DGI Adventure 03-20-17 – Expiry Discussion and Miscellany

Last Friday was the third Friday of the month, which is when the monthly options expire. Of course once a quarter options and futures on both stocks and indexes all expire, and it’s called quadruple witching. Last Friday was also quadruple witching.

Quadruple witching sounds really ominous, but there doesn’t seem to me to be anything special about the third Friday in March, June, September and December compared to other third Fridays.

It is kinda fun to say though isn’t it?

Quadruple Witching!!

Okay…enough of that.

We don’t play around in the futures market, but we certainly play around with options. So what wizardly positions expired last week and what does it all mean?

Let’s talk about it.

Expiring Positions

Position #1 TGT MAR17 ‘17 $56.50 PUT

This contract was originally sold on 2/28/17 and it was one of the trades that I glossed over with a summary post. If you own TGT or if you’ve been following it closely, you probably remember February 28th. Management reported earnings that morning, and Mr. Market freaked the fuck out.

Observant readers may remember that a previous TGT put I sold back in October of last year (at a $67 strike) was assigned right before the idiot in chief got elected. The market went bananas, and I elected to sell a covered call, which also got assigned although I didn’t really write about that specifically, the income was simply tabulated in the December summary.

I did pretty well on that sequence of trades, and then the stock price started coming back down. I sold another put in January that expired before the earnings kerfuffle. I was fortunate to not have an open position on the day of the earnings announcement.

So I opened this one, which expired on Friday. It was over 4% in the money (shares closed $54.29), which means I got assigned. I’m the proud new owner of 100 shares with a cost basis of $56.50.

Ex-div isn’t until May, so I will probably go ahead and start selling covered calls while the share price is still kind of close to my cost basis. Feels like this one might get worse before it gets better. Mr. Market hates TGT right now.

Position #2 QCOM MAR17 ‘17 $55.00 PUT

This trade was glossed over in the same summary post as the TGT put discussed above. Shares closed Friday at $57.55 which is pretty comfortably out of the money. The contract expired worthless and I will be looking to go to the well again. In my recent investment thesis, I identified a $60/share threshold as approximately “fair value” assuming the company can achieve a 6.5% dividend growth rate. Granted, I would like a little bit more margin of safety, but we’ll see what the options market is like. I will be looking to maximize downside protection while preserving my minimum target of 12%+ annualized premium return.

Position #3 SPY MAR17 ‘17 $238.50 PUT

I actually haven’t posted about this trade yet. I’m going to count today’s discussion as this trade’s official publication (rather than generate a totally separate post).

I sold this contract on Thursday 03/16/17 after my previous SPY put expired worthless on Wednesday 3/15/17. I had been hoping to get assigned on Wednesday, so I could hold the shares through ex-div on Friday to collect the $1.033/share quarterly dividend distribution. No such luck.

So then on Thursday afternoon I was evaluating my options:

  1. Do Nothing
  2. Buy SPY shares for ~$238.40 (that was the share price towards the end of the day on Thursday…it actually closed at $238.48)
  3. Do an options trade.

At that point I had gotten my heart set on that dividend. Plus option 1 is just boring. As much as I love options trading, I did seriously consider just buying the shares. But the at-the-money strikes had a little bit of premium juice in them, and I couldn’t resist.

I sold the put, which expired the next day, for $121.27 ($1.22 per share less $0.73 commission).

That sounds HUGE, and my dividend income tracker incorrectly calculated a 185% annualized return. But there’s more to the story than just the total. We have to break that premium down a little bit to understand why I could get so much for a one day trade.

Since the next day was going to be ex-div, $103.30 of that was technically intrinsic value, since the share price was about to drop $1.0333 for Friday’s open.

Since shares were trading at ~$238.40 at the time of the trade,  we’ll say that there was $10 of intrinsic value from the contract being in the money. So that leaves $7.97 in extrinsic value, which isn’t much, but that does technically work out o a 12.2% annualized return since the trade is only in force for one day.

The end result is basically the same as if I had bought 100 shares of SPY that afternoon; i.e. I get $1.033 worth of “dividend” and my cost basis is around $238.50.

