DGI Adventure 10-21-16 – Expiry Discussion

Happy Friday! Today is the third Friday of the month, which means the monthly options contracts will be expiring.

As my brokers’ automated messaging systems have painstakingly pointed out to me every morning this week:

I have options positions expiring.

Let’s talk about them.

GRC Put (one contract) – $25 Strike

I sold this contract on 09/16/16, when my first position expired worthless.

This one is relatively deep in the money (~3%), and I fully expect to get assigned. Shares are actually up a little bit today compared to the Thursday close, but nowhere near enough to climb out of the money.

I actually doubled down on this position yesterday with another put at a lower strike. I will write about that trade in a future post. Stay tuned.

HP Put (one contract) – $55 Strike

I opened a new position in this stock on 08/30/16.

When I first sold this put, I had a little over 10% of downside protection against that day’s closing price. September 20th would mark the closest it got to the money, with shares touching an intraday low of $56.19. Things shot up from there, and this one isn’t even close.

The HP options market is what I would call “thin”, namely there are only monthly expiries (3rd Fridays) and the strike prices are separated into $5 intervals. If I want to immediately continue this position, I’m not going to get the $55 strike for any kind of decent premium.

So I can either open another position with a higher strike ($60 is the next one up), or I can wait and see if things go back down again. Is the bottom in for oil? I don’t know. And you don’t either. So let’s not pretend.

I think I’ll wait a bit to see if I can get the $55 strike again. My fair value estimate was $70/share, but the company technically has negative earnings right now. I’d like a pretty sizeable margin of safety.

IBKR Put (one contract) – $33 Strike

I sold this contract on 09/06/16, and it was a continuation of my first position which I opened on 07/20/16.

This position was comfortably out of the money for most of the contract period, but the share price has been coming down for the last 2 weeks.

IBKR – One Month Chart – Courtesy Google Finance

Maybe I can open up a new position next week with an even lower strike price?

SCHB Call (one contract) $52 Strike

I sold this contract on 09/21/16 a couple hours before the FOMC emerged from their smoke filled room announcing no change in interest rates. That put the position immediately under water, and it remained in the money for several weeks, but it didn’t break out. It’s traded about as sideways as you can get and then in the last couple weeks drifted back below the strike price.

SCHB – One Month Chart – Courtesy Google Finance

That is pretty much the ideal scenario for anyone who wants to sell covered calls and keep the shares. Barring something totally whacky, I don’t expect to get assigned..

The problem is, I’m not sure how excited I am to keep the shares. Part of me was kind of optimistic that I would get assigned and unlock $5,200 in cash for something else.

But what?

I ignore all my options premiums when calculating my cost basis, because I treat the premiums as income. That means my cost basis from when I got assigned these shares is still $52. If I sell another call at the same strike, I will once again limit my upside to zero share price appreciation.

That would be a good idea if I think the market is going to keep doing nothing or might even have a correction. But seasonally we’re coming out of October which is volatile, and coming into November December, which are historically the best months to be long.

Thou can’t time the market, so thou shalt not try to. But I think I’m going to wait, and hope for a breakout so I can sell calls with a higher strike.

WFC Put (one contract) $44 Strike

I sold this contract on 9/13/16, which was shortly after the Wells Fargo fake account scandal broke. It was a continuation of two previous positions

The theory at the time was that this whole thing was being overblown by the media.

I still think it’s probably being overblown by the media, but then some stuff came out about how Wells Fargo basically had a policy to fire whistleblowers, and that didn’t sit well with me.

I almost closed the position, but I ended up letting it ride with much trepidation. You see the whole, firing whistleblowers policy kind of runs contrary to my investment thesis in WFC which could have been boiled down to something like, “well I think they’re the least evil big bank”.

Maybe they still are! But I don’t think I’ll be continuing any more long exposure to WFC. I consider myself kind of lucky that I didn’t get assigned, which is a crappy investment strategy. But I guess I’d rather be lucky than good.

AUY Call (six contracts) $2.50 Strike

Last but certainly not least we have one of my gold mining stock options. At the beginning of the year, I decided to sell calls against shares of my gold mining companies with the absolute worst possible timing imaginable.

I rolled them out once in February, and then again in April but I was grasping at straws. I was so underwater by then that not only was I embedding Bananarama videos into my posts, but I was looking at October expiries six months out with pitiful net premiums just to be able to roll out without additional costs. That’s when you know things are bad.

Then in May, my ABX option got assigned early before the ex-dividend date, even though the dividend distribution was only $0.02/share. WTF?

I didn’t mentioned it at the time, but CapitalOne charges a $20 “assignment” fee when an options contract gets assigned, which is another $0.20/share of drag on an already ridiculous fee schedule.

I don’t know exactly when, but sometime after that ridiculous early assignment I took it as a sign that it was time to just give up and let the AUY call contract play out however it was going to play out (which probably meant assignment).

Those last contracts finally expire today, and I’m done with gold mining stocks…for real now, and I’m done with shitty brokers that charge a $6.95 base trade + a $0.75 + a $20 “assignment fee” whatever that is. (Don’t get me wrong: I like CapOne, and it’s probably not fair to call them “shitty” but when it comes to options trades they’re pretty shitty. I’m not done with them completely…just done trading options with them.)

So I expect to lose 600 AUY shares over the weekend at a price of $2.50/share, even though the market price closed at $3.82/share and my cost basis is $6.07/share.

It sucks to lock in a loss like that, but I knew I could lose a lot of money when I first initiated the position. I said way back in January that I was done with gold stocks and I was “ready to accept the loss as tuition for a lesson well learned”. I tried to put off paying that tuition all year, and finally it’s time to step up to the plate and get it over with.

What’s the lesson exactly you may wonder? 

Gold stocks suck. Don’t waste your time or money.

Nothing here is ever investment advice, but that’s a lesson worth learning in my opinion, and it doesn’t have to cost you over $2,000 if you don’t want it to.

And if you don’t believe that lesson, or find yourself doubting it or whatever…I highly recommend you check in with Josh Brown’s article: My Views on Gold: Setting the Record Straight. It’s a fantastic rant in and of itself, and as a bonus there is a link wrap at the bottom with a collection of his other articles on the subject. Especially pertinent are the discussions on why gold mining stocks are a particularly bad choice.

So there you go. I have six positions expiring today, and two of them will probably get assigned.

Happy expiry day!

Have a good weekend (but don’t wander too far…there will be posts.)

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