 29 days that worked out to a fairly attractive 34.76% PAR. Reduced from the previous trade that we had expired worthless, but still quite heightened thanks to the volatility the shares and the market have been experiencing.
After initiating the trade, PARA and the overall market actually began to rise. It was really in the last couple weeks of September when things dropped substantially. Unsurprisingly, the turn lower came due to the inflation report coming in hotter than expected. The stock then shredded through the $21 strike and stayed there throughout the last run of the trade.
All said, if one had sold an equal number of contracts in each trade (I did), one would have collected a total of $1.77. That was over the course of 94 days, working out roughly equal to a quarter of a year. That's 7.375x the $0.24 quarterly dividend, basically collected the equivalent of a year and three-quarters worth of dividends.
Which brings me back to one of the reasons why selling puts to enter a position can be so appealing. I now own a stock I wanted to own, but I have also collected $1.77 in the time before taking assignment. Had I not taken assignment, I would have continued to sell more puts, collecting even more option premiums. Of course, it isn't always roses, but this trade worked out quite well at this point.
In another way, now that we collected $1.77 total, the breakeven of this trade could be seen as being at $19.23. That puts it right around the same price it closed on Friday ($19.04) or even lower than where the stock finished up after-hours ($19.28.)
One of my main options strategies is the options wheel strategy. In this case, I plan to continue holding on to these initial PARA shares. However, if the stock moved substantially higher over the coming weeks, I would reconsider. If we get up to something like $26 or higher, then I could potentially consider selling covered calls.
Instead, what I'm looking at doing more is selling even more puts. This would average down my position if assignment occurred. It would also give more flexibility in being tempted to write covered calls on a batch of shares. Since PARA is a position I've wanted to enter, my fingers are getting sticky on this initial batch.
With that being said, here are a couple of written put trades I would consider. If we get pummeled even more by the market next week, then even better.
The October 28th expiration is another weekly option expiration. There is more volume on the regular monthly expirations, but PARA tends to have sufficient open interest on most strike prices on all their option expirations.
Interestingly, going out to the November 4th expiration, after their earnings, doesn't increase the PAR that one would receive for the $18 strike price. At least, not with the last bid that is being shown.
For the $16 strike, the last bid is $0.38. That's enough to push the PAR to 24.77%. At the $17 strike, one is also being more compensated by collecting $0.61, working out to a PAR of 37.42%.
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Cash Builder Opportunities provides high-quality and reliable dividend growth ideas to build growing income for investors. A special focus on investments that are leaders within their industry to provide stability and long-term wealth creation. Along with this, the service provides ideas for writing options to build investor's income even further.
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Nick Ackerman is the lead author for Cash Builder Opportunities. Nick is an avid student of the markets and has been investing in his own accounts for over 10 years. He is a former Financial Advisor and has previously qualified for holding Series 7 and Series 66 licenses. These licenses also specifically qualified him for the role of Registered Investment Adviser (RIA), i.e., he was registered as a fiduciary and could manage assets for a fee and give advice. His specific focus is on closed-end funds, dividend growth stocks and option writing as an attractive way to achieve income as well as general financial planning strategies towards achieving one’s long-term financial goals.
Stanford Chemist is a scientific researcher by training who has taken up a strong and passionate interest in investing. His members appreciate the analytical and agenda-free insight and analysis that he brings to investments. He has developed his own metrics and tools for understanding closed-end funds and exchange-traded funds and how to profit from them and will seek to apply the same logical principles to Cash Builder Opportunities.
Disclosure: I/we have a beneficial long position in the shares of PARA either through stock ownership, options, or other derivatives. 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 initiate short PARA puts in the next 72 hours.