By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2014
August 17, 2016
I like to buy stocks when I think they represent great value. In this market, it is very difficult. I have to seek companies that are not on fund radar screens. I am constantly looking for value and yield. Like Warren Buffett, I want stocks that pay me while I hold them. I do break my own rule when I can deal in a stock that has enormous underlying value and an active option market. My option writing is a substitute for the lack of dividends. Anyway, that is how I justify it.
An out front gem that I write options on is CCL. This is Carnival Cruise Line. Under that umbrella, they own Carnival Cruises, Princess Cruises, Holland America, Cunard, Fathom, Seabourn, Costa, AIDA, P&O and Australia Cunard. The company owns a lot of infrastructure in Alaska and excels on tours of our northern most state. The company has over 92,000 employees and is still growing. Although European cruises will be down in 2017, Alaska, the Orient, South America and the Caribbean will continue to grow. The hold back on faster growth is the lack of ships. Carnival has a large building program in place over all of their brands. The company is caught in the mega trend of more people retiring and more money available for travel. I will let you do the research but here are some of the strategies I am employing.
The stock closed at $46.15 last night. I have put exposure at $44, $45, $46, $47 and $50. Those come due this Friday. When I wrote the put options, the annualized yield was an average of 22%. Against my long positions, I wrote calls at $50 that should expire worthless thereby adding dollars to my dividend income. I already had previously been writing put options for Sept. This stock only has monthly options. For October I sold call options with strike prices of $55-$60 for relatively small premiums. Keep in mind that the stock goes ex-dividend August 24 for $.35 a share, the current quarterly rate. My goal for this stock is $100 a share and at least $2.00 a year in dividends within the next 5-years. The next earnings report is due September 20th. September options expire September 16th. I expect earnings for the year to be around $3.00. This company is large enough for major hedge and mutual funds to place in their portfolios. Once that happens, option premiums will be reduced due to competition and I will have to look for new situations or accept lower income with greater safety. For right now, I have to decide if I want to be put at $50 (my cost is approximately $48 because of the option premium I received), receive the $.35 a share dividend and sell a Sept. or October $52.50 or $55.00 call for more money or just spread the $50 into a later month for an additional credit that is more than the dividend.
I am just bringing to your attention t that if you want to do this for a living and a way of life, you must make constant decisions. I have been writing options for 58 years and everyday is still a challenge but I really do love it.
So, what about the scary Halloween bull market? Well, I am sitting on a lot of cash and I write far out of the money puts for small premiums. It adds to the meager interest that the money earns as interest in my brokerage account. There are stocks that have weekly options that expire every Friday. In my opinion, these are best used by professionals because the premiums are relatively small.
For a list of companies that raise their dividends for the last 20 years in a row, check out the stocks in SDY. If you are more conservative, try the list in NOBL. The stocks SDY and NOBL holds are stocks have raised their dividend every year for at least 25 years in a row. Using those included stocks to write options gives you an enormous time advantage when it comes to ideas and research. You can even buy shares of SDY and NOBL. You really should have some ETFs in your portfolio and let the dividends be reinvested. I use ETFs under the management of WETF. I do own shares of WETF and I do write options on this volatile stock. The ETFs my family owns mainly pay monthly dividends. I do not look to write calls on those ETFs but I do occasionally write put options. The reason I don’t write any options often on those ETFs is because the option market is too inactive and I can’t get the return I want, which by the way is no less than 12% a year. I do not manage OPM. I only manage my family money. Why? Well some stock options just don’t have the volume for me to share with others. For example, I have written nearly 500 put options on PWE for Sept. at $1.00. Based on the premium we received, our annualized return is a shade over 30%. However, you can’t get even $.05 ($5.00 gross per contract) now. I have a lot of confidence in the new management which, took over the company 2 years ago. Conversely, I have written a ton of $2.00 calls that will expire this Friday. So, on Monday, I will be writing new calls but I may raise the strike price. PWE is a Canadian company so I monitor the Canadian dollar as well as the price of oil and gas.
Someone asked me so here is the answer. Yes, I do use charts in making my decisions. I use a service called Linn’s Software to develop the charts the way I want them. Linnsoft.com.
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.