October options trades and expiration: ERF, PGN, VIX & more!
This past week was October options expiration and I had the following short put options positions expiring:
- Enerplus Resources (ERF: 24.00 +2.00%, yld: 8.76%) – The October 17.5-strike puts I sold against ERF on 7/14/09 expired out-of-the-money (OTM) for a 3-month net return of about 5.9%.*
- Sonoco Products (SON: 33.06 0.00%, yld: 3.33%) – The October 17.5-strike puts I sold against SON on 5/13/09 expired OTM for a 5-month net return of about 4.4%.*
I normally like to arrange to have as many short put option positions expiring on a monthly basis as possible to maximize potential income. However since mid-year I’ve been increasingly shorting longer-dated (i.e., early next year) and farther-out-of-the-money puts in a defensive reaction to the market’s continued unrelenting uptrend and collapsing volatility.
Speaking of volatility, the following long-term chart of the VIX volatility index shows how this measure of market volatility has recently fallen to its lowest levels since late last year:
Some market observers are predicting that the VIX can’t/won’t fall much further from here, and that this could mean we’re nearing a market top of some sort. Could be, but based on the above chart a move well below 20 in the VIX in the coming months would hardly be unusual in a longer-term historical context, which would certainly have less bearish implications.
New positions
Progress Energy (PGN: 43.70 +0.11%, yld: 5.68%) – On 10/6/09 I sold some April 30-strike puts against PGN as it pulled back on some market weakness:
This electric utility operates in North Carolina, South Carolina, and Florida. Currently trading at about $38 and yielding almost 6.5%, its shares remain in an intermediate-term uptrend from their March lows at about $31-$32. A drop below about $37 would change this picture to neutral.
PGN has a respectable dividend history, with 21 years of consecutive dividend increases according to DividendInvestor.com. While I certainly wouldn’t look to buy PGN for dividend growth (the growth rates have been tiny), it would seem to be a better-than-average choice in this sector and a reasonable value at $30 or below – which would be my net cost basis if ultimately put the shares.
Universal Corp. (UVV: 37.75 -0.40%, yld: 4.93%) – On 10/7/09 I sold some May 30-strike puts against UVV during some market weakness:
Trading at almost $45 and yielding over 4%, the shares of this leaf tobacco processor and distributor are currently in a strong intermediate-term uptrend. The stock would need to drop below the $39-$40 level to change this picture to something more neutral/negative in the near term.
On a valuation basis, UVV appears to be about fairly valued here. By selling 30-strike put options against it, I’m expressing my willingness to potentially be put the shares at the decidedly undervalued price of $30 (and its corresponding dividend yield of over 6%) if the stock were to drop to that level between now and May options expiration.
* As always, the return on cash secured put option 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).
Related posts:
July options trades and expiration: BP, MMM, ERF, VIX & more!
June options trades and expiration: DOW, BBT, HD & more!
