Options Trades

New Purchase & Options Trade – TowerGroup (TWGP)

October 2, 2013 by All About Interest

When my shares of HGIC were bought out in 2011 I was looking for another P&C play. Instead of AFL (which I regret), I decided on a more speculative play, TWGP.

I added this company early last year and it’s been one of the most speculative positions I own.

I have been dreading this post but I try to keep my readers up-to-date on all my trades, good or bad. So far this one has been pretty ugly.

Back on Nov. 3 2012 I added some shares after deciding that the storms in the northeast wouldn’t have as much of an impact as everyone thought. That post can be found here.

Since then, TWGP has hit a yearly high of $22.30 and a yearly low of $6.58. They were over $20/share as recent as August. Yes, that’s a huge range!

TWGP went through a merger with Canopius Bermuda, a reinsurer. TWGP also understated its reserves and delayed their financial statement. This happened on September 17th. They are due to report their 2nd quarter results now the week of Oct. 7th, next week.

The CEO also was required to liquidate over 1 million shares due to an agreement with another financial institution. This added more fuel to the fire.

One of the biggest risks is a possible downgrade of their AM Best rating. There should be a big movement one way or another next week when earnings are reported.

Shares of TWGP have plummeted and have just recently started to climb a small % back up. Here’s a look at their chart and the volume below.

Here’s some recent trades with TWGP:

08/29/13 – BTC 1 TWGP Oct 19 ’14 $20 Put @ $6.50
08/29/13 – Sold 1 TWGP Apr 19 ’14 $17.50 Put @ $4.40
09/18/13 – Bought 200 shares TWGP @ $10.11
09/23/13 – BTC 1 Apr 19 ’14 $17.50 Put @ $9.50
09/27/13 – Sold 4 TWGP Apr 19 ’14 $7.50 Put @ $1.75
10/01/13 – Bought 274 Shares of TWGP @ $7.34

I have rolled puts out and averaged down on shares. I know this looks a little messy and this is probably the perfect scenario of trying to “catch a falling knife” but if this company doesn’t go out of business (which I don’t think they will) then current prices are going to look cheap in a couple of years.

My only realized loss is $860 from buying back puts. However, if TWGP is trading above $7.50 next April I will look to collect $750 in premiums.

I’m sitting at a cost basis of 12.34/share with 840 shares. Current yield is over 8% and shares are down 37% from my cost.

However, I’m done adding more money to this company. I’ve already assumed a lot of risk.

This is not a typical purchase but I don’t mind adding a little risk sometimes to my portfolio. This stock is certainly not for the faint of heart.

Options Trade – Call Assignment – Safeway (SWY)

September 25, 2013 by All About Interest

I originally bought 100 shares of SWY back last December for $19.12/share. I’ve since sold a put and closed that out for a gain of $130. I also collected $140 for selling this call that was just assigned. Since shares were trading above the strike of $20, this call was assigned meaning I had to sell my shares for $20/share.

The original trade:

01/24/13 Sold 1 SWY Sept 21 ’13 $20 Call @ 1.40; posted here

After assignment of the call I received $2000 ($20 call x 100 shares) plus $270 in premiums plus a few dividends I’ve collected since then. I’ve had over a 20% gain in less than a year which is pretty good.

I did leave some money on the table though. I would have been better off just letting SWY run. However, SWY was more of a speculative position and I still came out with a nice gain so I’m not unhappy.

I’ve also already found a replacement for SWY. Hint: It’s a large retailer that I’ll mention on my weekly buys tomorrow.

I currently have 9 open options positions and have already met my options goals of $3000. I met and posted this options goal in July. My options income is still ahead of my dividend income although I expect to catch up and pass it this month.

I recently wrote up an introduction to options for anyone interested, posted here

My options page has been updated accordingly.

Options Trade – Caterpillar (CAT), Norfolk Southern (NSC)

September 24, 2013 by All About Interest

I originally sold a CAT put and an NSC put in July. Since then, shares are enough above the strike prices that I could make a nice profit. With the debt ceiling debate going on, I expect some volatility in the market and could sell another CAT or NSC put in the near future.

The original trades:

07/26/13 Sold 1 CAT Nov 16 ’13 $80 Put @ 3.37; posted here
07/24/13 Sold 1 NSC Mar 22 ’14 $75 Put @ 6.50; ;posted here

I decided to buy-to-close the CAT put @ 1.21. So I earned $337 – $121 = $216 in premiums in just two months.

