By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2014
November 3, 2016
T is back. I thought I lost it forever. I owned it between $28 - $32. I had sold many calls on it adding to my dividend income. I really was very happy with the stock. I had no particular long-term price goal. The company has raised its dividend every year for the last 31 years in a row. It is an S&P Aristocrat. For the last several years, I sold covered calls against my position so that my total income from the stock was well above just the dividend income. Well, this year, the stock streaked up and I ended up selling all of my shares in the $40-$42 range. I thought they would never come back down. I love the stock market because the unexpected always happens. Very recently, T announced that it would be acquiring Time Warner so that it would have content for its acquisition of Direct TV. Frankly I do not understand it all but the thing is, the stock price went down sharply even though T announced another quarterly increase of their dividend from $.48 to $.49 beginning January 2017. I can only guess that arbitrage traders were looking to close out their trades and the result was that the stock came tumbling down to the $36.50 area. So, let’s see what we have: T became a growth stock with a 5.44% annual yield with a price of $36.00. Naturally, I spent several days writing put options at $36.00, $36.50 and $37.00. I even had written put options at $34.00 and $35.00. The premiums are not as large but due to the sudden risk in writing put options, the ones I wrote had much greater premiums than normal. I kept the options short term and T is one of the stocks that has one-week options. Those one-week options expire every Friday. I don’t advise anyone write one-week options unless you want a new career. I have yet to meet one money manager who handles client funds or financial advisor who works with one-week options. The reason I mention this is because you should know it exists and you can challenge the person whom you are paying a fee to, to manage this great source of added income. At some point, I expect T to quiet down and then a stable chart pattern should develop. As an example, even now, the Nov 18, 2016 put options at $36.00 will bring you $.38 a share. November 18 is but 3-weeks away. That is an annual yield of 18.06%. The December 16 $36.00 puts will bring you $.67 for an annual yield of 14.02%. By the way, weekly options on T trade with $.50 strike prices ie $35.50, $36.50, and $37.50. This increases the flexibility of the writer and buyers of options. IF T goes lower in price, I will be able to write put options at lower strike prices. And get a decent premium. If I end up buying the stock, even now, I can write December 16, 2016 calls at $41.00 and $42.00 and get a premium of $.02 a share ($2.00 a contract). Pure extra money if I get put. Want more extra money for free? I noted the bid showing someone wants to buy calls on T for January 20, 2017 at $45.00 and will pay $.01 or $.02 a share. June 17, 2017 $45 calls can be sold for $.06 a share. In order to really buy shares at less than the current price, you might consider selling the November 18th $37.00 puts for $.85. If you don’t get put, the premium will give you an annual yield of 39.89%. If you get put, you can then sell a covered call, maybe the June 17, 2017 for $.06 with a $45.00 strike price. Of course you will be paid the dividends while you own the stock.
From all of this, I hope you see the benefits of writing put options. It takes a lot of practice to get it done right but it is worth it especially as you get older. It helps to keep your brain active.
Check out WETF. $9.04 and its options.
I fully expect a raise in the Federal interest rate of ¼ point in December.
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.