DGI Adventure – 06-09-16 – Sold Cash Secured Put – Gap Inc (GPS) – $17.50 strike – July 8 Expiration


I loaded up on more GPS in my taxable account last month, and my investment thesis hasn’t really changed since I originally purchased shares back in September of last year. So this won’t be a full blown post. Just a record of the trade. Mr. Market presented an opportunity to possibly average down even further, and he’s paying me very well to take the “risk”. Sweet!

Dividend Cycle

GPS will go ex-dividend on 7/1/16, when shareholders of record will be entitled to the $0.23/share payout. The payout has been stuck at this level since April of 2015. The company has a pretty strong balance sheet, so they could raise it if they wanted to, but I think management is being conservative. Technically they can maintain their dividend contender status, extending their streak to 12 years, just by keeping the distribution at $0.23 next quarter. That would only represent a 1.1% increase from 2015 to 2016 annual payout, but it would be an increase none the less. If I am assigned the shares, it will most likely be after the ex-dividend date. I will miss out on the dividend, but the premium received is actually more and I get it now instead of later…so NBD.

Investment

Today I sold one cash secured put contract for $26 ($25.22 net premium after $0.78 commission) on GPS shares with a strike price of $17.50/share and an expiration of July 8 2016. I need to keep the $1,750 in cash secured for 29 days which makes the 1.44% absolute return an 18.14% annualized return. GPS closed at $19.32 today, meaning I enjoy a very comfortable 9.4% of downside protection on top of that juicy yield. If assigned, this cost basis represents a 5.2% yield, which I would much rather have in a tax advantaged account. I would likely shift some of my exposure out of the taxable account after waiting 31 days for wash rule issues to clear.

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