The Stock Option Writer
© Warren Kaplan 2011-2012
June 12, 2012
The last time I wrote about this ETF, a lot of money was made. Now, it is time to revisit.
The underlying financial companies have gotten stronger and the ETF has declined from a recent $16 high to tonight’s close of $13.88. There are a number of option writing opportunities here depending on your approach, beliefs, and objectives. For those who know me, my concept of making money is to allow me to spend it. Yes, I have a new iPad, a new SONY HX 100 camera and 3 new Samsung Smart TVs. I spend my gains traveling around the world. So for me, safety is important. In that regard, I was selling June 16, 2012 puts today for 3¢. That brought me a gross return of 12.00% on an annualized basis. The key is to keep your commission costs as small as possible. I sold July 21, 2012 puts at $13.00 for 28¢ and that gave me an annualized return of 26.42%.
The top ten holdings of this ETF, in percentage order, are Wells Fargo, JP Morgan Chase, Berkshire Hathaway B, Citigroup, Bank of America, Goldman Sachs, US Bancorp, American Express, Simon Property and MetLife. Keep in mind that ETFs do not go bankrupt and if any one company failed, it would simply be replaced. The index includes: diversified financial services; insurance; commercial banks; capital markets; real estate investment trusts; consumer finance; thrifts & mortgage finance; and real estate management & development. It may invest in cash and cash equivalents or money market instruments.
The current annual yield from this ETF is 1.66%, which is above the current money market rate. Dividends are paid quarterly, every March, June, September, and December. Expenses for managing the fund is .19%, well below what mutual funds charge.
The July $13 put brought 28¢ today, thereby yielding 26.42% annualized for one year. If the stock declines under $13.00 you will own it at a cost of $12.72. You can then turn around and sell a covered call at $13 or for less premium, for $14. The premium would depend upon how long a time period you are willing to insure the price to the buyer.
The $14 put brings 65¢. Keep in mind that this put is currently in the money for 12¢ and the balance of 53¢ represents a premium for the risk you take. However, the correct way to look at this is, would you like to own this ETF at a cost of $13.35?
If you look at the August 2012 options, you can get 42¢ for a put at $13 (true cost would be $12.58) for an annualized return of 20.03%. More aggressive is to write the August 2012 put option with a strike price of $14.00 and take in 79¢. This provides a potential return of 35.88%, as your true cost would be $13.21.
If you do not wish to own the shares at the contracted price, you can try to sell a spread. You give the broker an order that in effect states that you want the brokerage firm to “buy to close” the option you have and at the same time, “sell a put” for more money than it will cost you to buy back the original put. This is called a spread order. You will have to tell the broker how much credit you want on the spread. This should be no problem to an experienced money manager or broker. If it is a problem, fire the broker or money manager.
Writing options is a way to enhance income if properly handled. Please do not forget to spend some of the money on what you want and desire. I know people, who use the profits to travel, cruise and/or buy collectables. The main point, money should be used for enjoyment.
If you don’t think financials will be here forever, then decide where you will hide or invest your money. I can tell you that this ETF, XLF, has sold for a much higher price in 2007 and 2008. My research shows a high of nearly $40 a share. For the last 12-months, the range has been $10.95-$16.01.
Always remember that the lower the price goes, the higher the amount that you will receive for the put option. Also, the lower the amount you will receive for a call option. You will need to balance the amount you receive for an option by strike price, time and volatility of the underlying stock. As a writer, the general rule is you want to write options with short time periods.
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.”
Reader’s comments are welcome. Please do not consider these opinions as advice and we take no responsibility for any trades made. You should review these option writing ideas with your financial advisor so that you are properly guided. Writing options is not for everyone. If you want information about a certain stock, please email email@example.com.