Options exp (Jan), VIX thoughts, naked puts on C, GM, JPM, AMAT & much more

As a seller of put options – and with a lot of them expiring this month – I couldn’t have asked for a better options expiration scenario than having the market rise to multi-year highs into expiration. Virtually all of my short put option positions expired out of the money, leaving me with 100% of the original option premiums as profits (see below). In fact my biggest concern going into this month’s expiration was my single covered call option position, which was trading well into the money (see below) – a good problem to have.

Many of my naked put option positions that expired this month were the result of “rolling out” risk reduction adjustments to earlier trades – some originating almost two years ago – where I had bought back options that were trading deep in-the-money (typically for a loss) and then paid for them with long-dated out-of-the-money LEAPS put options (typically for a net overall credit). One way to look at this is as “buying time” – in the traditional sense of “kicking the can down the road” and avoiding an overall realized loss – by “selling time” (i.e., by selling option time premium).

Consequently, the results of many of these risk reduction trades are nothing to write home about (for example, a minimal profit or breakeven result after 20+ months in a position). But these trades all achieved their goal of avoiding (or in one case minimizing to a trivial amount) losses and preserving capital. In retrospect most of the original trades would have worked out fine – even in cases where I would have been put the underlying shares at an initial sizable loss – but of course there was no way of knowing that at the time. And managing risk involves trying to increase the possibility of good outcomes across as many scenarios as possible, both good and bad – especially the latter.

Looking ahead, I still have a good number of naked put positions expiring over the coming months, but will certainly be looking for opportunities to deploy some of the cash freed up after this month’s expiration. However, with the market trading at five-year highs and the VIX down at the 12-13 level, tempting naked put option selling opportunities currently seem to be few and far between.

That said, it doesn’t mean I’m going to just wait around for the VIX to move higher before initiating some new short put option positions. There are almost always opportunities in individual stocks or industry sectors occurring on a regular basis. And unlike some market observers who believe that the low current VIX level signals imminent danger of a market pullback, I observe from history (see the VIX heat map I created a few years ago) that the VIX can remain low (at these levels or lower) while the market can continue to rise for extended periods before seeing any significant pullback. Another reason I pay little attention to most market “experts!”

Options expiration results:
AFLAC Inc. (AFL) – Some January 30-strike put options I sold against AFL on 8/26/11 for $5.03 as part of a risk reduction roll-out/roll-down of an earlier, 40-strike-price position in AFL expired out-of-the-money (OTM) for a 22-month net return of about 6%.*

AFLAC Inc. (AFL) – Some January 35-strike put options I sold against AFL on 8/23/11 for $7.65 as part of a risk reduction roll-out/roll-down of an earlier, 41-strike-price position in AFL expired OTM for a 20-month net breakeven return.

Amgen (AMGN) – A January 50-strike put option I sold against AMGN on 8/10/11 for $7.97 as part of a risk reduction roll-out/roll-down of an earlier, 52.50-strike-price position expired OTM for a 21-month net net return of 9.8%.*

Applied Materials (AMAT) – Some January 9-strike put options I sold against AMAT on 5/24/12 for $0.65 expired OTM for an 8-month net return of 6.9%.*

Applied Materials (AMAT) – Some January 10-strike put options I sold against AMAT on 9/9/11 for $1.50 as part of a risk reduction roll-out/roll-down of an earlier, 12.50-strike-price position in AMAT expired OTM for a miniscule positive 21-month net return.*

Barclays PLC (BCS) – Some January 10-strike put options I sold against BCS on 9/9/11 for $3.27 as part of a risk reduction roll-out/roll-down of an earlier, 15-strike-price position in BCS expired OTM for a 20-month net return of about 5%.*

Baxter International (BAX) – Some January 50-strike put options I sold against BAX on 4/16/12 for $3.1 expired OTM for a 9-month net return of 6.0%.*

Baker Hughes Incorporated (BHI) – Some January 38-strike put options I sold against BHI on 3/22/12 for $3.55 expired OTM for a 10-month net return of 9.1%.*

Cameco Corp. (CCJ) – Some January 18-strike put options I sold against CCJ on 4/4/12 for $1.7 expired OTM for a 9-1/2-month net return of 9.2%.*

