DGI Adventure 11-14-16 Sold Covered Call – Gorman-Rupp Co (GRC) – $30 Strike – Dec 16 Expiration

I wound up with 100 GRC shares by selling a cash secured put that expired in the money and was assigned to me. The put in question was sold back in September and expired a couple weeks ago. The strike price at which I got assigned was $25/share.

The share price kept falling after I got assigned, to the point where I actually sold another put at a $22.50, so if it kept dropping I could at least average down. That contract expires this week, and seems highly unlikely to wind up in the money.

Don’t ask me how GRC fits into the “trump trade”, but the share price has gone bananas along with everything else last week.

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GRC – 5 day Chart – Courtesy Google Finance

It might be hard to see the exact numbers, but take a look at the historical prices. Shares opened Monday morning at $23.68 and closed Friday afternoon at $29.05.

That’s a 22.7% gain in 5 days…

WTF America?

There’s a saying that Wall Street takes the stairs up and the elevator down. For whatever reason that was totally backwards last week…especially for GRC. Shares have been in slow and steady decline for most of the year, and then BAM…elevator up!

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GRC – 6 Month Chart – Courtesy Google Finance

I decided to sell a covered call against my GRC shares. This trade was actually executed on Friday 11/11/16, I just didn’t get around to writing about it until today.

The call option I sold expires 12/16/16 and has a strike price of $30/share. I received a premium of $0.65/share and paid a $1.09 commission, so I netted $63.91 on the trade. Using $3,000 as the denominator of equity “at risk” that works out to a 2.13% absolute return. The option will be in force for 35 days, so that works out to a face melting 22.21% annualized return…and that’s just on the call option.

As I mentioned earlier, my cost basis is $25/share. And as icing on the cake, GRC went ex-div last week, which means I will collect $11.50 worth of dividends on 12/9/16 (that distribution represents a 9.5% increase by the way…assuming it’s maintained, that will extend the company’s streak of increasing payouts to 44 consecutive years, maintaining dividend champion status)

Put it all together and that means my max profit on the trade is $63.91 (option premium) + $11.50 (dividend) + $500 (capital gains) = $575.41, which is a 23% gain on my invested capital of $2,500. Since I took ownership of the shares on 10/21/16, that gain would be earned in 56 days, so my annualized return works out to a nice even 150%.

Of course that’s only if the shares get called away. TBH I’m okay either way, although that is a juicy return isn’t it? 

I find it hard to believe that the climb can maintain this kind of pace…but then again, there are a lot of things happening recently that I previously found hard to believe.

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