Options trades: Naked puts in BP, WAG, O & more!
I recently took early profits in some of my naked put option positions and made adjustments in others in anticipation of what could be a more sustained higher-volatility environment going forward. If so, this would be great news for sellers of naked put options and covered calls, and I wanted to position myself to take better advantage of it while also using it to reduce risk in some existing positions.
Closed/Adjusted positions:
Applied Industrial Technologies [[AIT]] – On 5/28/10 I bought to close the August 20-strike put options I sold against AIT on 1/22/10 for a 4-month net return of about 4.5%.*
BP Plc [[BP]] – On 5/25/10 I rolled out and down half of the January 50-strike put options I sold against BP on 4/27/10 by buying them back (at a loss) and selling some January 2012 35-strike LEAPS put options for an overall net credit. This does increase my potential overall position size in BP if I’m ultimately put all the shares at both strike prices, but only by 20%.
At the same time it lowers my potential cost basis – if assigned the put options at both strikes – to below $38, a level at which I’m more comfortable owning the stock given the ongoing uncertainty over future costs and liabilities from the Gulf oil spill. If I’m not assigned at the lower strike, I’ll have significantly reduced the risk in the original position by virtue of the smaller position size. In either case (whether I’m ultimately assigned at both strikes or not), I should have increased flexibility to further adjust the position down the road.
Realty Income [[O]] – On 5/24/10 I bought to close the September 25-strike put options I sold against O on 3/25/10 for a 2-month net return of about 0.8%.*
Walgreen Co. [[WAG]] – On 5/25/10 I rolled out the October 30-strike put options I sold against WAG in my IRA on 3/4/10 by buying them back (at a small loss) and selling some January 25-strike put options for an overall net credit, thus lowering my risk in the position and significantly reducing my net cost basis (to a little under $25) if ultimately put the stock.
I’m also still short some October-dated 33-strike naked put options on WAG in my regular account, which I may or may not decide to adjust as well. I would actually like to get long many of the stocks – including WAG – that I currently have short naked put options positions in, but will adjust the option positions if it seems likely I may be able to be put the shares of the underlying stocks at even lower prices.
* As always, the return on sales of cash secured 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).
