I am reporting another options trade for 03/06. LO shares have been under weakness for a while due to reports about flavoring/menthol being banned from cigarettes. I continue to be bullish LO long-term and welcome any opportunities to add to my position.
The Trade:
I Sold 1 LO Jan 18 ’14 $40 Put @ 5.35.
This trade could turn out a few ways:
1) I hold shares until expiration and shares are trading above $40.00. I will get to keep the $535 in options premiums.
2) I hold shares until expiration and shares are trading below $40.00. I will get assigned 100 shares of LO at a cost of $34.65 per share. This price would give me a YOC of 6.3% without any further dividend increases.
3) Shares of LO go on a run and I decide to buy back the put early for a profit less than $535.
I currently have 17 open options positions and a total options profit of $1178 for 2013. I’ve also increased my options account to 12k to keep it about 10% of my portfolio. My options page has been updated accordingly.
I’m confused. How did you sell a $45 put on LO for $5.35 yesterday when the stock price was $38.50 or lower throughout the whole day? Did you mean a different stock?
Hi Anonymous,
No, it was a $45 Put on LO. The stock doesn’t have to be trading at the strike price, the strike just affects the premium. The reason the premium was so high is because LO is trading under $40 currently and if LO isn’t above $45 around expiration then I’ll have to pay $45/share for LO no matter how far below that it is trading.
I hope that made sense. Thanks for stopping by!
I like the trade. I don’t see the government banning menthol/flavorings because all it would do it create a black market for it. Although if it does somehow go through LO would take a big hit. Overall it’s a nice trade. Have you been leaning more towards selling in the money puts to collect more premium or only as the situation permits. Obviously if you think the stock price will be above the strike by expiration then you can collect a much better premium. Or are you expecting a bounce back in price and will close it out early?
I got a question for you if you don’t mind emailing me at passiveincomepursuit @ gmail dot com
Hi PIP,
I don’t think they will be banned either. That’s why I have sold 3 puts and actually picked up some shares today that I will mention tomorrow.
To answer your question though, yes I’ve been selling more in-the-money puts in order to reduce the % of fees that I’m getting. Keep in mind I’m only doing this for companies I want to own anyways.
I just sent you an email by the way.
Thanks for dropping by!
AAI,
I don’t believe that the FDA will ban menthol cigarettes either. They’ve already been round and round this thing before. The fact that they keep bringing it up just gives long-term investor great entry points.
That being said, however, I don’t want to go overboard. I’ve already got 60 shares in my ~$100k portfolio, but jeez that almost 6% yield is hard to pass up!
I’m heavily considering LO right now with some capital I have available. KMI is also high on my list. BCE is up there too.
Best wishes!
Hi DM,
I do agree with you. There aren’t a lot of values now in the market but I think LO is one of them. I actually just picked up more shares that I’ll post about today.
I will be a little overweight with LO but I don’t mind. The rest of my portfolio will catch up before long. The yield is definitely hard to resist!
It’s also funny you mention KMI because I picked up some as well with my WM proceeds.
Take care!
I should have clarified by asking how you only sold the Jan ’14 $45 put for $5.35. The spread at this price is between $8.90 and $9.25…hence, my reason for asking whether you got mixed up somehow.
Hi Anonymous,
Sorry about that and you are correct. I sold a $40 put not a $45 dollar put. I will correct that now on my post.
Thanks for pointing that out.
No problem. I’m a put seller/dividend lover myself and I recently started following your blog. Keep on compounding that yield!
Thanks! You don’t happen to have a website do you? I like to see other people’s options trades as well. There aren’t a whole lot of DG investors that trade options. I just started doing more options trades last year so I’m by no means an expert and always eager to learn more from others.
Thanks for commenting and keep stopping by!