DGI Adventure 01-09-17 Sold Cash Secured Puts – The Gap, Inc. (GPS) – Multiple Strikes – Multiple Expirations

Okay so this post is a little different. I mentioned earlier today that I was behind a little bit with posting. I don’t want to cut any corners, but I’ve been really active with GPS lately, so I’ve decided to combine all those moves into a single article.

I will be covering three different trades in this post:

Trade #1 – completed 12/23/16 (expires this Friday 01/13)

Trade #2 – completed 01/05/17 (expired last week 01/06)

Trade #3 – completed 01/05/17 (expires later this month 01/27)

I’m not running through my investment thesis process. I first went through that exercise well over a year ago when I first opened my position. I revisited in November to make sure the numbers hadn’t changed too much. They hadn’t.

The point of this article is really just to document the trades.

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

Dividend Cycle

GPS went ex-div on 12/30/16. The quarterly distribution remains stuck at $0.23/share, but as I  discussed in that revisted thesis the company managed to maintain its dividend contender status in 2016 since technically the aggregated annual distributions exceeded 2015’s payments by $0.01/share.

I already own shares of GPS, so I still enjoyed the ex-div date on 12/30, but these trades all had to tow their own weight. Fortunately the premiums exceeded or a least rivaled the quarterly payouts.

Investment

Trade #1 

Trade #2

Trade #3

SPL (Strike Price Logic)

My cost basis in the taxable account was $21.69 (that sentence foreshadows tomorrow’s post for astute readers).

All three of these options, if assigned, would have represented a reduction in that cost basis.

At $22/share the assumed DGR (i.e. dividend growth rate that would make the price “fair” assuming a 10% discount rate) is 5.9%. Obviously if management continues with the token $0.01 increases, then even at these strike prices, the shares are pretty overvalued.

However the balance sheet is so strong, and management is so closely aligned with shareholder interests (43% of shares are held by insiders), I have to believe that they’ll resume their robust dividend growth rate sooner rather than later.

Trade #2 is noteworthy for how ridiculous of an annualized rate I realized. Since the position was only open for one day, the 1.3% absolute return becomes simply retarded when you multiply it by 365 days. Obviously I can’t make that trade every day of the year. The markets aren’t open every day for one thing, and the market was seething with a confluence of weird forces driving the derivatives market crazy

  1. Retail stocks across the board were having a bad day.
  2. Gap was going to report their monthly store comps for December, which is obviously a critical month. The GPS share price has a tendency to be very volatile around the days they announce monthly comps. Christmas just magnified the effect.

The result of that confluence meant I could sell puts for ridiculous premiums.

And so I did.

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