Not as many transactions this week. Much of my capital was occupied with current holdings be they options or strict equity ownership.
On Monday May 18th I sold put contracts for Rollings (ROL) and Fastly (FSLY).
The ROL contract was intended to grow my stake in the pest-control parent of Orkin. Okin is a core position in my portfolio, but I have bee slowly growing my position after the market fell in March 2020. This trade offered exposure to one contract of 100 ROL shares at a strike price of $35 for a premium of $0.50 per share. For those scoring at home, $35.00 was 12% from the $39.70 market price as of the time the trade was entered and the premium’s annualized yield was about 16%.
My current exposure to ROL is now 300 shares owned with 3 contracts that obligate me to buy 100 shares, each, at $35.00. If shares of ROL are greater than $35 at the market’s close on June 19th, I will keep the roughly $120.00 in premiums and my capital - and sell more options of ROL. ROL has not fallen below $35 since the end of March and its low, during the recent market action, was roughly $31.57 on March 23rd.
The FSLY are not as near and dear to me, but I like the company because it is focused on improving cloud computing speed. I bought shares for about $22.90 in mid-April after the put contracts I had previously written had expired. Thanks to the subsequent appreciation of those shares, I now have a handsome 79.47% paper profit (as of Memorial Day 5/25/2020).
This FSLY trade was intended to sell time value on an expiring (May 22nd) contract - queue the nickels and steamroller joke. Contract details: strike $36; expiry 5/22/2020; premium $0.24; I sold two contracts. So I made a bit more than $23 for lending my $3,600 for almost 5 trading days. I can’t take my wife for sushi for that, but its payday loan math - $23 on $3500 is over 47% annualized over 5 days, or 33.7% if you annualize by weeks.
Time out for some real talk - were I able to earn 33% on capital for a whole year, I’d have investors bribing me to take their money. Here’s a reality check:
These are small trades. It is difficult to find trades like this to employ millions of dollars - and I’ve never done it!
I make trades like this (out-of-the money put option sales) on only companies I’d like to own. The above FSLY trade required the market price to fall 14% in 5 days for my capital to be distributed. It’s a calculated risk.
Most importantly, I actually want to own FSLY. If executed, the above nickel/steamroller trade would have doubled the FSLY shares in my portfolio. Since the contracts expired worthless, my stake in FSLY is 1.5% of my total portfolio.
Tuesday, May 19th, saw four trades executed. I sold put contracts on match.com (MTCH) and Beyond Meat (BYND). Then I exchanged a short position in Peloton (PTON) put contracts.
The MTCH contract netted about $23 for its occupation of $7,750 in capital over four days. On a weekly basis an annualized return of 15.7%. This position also hedges against the call I wrote the week prior - if my shares would be called away this contract would expire worthless.
The BYND trade was another expiring contract that paid about $50 for a put contract expiring 5/22 in which the $122 strike price was 12% below the market - with four days to play.
I must not want the PTON shares as badly as I thought! But seriously, the share price had run up quite a bit and this was an opportunity to lower my potential cost basis. Originally I sold a put contract for PTON on 5/12 for $1.05 per share and a $43 strike. That’s a 2% premium yield for roughly two weeks or 63% if you could repeat the trade every other week. $43 was 9% below the market, and the market was running hard.
On the 19th PTON had fallen more than 5% over the past week but my option was more valuable than when I had sold it. I bought to close the first contract for $81 (netting about $23) and wrote another put with a lower strike price. The new contract had a strike of $40 (89% below market) and yielded about 14% annualized on a weekly basis. 14% is below my required return so that one’s on me. I am fortunate it expired worthless at the end of the week.
On May 20th I bought back two US Bancorp (USB) put options. The strike was 15% below the market as USB had appreciated since I wrote the option and the contracts were significantly devalued. After originally selling the puts for $0.29 per share I bought to close them for $0.07. Were the contract expiring that Friday, I may have let them expire on their own, but these contracts were dated for 5/29. By buying to close two (effective) weeks early I have the capital available for another two week trade - and this one still netted about 19% annualized.
Also on the 20th, I sold a contract for Quidel Corp (QDEL) put for $2.80 per share before commissions with a strike of $145. That’s a 23% annualized return on a contract that expires on June 19th. Quidel has had a rough week since the 20th. When I entered the contract, QDEL traded north of $190 per share (needed to fall 24% to reach my strike).
This $145 contract was supposed to replace another QDEL contract with a strike at $170. The contract at $170 remains on my account as I mistakenly tried to wait for a more favorable exit point. As a virus testing company, QDEL has been very volatile during this pandemic and traded at $173.49 as of the close on Friday before Memorial Day weekend. Were the $170 contract executed, my cost basis would be about $161.50 so maybe I will hold contract through its expiration.
On the 21st I went back to the PTON well and sold another contract expiring the following day - which almost makes my previous transaction look silly when I bought to close a $43 strike contract. After commission, this trade provided annualized return of 16.6% over the five days my capital was occupied. This was Thursday before along weekend, I had about $5,000 available to invest in my account and when this contract expired worthless less than two days later I had enough money to take my wife out for coffee (but don’t tell her).