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Monday Trades

Four new options positions.

music selection:  “For You” — Staind

weigh-in:  212.4 (0.8)

Prospect Capital Corporation (PSEC) is a range bound stock that offers opportunities to buy around 8 and sell around 9.  Price has fallen back to close to 8 so I’m writing puts to try to get assigned.  Assignment will result in a yield of 12.5% while I write covered calls at 9 waiting for a profitable exit.  I sold PSEC170721P00008000 for 20 cents a share.  The trade will be in force for 40 days and yields 22.81% on an annualized basis while enjoying 3.23% downside protection.

With Oracle (ORCL) I’m getting back to my roots of writing puts on Big Cheap Tech.  There are several dominate businesses in the tech space that are quite a lot like digital utilities in that they sell an essential service and have stable mature businesses.  They tend to have options premiums that reflect their early go-go growth days though so offer an excellent balance between safety and return.  I sold ORCL170721P00044000 for 1.42 a share.  The trade will be in force for 40 days and yields 29.45% on an annualized basis while enjoying 3.27% downside protection.

I was assigned shares of Archer Daniels Midland (ADM) over the weekend.  My thesis here is that Big Corn is here to stay and has a strong tailwind in the form of a growing middle class in India and China.  I sold ADM170721C00045000 for 29 cents a share.  The trade will be in force for 40 days and yields 5.88% annually.  Until shares are called away, I stay eligible to collect the 3% dividend yield.

EOG Resources (EOG) was assigned to me in a prior month.  A covered call expired out of the money over the weekend so I am writing a new one.  I sold EOG170721C00095000 for 1.35 a share.  The trade will be in force for 40 days and yields 12.97% on an annualized basis.  I have collected 5.65 in options premiums on EOG to date or almost 6% of my cost basis.   All since just mid March.

The four positions have a simple average annualized return of 17.78%.  After adjusting for a 25% marginal tax rate, my return is 13.33% on an annualized basis which far outstrips the long term average of buy and hold S&P indexing.  At the same time, I have reduced my risk and lowered my Beta.  That is the goal of selling options for income.

Devour your prey raptors!

{ 6 comments… add one }
  • M. D. June 15, 2017, 5:03 pm

    Good to know there are other successful option traders. Do you trade only options on stocks or on futures too? I am trading usually options on futures. If you like, check my trading journal on my website.

  • Chris B June 15, 2017, 7:32 pm

    In your selection of stocks to trade options on, to what extent do bid-ask spreads play a role? Obviously, trading a high B-A is like taking an instant loss, but I wonder to what extent high IV makes up for that, compared to, say, trading SPY options with 1-2 cent B-As but lower IVs. Do you screen for both high IV and low option BAs?

    The thing I’m trying to understand is what’s the incentive for anyone, buyers or sellers, to trade the more illiquid options?

    Also, do you use market orders or submit a series of lower limits until a buyer finds you?

    • The Lizard King June 15, 2017, 11:03 pm

      Chris,

      I don’t pay much attention to the b/a spread. When the spread is ‘wide’ the market maker will get involved as soon as there is an arbitrage opportunity of even a penny. Just submit a limit order and give it a few minutes to work before lowering the ask a penny. Know your limits though. If the projected yield falls too low, look elsewhere. You can usually get filled at a reasonable price.

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