My Rookie Season Writing Options: Second Inning - June Expiry And July Contracts

by: J.D. Welch

Back in mid-May I wrote two articles about my adventures venturing into the realm of writing options, one about selling cash-secured puts and the other about selling covered calls against positions I held. This past Friday was the expiration date for the June options, so here are the results.

June Puts

I wrote a total of four cash-secured puts for Arch Coal (ACI), three at the $8 strike price and one at the $7 strike, all at varying but decent premiums and pretty much the same commissions. ACI closed Friday, June 15th at $6.01, so I got assigned all 400 shares for those contracts. Thanks to my premiums and low commissions, my cumulative cost basis ended up being $6.95 per share, so I was $0.94 in the hole per share upon assignment. As of the writing of this article, ACI is currently trading at $6.43, so it's moved up a bit since last Friday, taking a bit of the sting out of the results of this experiment. The bad news is that just after I sold my last put contract in May, ACI slashed its dividend down to what amounts to about a 1.9% yield, and its dividend was one of the reasons I kept writing puts for more shares in May; that, and I was getting pretty good premiums for those puts. I'm still bullish on coal in the long run, so I'm looking at these shares now as a potential, but highly speculative growth opportunity. No regrets.

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I also wrote a total of four put contracts for Nokia Corporation (NYSE:NOK), two at the $3.50 strike price and two at the $3.00 strike. Nokia continued its slide into June and closed last Friday at $2.48 per share, so I got assigned all 400 shares for those contracts, too. Thanks again to my decent premiums and low commissions, I ended up with a cost basis of $2.79 per share, which is better than my ACI experiment went. NOK is currently trading at around $2.56 per share, so it's eking its way back up along with the rest of the market. I think Nokia's chances of gaining back market share in the mobile space are pretty good, especially with the support their getting from Microsoft (NASDAQ:MSFT) on the Windows Phone operating system and AT&T (NYSE:T) in terms of advertising dollars to push their new Lumia line of smartphones. This is definitely a speculative play for me, just like ACI is, but for less than half the cost. Again, no regrets here.

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June Calls

On the call side of the house I had a mixed bag of results. First, I wrote two covered call contracts for Cirrus Logic (NASDAQ:CRUS) at the $28 strike price for a $0.70 premium. That seemed like a pretty good deal to me, as my cost basis for my 200 shares of CRUS was just $18.21 per share. CRUS is a highly volatile stock, and it didn't disappoint, closing last Friday at $28.98 per share, which meant my shares got called away. I ended up leaving a total of only $57.31 on the table after factoring in my premium less commission, but CRUS has shot up to over $30.40 a share since then. I really don't mind, though, because I realized a 58% profit for holding it for only 210 days. At its current levels, I'm not in any hurry to get back into CRUS, but I still think it's a good growth play, and if the price drops when I've got some dry powder, I might get pick some up again. Cirrus Logic has chips in pretty much every iDevice that Apple (NASDAQ:AAPL) makes, and so its fortunes are closely tied to Cupertino's future success, although Cirrus has been trying to broaden its customer base.

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Neither Medtronic (NYSE:MDT) nor Microsoft closed in the money on Friday as far as the contracts I'd written against them went, which was pretty much how I expected things to go down. As a result, I collected nice premiums for both which worked out to a 2.01% and 4.03% annual return on each, assuming I could do the same thing six times a year and get similar premiums.

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On Deck

It doesn't look like I'll be writing any more cash-secured puts in the near future, as I've got a number of open limit orders that I'm waiting to be filled, the details of which can be found here. I'd like to keep some dry powder on hand, as I suspect there's going to be another pullback later in the summer. The results of the Greek elections didn't make Mr. Market go crazy in either direction on Monday, but there's still a lot of uncertainty about the Eurozone, and in a perverse way I'm hoping for a decent decline in the market so I can pick up some bargains. I am considering writing a single put contract for Corning (NYSE:GLW) if I can get a decent premium for it, but I'm going to wait for the time being (GLW is up as of this writing, which has driven the premium for the $13 strike down a bit past what I had hoped to pick it up for).

At Bat

I did write a few more covered calls this morning, however. First, since I did fairly well with it last month, I went ahead and wrote a single call contract for Microsoft for the $33 strike at a $0.20 premium. After a $1.03 commission, that would come to a 4.03% annualized return if I did this six times in a year, assuming my shares don't get called away, but at the rate things are going I might keep this up and do it every month, which would mean about an 8% return.

I also put some of my new Arch Coal and Nokia shares to work, writing two covered call contracts for each of them. The ACI calls were at the $7 strike price for a premium of $0.18. Seeing as my cost basis for my ACI shares is $6.95, that's cutting it a little close, but if they don't get called away and I use the six-times-a-year formula for writing covered calls like these, that's an annualized return of 15.3% for a stock that's seen its dividend slashed recently.

The NOK calls were at the $3 strike for a premium of just $0.09 for each contract, but with a cost basis of $2.79 for my NOK shares, that would mean an annualized return of 18.56% if NOK stays below that strike by the time that July 20th rolls around.

I only wrote two call contracts each for ACI and NOK at this point in time, as I want to see which way the market goes in the coming days and weeks. If it continues to trend upwards, I may write calls against the remaining shares that I hold of each of these companies for even better premiums, at strike prices above these and, consequently, well above my cost basis for each.

The premium for Medtronic wasn't nearly as high as it was a month ago, so I decided to pass on writing a covered call against it for the time being.

End of the Inning

That's it for this inning of my rookie season writing options contracts, at least for now. If anything changes, I'll let you know; otherwise, I'll report out after the July expiration date and we'll see how things turn out then.

(All charts courtesy of Google Finance.)

Disclosure: I am long AAPL, ACI, GLW, MDT, MSFT, NOK, T.

Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.