July options trades and expiration: BP, MMM, ERF, VIX & more!
This week was July options expiration and I had the following options positions expiring:
- BP plc (BP: 56.04 0.00%, yld: 6.00%) – The July 45-strike puts I sold against BP last January (which had themselves been rolled out and down from the January 50-strike puts I’d sold against BP last September) expired out-of-the-money (OTM) for a 10-1/2-month averaged net return of about 7.4%.*
- Enerplus Resources (ERF: 23.24 0.00%, yld: 8.49%) – Some July 17.5-strike puts I sold against ERF last January expired OTM for a six-month net return of 17%.*
- Johnson Controls (JCI: 31.80 0.00%, yld: 1.64%) – Some July 12.5-strike puts I sold against JCI last January expired OTM for a 5-1/2-month net return of over 21%.*
- 3M Company (MMM: 81.99 0.00%, yld: 2.51%) – The July 40-strike puts I sold against MMM last March expired OTM for a 4-1/2-month net return of over 11%.*
- Overseas Shipholding Group (OSG: 44.04 0.00%, yld: 3.98%) – The July 17.5-strike puts I sold against OSG last April expired OTM for a three-month net return of 7%.*
- AT&T (T: 25.56 0.00%, yld: 6.46%) – Some July 21-strike puts I sold against T last January expired OTM for a six-month net return of 8.9%.*
- Valspar (VAL: 28.93 0.00%, yld: 2.11%) – The July 12.5-strike puts I sold against VAL last February expired OTM for a five-month net return of about 4.9%.*
This was another exceptional month, with several of the trades showing annualized returns of well over 20% – compliments of the huge market volatility earlier this year and its consequent reflection in options prices. Volatility – as measured by the CBOE Volatility Index (i.e., the VIX) – has since come in quite a bit from those levels (see chart below), and only just this past week fell below its long-term linear regression trendline:
Clearly there’s room for it to fall further. At the same time, the further it falls – and as market participants become more complacent – I’ll become increasingly cautious when initiating short put positions. In the meantime, I recently initiated the following new options positions:
Enerplus Resources (ERF: 23.24 0.00%, yld: 8.49%) – On Tuesday I sold some October 17.5-strike puts against ERF on weakness as it became increasingly likely that my July short put position in ERF (see above) was going to expire out of the money:
Shares (actually “units”) of this Canadian oil and gas Royalty Trust have sold off recently with the decline in oil prices, but still remain in an intermediate-term uptrend. A break below the recent lows at around $18 would suggest a more neutral or even potentially negative picture.
ERF is an income fund that pays a monthly distribution (currently at about $0.16 USD), which at current price levels provides an over 8-1/2% annual yield. As with PWE (another “CanRoy” discussed recently), the company has indicated that it expects to continue its “yield-oriented distribution model” after 2011, when such trusts are expected to lose their tax-exempt status.
Penn Virginia Resources (PVR: 22.98 0.00%, yld: 8.18%) – On Wednesday I sold some August 12.5-strike puts against PVR:
Continuing with the theme of income-producing energy/resources-related investments, shares (actually “units”) of this coal and gas Master Limited Partnership are currently trading within what appears to be a large range of between about $9 and $16. I wouldn’t mind initiating a position at about the $12 to $12-1/2 support level, which would be my cost basis if put the units. The annual distribution yield at current price levels (~$14) is over 13%.
* As always, the return on “cash secured” put sales was based on the premium received from the sale of the options (minus commissions) against the unmargined capital set aside to pay for their possible assignment (i.e., my being put the shares of the stock).
