FROM THE LOG: Friday, June 22, 2012
-5 Weekly(8) 18 Calls @ .71
Our net( includes commissions) Cost per Share is now $16.19.
CHK closed at $18.61. The option is in the money at this point and we are/will be subject to call of our entire 500 share position if it closes above 18 on Friday next. During the week, we will focus on writing more at-the-money puts to get more stock (we want a 2000 share position) or, failing to get put more stock, at least drive down the potential Cost per Share while we continue to write more puts and calls.
Why not just buy the shares?
The rationale here of selling/writing at-the-money puts is to get stock at a discount, which discount is determined by the premium received. For example: If we had sold 10 put contracts today at 18 only three things can happen.
a) Our 18 calls written on the 500 shares we already own expire worthless and we keep the premium.
b) Puts assigned at 18 and pay $18,000 for more 1000 shares. We keep the .85 put premium in effect buying the stock at 17.15.
c) We now have 1500 shares, which gives us a Cost per Share of $16.83, a slight increase over the current $16.19
d) We now have 1500 shares on which to sell calls
2) Stock finishes above 18
a) Our 18 puts expire worthless and we keep the premium
b) Calls are exercised and we get paid $9,000. We now own no shares.
c) Our cost per share calculation becomes meaningless because we own no shares so cannot have a cost per share, but we do have a cash profit of $906.85, that we
will apply to future stock purchases.
d) We write more puts to secure more stock. Premium received drives down potential Cost per Share
3) Stock finishes at exactly 18. Neither call nor put is activated (Highly Unlikley)
a) We keep all premium.
b) Our Cost per Share is a happy $16.24
c) We write more puts and calls and premium received drives down costs even more.
Just buying 1000 shares @ 18.61 would leave us with a Cost per Share of $17.70.
By analyzing each potential transaction in light of our trading plan, we are able to easily determine our course of action. As we have reported before, a simple Excel spreadsheet works very well.
FROM THE LOG: Monday, June 25, 2012
-10 Weekly(5) 17 Puts @ .31, or $310
That brings our net Cost per Share down to $15.57
ORDER: Placed a GTC order to Buy to Close 5 Weekly(5) 18 Calls @ .15. This would take us out of the calls at an 80% profit. Expiration is Friday.
-6 Jul 13 Puts @ .45, or $270
Net Cost per Share is $23.84
Europe continues to play the basket case and countries deteriorate by the day. Interest rates on Spanish and Italian bonds spiked to very high levels as investors are beginning to realize (what took them so long?) it is unlikely those countries will ever pay their debt OR interest thereon…ever. European banks are stuffed with toxic government paper and are mostly insolvent and require huge infusions of capital just to stay open.
This morning the market gapped down and option premiums gapped up. The VIX, sometimes called the fear index, moved up 2.27 to 20.38. This means that option premiums just got fatter and we will go after our share all this week.
CHK, PBA, SPY
FROM THE LOG: Tuesday, June 26, 2012
+5 Weekly(4) 18 Calls @ .15
We closed out these calls for a nice profit. Our remaining weekly(4) puts are only slightly out of the money with only four days to go. It is a toss up whether we get the stock assigned or the options expire worthless. Either way we win.
-5 Aug(53) 25 Puts @ 1.05 No Fill.
We have owned this stock for many years and love the monthly dividends. Our cost per share is very low. We will drive it even lower by selling more puts, but our main objective is to get more stock. This one is not very liquid so the bid/ask spread is huge making it difficult to get a good fill.
+20 Aug 148 Calls @ .04
-20 Aug 143 Calls @ .19
-20 Aug 119 Puts @ .93
+20 Aug 114 Puts @ .52
Total Credit= .56, or $1,120
Margin = $8,880
Probability = 86%
BE= 118.43 (10%) and 143.57(09%)
Annual Yield = 89.2%
ROI = 13%
Theta = $31.71
Delta = -21.21%
+20 Aug 174 Calls @ .32
-20 Aug 169 Calls @ .53
-20 Aug 138 Puts @ .65
+20 Aug 133 Puts @ .38
Total Credit= $960
Margin = $9,040
Probability = 84%
BE = 137.51 (10%) and 169.49 (11%)
Annual Yield = 75.4
ROI = 11%
Theta = $23.33
Delta = 10.26%
The VIX retreated a little today, meaning that overall volatility has declined slightly. Still, there are many individual situations with nice volitility and juicy premiums so we do not lack for candidates.
FROM THE LOG: Wednesday, June 27, 2012
+1 Aug 92.5 Call @ .76
We sold this call May 31st for $3.85. Today, it reached the 80% earned level and per our rules we Bought to Close.
