All About Interest

One man's journey to financial independence.

2012 Year-end Options Results

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Let me start off by saying that I’ve learned quite a lot by trading options this year.  This is the most I’ve ever used options trades.  I closed out 21 options positions and earned more profit by trading options than I did from dividend income.  This was partly due to a large speculative gain, $890, on SLV earlier in the year.

My job allows me to be in front of a computer at work all day so I am able to keep an eye on the market in order to capitalize on large market movements.  I still plan to use options trades in 2013 to either lower my cost basis or get paid a premium to wait for better prices.  I will mainly only target companies I either already own or want to own in my DG portfolio at a better price.

First here are all of my trades for 2012:

Total Profit: $2719 (before commissions)

 12/27/12 Bought-to-Close 4 BBVA April 20 ’13 $8 Puts @ .45
 10/24/12 Sold 4 BBVA April 20 ’13 $8 Puts @ 1.05
 Profit:  $240

12/27/12 Bought-to-Close 1 VOD APR 20 ’13 $26 Put @ 1.41
11/15/12 Sold 1 VOD Apr 20 ’13 $26 Put @ 1.8
Profit: $39

12/23/12 Assigned 100 shares of INTC @ $23/share
09/10/12 Sold 1 INTC Dec 22 ’12 $23 Put @ 1.1
Cost Basis: $21.90 before commission

12/18/12 Bought-to-Close 1 DOW Jan 19 ’13 $28 Put @ .14
10/02/12 Sold 1 DOW Jan 19 ’13 $28 Put @ 1.33
Profit: $119

11/18/12 Assigned 100 shares of INTC @ $24/share
09/17/12 Sold 1 INTC Nov 17 ’12 $24 Put @ 1.44
Cost Basis: $22.56 before commission

11/02/12 Bought to Close 1 ADM Dec 22 ’12 $25 Put @ .25
08/10/12 Sold 1 ADM Dec 22 ’12 $25 Put @ 1.31
Profit: $106

09/13/12 Bought to Close 1 JCI Oct 20 ’12 $25 Put @ .10
07/19/12 Sold 1 JCI Oct 20 ’12 $25 Put @ 1.20
Profit: $110

08/20/12 Bought to Close 1 DOW Sept 22 ’12 $30 Put @ .74
07/06/12 Sold 1 DOW Sep 22 ’12 $30 Put @ 1.14
Profit:  $40

08/19/12 Expired – 1 COP Aug 18 ’12 $50 Put
05/09/12 Sold 1 COP Aug 18 ’12 $50 Put @ 1.96
Profit: $196

08/02/12 Bought to Close 4 BBVA Oct 20 ’12 $50 Puts @ .30
07/20/12 Sold 4 BBVA Oct 20 ’12 $5 Puts @ .40
Profit: $40

07/24/12 Bought to Close 2 WAG Oct 20 ’12 $28 Puts @ .25
06/20/12 Sold 2 WAG Oct 20 ’12 $28 Puts @ 1.20
Profit: $190 before brokerage fees.

07/20/12 Expired – 1 VOD July 21 ’12 $27 Put
04/09/12 Sold 1 VOD July 21 ’12 $27 Put @ 1.45
Profit: $145

07/20/12 Assigned 300 shares of BBVA @ $7/share
03/28/12 BBVA July 21 ’12 $7 Puts @.55
Cost Basis: $6.45/share before fees

07/12/12 Bought to Close 1 PG July 21 ’12 $62.50 Put @.83
04/30/12 Sold 1 PG July 21 ’12 $62.50 Put @1.42
Profit: $59

06/29/12 Bought to Close 1 AZN Oct 20 ’12 $45 Put @ 2.30
03/12/12 Sold 1 AZN Oct 20 ’12 $45 Put @ 3.00
Profit: $70

05/23/12 Bought to Close 1 KMI June 16 ’12 $30 Put @ .65
01/23/12 Sold 1 KMI June 16 ’12 $30 Put @ 2.25
Profit: $165

05/14/12 Bought to Close 1 CHK July 21 ’12 $16 Put @ 2.52
04/25/12 Sold 1 CHK July 21 ’12 $16 Put @ 1.13
Profit: -$139

04/12/12 Sold 1 JNJ Oct 20 ’12 $62.50 Put @ 2.60
04/30/12 Bought to Close 1 JNJ Oct 20 ’12 $62.50 Put @ 1.62
Profit: $98 (not bad for only waiting 18 days)

01/19/12 Sold 2 TSM July 21 ’12 $15 Puts @ 1.80
04/09/12 Bought to Close 2 TSM July 21 ’12 $15 Puts @ 1.03
Profit: $154

01/03 – Sold 1 RIG $35 May 19 ’12 PUT @ 2.11
03/12 – Bought to Close 1 RIG $35 May 19 ’12 Put @ .09
Profit: $202.00

01/06 Bought 10 SLV Jan 19 ’13 $45 Calls @ 1.05
01/26 – Sold to Close 5 SLV Jan 19 ’13 $45 Calls @ 1.85
02/28 – Sold to Close 5 SLV Jan 19 ’13 $45 Calls @ 2.03
Profit: $890

Definitions

For those of you not familiar with options trading, here are a couple of definitions:

A put option gives the holder the right to sell a specific stock at a set price, the “strike price” , on or before a specified date.