Chicago Bridge & Iron Company (CBI) – Some January 30-strike put options I sold against CBI on 7/30/12 for $1.8 expired OTM for a 5-1/2-month net return of 5.7%.*

Citigroup (C) – Some January 30-strike put options I sold against C on 8/10/11 for $8.77 as part of a risk reduction roll-out/roll-down of an earlier, 34-strike-price position in C expired OTM for a 19-month net return of about 6.9%.*

Computer Sciences Corporation (CSC) – Some January 30-strike put options I sold against CSC on 8/9/11 for $5.55 as part of a risk reduction roll-out/roll-down of an earlier, 35-strike-price position in CSC expired OTM for a 20-month net return of about 5.5%.*

ConocoPhillips (COP) – Some January 50-strike put options I sold against COP on 5/3/12 for $3.1 expired OTM for an 8-1/2-month net return of 6.0%.*

CSX Corp. (CSX) – Some January 20-strike put options I sold against CSX on 2/15/12 for $2.15 expired OTM for an 11-month net return of 10.4%.*

General Dynamics (GD) – A January 60-strike put option I sold against GD on 8/9/11 for $10.60 as part of a risk reduction roll-out/roll-down of an earlier, 65-strike-price position in GD expired OTM for a 21-month net return of about 7%.*

General Motors Company (GM) – A January 22.5-strike put option I sold against GM on 9/15/11 for $4.62 as part of a risk reduction roll-out/roll-down of an earlier, 27-strike-price position in GM expired OTM for a 22-month net return of about 5%.*

Gold Fields Ltd. (GFI) – Some January 11-strike put options I sold against GFI on 5/15/12 for $1.05 expired OTM for an 8-month net return of 9.1%.*

HSBC Holdings plc (HBC) – A January 40-strike put option I sold against HBC on 1/12/12 for $6.65 as part of a risk reduction roll-out/roll-down of an earlier, 46-strike-price position in HBC expired OTM for a 22-month net return of about 2.5%.*

JPMorgan Chase (JPM) – Some January 30-strike put options I sold against JPM on 9/22/11 for $7.35 as part of a risk reduction roll-out/roll-down of an earlier, 35-strike-price position in JPM expired OTM for a miniscule positive 20-month net return.*

Medtronic (MDT) – Some January 35-strike put options I sold against MDT on 2/22/12 for $2.80 expired OTM for an 11-month net return of 7.8%.*

MetLife (MET) – Some January 30-strike put options I sold against MET on 8/10/11 for $5.98 as part of a risk reduction roll-out/roll-down of an earlier, 35-strike-price position in MET expired OTM for an 18-month net return of 4.8%.*

Merck (MRK) – Some January 30-strike put options I sold against MRK on 8/11/11 for $4.95 as part of a risk reduction roll-out/roll-down of an earlier, 33-strike-price position in MRK expired OTM for an 18-month net return of about 8%.*

The Mosaic Company (MOS) – Some January 42.50-strike put options I sold against MOS on 4/10/12 for $3.20 expired OTM for an 11-month net return of 7.8%.*

New York Community Bancorp (NYCB) – Some January 12.50-strike put options I sold against NYCB (formerly symbol NYB) on 9/12/11 for $2.62 as part of a risk reduction roll-out/roll-down of an earlier, 14-strike-price position in NYCB expired OTM for an 18-1/2-month net return of about 10%.*

Northrop Grumman Corporation (NOC) – Some January 55-strike put options I sold against NOC on 8/11/11 for $10.80 as part of a risk reduction roll-out/roll-down of an earlier, 60-strike-price position in NOC expired OTM for an 18-month net return of 6.7%.*

Nucor Corporation (NUE) – Some January 29-strike put options I sold against NUE on 5/18/12 for $2.10 expired OTM for an 8-month net return of 7.2%.*

NYSE Euronext (NYX) – Some January 30-strike put options I sold against NYX on 2/10/12 for $4.3 as part of a risk reduction roll-out of an earlier, 30-strike-price position in NYX expired OTM for a 20-month net return of 7.3%.*

Pan American Silver Corp. (PAAS) – Some January 13-strike put options I sold against PAAS on 5/15/12 for $1.1 expired OTM for an 8-month net return of 8.1%.*

