Friday Options Expiry Discussion

Today is Friday, July 21st, which for most folks is probably just like any other Friday. It’s mostly like any other Friday for me too, except I have a couple options contracts that are expiring.

 Let’s talk about that.

 On July 11th I sold a couple of put contracts, which were documented with my first ever tweet! 

  Both of those contracts are set to expire today.

 In the interim I doubled down on the DSW position at the same strike and same expiry:

So that leaves me with one GPS put contract and 2 DSW put contracts expiring today.

 The GPS JUL21’17 $21 put is most likely to expire worthless. GPS closed at $23.51 yesterday. Although not impossible, a 20% daily drop is pretty unlikely. So there is not really much to say about that contract.

 But the DSW puts are pretty interesting. The pricing moved against me since the first contract, and the second contract was actually in the money when I sold it.

 Let’s go over the math of that second contract real quick:

 As I indicated on the twitter, the contract sold for $0.75/share, but DSW was trading around $16.93 at the time, so $0.57 of that was intrinsic value, so only $0.18 ($0.1765 after commission) was “premium”, which, as I twittered, is still a good annualized return.

 Well today both of those DSW contracts are due to expire. Shares closed yesterday at $17.12 which is better than it was on July 10th when I doubled down, but still decidedly “in the money”.

Still, the intrinsic value of the contracts had dropped from $0.57 to $0.38. It was even better earlier in the day yesterday.

 So I decided to roll the options forward, which I rarely do. But by closing out the expiring contracts, I was able to crystallize the intrinsic gain. Otherwise it would just have turned into imaginary cost basis bucks when I got assigned the shares over the weekend.

 As is my new custom, I announced this trade on the twitter too:

 What exactly did I mean by convoluted math?

Well…to close the original positions I bought those JUL21 contracts back for $0.35/share, which came to a total of $71.59 spent including commission. I’ve already booked the premium from both of those trades to the dividend income tracker as income, so there was just the $57 of intrinsic value left over to offset that purchase.

 So that puts me $71.59 – $57 = $14.59 in the hole. (Of course that’s an arbitrary accounting practice…I sold the contracts for $104 and only bought them back for $70…that’s a profitable trade…but I had already recognized that profit upfront.)

 Fortunately, since I was rolling the position forward, I would have new premium income to offset that “loss”.

 I then sold two DSW AUG18’17 $17.50 PUT contracts for $0.80/share. Which comes out to $159.40 received after paying trading fees. 

BUT DSW was trading around $17.15 when I sold them, so $0.35/share (or $70) of that was intrinsic value, which leaves $89.40 in premium. Less the $14.59 rollover cost, I’m left with $74.81 in premium “income”, which comes out to $0.37405/share (200 contracts).

 You can see from the twitter that I mixed up my initial calculation which had to do with misaccounting trading fees.

 Of course DSW immediately gave up most of this week’s gains this morning, so for now the position gave back all that intrinsic value that I “locked” in, but I extended the life of the position for another 29 days. A lot can happen in that time.

 DSW is supposed to report earnings at the end of August, and should go ex-div in early September. I would expect premiums to be very juicy around the time these expire, so I could very well keep on rolling.

What do you think? Are discount shoe stores doomed to be devoured by Amazon?

Should I have just let the puts expire in the money and taken my share assignment?

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