A call option gives the holder the right to buy a specific stock at a set price on or before a specific date.

The Trades

I made a total profit before commission of $2719.
I came up with total commissions of $469.26.  This ate up 17.3% of my profits.  However, I did include the 19.99 fee when shares get assigned for three different puts that were assigned to me.  Without this $59.97, the commissions would have eaten up just 15.1% of the profits.

My total profit after commissions was $2249.74.  I made more in options profit than I did in dividend income!  I don’t know if that will continue but I do plan to keep my strategy of selling naked puts on companies I want to own anyways.

As I mentioned, I was assigned shares 3 times at expiration due to selling puts.  Let’s look at how those turned out.  Since I’ve already counted the income from selling the puts and subtracted the commissions from my profit I won’t use an adjusted cost basis for a simple calculation of capital gains from these shares.

I was put the following shares spending $6800:

300 shares of BBVA @ $7/share
100 shares of INTC at $24/share
100 shares of INTC at $23/share

As of 01/02/13 the price of BBVA is $9.55/share and the price of INTC is 21.35.

The combined value of these companies are 7135.00, a profit of $335 if sold at the closing price.

Now this is of course an unrealized capital gain since I haven’t sold the stock.  I do have a call option expiring January that will likely call away 200 shares at a nice profit though.  I also believe in INTC long-term and that it will recover.

How to reduce commissions?

Going forward, I would like to reduce the % of profits lost through commissions.  I’ve outlined 6 ways in which I can accomplish this:

1.)  selling multiple puts at once –   While I could sell more than 1 put at a time, this one will be tough because I’m committing to 100 shares per contract that is sold.

2.) request better pricing – I’ve called E*trade and requested lower fees that are comparable to another brokerage firm.  This is in process and I will post the results when it happens.

3.) use another brokerage firm –  I’ve actually already signed up at sharebuilder and plan to start contributing by February using that account.  They do allow options and I’ll be looking into pricing.

4.) wait for puts to expire – If I sell less puts that are speculative in nature then I would be more willing to ride out the put until expiration.  When the put expires worthless there is no additional fee involving like when I have to buy back the put to close out the position.

5.) sell in-the-money puts – Basically this is selling a put priced around the current market value or less.  While this strategy has a much higher change of getting put shares, the premiums paid are also much higher.

6.) sell longer dated puts –  The longer until expiration, the higher the premiums you can earn.  I do plan on selling some longer dated puts.

Tax Consequences – applies only to the U.S.

Buying options is a little different and I won’t go into that now but if you are selling options, there are three things that can happen:

1. they expire worthless on the expiration date
2. they are exercised because they are “in the money”
3. they are bought back or sold prior to expiration to cancel out the option

From a smartmoney.com article located here:

“Option writers receive premiums for their efforts. The receipt of the premium has no tax consequences for you, the writer, until the option: (1) expires unexercised, (2) is exercised or (3) is offset in a “closing transaction” (explained below).”
“When a put or call option expires, you treat the premium payment as a short-term capital gain realized on the expiration date. This is true even if the duration of the option exceeds 12 months. For example, say you wrote a April 5, 2011, put option at $25 per share for 1,000 shares of XYZ Corp. for a $1,500 premium. This creates an obligation for you to buy 1,000 shares at a strike price of $25. Fortunately for you, the stock soars to $35, and the holder wisely allows his option to expire. You treat the premium as a $1,500 short-term capital gain. Report it on Part I of Form 8949 as follows: Enter the April 6, 2010, expiration date in column (c), the $1,500 as sales proceeds in column (e), “expired” in column (f). If you wrote the option in the year before it expires, there are no tax consequences in the earlier year.”
“If you write a put option that gets exercised (meaning you have to buy the stock), reduce the tax basis of the shares you acquire by the premium you received. Again, your holding period starts the day after you acquire the shares.”
“If you write a call option that gets exercised (meaning you sell the stock), add the premium to the sales proceeds. Your gain or loss is short term or long term, depending on how long you held the shares.”
“With a closing transaction, your economic obligation under the option you wrote is offset by purchasing an equivalent option. For example, say you wrote a put option for 1,000 shares of XYZ Corp. at $50 per share with an expiration date of July 12, 2011. While this obligates you to buy 1,000 shares at $50, it can be offset by purchasing a July 12 put option for 1,000 shares at $50 per share. You now have both an obligation to buy (under the put option you wrote) and an offsetting right to sell (under the put option you bought). For tax purposes, the purchase of the offsetting option is a closing transaction because it effectively cancels the option you wrote. Your capital gain or loss is short term by definition. The amount is the difference between the premium you received for writing the option and the premium you paid to enter into the closing transaction. Report the gain or loss in the tax year you make the closing transaction.”
It’s very important to know the tax consequences before you start options trading.  I admit there were several things I did not know and I will be learning when I file taxes myself this year on Turbotax.

