Could have been assigned, but took in a bit more premium ...

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Let me start with closing the "story" on last week's thought process to being assigned.  In last weekend's blog entry here I gave excruciating details on three stocks/option plays where the underlying had been put to me.  The three symbols were AMAT, MU, and SQ.

The gist of the story was that I had maximum profit potential at the following levels in these three stocks, which were all part of individual covered-calls:

• AMAT:  $300 maximum profit (put to me at $50 and potentially called away at $53)
• MU:   $300 maximum profit (put to me at $41 and potentially called away at $44)
• SQ:   $150 maximum profit (put to me at $41.50 and potentially called away at $43)

These underlyings were all in the money (ITM), so would have been called away with options expiration.  The closing values for each were:

• AMAT:  $54.90, ITM $1.90
• MU:  $44.21, ITM $0.21
• SQ:  $44.11, ITM $0.11

I noticed that as we were coming up into 3:59 pm ET, I had an opportunity to close the option leg and then close the stock, as the combined proceeds of closing the leg and selling the stock would have been greater than simply having the underlying's called away.  So I (rapidly) closed the following trades (ignore AVAV -- not part of this story) to capture the excess premium:

Here is how that story turned out:

So, for SQ, I was anticipating a $150 maximum profit but was able to capture $260-$71 = $189.  For both MU and AMAT I was expecting $300 maximum profit but was able to capture $321.25 + $4.00 = $325.25 for MU and $504.25 - $178 = $326.25 respectively.

I readily acknowledge that this is not the norm but I was able to do this, resulting in $90.50 increased value capture ($840.50 versus an anticipated $750).  The final numbers for each of these trades is as follows:

AMAT

• Premium from CSP (incl commission): $40
• Premium from CC:  (incl commission): $29
• Days from selling CSP to CC expiration:  12
• Original CSP amount:  $5000
• CC-CSP Value:  $300 (if ITM)
• Additional net premium/value received from sale:  $24.25 =  ($504.25 - $300 - $178 - $2)
• Total profit:  $393.25 = $40 + $29 + $300 + $24.25
• Return on AMAT transaction chain:  $393.25 / $5000 = 7.865%
• Annualized return on AMAT transaction chain:  7.865% * 365 / 12 = 239%

MU

• Premium from CSP (incl commission): $44
• Premium from CC:  (incl commission): $24
• Days from selling CSP to CC expiration:  19
• Original CSP amount:  $4100
• CC-CSP Value:  $300 (if ITM)
• Additional net premium/value received from sale:  $23.25 =  ($321.25 - $300 + $4 - $2)
• Total profit:  $391.25 = $44 + $24 + $300 + $23.25
• Return on MU transaction chain:  $391.25 / $4100 = 9.542%
• Annualized return on MU transaction chain:  9.542% * 365 / 19 = 183%

SQ

• Premium from CSP (incl commission): $29
• Premium from CC:  (incl commission): $39
• Days from selling CSP to CC expiration:  19
• Original CSP amount:  $4150
• CC-CSP Value:  $150 (if ITM)
• Additional net premium/value received from sale:  $37 =  ($260 - $150 - $71 - $2)
• Total profit:  $255 = $29 + $39 + $150 + $37
• Return on SQ transaction chain:  $255 / $4150 = 6.144%
• Annualized return on SQ transaction chain:  6.144% * 365 / 19 = 118%

So, the plan worked out in my favor. It doesn't always go this way, but I wanted to close the loop so that you can see how to do a cradle-to-grave analysis on the trades.

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I closed a couple of other trades this week; here is the accounting:

