January 17th Options Expiration

January 17th Options Expiration

     Another month has passed in the world of Stock Options for the EAF Portfolio. Here are the four plays from the past month:

KEX - Call Credit Spread, Paying arm strike price $85
SSYS - Call Credit Spread, Paying arm strike price $90
OPHT - Put Credit Spread, Paying arm strike price $40
BRC - Put, Naked on Equity, strike price $30

Picks 1, 2, and 3 - Lots of Winners

     Out of the four Options plays over the last thirty days, three of them will expire worthless. Remember that this is a good thing. We are selling Options so they paid us a fee a month ago to enter into a contract. As the three stocks at the top did not reach their strike prices (up for Calls, down for Puts) by the end of the contract date we do nothing, the contracts expire, and we keep the fee that they paid us up front. It has been a very productive thirty days in that nothing happened and I like it that way.

BRC - A Different Story

     BRC's trade however, was a different story. BRC happens to be one of the Dividend Champion stock that I use in my buy-and-hold portion of the EAF Portfolio (I'll be posting about that in the coming weeks). I wouldn't mind buying BRC and holding it at its current value for the dividend that it pays and prospects of forward gain. To that end I sold my first Put On Equity - selling an option contract based on the amount of stock I held in the account instead of the amount of free money I had. I sold it largely inside of the strike price ("in the money") to pull a much larger payment and had hoped that it would reach $30 prior to today. Sadly that was not the case.

     What happens now is that I have to sell some of my current stock holdings to fund the purchase of the BRC stock that I entered into the contract for. Overall I will be buying the BRC stock at close to a 12% "loss" over the current value of the stock. Factor in the money that I was paid to sell the Put at the beginning of the month and it comes in as a 3% loss. Now the good news is that I will still own the stock and a 3% swing is easy to come by for a stock given some time so I'm not worried about losing on this deal, I'll just have to wait a while for it to mature.

     This is not the way that this trade was supposed to go and I made one large mistake. I sold the Put way too far in the money. I chased that premium and it led me down the path that greed so often does. When I sold this put with a $30 strike price the stock had upward indicators but was hovering at just over $25.50. I took a bet that a very stable, long running stock would raise 17% in just 30 days. That is ridiculous thinking but with it being my first Put on Equity I took the bet without doing a thorough step back to see what I was looking at. Percentages are more important than $$$. Different stocks trade at different levels and spending too much time looking at $100+ stocks stuck in my brain that a $5 shift would be easy to accomplish. Perspective would have saved me or sticking to my percentages and not chasing additional income. I could be up 1% on this trade instead of down 3%. Just another valuable lesson learned.

The Last 30 Days Overall

     Overall it has been a very good thirty days. Even with the Equity trade that left a hole in the profits I pulled in a 3% profit with the credit spreads covering. I'd like to see 5% a month if possible but 3% is more than respectable considering you'd be hard pressed to find a bank that will pay you 3% interest yearly. I'm turning this number monthly. It is risky though and losses will be made but staying in the green is the important thing. As these trades were made last month and the premium delivered then, the profits will also be logged to last month so they helped bolster my year end numbers. Now that they are resolved we can begin selling for this year. Stay tuned next week for January's trades for the EAF Portfolio.