I bid on six trades and completed four.

music selection:  “Gemini Dream” — The Moody Blues

weigh-in:  206.4 (2.8) – A good week.

Six positions expired over the weekend.  I was able to reestablish four but two more offered no attractive bids.  PSEC and ORCL both expired out of the money and left me with an opportunity to write new puts.  I was unable to find a bid that allowed for my minimum 12% annualized return on put writing. I’ll move these two to the watch list and look for better opportunities in the future.  I have four covered call trades to share with you instead.

SM Energy has disappointed but I’m working to make the trade profitable.  I sold SM170818C00022500 for 10 cents a share.  The trade will be in force for a short 26 days.  It yields 6.24% annualized.  After this trade, I am down 19.73% in the trade since inception.  I’ll need some stability in the market for WTI crude to make a full recovery.

Shares of CNNX were narrowly assigned over the weekend. I sold CNNX170818C00020000 for 55 cents a share.  Like SM, the trade will be in force for only 26 days.  It yields a tasty 38.61% annualized.  The underlying yields over 5% but it is a 50/50 proposition at this point whether I will actually collect a distribution before being called away.  The call yields are compensating me plenty well enough though.

Archer Daniels Midland (ADM) is another trade that has been disappointing.  Shares moved against me almost immediately after opening a position and have been slow to recover.  I sold ADM170901C00045000 for 15 cents a share.  The trade will be in force for 40 days and yields a paltry 3.04%.  All in, I am now only down 4.47% on the trade in total.  A break even result is highly achievable.

EOG has been treating me pretty well.  This is a best in class shale driller in the Permian Basin of west Texas.  They should remain profitable down to a WTI crude price of 35 a barrel.  I sold EOG170901C00095000 for 2.20 a share.  This trade will be in force for 40 days and yields a desirable 21.13% annualized.  This position is 6.79% in the green after accounting for options premiums received.  I should be able to play this one profitably for months.

All together these four options trades yield a simple average annualized return of 17.25%.  I think that is pretty good considering half the positions have moved against me and I’m still handily beating the long term average return of buy and hold index investors.  It leaves me puzzled that so many people think indexing is the only rational strategy.

I’ll be taking a road trip vacation to the mountain west with my father, Lizard King Sr, next week.  Further blog updates will be highly dependent on finding reliable Wi-Fi.

Devour your prey raptors!


Four New Options Trades

Never miss another opportunity to devour prey!

14 thoughts on “Four New Options Trades

  • July 24, 2017 at 9:16 pm

    How far OTM do you aim to be when you look for 12% annualized?

    • July 25, 2017 at 2:29 am

      I aim for at the money. 12% is a good reward for taking roughly market neutral risk.

      • July 25, 2017 at 5:51 pm

        Also, theta is highest ATM and drops off as you go ITM or OTM.

  • July 25, 2017 at 5:37 am

    Thanks for the update and enjoy your holidays 😉

  • July 25, 2017 at 6:08 pm

    It was you talking about the drop in ADM that got me writing puts on it (at strike 40 as I do not really want to be assigned). Glad to read you can make soem profit by selling calls now that moves within the 40,5 – 41,5 range.
    Have a look at AB Inbev (the guys that bought Anheuser Bush). I love them below 100 euro

  • July 27, 2017 at 9:42 am

    Indexing is not the only strategy for investing but my advice is that investors should stick to the strategy that they understand. That is, the one that offers that best returns.

  • July 28, 2017 at 4:20 pm

    Question for the lizard:

    If you wanted to combine a long stock position with a synthetic short for purposes of collecting almost risk-free dividends, what stock would you choose? I was looking at NLY, but because they pay their 10% dividend quarterly, the calls might be exercised often.

    • July 28, 2017 at 11:31 pm

      Getting fancy? I’ve never tried this strategy. If I was going to do it, I’d go with long dated expirations to reduce the occurrence rate of getting called away. You want a lot of time value on the synthetic. I’d probably look for high yielding closed end funds that are trading at a steep premium to NAV. They are unlikely to climb higher and be called away. You will probably take a capital loss on the shares offset by a capital gain on the put. I think more common of an approach to isolate the distribution premium is to use what is known as a “jelly roll” which is a calendar spread made of both a put spread and call spread. You basically roll your exposure (short or long) from one month to the next. The distribution should show up in the spread pricing assuming EMH. Efficient markets are your enemy with the strategy you propose. The premium should reflect the expectation of buyers and sellers to capture the value of the distribution. This probably works best if you find something with low options volume. Anything with high volume is going to have more arbitrage activity and be closer to theoretical efficiency. So NLY probably already reflects the distribution on front month options. Longer dated options should perform better?

      I really don’t know. Let us know how it works if you try this. Maybe you have a Nobel Prize in Economics coming your way!

