By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2014
April 5, 2016
I had slowly accumulated a position in value stocks over the last 2.5 years. Then, I sold calls at relatively near strike prices. For example I sold calls at $35 on T, which I was previously put and had a cost of $30.75. The calls expired worthless and I continued to write new calls and take in quarterly dividends. Sensing a change in investors attitude and increasing dividends, I began to sell calls at $37.00-$39.00, not for big premiums but just a few dollars to add to my growing dividend income.
This year, the investors are finding value. T, VZ ED and other quality investment stocks have been breaking out of their “normal” trading range. Suddenly and persistently, T, VZ and other value stocks have seen higher prices. I had to use an option strategy called “rolling out and up”. What I did was I would wait until a stock actually reached the strike price of the option I sold. So, when T reached $37.00, I simply used a straddle option to buy back the $37.00 call I sold and then sold a new call option at $37.50 or $38.00 and received a dollar credit by doing so. During the new option holding period, I would be receiving any dividends that T declared thereby adding to my total return. In certain cases, it may be difficult to spread “out and up” in a short term and you may have to give the option buyers more time and/or reduce the credit you want. I use charts to help me to determine time and selling prices as well as current yields and the total size of my stock position.
Here are some examples of spreads I have recently done:
VZ ($54.01) expiring March 18 was rolled up from $52.5 to $53.00 due April 1 for $3.00 per contract. (I really don’t want to sell the stock at the contract price even though I have a $45 cost)
OFC ($26.24) expiring March 18 was rolled out from $25 to $25 due April 15. I was paid $15 per contract and if not called before, I pick up a $27.50 per 100 shares dividend. The ex-dividend date is March 29th. PS. This article is being written April 3rd and although the stock price was above $25.00 before March 29th, the stock did not get called away so I will get the dividend. I have no idea of the thinking of the person who owned the option nor of their broker. The option that I performed is called a SPREAD. I bought the March 25 option and sold the April 25 option at the same time. The $15.00 was the credit I was looking for. You can decide on the credit you want when placing the trade. OFC has a very poor, not deep, option market.
T ($39.05) call expiring 4/15/16 at $39. The stock closed at $39.05 on April 1st. I really don’t want to sell the stock at $39. I had written the call when the stock [rice was $33 never thinking that my value stocks would suddenly get popular after 2 ½ years. Sure, if I sold the shares at $39 I would have a nice capital gain but frankly, I like the dividends and based on history, I expect T to raise its dividend in December 2016. T will go EX-DIVIDEND April 6th for $.48 per share. So, I entered a SPREAD order to buy back the April 15 $39 call and sell a June 17, 2016 call at $40 and for me to receive $10.00 per contract. That happened on 03/29/16. IF the stock gets called away from me at $40.00, I would have an even bigger capital gain that I had previously hoped for. (Yes, Hope is a strategy). T continues to grow as a company and it is not affected by China, currency, Brazil, Russia, the price of oil/gas or even “who gets elected”.
Here is one of my recent “trades” and the reasoning behind it:
PSEC ($7.27) is a finance company lending money to middle size companies. The stock price on 3/23/16 was $7.08. I did not want to pay that price and the stock was just not getting down to $7.00, where I wanted to buy the stock. So, I entered a BUY/WRITE order and I bought the stock at the price I wanted. How? Well, I actually paid $7.04 for the shares and at the same time, I sold the 5/20/16 $8.00 call for $.04. Hence, my cost becomes $7.00 and I have an obligation, if called upon, to sell the shares at $8.00 by 5/20/16. Now the interesting part. The dividend on this stock is $1.00 a year and it is paid out on a monthly basis of $.0833. The next ex-dividend date is 4/27/16. So, I can make a 14.28% capital gain or “suffer” a dividend return of 14.28%. If the stock is not sold by 5/20/16 at $8.00, then I will look to write another call option and I can decide to write the next call option withy an $8.00 or even a $9.00 strike price. Meanwhile, I will be receiving my monthly dividends while I own the stock. Note that I also own the stock at prices ranging between $5.80 - $7.10. You need to really research the stock to see if it fits into your portfolio. Do not just do what I do. However, learn the possibilities that are out there.
Thanks to an up market, I have been selling a lot of call options at strike prices that I would love to see. Conversely, I have sold off some T and VZ and ED at lower prices than the current market due to call options and that I had not been able to SPREAD at satisfactory prices to me. I am sitting on a bit more cash than I need waiting for the market to come down. In such cases, I have to accept a much lower premium or raise the strike price that I am willing to buy shares at. Sometimes, it is difficult to take the emotional senses out of the investment equation.
Warren 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.