At the start of last week our portfolio had short exposure to eleven put option contract positions and one call option contract position.
Remember, we consider short positions on put option contracts as selling downside insurance to shareholders of businesses we’d like to own at a lower price level; short positions on call options, covered-calls – our margin-free account requires us to own shares before selling a call, earn an extra dividend on our holdings and/or offer a premeditated exit point for positions we’d like to trim.
At today’s open we held short exposure to four put option contract positions and six call option contract positions. The week’s broad market advance provided opportunities to take profits in our put option contract positions and initiate covered-call positions. As I type, the market is at or near an all-time high and our portfolio is up three percent from the prior week.
Monday, 29MAR2021, saw a five percent decline in Square (SQ) shares and so exposure to our sole covered-call option (strike: $260; expiration: 16APR2021) was liquidated as the first transaction of the week. We netted $58.61 and only having exposure to the position for the weekend. Spoiler alert: I sold another covered call on our SQ shares to roll out the position to expire a week later (strike: $260; expiration: 23APR2021).
Source: MarketWatch.com; accessed 5APR2021
The week’s broad advance began on Wednesday but on Tuesday I closed two put option contracts below my target return thresholds. First, I closed a put option contract in Cloudflare (NET; strike: $65; expiration: 1APR2021) to net just a few dollars after holding the position for 42 days. With two days prior to expiration I thought saw this trade as an opportunity to breakeven and write another put at lower entry point. For the same reason I closed our NextEra Energy contract (NEE; strike: $72.50; expiration: 16APR2021) to net $53.61 (0.7% return; 7.5% annualized). NEE is up three dollars a share, or four percent, since last Tuesday so live and learn.
On Wednesday, 31MAR2021, I closed positions in three put option contracts when the market provided the opportunity to realize annualized returns greater than 25%. I remember feeling anxious holding downside exposure and closing these positions liberated $21,000 worth of collateralized cash. The cumulative return on the capital was one percent over two weeks; not bad.
Three put option contracts on Palantir Technologies (PLTR; strike: $20; expiration: 16APR2021) netted $64.87 over 15 days with $6,000 exposed to the trade. A Fastly put option contract position (FSLY; strike: $60; expiration: 16APR2021) generated $53.61 on $6,000 over 13 days. And our exposure to Unity Software (U) through a put option contract (strike: $90; expiration: 16APR2021) netted $103.61 on $9,000; also held for 13 days.
Thursday was the last trading day last week due to the Christian holiday and two more put option contracts closed as the market accelerated ahead of the long weekend. Our Trupanion (TRUP) put option contract position (strike: $70; expiration: 16APR2021) liquidated on our ask to net $98.62 to return 1.4% over our 13 day holding period (39.6% annualized). Pintrest (PINS) shares appreciated nearly ten percent over the nine days we were exposed to the put option position (strike: $55; expiration: 16APR2021) closed Thursday. The PINS trade netted $78.62 on our $5,500 in collateralize capital or 1.4%; 58% on an annual basis.
Source: MarketWatch.com
All of the companies to which we have had short put option exposure are high-flyers over the past 12 months whose shares have more recently experienced a significant correction. The market has experienced a rotation away from these companies whose business benefits from a socially distanced economy in favor of more cyclical businesses that stand to benefit as the economy returns to include more in-person services and activities. In this environment I will continue to keep such positions on a short leash and be quick to take gains. Another tactic you may have noticed was the smaller position size and the distribution of capital across more companies to mitigate company-specific risk.