DGI Adventure 10-24-16 Sold Cash Secured Put – Gorman-Rupp Co (GRC) – $22.50 strike – Nov 18 Expiration


This trade was actually executed on Thursday 10/20/16. I didn’t get a chance to write about it until today.

Those interested in my investment thesis on GRC, can find it fully explained back when I first opened a position in June. I rolled that position forward last month, keeping the strike at $25 in exchange for a very fat premium. I might have considered rolling down to a lower strike, but I didn’t, which means I didn’t have a lot of downside protection.

It held above $25 for a long while, but things finally broke down with a little over a week to go on the contract. There was a big move down Thursday (closed at $24.17 – a daily decline of 1.55%), which made the market to sell puts interesting.

So I did.

I have updated the portfolio and income tracker back at the mothership to reflect this position.

Dividend Cycle

GRC is one of those dividend champions you might have never heard of if you don’t work around big industrial pumps. I’ve said it before, and I’ll say it again: they make badass pumps. Another thing that’s badass is their 43 year streak of increasing dividends. The next dividend payment will be the Q4 distribution and since the payout has been at $0.105/share for the last four quarters, I’m expecting a raise.

This contract will most likely expire after the ex-div date, which I expect to be be around 11/10 (ish), but I don’t mind, because 1) I will get paid for the shares that were assigned to me on Friday, and 2) the premium for this trade is nearly 4X the dividend distribution.

Investment 

SPL (Strike Price Logic)

I was pretty sure that my previous put would get assigned on Friday (it did), but I’m ready to take on more shares if it turns out that the decline isn’t over. Since the share price is in the $20s I can easily afford to double down and lower my cost basis without taking too large of a position.

The options market for GRC is kind of thin; the only expiration dates are the “monthlies” (3rd Fridays only), and the strikes are $2.50 apart, which represent big swings with such a small share price. As much as I would have loved to have the downside protection of a $20 strike, the premium wasn’t there unless I went out to December or later. The $22.50 strike was pretty good though: I got nearly 7% downside with over 21% annualized return on the premium.

That’s almost as awesome as a Rupp pump!

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