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Options Writer Series — Is It Too Early To Invest?

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By Warren Kaplaninvestments

The Stock Option Writer

© Warren Kaplan 2011-2016

May 6, 2016

 

This is from a diary of a stock option writer. Me

April 19, 2016

With the Dow Jones passing the 18,000 mark, every professional investor is wondering if it is too late to invest.  Meanwhile tons of cash is on the sideline waiting for the stock market to decline. Money managers who are measured by the stock averages are sweating it out as cash brings in very very little income.  At this pint, many of the professional money managers are just thinking about the BS they will use to explain to their clients why they are holding so much cash.  If money managers knew how to write options, they would be earning their money. There is a way to hold cash and to improve total returns.

The goal is to hold cash and wait for a downturn in the market. So, How do you define a downturn? Well, the DOW is at 18,000. Are you looking for a 10% selloff”? If not, what percentage selloff are you looking for? If not the DOW, what stock would you like to buy and at what price?  By the way, I use this strategy with my family money. I do not manage other people’s money.  

I really like Carnival Cruise Lines (CCL). You have to do your own research. That aside, I want to buy the stock at $50 or less. The current stock price is $50.84. So, what I did was to write a put at $50.00. That is, I guaranteed someone that IF they want; they can sell me their shares of CCL at $50.00 from April 18, 2016 till May 20, 2016. For my guarantee of the $50.00 price, I was paid $1.21.  On the same day that I wrote the put option on CCL, I bought several hundred shares at $50.40 and sold the $55.00 call (I am willing to sell my $50.40 shares for $55.00) and received $10 per contract ($.10 per share). On May 25, 2016, the stock goes ex-dividend and I will receive $35.00 per 100 shares.  I believe that the current stock price of CCL represents a lot of value with a positive shareholder attitude.  For my family trading accounts, I have written $55 calls, which have been expiring worthless and that just adds to our income. For my family investment accounts, we are writing longer-term $60 and $65 calls, which do not bring big premiums but here too, the premiums add to our income and net worth.

May 4, 2016

I am continuing to hoard more cash than usual. To add to our income, I have been writing weekly options whereby the strike price is well out of the money. So for example, for the last 2-days I have been writing put options (I post cash against the obligation) on POT at $16.00. This stock has weekly options. I had recently owned the stock and I let it get called away at $17.50 on April 29th. Between my buy price of $16.73 and the fat premium I got of $.85 (I sold a call that was in the money). Then today, I received a $.25 dividend.  The put options at $16.00 expire this Friday and I received between $.05-$.07 a share. Remember that my objective is to just add to my income and to keep my cash loose.  I do not expect to buy the stock at $16.00 but IF I did, it would be OK with me. I would just turn around and sell calls against the long position.  Remember that this is supposed to be loose cash money. This is not to make use of trading or investment funds.  

The point is you should break out your funds and have multiple accounts at your broker. I have a formula that works for us and we monthly drag off cash from our trading and investment accounts and transfer that money to our spending account and our loose cash that is reserved for a strong down market buying.

For this Friday, May 6th, 2016, I have a bunch of DDD calls ($25.00-$27.00) that will expire worthless and I will write fresh call options on Monday May 9. I note that I have call options that I wrote on VZ at $53.50, that will expire worthless and I had sold calls in my “cash” account on PFE at $32.50 that I will let get called away. If I had the PFE in my investment accounts that I would not like to lose the stock, I would have attempted a SPREAD. That is effected by my buying back the $32.50 call and selling a $33.00 call AND take in additional cash. It just so happens, I have sold PFE calls in my investment accounts at a $38.00-$40.00 strike price. Those calls will expire later.  My buy price is between $28.00 - $30.00 and the dividend is $1.20 a year. I expect a raise in the dividend in December of this year probably around $.02 more per quarter.

For May 13th, I see I have T calls at $39.50 that will expire. I may spread those out to become a $40.00 call and take in more money. I also have ADM call exposure at $42.50 that will expire.  Both T and ADM are in the SDY ETF. That is, they have raised their dividend every year for at least the last 20 years.  The SDY is a great place to find great long-term stocks.  

For May 20th, I have a ton of options expiring and I will discuss those in my next article.

warrenkaplan-3Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner.  He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”

Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone.  This article was written for informational purposes only.

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