I also decided to buy-to-close the NSC put @ 3.88. So I earned $650 – $388 = $262 in premiums in about the same amount of time..

I recently wrote up an introduction to options for anyone interested, posted here

My options page has been updated accordingly.

Options Expiration – Lorillard (LO)

September 23, 2013 by All About Interest

I originally sold a LO put in February. Shares are trading well above the strike price of $37.50 so this put has expired over the weekend worthless, meaning I get to keep the entire premium.

Lorillard is a stock that I currently own and will continue to buy more shares and sell more puts against to keep dollar-cost averaging into. I would have had no problem if these shares were assigned to me. This is why I sell puts against companies that I’d like to own more shares of anyways. I don’t have to worry about getting assigned shares since I’m picking a price that gives me a cost basis cheaper than current market values and one that I would be happy to pay.

The original trade:

02/27/13 Sold 1 LO Sep 21 ’13 $37.50 Put @ 2.97; posted here

This options expired so I get to keep $297 in options premiums. This brings my total options premiums to $3433 for the year.

I currently have 12 open options positions and have already met my options goals of $3000. I met and posted this options goal in July. My options income is still ahead of my dividend income but I expect to catch up and pass it this month.

I recently wrote up an introduction to options for anyone interested, posted here

My options page has been updated accordingly.

Options Trade – Dow Chemical (DOW)

August 23, 2013 by All About Interest

I originally bought 100 shares of DOW back on June 14th for 33.93/share mentioned in a post here.
While DOW isn’t really a “core” holding of mine, I am still bullish on their earnings especially due to cheap natural gas inputs. I’ll also be using this trade as an example in my next article: Introduction to Options Trading – Part 2 (Calls).

Since June 14th, DOW has increased in price to $37.35/share. I could just go ahead and sell 100 shares for a profit of $342 taxed as a short-term capital gain. This is a 9% profit in only 2 months!

Instead of just selling I decided to sell a covered call. Here’s the trade:

I sold 1 Dec. 21 ’13 $35 Call @ 3.25. I collected $325 in premiums.

This trade could turn out a few ways:

1) I hold shares until expiration and shares are trading below $35.00. I will get to keep the $325 in options premiums.

2) DOW is trading above $35.00 at or before expiration and shares are called away. I will sell 100 shares of DOW at a price of $35.00/share. My profit not counting commissions in this scenario is the sales price ($35) minus my cost basis ($33.93) plus premiums ($325). This is $432 or a 12.7% profit in only 6 months!

3) Shares of DOW drop substantially and I decide to buy back the call early for a profit less than $325.

I currently have 15 open options positions and a total options profit of $3486 for 2013. My options page has been updated accordingly.

Introduction to Options Trading – Part 1 (PUTS)

August 20, 2013 by All About Interest

Apple Has More Money Than God, Could Exist Solely On Cash Reserves Till 2018

I had a few people ask about an introduction to options. In this introduction to options, I will go over some of the basics and talk about the options strategy I use the most, selling puts. In a rising market, It can feel like you are “printing money.” I will also talk about how to buy a put and why you would want to.

I am certainly no expert on options trading but I have done really well so far. I’ve earned $3486 so far this year and have kept no more than $13,000 in my options trading account. You can see all of my options trades on my options tab. I don’t know if it has been mostly luck but hopefully, I will be able to give some advice or tips from what I have learned over the last 1 1/2 years.

Before I begin, I previously posted my 2012 year-end options results here. This covers some of the basics and also a lot of the tax implications of options.

So what are options? From Wikipedia:

An option is “a promise which meets the requirements for a formation of a contract and limits the promisor’s power to envoke an offer.”

Options typically exist in one of two forms:

Put Options – 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.

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

Additional options terminology you should know before we continue:

Strike Price – The strike price is a fixed price at which the owner of this option may buy or sell said security.

Premium – This is the income received by buying or selling an options contract(s).

Expiration Date – This is the last day that the options contract is valid.

Example of selling a put:

Let’s use Coca-Cola (KO) as an example. As of this writing, KO shares are currently trading at $39.46/share. I really like KO stock and want to buy more but I believe that Coca-Cola may be slightly overvalued. However, I determine that I’m willing to purchase KO shares on for $37/share or less. Well, I could sell an option contract in order to “try” to buy more KO stock at this cheaper price. The worst case is that KO’s price doesn’t drop and I get to keep the premium.

