Good Friday – A Monthly Affair for Option Sellers
Most people go through their whole investment lives without ever experiencing the thrill of seeing options they’ve sold expire worthless, month after month. The benefits of writing (selling) options are very misunderstood.
The technique is frequently disparaged by those who do not actively take the other side of the trades they warn others against making. Monthly options expire following the third Friday of each calendar month. The end of that trading week marks the ‘use it, or lose it’ date for owners of puts and calls.
For option buyers that date often extinguishes all hope while flushing investment dollars permanently down the toilet. Option writers, however, generally look forward to expiration dates as the termination of their obligations and the final recognition of profitable trades.
To option sellers, those dates are indeed, Good Fridays.
September 19, 2014, was better than good in my margin-type account. The list below shows my non-IRA, option-related trades that finished up this week.
Note: I use Quicken software to keep my books and list options by the number of shares represented rather than as 100-share contracts. Cash and results are identical either way.
I mostly sell ‘put’ options on stocks I’d like to own cheaper than their trade inception date prices. Sometimes I sell covered calls against shares held, but only if I’d be willing to sell above certain levels. Both put and call transactions were in play for me this month.
I am not going to argue with the ‘haters’ about calculation of ROI (Return on Investment) from options sold short that end up expiring worthless. When writers’ options simply disappear, the monetary result is a 100% gain of all premium received. It was achieved without ever having to lay out any cash. That’s a fine outcome regardless of how you figure the percentage return.
Selling naked puts requires enough unencumbered buying power in a margin-type account to ensure that you could make good on all potential purchases which you commit to, via options sales. Covered call writing only requires hundred share lots of the underlying stock to be held for the duration of the call options sold.
Did I take undue risk in netting more than $20K in profits on trades that spanned no more than around six to eight months? Three of the four underlying stocks (BWP, BKE, and KN) hadn’t spent even one day during the past year as low as any of my break-even (a.k.a. ‘if put’) points.
The Valmont Industries (VMI, Financial) September $145 put brought in $9.69 per share when it was sold to open (STO) on Feb. 21, 2014. This could have been rolled out to March of 2015, for a net credit. Instead, I simply let it be exercised. I now own an extra 100 VMI shares at a net cost basis of $135.31 ($145 strike price - $9.69 put premium). That is slightly cheaper than the market price at the time of exercise.
Valmont traded north of $163 less than three months ago. My target price remains $180 or better within 12- 18 months. The two pairs of September $160 and $165 covered calls expired worthless as the stock closed last week below those strike prices. I kept my 400 shares plus $1,376, combined, from the covered call sales as a consolation prize.
Why did I sell calls at $160 - $165 if I thought VMI was going to $180? In the short run I was willing to part with some shares at net levels of $163.69 ($160 strike price + $3.69 call premium and/or $168.19 ($165 + $3.19).
Valmont has been a true wealth creator over time. The company’s recent trimming of near-term estimates don’t faze me at all. VMI now represents one of my largest holdings.
The latest “Good Friday’ was more of a ‘great’ one than usual. That said, my long-term success rate with options has been quite gratifying. Selling time premium puts the odds heavily in your favor. The technique requires more capital up front than buying options does. That merely reinforces the old adage that, “It takes money to make money.”
The next time someone tells you to avoid selling options… ask to see their P&L records.
Disclosure: Long BWP & VMI, Short BWP, KN, BKE & VMI options for future months
