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.
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.
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
- Retail stocks across the board were having a bad day.
- 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.