I decided to look about 5-6 months out in time. Below you can see the Jan 18 ’14 KO Puts around $40 strike. Since I’m selling a put, the bid price is the price I’m going to get paid to sell this put option. Keep in mind that the longer the amount of time I’m willing to wait, the higher the premium is.

So what Strike Price will give me a chance to purchase KO for under $37/share?? For the sake of this example we won’t be counting commission costs. So the way you figure your cost basis is to take the Strike Price and subtract the Bid price. So for the $40 Strike, I would subtract $2.17 and come up with $37.83. This is higher than I want to pay so let’s take a look at the $37.50 Strike. If I sell 1 $37.50 KO Jan 18 ’14 Put right now then I would receive $1.05 x 100 = $105. Keep in mind that 1 put is equal to a 100 share lot so you multiply the bid/ask by 100 to figure out your premiums. So if these 100 shares of KO got assigned then my cost basis would be $37.50-$1.05 = $36.45/share. If KO is trading above $37.50/share around Jan 18 ’14 then I would get to keep the $105 for waiting.

To me, selling puts against sold blue-chip companies is a win-win. I’m not worried KO is going out of business. I currently own shares and would like to build a bigger position. The key is trying to buy shares without over-paying. In this example, by waiting 5 months, you are given a chance to own additional shares of KO at a cost of $36.45/share or a 7.6% discount to where KO is currently trading.

Example of buying a put:

Let’s assume I bought the put instead of sold it in my previous example. My break-even (the point where the sloped part of the graph crosses the x-axis) in the above example would be $37.50 (the strike) – $1.06 (the premium paid per share) = $36.44. Any price above $37.50, I have limited my loss to the premium paid. Any price below $36.44/share, I will be making a profit.

Buying puts is a concept that I understand but have not done yet. You are hoping or expecting the stock price to drop between the purchase date and the expiration date. Your loss is only limited to the amount of premium you paid. However, your profit potential can be very high depending on how far the stock drops in price. If you had bought puts in bank stocks before the financial crisis then you could have gotten rich. You are buying the right to sell a particular stock at a pre-determined price. You can do this whether you own the stock or not. Using the example above, let’s assume I bought the $37.50 Jan 18 ’14 Put. It would cost me $1.06 (ask price) x 100 shares = $106. Basically, if KO was trading below $37.50/share then I might want to exercise my right to sell 100 shares for $37.50/share. This trade protects my investment from dropping below $37.50 before the expiration date. If I didn’t own 100 shares of KO then I am basically just betting that KO stock will drop in price enough that I can sell the put back before expiration for more than the premium. As KO stock drops, the bid/ask price of this particular put will rise.

In order to sell options, you will have to apply for an options trading account with your broker. For E*Trade, in order to sell naked puts, I had to get approved for Level-3 options trading using a marginal account. This requires a little bit of prior options experience to get qualified for naked puts. However, most anyone should be approved for basic options trading using a cash account. To better understand this, you can refer to online blogs and resources similar to “margin trading vs option trading explained“.

You will want to have $37.50 x 100 = $3750 in cash to secure the KO trade for a cash account. Once you get approved for marginal trading and naked put selling then you are able to leverage your money to make many more trades. For instance, this particular trade would only require me to have $750 in cash initially. As the price of KO goes up, the bid/ask price will go down. So if KO goes on a run then my margin maintenance requirement will also go down. However, is KO shares drop then I will be required to hold a little more cash to secure this put. I will talk about maximizing your leverage in a future article.

Note: I actually made a real-life put trade with KO recently and have posted that here.

I hope this is helpful and I plan to write another article involving call options, using margin to leverage your trades and some advanced options strategies.

Options Trade – Coca Cola (KO)

August 20, 2013 by All About Interest

I’m reporting an options trade that executed on Monday. Last Friday, I set a limit order on shares of KO to sell a put since my previous put was expiring. KO currently yields 2.9% but they are expected to raise the dividend for the first payment next year in April. They have raised their dividend each year for over 50 years! If they raise the dividend as much as this year, .025, then my YOC if assigned will be 3.4%. Not bad for a dividend champion of this caliber.

The trade:

I Sold 1 KO Feb 22 ’14 $38 Put @ 1.67

This trade could turn out a few ways:

1) I hold shares until expiration and shares are trading above $38.00. I will get to keep the $167 in options premiums.

2) KO is trading below $38.00 at or before expiration and shares are assigned. I will receive 100 shares of KO at a cost of $36.33/share. This is a discount of 6.3% to where the stock is currently trading and 8.3% below my cost basis of $39.62/share.