      • July 31, 2017 at 10:08 pm

        DSL might be a good CEF example:

        8.49% dividend. Dividend frequency = $0.15 monthly. Current price is about midway between two options strikes at $21.31, so I could buy 200 shares and approximately hedge them with one synthetic short at each strike (I think). For the Feb 18, 2018 expirations (200 days)(price estimates are “mark”), I could sell the 20-strike call for $2.90 and sell a 22.50-strike call for $0.10 (or maybe not bother for 0.10!). Then I could buy the 20-strike put for $0.45 and buy a 22.50-strike put for $2.15. So net proceeds from selling calls = $3 and net expense from selling puts = $2.60 to hedge 200 shares. Net credit $0.40 total, or 0.20 per share..

        Between now and expiration, one could expect to receive perhaps 5 × $0.15 = $0.90 in dividends (not counting the 0.15 Feb dividend, assuming one or both calls will be executed). 200 shares × $0.90 = $180, plus the 200 × $0.20 = $40 credit taken to set up the synthetic short = $220.

        Cost is 200 × $21.31 = $4262

        $220 revenue / $4262 investment = 5.16%

        That’s earned in 200 days, so annualized it would be (365/200) * 5.16=9.42% ROI.

        I have not yet analyzed other CEFs. There are probably better deals out there. But this would seem to be a proof of concept, unless you can see something wrong with it (aside from not counting commissions).

        I’m not ready to make this trade because I lack the experience to understand how the synthetic short would perform over time – whether it would truly hedge capital losses 100%. I’m also unsure of my plan for when the synthetic short goes far ITM or OTM. I need to find a program that can simulate the trade over time. I am actually skeptical that such returns are available virtually risk-free and detached from market volatility, but if it’s not possible I want to know why. Any thoughts?

        • July 31, 2017 at 10:56 pm

          It makes a certain amount of sense. In effect, you have a put/call “parity” trade open. Theoretically, there is no profit in such a scenario as it should be arbitraged away. But there is usually a small amount of “negative skew” in the put/call options pricing. And by ‘small’ I mean something that reflects the frictional costs such as commissions and prevailing interest rate on the funds to secure the trade. You are adding a twist of an underlying that pays a distribution. You probably would collect 4 of the 5 distributions and have shares at high risk of being called early on the last one. This, of course, assumes you use the same strike for the puts and calls. It looks like you are proposing to spread the strikes out around the price of the underlying so really more of a collar than a parity trade.

          I see three possibilities: 1) price stays between the strikes, you collect all distributions and options expire worthless 2) price increases past the call strike, shares are called away early on one or more dividends when the time value is less than the distribution 3) price falls below put strike, you collect all distributions and sell shares at a (small) loss at expiration.

          Where such a strategy could potentially shine is if you leverage up. You are hedged against the worst effects of leverage so why not enjoy 1.5 times the normal distribution (less borrowing costs)? Let me know if you try this. I’m interested to see how it turns out.

        • August 1, 2017 at 12:28 am

          You have me intrigued. I’ve been trying to make the math work using NLY (I wanted something liquid). Best I can come up with is 2.8% annualized risk free return. Or roughly the risk free opportunity cost of 10 year treasuries. It seems options pricing considers distributions for high yield securities. I’m increasing doubtful you can get favorable option pricing that makes this work.

  • August 1, 2017 at 2:02 pm

    DSL bid-ask spreads were horribly wide yesterday, and of course spent the night at outrageous levels, but are considerably tighter today. Still very little volume, but I still think a trade could execute at around mark or the theoretical price. I scanned the names on cefconnect.com and confirmed that DSL is the highest-yielding CEF with an options market.

    One could get about a $0.90 credit on a synthetic short at the 20 strike, which would leave all but $1.36 of the cost basis protected (share price is 21.36). A couple months of dividends would cover the remaining risk exposure.

    Your observation that dividends should be baked into options pricing is intriguing, because options prices inflated above what mere probability would suggest would open up arbitrage opportunities for options sellers. For example, put sellers would be able to charge a lot more when there is high willingness to pay from protected put buyers seeking to cash in the dividend while hedging their risk. An equilibrium would have to occur where the value of the dividend is split between the put seller and the put buyer via a surcharge on puts. This could be the free lunch you’ve been eating for a long time, lizard.

    And if puts prices were skyrocketing, perhaps calls would have to also rise so that spreads could not be arbitraged in some way for too much risk-free profit.

    Finally, many dividend CEFs have a natural decline built in due to return of capital. This factor could be responsible for some of our theoretical put pricing surcharge. If somehow this was not the case, that would be an arbitrage opportunity too.

    I have lots to learn in this space. I might try to set up this trade in a paper trading account to see what I can learn.

    • August 1, 2017 at 5:08 pm

      Those wide bid/ask spreads may be your only friend in such a trade. You could set up a “stink bid” limit order and hope to get filled during a moment of market exuberance. There is good money to be made in the microcap pharmaceutical space that way. It takes big stones though!

      Keep us posted.


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