By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2014
July 25, 2016
Ever professional hates this stock market rally. It seems that every sale of stock is a mistake. The rational is that the stock is over priced or that it must pull back. I slowly sold off my closed muni bond fund, mainly PMM. I had a lot of it that I had bought back in 2013 and 2014 when there was panic in the muni bond market due to Detroit, Puerto Rico and a city in California that filed bankruptcy. I enjoyed tax-free income monthly. There was a high-level woman analyst who worked for a major firm and she predicted that there would be a lot of municipal and even State bankruptcy filings. I ate a lot of shares of PMM (Putnam Managed Municipal Income Trust) that sold at a discount to the actual value of the bonds. It sold as low as $6.50. When the stock reached $7.30 and the yield was declining, I began to systematically start to sell 1,000 shares at a time feeling that the stock will fall back as the Federal Reserve finally raises rates. I sold 1,000 shares on every 5¢ stock price increase. When PMM recently reached $8.00, I sold off all of the shares I had. In order to continue to pay the monthly dividend, I believe that the company has increased the leverage it has on its portfolio. The low interest rate is forcing this issue. Pension and annuity accounts are running the same risk. Getting a safe yield is harder to find. The forward price/earnings ratio of the S&P 500 is 19, according to the article I just read in Barron’s. Even one of my favorite option stocks, Con Edison (ED) is selling at $81.18 and the yield is now only 3.30%. I wrote this stock up at $60 and had sold many puts whereby we either bought the stock or spread the options out to a later date for dollar large premiums. We also sold calls on our long stock that increased our yields to nearly 10% plus the chance to earn a 20+% capital gain. By the time the stock reached $75.00, I had sold all our shares. Lately we have “lost” our T in the $40.00 - $42.00 range. Again, we had large capital gains. To add to our overall performance, some of the August calls we sold were exercised on July 5th whereby we did not get the quarterly dividend.
We have been piling up more cash than we want. It is harder to find great companies at super or even fair prices so that we can get income in these markets. We have increased our positions in PSEC and have sold November $9.00 for $5.00 per contract. We have many more $7.00 put contracts that will expire August 19, 2016. At this point, there is no August bid to hit. The stock pays a monthly dividend of $.083333 per share. I beg you to do your own research on PSEC and to make your own decisions. Buying and selling options on this stock, at this time, is very difficult. One way to reduce your risk in this stock is to learn and execute a buy/write strategy. We did this because of the high dividend yield that we can capture and to add a layer of price protection to our position.
At $44.00 a share, we consider CCL to be a blue chip steal. Carnival Cruise Line owns a variety of cruise brands including Carnival, Princess, Cunard, Fathom and Holland America. The stock pays a recently raised dividend of $.35 a quarter (3.18% annual yield). The estimated P:E ratio is below 15. This company is in the S&P 500. The 52 week range is $40.52-$55.77. I have sold short-term calls with strike prices of $55-$65. You can take extra risk and sell puts at higher levels than the current price like at $47. The stock will go ex-dividend $.35 August 24,2016. I think the stock could sell at $100 a share in 5-years and be paying a dividend of at least $2.00.
The main goal for me of selling options is to enhance my income. You need a goal or don’t get involved. In the family IRA accounts, depending on age, the options allow us to acquire shares toward each of our goals. My goals are different from my children’s goals and the best ones positioned are our grandchildren who have IRAs and one has a Roth IRA.
Don’t be afraid to sit on cash. I know how little it earns but when the Federal Reserve raises rates, I would expect to see stock prices come down to much more attractive levels. And, if I am wrong, well you should still have a winning portfolio with CCL and the suddenly alive PFE and VZ and many of the other fine stocks this column has mentioned. If you have SDY, DGRW, SDIV or NOBL, we advise you to not sell call options on those stocks but rather continue to slowly accumulate them for the long term. You can sell puts and try to accumulate shares in those stocks but the option market is not liquid and the bid/ask prices could have a large spread. You just need to know how to work in that environment.
At this point, Judy and I are going back to traveling around the world. There is no point in making money and not spending it. Writing options is a wonderful way to increase your income above the dividend rate. If you want to make weekly money, there are a number of stocks that offer weekly options. Unlike a regular job, you can write options from home but be prepared to spend a lot of time reading research papers and investment books such as Michael Sincere’s Understanding Options.
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.