DGI Adventure 08-14-16 Sold Cash Secured Put – Wells Fargo & Company (WFC) – $46.50 strike – Sept 09 Expiration

This trade was actually executed on Friday 08/12/16. I didn’t get a chance to write about it until today.

Again if you want the full investment thesis process, check out my first WFC trade last month. I’m simply continuing that position here.

The dividend income tracker and portfolio are updated though.

Dividend Cycle

WFC recently went ex-dividend on 08/03/16, so we don’t have to worry about that again until November. The current payout is $0.38/share, which is close to the amount of premium received. The company is a dividend challenger with 6 years of increases under its belt. It’s hard to give management too much credit for any kind of “dividend culture” because the government tells systemically important financial institutions what they are and aren’t allowed to do in terms of distributions.

Investment

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SPL (Strike Price Logic)

I had a major brain fart when executing this trade. I was looking at the Sept 02 contracts, specifically at the $47 strike. Those were priced pretty nicely around $0.35/share (21 days in force…13% annualized return).

Then I went over to another window for whatever reason, and when I came back I saw a $46.50 strike trading around $0.34/share. I missed the fact that I was looking at a different expiry another week out (Sept 09).

Thinking I was getting one over on the robots (for $1 less in premium I got $50 more downside protection), I pulled the trigger quickly…like an idiot.

Now don’t get me wrong, 9.35% is a very nice annualized return…but it’s just too low for being short a put contract on an individual stock. When selling puts, I’m taking on the full risk of long exposure to the stock, but I give up the unlimited upside potential. So the return from the premium might be all I get…I want to make sure it is a solidly market beating return.

Financial velociraptor has a 12% rule and it’s not a bad one.

Oh well. Maybe if I’m lucky the stock will surge up and I can close out of this one a little early to get a higher annualized return. I’m not going to stress too much about it though.

At the very least it serves as an interesting lesson in defining the relationship between downside protection and duration. Apparently in this case one additional week of duration, was worth about 1% of downside.  

It’s also a good reminder that you’re probably not going to get one over on the robots very often. 

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