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Options Writer Series — The Year of the Comeback

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warrren

By Warren Kaplan

The Stock Option Writer

© Warren Kaplan 2011-2016

January 4, 2016

Carnival Cruise Line (CCL) was endorsed by Barron’s this week. They have a price objective of $66 in the next 12-months. Followers of my articles are in at $48.00 - $50.00. The current dividend is $1.20 annually and the company benefits from lower oil prices.  You can add additional income by selling covered calls at $57.50, $60.00 and even $65.00. On Oct 23, 2015, I sold the $60 January calls for  $.40. The stock closed at $54.48 on December 31, 2015 so I expect to retain my shares. The premium I received by selling the call, in effect, better than doubles the total income from that position as the dividend is $.30 quarterly. If the stock gets called away from me on January 15, 2016, I would have a very nice short-term capital gain of 20%+ in less than a year. The beauty of selling covered calls is that you take in money (like an insurance company) and if the event does not happen, you can sell another call and take in more premiums and receive more dividends. Check the CCL in the Barron’s of January 4, 2016.

Oil. I believe that there is more room for the price of crude to go up than to go down. I don’t know (no one does) if 2016 is the year of the price recovery but I do know that the world demand for oil will continue to rise. The Keystone pipeline would have increased the USA’s ability to be more self reliant as well as it would have caused thousands of high paying jobs. The current Federal administration is just totally ant-business and I am glad that President Obama’s administration is coming to an end.  It took 40 years before the right to export oil was allowed. Linn Energy has gone from $35.00 a unit to $1.30. The $3.50 a year distribution is gone for now. The company is working on reducing debt.  The option market on LINE is very active and recently, the option market has gone weekly on LINE.  If the unit price goes from $1.30 to $2.60, you have a 100% gain in your capital.

The Barron’s January 4, 2016 issue was also kind to my AT&T (T), Verizon (VZ) and utilities. I favor Con Edison (ED), which is an S&P Aristocrat stock as is AT&T. I had correctly predicted the timing and the increase of the dividend of T on December 18, 2015 from $.47 to $.48.  I sell out of the money call options ($37+) because I don’t want to lose the stock and the premiums add to my total return from the investment.  The stock sells around $34.40 and pays me a 5+% dividend. I have been selling short term put options at $33.00 and at $32.50, which have been expiring worthless so the premium I received has been 100% profit to me. When a stock price declines, I sell the put options and receive greater premiums. Do not sell put options if you really do not want to buy the stock.

I expect last year’s high-flyer stocks that may be selling for 50X-100X earnings to go down in January, as hedge funds that delayed selling them due to tax considerations would be smart to start the year by locking in profits.

If you are writing options, the idea is to write short term and watch the time value disappear quickly. So, if you buy options, you want to buy long term. I have been looking at buying January 2017 options on certain stocks with a preconceived plan for date and exercising or selling the options.

By the way, I suggest using some of the profits to build a position in the ETF SDY especially if you have a long-term horizon whereby you use this stock as a basis for retirement income.

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warrenkaplan

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.

 

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