1. AVAV 180216P50 was sold on 1/16 and I collected $0.90 at $1 commission.  I bought the position back on 2/16 for $0.05, netting $90 - $5 - $2 (commissions) = $83.  The duration was 32 days, inclusive of start/ending dates.  ROO was $83 / $5000 = 1.66% and AROO was 1.66% * 365 / 32 = 18.9%, including all commissions.
2. EXEL 180216P28 was sold on 2/5 and I collected $0.50 at $1 commission.  I bought the position back on 2/15 for $0.05, netting $50 - $5 - $2 (commissions) = $43.  The duration was 12 days, inclusive of start/ending dates.  ROO was $43 / $2800 = 1.54% and AROO was 1.54% * 365 / 12 = 46.7%, including all commissions.
3. TSN 180223P70 was sold on 2/12 and I collected $0.30 at $1 commission.  I bought the position back on 2/15 for $0.05, netting $30 - $5 - $2 (commissions) = $23.  The duration was 4 days, inclusive of start/ending dates.  ROO was $23 / $7000 = 0.329% and AROO was 0.329% * 365 / 4 = 30.0%, including all commissions.
4. XEL 180216P27 was sold on 2/8 and I collected $0.30 at $1 commission.  I bought the position back on 2/15 for $0.05, netting $30 - $5 - $2 (commissions) = $23.  The duration was 8 days, inclusive of start/ending dates.  ROO was $23 / $2700 = 0.85% and AROO was 0.85% * 365 / 8 = 38.9%, including all commissions.
5. NVCR 180216P20 was sold on 2/12 and I collected $0.35 at $1 commission.  I bought the position back on 2/15 for $0.05, netting $35 - $5 - $2 (commissions) = $28.  The duration was 4 days, inclusive of start/ending dates.  ROO was $28 / $2000 = 1.4% and AROO was 1.4% * 365 / 4 = 128%, including all commissions.

I did not have one losing trade all week.

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Here's how I am positioned going into the President's Day shortened week:

COP 180223P55 is ITM right now, with the underlying sitting at $54.77.  If nothing changes this will be put to me at the end of the week.   I bought this on 2/5 and received a premium of $0.50.  Maximum option pain indicates a bit higher movement is possible this week, but of course, this is pure speculation (option pain does not always reflect reality):

PYPL 180223P75 is OTM right now, with the underlying sitting at $78.16.  I collected $1.00 in premium on 2/5.  Option pain suggests that this could come down towards my strike by the end of the week:

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SQM was Put to Me

I sold SQM 180216P55 on 1/18 for $0.95.  Friday's SQM close was $54.56, so I was put the stock at $55.00

From a Greenfield perspective, SQM meets all of my criteria.  I do not mind holding this stock at all, except that a month is a long time to wait for the next OE :)

SQM reports earnings on 2/28, after the close.  I am expecting that EPS will be higher but revenues will be lower, and given where we are in the ER cycle as a whole, I think they will get punished.  

An ATM credit straddle is showing about $3.20 expected movement from Friday's close, using the March expiration.  Of course, this needs to be re-evaluated the day prior to ER, but this suggests that I should be looking to sell a call at least above $54.56 + 3.20 > $57.76, or at a strike greater than $58.  The nearest strike is $60, so at a bid premium of $0.80, let's see if it meets the 20% requirement.  With 25 days left to March expiration, we have:

$80 / $5500 * 365 / 25 = 21.2%

Barely.  The delta at the 60 strike is 0.26, which (loosely) infers that there is a 74% chance of being OTM and holding the position at OE.  I like deltas 0.20 or lower.  

The order for Tuesday (Monday is a holiday) is STO 180316C60 limit $0.85.

SQM Trade Analysis

If the price of SQM rises above $60, I'll make $500 from the stock appreciation (put to me at $55 and called away at $60), plus the premium from the CSP of + $94 (incl comm), plus this CC premium of $79 (premium of $80 less $1 comm), so $173 in total premiums, for a total of $673.  The original amount invested was $5500 on 1/18 (cash secured put), so for 33 + 25 = 58 total days the annualized return is (673/5500) * 365/58 = 77%.

If the price of SQM is above $55 but below $60 then I'll still have the amount above $55 as paper profit plus the banked premium of the CSP ($94 incl comm), plus the banked CC premium of $79 (incl comm).  The call will expire worthless and I keep the premium.  The AROO for all premium received ($173 incl comm) and amount tied up ($5,500) is 19.8% (= $173 / $5500 * 365 / 58).  I could sell the shares on the market to collect the paper profit or I could sell another call against the underlying.

If the price of SQM is below my new break even of $55.00 - $0.94 (CSP) - $0.79 (CC) = $53.27 (3.14% reduction off of retail) or lower I'll still be underwater (but owning a quality stock).  I keep all the premiums and will sell another call to further lower my basis.

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I have the following CSPs in play right now:

EXEL 180316P25
SRNE 180316P5
ECHO 180316P25
SQM 180316P50
SAIA 180316P70
NAV 180309P35
PYPL 180223P75
COP 180223P55

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If you see anything wrong in my calculations, please let me know.  I think I have all of the bugs out of the spreadsheet that I used, but ya never know until others look at it.

As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.

Regards,

pgd