Of course if I bought the shares I would have a cost basis $0.10/share lower…but I got the $10 of intrinsic value from the premium sold, so it’s really the same as if I had bought the shares at the lower price and “saved” $10.

PLUS…I don’t have to wait until April to get my $1.033/share. I got it on Thursday.

PLUS…there was a chance (albeit a small one) that the share price would rally back and I would get all that premium without having to buy any shares. That didn’t happen, but there was a chance.

PLUS…I got an extra 8 bucks. It’s 8 bucks more than I had before.

Position #4 VNQ MAR17 ‘17 $85.00 CALL

So evidently I didn’t write about this trade when I opened it? Sorry, dear readers…I guess I missed this one. It’s been a crazy couple months.

Anyway, I did mention in one of my catch up posts that I recently rolled my old 401K from my previous employer into my traditional IRA account (account #2 in the portfolio back at the mother ship). That brought the account value up over $40K, which is enough for me to start looking at executing my options strategies. It was time to say goodbye to uncle Schwab, and move the account to Interactive Brokers.

Even though I’m trading options, I’m keeping to a passive indexing theme. So the idea is that in this account I trade options on index funds.

I keep saying that someday I’m going to write about my REIT crisis of faith, and believe me…I will. Until then, you will just have to understand that I’m done trying to pick individual REITs and will be getting exposure to that asset class through VNQ, which is Vanguard’s REIT index fund.

I already had quite a few shares of VNQ when it was a Schwab account. After it got to Interactive Brokers, I topped the position up to 100 shares and sold this covered call.

Towards the end of February, this position was briefly in the money, but then it quickly became apparent that the Fed would raise rates on Wednesday, and VNQ’s share price collapsed. My cost basis in VNQ is $81.6613/share, and it closed at $82.44 on Friday, so I’ll be looking to sell another call this week if the opportunity presents itself.

Theoretically it should go ex-dividend pretty soon, although who knows when or how much it will be.

So that concludes our expiry discussion for this month. 2 out of 4 positions are getting assigned.

So it goes.

Miscellany

Things are starting to settle down a bit with our move to Denver. We’re more or less unpacked, and figuring out the city and our new jobs and all of that.

It’s still been pretty hard for me to keep up with all of our trades though.

Both Mrs. Wizard and I have made a few purchases in our ROTH IRAs by way of limit orders being executed. Here’s a summary:

Mr. Wizard – 2 purchases:

Purchase #1 – 03/02/17

VLO: 25 shares at $67/share for a total investment of $1,681.95 (including $6.95 trade commission).

I used to have 26 shares of VLO in the taxable account, but they were sold in the Great Catfishwizard Taxable Liquidation, I still love VLO stock and decided that as a relatively high yielder, it was perfect for my ROTH. Original investment thesis is published here, although after the recent dividend increases, the “fair value” is quite a bit higher. I’m due to revisit that thesis, and likely will when I sell my next put in the Beneficiary IRA.

Purchase #2 – 03/06/17

CSCO: 44 shares at $34/share for a total investment of $1,502.95 (including $6.95 trade commission)

With the recently announced 11.5% dividend increase, this gives me an invested yield of 3.4%, which is great for a tax advantaged account. Original investment thesis is here, although again fair valuations need to be adjusted to account for dividend increases.

Mrs. Wizard – 1 Purchase:

Purchase #1 – 03/15/17

SBUX: 28 shares at $54.12/share for a total investment of $1,522.31 (including $6.95 trade commission).

The original investment thesis was published back in June of last year. I’ve sold a number of puts since then, none of which have gotten assigned.

Don’t ask me where she comes up with these limit order amounts, but she is pretty good at it. The intraday low was $54.09.

SBUX 3 Month Chart – Courtesy of Yahoo Finance

So that gets us *mostly* caught up. There is still one more put that I sold last week that I haven’t written about yet, and some UVXY updates. Hopefully I’ll get to those and will be able to get back into the groove of posting each trade relatively quickly.

Remember, the dividend income tracker and the portfolio back at the mother ship get immediately updated after every trade. So you’ll always know what I’m up to there.

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