Option trades and expiration: SFL, TNP, WAG, HYG, O & more!
Another options expiration has come and gone, once again enabling me to bank some income in my accounts from selling naked put options (and a covered call). While the returns this time around were hardly spectacular (see below), they reflect the more conservative strategy I adopted late last year of selling further out-of-the-money and later-dated put options, as well as the fact I didn’t take profits earlier (although I had ample opportunity to do so if I’d wanted to).
I did, however, close out early (i.e., take profits in) several more short put option positions (see below) in my IRA as the market continued to levitate higher and option volatility – and the premiums on the options I was short – declined to new lows. This not only resulted in some nice returns, but also took some risk off the table and freed up a significant amount of cash making it available for other opportunities.
Finally, I also initiated several new naked put option positions (see below). It’s getting increasingly difficult to find stocks trading at or near values that I’d be willing to pay for them, but selective opportunities are almost always to be found.
Options expiration results:
- Bristol Myers Squibb [[BMY]] – The March 18-strike put options I sold against BMY on 08/28/09 expired out-of-the-money (OTM) for a 6-1/2-month net return of about 3.7%.*
- Chevron [[CVX]] – The March 55-strike put options I sold against CVX on 10/01/09 expired OTM for a 5-1/2-month net return of about 2.3%.*
- iShares High Yield Corporate Bond ETF [[HYG]] – The March 79-strike put options I sold against HYG on 10/02/09 expired OTM for a 5-1/2-month net return of about 4.9%.*
- Lockheed Martin [[LMT]] – The March 60-strike put options I sold against LMT on 9/24/09 expired OTM for a 6-month net return of about 1.9%.*
- Mobile Telesystems [[MBT]] – The March 35-strike put options I sold against MBT on 10/23/09 expired OTM for a 5-month net return of about 3%.*
- Realty Income [[O]] – The March 30-strike covered call options I sold against my long position in O on 10/23/09 expired OTM for a 6-month net return of about 3.9%.
Closed positions:
- Dover Corp. [[DOV]] – I bought to close the June 30-strike put options I sold against DOV on 10/27/09 for a 5-month net return of about 4.2%.*
- Eaton Corp. [[ETN]] – I bought to close some January 2011 35-strike LEAPS put options I had sold against ETN in my IRA on 2/26/09 (as part of a defensive move of rolling out and down some April ’09 50-strike put options I had originally sold against ETN in October ’08) as they were trading at a tiny fraction of their original selling price, resulting in an 18-month net return of a little over 9%.*
- Medtronic [[MDT]] – I bought to close the May 30-strike put options I sold against MDT on 10/20/09 for a 5-month net return of about 3.2%.*
- Sysco [[SYY]] – I bought to close the May 22.5-strike put options I sold against SYY on 11/03/09 for a 4-1/2-month net return of about 3.6%.*
New positions:
Ship Finance International [[SFL]] – On 3/19/10 I sold some August 15-strike puts against SFL as the stock dipped on market weakness:
Ship Finance International is a major ship owner with a diversified fleet of 66 vessels operating in various sectors of the shipping and oil service industry. Currently its shares are in a strong intermediate-term uptrend and approaching upside resistance around the $20 level. While some backing and filling here might be expected, it would probably take a break back below the $16 support level to turn this picture less positive.
Fundamentally, SFL seems reasonably valued here with decent projected 2010 earnings (at well over $2 per share) and good cash flow. The company has paid dividends consistently (every quarter) since 2004, although the payouts have varied as is typical of commodity-based stocks. The current payout will correspond to a yield of over 8% on my cost basis of under $15 if I’m ultimately put the stock.
Tsakos Energy Navigation Limited [[TNP]] – On 3/17/10 I sold some June 15-strike puts against TNP as the stock sold off after reporting a fourth-quarter loss:
Tsakos Energy Navigation owns and operates about 50 crude and product oil tankers, making it one of the largest publicly traded tanker companies. Currently trading at about $15, its shares are presenting a neutral to negative intermediate-term picture. A break below the $14-1/2 to $15 level could suggest a retest of the $12-$13 lows.
Despite the Q4 loss, the company earned $0.77 per share for 2009 and is expected to earn over $1.50 in 2010. The stock is also trading well below reported book value (~$25 per share). Assuming shipping rates have bottomed (or are close to bottoming) for this cycle, the stock would seem to be a reasonable value somewhere around current levels (~$15) or below.
The company has a policy of paying semi-annual (April and October) cash dividends representing between one-quarter and one-half of ordinary net income. The current payout ($0.60 annual) would correspond to a modest yield of over 4% on my cost basis if I’m ultimately put the stock.
Walgreen Co. [[WAG]] – On 3/9/10 I sold some October 33-strike put options against WAG on weakness:
The largest drugstore chain in the U.S., Walgreens operates more than 7,000 drugstores across the U.S., Guam and Puerto Rico. The company recently announced plans to acquire Duane Reade, a New York City-based drugstore chain of 257 stores that is expected to significantly boost the company’s position in the country’s largest retail and drugstore market.
Currently trading at around $34-$35 and yielding about 1.6%, its shares have been weak recently and are near oversold levels but are still presenting a positive to neutral intermediate-term picture. A break below the $32-$33 level would suggest a more neutral to negative intermediate-term outlook.
I had already just recently sold some October 30-strike put options against WAG in my IRA and in the related blog post I mentioned several longer-term fundamental reasons for being positive on WAG. These include the company’s history of dividend growth, its expanded dividend plans going forward, and the stock’s reasonable current valuation.
On further reflection I decided I really wouldn’t mind having a more significant position in WAG in the low $30s or below as a long-term dividend-growth play, so decided to sell the additional closer-to-the-money puts in my regular account. If the stock drops back toward the $30 level I may adjust one or both of the positions to potentially lower my ultimate cost basis, but am comfortable being long WAG at just over $30 (which would be my cost basis if ultimately put the stock) for its long-term total return potential.
* The return on sales of naked put options 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).