+1 Nov 85 Put @ 9.05. We removed this hedge as time decay is starting to erode its value.
We have pushed the net Cost per Share of CAT down to $94.48.
+10 Weekly(3) 17 Puts @ .06
We originally sold these puts June 25th and received .31, or $310. After today’s Buy to Close, we now have a net Cost per Share of $15.72.
Order: +5 Jul 15 Puts @ .20 (GTC order-No fill yet). This represents the 80% earned level and the option is not quite there yet.
Tomorrow is weekly option creation day so we may get opportunities to put on more premium rich positions. We have identified several more stocks we would like to own so will write puts on them. Of course, a number of 80% situations are teed up and ready to go as soon as the market triggers them.
CHK, SSO, CAT, JPM, SLW, RDS.B, FCX, MWE, SLB, OFC, NBR
FROM THE LOG: Thursday, June 28, 2012
-5 Jul Weekly(9) 18 Calls @ $ .62, or $310
-5 Jul 16 Puts @ $ .44, or $220
Cost per share (CPS) = $14.66
+2 Jul 54 Calls @ $ .40, or $240
CPS = $58.26
-2 Jul 80 Puts @ $2.18, or $436
CPS = 90.33
-5 Jul Weekly(9) 35 Puts @ .63, or $315
-1 Sep 32 Put @ $1.31, or $131
-5 JulW(9) 25 Puts @ $ .38, or $190
-1 Aug 90 Call @ $1.15, or $115
Bought the stock 2/03/12 for $72.55/share
CPS = $68.73
-5 Jul Weekly(9) 32 Puts @ $ .76, or $380
-3 Aug(51) 45 Puts @ $1.50, or $450
-2 Jul 60 Puts @ $1.42, or $284
-10 Sep 13 Puts @ 1.07 (No Fill)
300 shares @ $13.72
-5 Aug(51) 22.5 Puts @ 2.00, or $1000
+200 Shares @ $22.26
In the past 4 days we took in $6,967.93, in net premium (293.45+1835+732+3851). That is cash directly into our trading account. Obviously, much of it is also unearned at this point and it is important to focus on the amount we get to keep at the final tally. Even so, just as we sell premium every day, we also harvest premium almost every day.
The object of this strategy is to drive down the Cost per Share to very low levels which then positions us to profit from the eventual sale of the particular stock. It is also a method to enhance profit and compensate for drops in share prices to the point of recovering losses and turning them into gains. It even allows us to earn money on stock we do not own and to purchase shares with other people's money. It is very effective and we normally run annual yields in excess of 100%.
Corporate Office Properties OFC
This is a unique publically traded REIT whose innocuous name belies the James Bond nature of its business. They provide very special buildings and secure office space to our nation’s Intelligence agencies and related contractors. Some of the building have signs identifying their tenants, but many are non-descript buildings nestled in sleepy suburbs with ample parking and easy access to a highway. Many buildings are fortified to prevent eavesdropping by enemy satellite. Protective film coats the windows to stop probing microwaves. The only clues to what goes on inside are the fences and black-clad security guards. OFC is headquartered our of Columbia, Maryland.
The Company’s strategy has coincided perfectly with the government boom in spending on security, particularly around Washington, D.C.
The Company has benefited from enhanced security requirements for government buildings which has moved employees out of dense areas in and around Washington, and into the suburbs. Building buildings to the “soft side” of government agencies involved in information processing, software development and communications is a winning strategy.
Intelligence will remain vital to national defense on a constant and growing basis, while the manufacture of hard weapons such as tanks, depend more on the cycles of military procurement and spending.
The business parks themselves are unremarkable…even their names are bland. Airport Square, for instance, is an office park near the Baltimore-Washington International Airport, now known as BWI, out of which I learned to fly many years ago. I probably worked out of some of these same or similar buildings at one time too.
Four and five story buildings , each with its own parking lot, line a neatly landscaped road. There is a Marriot and a Ruby Tuesdays nearby. Next to the Hilton Homewood Suites is an unidentified building with tinted windows and a guard shack in front. A security officer holds a guard dog on a leash.
In some cases the Company doesn’t know who the occupants of its buildings are. That is an odd position for a publically traded REIT, which lists its tenants in its annual report.
OFC has cornered the market in leasing offices to the intelligence community. The Company has the necessary land, security clearances and relationships with defense contractors that make it difficult for competitors to grab a significant portion of its business.
We have held OFC stock since about 2005 and its Preferred Shares and Common are consistent dividend payers.
It is presumed that the Government will pay its rent in full and on time.