DGI Adventure 08-06-16 Sold Cash Secured Put – HCP, Inc (HCP) – $37.50 strike –  Aug 19 Expiration (plus bonus options expiry discussion)

This trade was actually executed yesterday 08/05/16.

For my last trade in HCP, I posted a full blown writeup that (sort of) conformed to the core philosophies article on my investment thesis process. My crisis of faith in REITs still isn’t resolved, but it’s not enough for me to sell out of the position. I do want to move the yield to a tax advantaged account, so I’m getting a little more aggressive about getting assigned.

This is just a record of the latest trade, followed by some bonus discussion about other positions.

Dividend Cycle

HCP went ex-div on Thursday 08/04. The current distribution is $0.575/share. HCP is a dividend champion, but that record is potentially in jeopardy depending on what happens with the upcoming spinoff of the HCR Manor Care portfolio. This trade will expire well before the next ex-dividend and is only $0.025 lower than the full quarterly payout anyway.

Investment

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SPL (Strike Price Logic)

As I mentioned last time our aggregated cost basis (across three different accounts is $40.80/share). So anything below that is pretty good. I realized earlier this week that my tax adjusted “invested yield” on REITs is so crappy, this maneuver is probably still “worth it” even at elevated cost bases.

Case in point: HCP annual yield is $2.30 per share, but they’re unqualified dividends taxed at the full octane income tax rate of 28%, so I really only get to keep $1.656. At a $40.80 cost basis that works out to a 4.06% yield. If assigned here in the beneficiary IRA, I can keep all $2.30 at an aggregated cost basis of $38.97, which is more like a 5.9% yield.

No brainer right?

Bonus Expiry Discussion

Totally unrelated to the above trade, I have two options that expired yesterday.

1) My MSFT covered call is well in the money. Shares will be called away this weekend. I quickly sold this call worrying about a dead cat bounce after the brexit fall out. The cat was very much alive, and I’m giving up several hundred dollars in potential gains. Oh well. I still did pretty well on the trade, and will have fresh cash on Monday to put to work.

2) My WFC cash secured put is well out of the money. The position expired worthless, and the cash will be available to secure a new position next week. Shares aren’t up that much from when I first initiated the position. I very well might just re-initiate the trade depending on what things look like on Monday.

Early Assignment Watch

Having a covered call option exercised early because of an ex-div date is a little jarring. Now that the MSFT call has expired, the only open covered call (that I care about) is my VLO position, which I initiated last month. When I sold that call I commented about the ex-div date:

I’m not 100% sure when VLO is going to go ex-dividend. Back in 2013, the Q3 distribution went ex-div on 8/12. All the other recent years have been somewhere between 8/13 and 8/18. This trade should expire before the ex-div date, but I will want to keep an eye on it just in case.

Of course it turns out that it goes ex-dividend on Tuesday 08/09. Shares closed at $53.50 yesterday, which is still out of the money by $1.00, but that isn’t all that much. Just look at the chart over this week:

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08-05-16 VLO 5 Day Chart – Courtesy Yahoo Finance

The dividend payout is pretty sizeable ($0.60) and the option expires in less than a week, which means there isn’t a lot of extrinsic value left.

That is a potential recipe for early assignment. It depends what the share price does Monday, but if it’s close, I will probably go ahead and roll the position out to make sure.

I would really like to get that $60 dividend, plus the share price has appreciated quite a bit. I should be able to roll out to a higher strike price and lock in a bigger capital gain.

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