Suncor Energy (SU) – Some January 30-strike put options I sold against SU on 2/14/12 for $3.2 expired OTM for an 11-month net return of 10.4%.*

Stanley Black & Decker (SWK) – A January 60-strike put option I sold against SWK on 5/17/12 for $5.2 expired OTM for an 8-month net return of 8.4%.*

Closed/Adjusted positions:
Archer Daniels Midland Company (ADM) – On 1/3/13 I bought back (for $0.03) some 25-strike-price put options I had sold against ADM on 10/4/11 for $4.85 as part of a roll-out/roll-down risk reduction trade of an earlier, 27-strike-price naked put position in ADM, for a total 18-month net return of 11%.*

BP plc (BP) – On 12/27/12, I rolled out an ongoing – and currently profitable – naked put option position in BP by buying back (for $0.36) some 40-strike January ’13 put options I had sold against BP on 9/2/11 (for $9.20) and sold an equal number of July 40-strike put options for $2.71. The original 40-strike naked put position itself had been a risk-reduction roll-out/roll-down trade of an earlier 42.50-strike naked put position in BP, which itself had been a risk-increasing rolling-up trade of an even earlier position. I remain comfortable with the idea of owning BP in the $40 range or lower, so with the stock still trading at relatively low levels I elected to roll out the position rather than take a modest profit and move on. My net cost basis for the stock if I’m assigned the puts I’m currently short against it will be a very reasonable $36/share.

Enterprise Products Partners L.P. (EPD) – On 1/14/13 I rolled out some January 52.50-strike covered call options I had sold on 2/17/12 (for $2.80) against a long position in EPD by buying them back (for $2.03 – taking a modest 11-month net profit of 1.3%*) and then selling the same number of 52.50-strike January 2014 LEAPS call options against EPD for $3.53. This position (as was the original) is intended mostly as some protective measure against potential downside in the underlying shares (or units, in this case), which I would prefer to continue to hold for the distribution. That said, at almost $55, EPD is trading well above my entry price and is probably also just about fully priced, which is why I chose to sell the in-the-money 52.50-strike call options – with their higher premium and corresponding higher protection value – rather than roll up to the 55-strike calls.

Exelon (EXC) – On 1/17/13, in a risk reduction roll-out/roll-down trade, I bought back (for $5.48) some now deep-in-the-money April 35-strike put options I had originally sold against EXC on 9/12/12 (for $2.25), and then sold an equal number of EXC January 2015 30-strike LEAPS put options for $4.43, for a total net credit of about $1.00. It appears possible that EXC could remain mired in the 20s and low 30s for some time – especially if there is a dividend cut – but otherwise could be presenting a longer-term buying opportunity. I’m willing to wait this one out a while, so have “kicked the can down the road” and minimized the risk of an option assignment by once again buying back (what is now) intrinsic value (the deep in-the-money April 35-strike put options) and paying for it by selling time premium (the out-of-the-money January 2015 30-strike put options).

Hatteras Financial (HTS) – On 1/7/13, in a risk reduction roll-out/roll-down trade, I bought back (for $2.20) a now in-the-money February 28-strike put option I had originally sold against HTS on 8/23/12 (for $1.8), and then sold an HTS August 27-strike put option for $2.66, for a total net credit of about $1.80.

Itron (ITRI) – On 1/3/13 I bought back (for $0.10) a 40-strike-price put option I had sold against ITRI on 8/8/11 for $8.40 as part of a roll-out/roll-down risk reduction trade of an earlier, 45-strike-price naked put position in ITRI, for a total 22-month net loss of about 2% in the position.

Transocean Ltd. (RIG) – On 1/2/13 I bought back (for $0.25) a 42.50-strike put option I had sold against RIG for $6.76 as part of a roll-out/roll-down risk reduction trade of an earlier, 50-strike naked put position in RIG, for a total 20-month net return of about 5%.*

* As always, the return on sales of cash secured or naked put options was conservatively calculated based on the option premium received from the sale of the options (minus commissions) against the unmargined capital set aside to pay for the possible option assignment (i.e., my being put the shares of the underlying stock).

Related Posts:

Comments are closed.