Options trades and expiration: MO, BKE, BAX & more
I made several options trades this week as option volatility continued to drop back down to more normal levels. Considering the possibility that this could be just a prelude to another spike higher, I elected to continue to selectively reduce risk in some of my existing short naked put option positions (see below) by adjusting them or closing them out.
Earlier in the week – with the VIX still at above-average levels – I also initiated a new options position by selling naked put options in a high-yielding tobacco company stock. Finally, this was options expiration week and, as usual, I was able to profitably close the books on some short put options that expired out of the money.
Options expiration results:
- Buckle Inc. [[BKE]] – The June 22.5-strike naked put options I sold against BKE on 1/7/10 expired out-of-the-money (OTM) for a 5-month net return of about 2.8%. *
- Mine Safety Appliances [[MSA]] – The June 20-strike naked put options I sold against MSA on 1/15/10 expired OTM for a 5-month net return of about 3.1%. *
Closed/Adjusted positions:
- Ameren Corp. [[AEE]] – On 6/15/10 I bought to close the September 22.5-strike naked put options I sold against AEE on 1/22/10 for a 5-month net return of about 1.1%. *
- Baxter International [[BAX]] – On 6/14/10 I rolled out and down the January 45-strike put options I sold against BAX on 4/23/10 by buying them back (at a loss) and selling an equal number of January 2012 40-strike LEAPS put options for an overall net credit, reducing both my position size and net cost basis (to about $38) if ultimately put the stock.
- Kinder Morgan Management, LLC [[KMR]] – On 6/16/10 I bought to close the August 50-strike naked put options I sold against KMR in my IRA on 2/5/10 for a 4-month net return of about 3.3%. *
New positions:
Altria Group [[MO]] – On 6/14/10 I sold some December 17-strike naked put options against MO as it dipped with the overall market:
The largest cigarette maker in the U.S., Altria Group sells popular cigarette brands like Marlboro, Virginia Slims and Parliament, as well as smokeless tobacco products and cigars and pipe tobacco. Earnings are potentially subject to litigation and regulatory risk, as well as a long-term structural decline in tobacco sales; positives include the potential for enhanced returns from restructuring moves, the company’s modest level of diversification (including a stake in brewer SABMiller) and the industry’s general stability.
Trading at $20 and yielding 7%, shares of MO are approaching intermediate-term oversold conditions after having fallen over 10% in the last month. The intermediate-term picture is still relatively neutral, however, given the stock’s equally strong price action to the upside prior to that. A break below the $19.50 level would suggest a more negative picture.
Valuation wise, MO could be considered to be modestly undervalued here if the company can manage to show increasing earnings over the next several years as analysts generally seem to expect. Its average current fair value estimate is about $22, based on a variety of valuation measures. That said, the low end of its current estimated fair valuation range begins at about $16 to $17.
Altria Group is included in the US Broad Dividend Achievers index, which comprises companies that – among other things – have increased their annual regular dividend payments for the last ten or more consecutive years. My cost basis if ultimately put the stock will be less than $16.50, with a corresponding dividend yield of almost 8.5% (based on the current dividend level).
* As always, the return on sales of cash secured 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).
I follow your trades whenever you post.
Like you I’m interested in income from selling puts.
It seems that you are extremely conservative. Sometimes you make only 2% from a 6 month position.
Are you simply content with this return, or could you explain your philosophy?
Thanks,
Steve
Steve,
While I am probably more conservative than average, many of the cases of very small returns reflect positions that were closed out early and aren’t indicative of the original expected returns. I sometimes do this for several reasons: perhaps news or price action in the underlying stock (or overall market) causes me to want to reduce risk, or I may decide to free up cash for better opportunities or to take advantage of a changing market environment as has happened recently.
Generally I try to look for double-digit – or at least high single digit – annual returns (conservatively calculated on a cash-secured basis). But at the same time I try to adjust my risk exposure with the market environment. In a low-interest-rate, low-volatility environment with low option premiums and a market up 70%-80% from its levels a year earlier I may content myself with less for a while rather than try to achieve higher returns by selling puts at strikes that are closer-to-the-money than I’m comfortable with.
On the other hand, when the market has a nice drop and volatility spikes higher I’m in a position to be able to take advantage of that environment. It not only means being able to sell options with higher premiums, but being able to sell them on “cheaper” more attractively priced stocks, which fits nicely with my investing-oriented approach.
At the same time it isn’t a binary “all in/all out” timing-the-market approach. I do try to establish and spread out positions over time and in different market environments to try to allow for some option writing income to be regularly generated on a monthly basis. As a result, while returns do tend vary over time they are probably more consistent, with less variance, than they might be otherwise.
I’m not sure if I’ve been able to completely answer your question? Please feel free to ask if you have additional questions.