Let me summarize the main points because this can be confusing:

PUTS

1. Selling a put that expires or is closed out (by buying back a put that you’ve sold) creates a short-term capital gain, no matter the holding period.
2. Selling a put that expires or is closed out is only taxable in the year it expired or is closed out, not in the year the premium is received. Your profits (premiums received – premiums paid – commission costs) are taxed as short-term capital gains.
3. Selling a put that gets assigned reduces the cost basis of the stock by the premiums received and capital gains treatment of that purchase begins on the date of assignment.

CALLS

1. If you sell a covered call and your shares are called away, add the premium minus commission costs to the sales proceeds.  Your gain or loss can be short-term or long-term depending on the holding period.  
2. If you sell a call and it expires worthless or is closed out by buying it back, you are taxed as a short-term capital gain on your profit in the year of expiration, no matter the holding period.

Conclusion

Despite the tax treatment, I believe selling puts is a great way to generate extra income or reduce the cost basis on companies for DG investors.  I would only recommend selling puts on companies that you either own or want to own anyways.  I’m talking about the blue-chip, large moat companies that have long histories of paying and increasing dividends.  Companies such as JNJ, KO, PEP, MO and MCD to name a few.

If you made it through all of that I would love to hear some feedback.

Disclosure: Long JNJ, PEP, MO, INTC, BBVA and MCD
  

Comments

  1. I trade all my options in my ROTH IRA account. This way I don’t have to worry about the tax consequences. The only downside is that I can’t trade on margin or do naked puts or calls. Doing it this way makes tax time a little easier.

    Reply

    • Thanks for stopping by Chad. That definitely sounds like a good way to do it, unfortunately or maybe fortunately I don’t qualify to contribute to a Roth any more. My only option is to trade in a taxable account currently.

      Reply

    • Hi Executioner,

      Thanks for stopping by.

      This information is directly off the irs website here: http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

      If you are married and filing jointly and have a retirement plan at work (I have a 401k i can contribute to) your IRA deduction is $0 if your AGI is over $112,000. Therefore I get $0 deductions.

      Also the max contribution for 2012 is 5k, and I’m penalized to take any money out before 59 1/2.

      I’m trying to become FI well before that age so those are just more reasons I’m not interested in any type of IRA.

      Reply

  2. Congrats on a great year in options! I’m hoping to get a chance to sell more options in 2013 but we’ll see how things go. It’ll really depend on whether the market has a lot of good values or not for buying directly.

    Reply

    • Thanks and I agree with you PIP about the market. If the market continues upward then I will keep selling puts and they will keep hopefully expiring. I am still hoping for a correction in the market or short-term weakness from one of my holdings so I can buy outright. Take care.

      Reply

  3. Wow thanks for the write up! It’s pretty clear you made out like a bandit. A few things:

    -2012 was an up year, have you considered what would happen in a down year? I don’t know enough about options to answer this. It seems like losses could pile up, probably unrealized losses. Sticking to companies you want to own anyway sounds like a great plan.

    -I like your idea of shopping for better rates. Fidelity is $7.95 + $.75 for extra contracts. $7.95 if it executes. I wrote a few covered calls in 2011 with positive results. One of the best covered calls I wrote was 2 contracts of LTC which expired worthless. The reduced commissions for 2 contracts really boosted the gain.

    -Perhaps wait for periods of high volatility? Or be more active if it happens? Again 2011 had ridiculous volatily we didn’t see in ’12, but it was great for option premiums. The low volatity in ’12 is partly why I didn’t use covered calls last year (I also wanted to simplify).

    -Perhaps use covered calls as the sell price if something gets to pricey. I have thought about this and tried it a few times. I may get back to doing it once again if I have atleast 100 shares.

    I’ll be interested to see how the options work for you this year. It is working no reason to stop!

    Reply

    • Hey CI,

      Thanks for stopping by. I hope this information is helpful to some people. I still have a lot to learn.

      To answer your question about a down year; If I continue selling puts then I would basically be put more stock. All of 2012 I was only put stock 3 times. In a down market I would have the option to either buy back the put at a loss or waiting it out and buying the stock. If I’m only selling puts against companies that I want to buy anyways, then I’m always going to pay less for that company’s shares than where their stock was trading on the date I sold the put. The way to collect premiums though in a down market would be to sell calls as your mentioned. The only drawback would be that you have to sell your shares and in 100 share lots. I was really close to selling a covered call on WM on Friday.

      I have heard some good things about Fidelity. I will have to check them out. That sounds a little cheaper than what I’m paying currently.

      Thanks again for commenting.

      Reply

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