3) Shares of KO go on a run and I decide to buy back the put early for a profit less than $167.

I currently have 14 open options positions and a total options profit of $3486 for 2013. My options page has been updated accordingly.

Options Expiration – Coca-Cola (KO), CSX Corporation (CSX)

August 18, 2013 by All About Interest

I originally sold a CSX put last December and KO put in February. These puts both expired yesterday worthless, meaning I get to keep the entire premiums.

These are both stocks that I currently own and will continue to buy more shares and sell more puts against to keep dollar-cost averaging. I would have had no problem if these shares were assigned to me. This is why I sell puts of companies that I’d like to own more shares of anyways. I don’t have to worry about getting assigned shares since I’m picking a price that gives me a cost basis cheaper than current market values and one that I would be happy to pay.

The original trades:

12/27/12 Sold 1 CSX Aug 17 ’13 $20 Put @ 2.00; posted here
02/12/13 Sold 1 KO Aug 17 ’13 $37.50 Put @ 1.71; posted here

Both of these expired this weekend so I get to keep $371 in options premiums. This brings my total options premiums to $3486!

I currently have 13 open options positions and have already met my options goals of $3000 for the year. I met and posted this options goal in July. My options income still continues to outpace my dividend income but I expect to almost catch up in September which will be a big month for dividends.

My options page has been updated accordingly.

New Purchase & Options Trade – TWGP

August 12, 2013 by All About Interest

Tower Group’s (TWGP) shares plummeted over 20% last Thursday.

From E*Trade:
Tower is Bermuda-based and through its subsidiaries underwrites insurance and reinsurance products including commercial, personal, and specialty insurance, in Bermuda, the United States and London markets. On August 7, 2013 the Company issued a press release announcing that Tower is postponing the release of its financial results for the second quarter of 2013 and its previously announced conference call to discuss the results, originally scheduled for August 8, 2013. In the press release, the Company stated that “additional time is needed to review matters relating to the estimate of its loss reserves and, primarily due to the integration of the Canopius Bermuda merger, its allocation of goodwill and certain tax accounts.” The Company further disclosed that it is working with the assistance of outside professionals to resolve these matters and does not expect to file its report on Form 10-Q for the quarter ended June 30, 2013 by the required filing date of August 9, 2013.

It was last fall that the record storms tore through the northeast where Tower Group is concentrated. Their stock price dropped from about $18/share to below $16 within a month after losses were calculated. Since then their stock was on a tear reaching a high of $22.30/share before the latest drop. I believe this giant drop in price back to around the $16/share level presents a good opportunity for someone willing to take on a little risk and also provides a 4% yield. As long as Tower continues to pay their dividend then I’m willing to see how things shake out and see the effects of the merger on their earnings.

Back in March, Tower Group announced its plans to merge with Canopius Bermuda. Shareholders received 1.133 shares of the new Tower for every share of the old Tower they owned. This is why it looks like their dividend decreased when it actually stayed the same. Their press releases can be found on their website. http://www.twrgrp.com/

Last week, I wasn’t compelled to buy more shares right away. I wanted to see what happened to the stock price over the next few days. So I sold a put first.

The trade:

Last week I sold 1 Oct 19 ’13 $20 Put @ $3.00
Monday I added 123 shares of TWGP @ $16.24/share reducing my cost basis to $17.24/share.

This is one of my few speculative plays. I now have a full position in TWGP and also have the chance to pick up another 100 shares in Oct. for a cost of $17/share.

This purchase adds $81.18/year to my dividend income and has increased my forward 12-month dividends to $7017.04.

Options Trade – CAT

July 29, 2013 by All About Interest

I’m reporting an options trade from last week for CAT. I’ve already bought and closed early two previous CAT puts for an options profit of $287.

The trade:

I Sold 1 CAT Nov 16 ’13 $80 Put @ 3.37

This trade could turn out a few ways:

1) I hold shares until expiration and shares are trading above $80.00. I will get to keep the $337 in options premiums.

2) I hold shares until expiration and shares are trading below $80.00. I will get assigned 100 shares of CAT at a cost of $76.63/share. This is a discount almost 8% to where the stock is currently trading and a 12.5% discount to my cost basis of around $87. CAT recently raised their dividend 15% to .60 from .52 for their August payment. This price corresponds to a yield of around 3.1% which I find attractive.

3) Shares of CAT go on a run and I decide to buy back the put early for a profit less than $337.

I currently have 14 open options positions and a total options profit of $3115 for 2013. My options page has been updated accordingly.