Just was assigned MRO, now what?

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There is an earlier update from Sunday, March 4th, that can be found here:  https://greekgodtrading.blogspot.com/2018/03/march-3rd-csp-and-cc-weekend-update.html   

That update provides the weekend overview that I normally do -- this entry is focused on the analysis of MRO.

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MRO

I was just assigned MRO as of the close on 3/2; now what?

First, let's look at the accounting that got me here:

• MRO 180302P15 was sold on 2/26 and I collected $16 per contract at $1 commission per contract, for a total of ($16-$1) * 3 contracts = $45 total.  MRO closed at $14.86 on 3/2, below my strike, so 300 shares were put to me.  The duration was 5 days, inclusive of start/ending dates.  ROO was $45/4500 = 1% and AROO was 1% * 365 / 5 = 73%.  My new basis for the stock is $15.00 - $0.15 = $14.85, inclusive of commissions.

Step 2:  Has my position changed on whether I should own MRO?

• ER:  MRO does not report earnings until 5/16, after the close.  This is far in the future, so no worries.
• Dividends:  MRO went ex-Div on 2/20.  This is prior to ownership of both the put option as well as shares, so nothing here to consider.
• Earnings:  MRO could be getting into trouble here, as a number of analysts are predicting a bumpy road ahead.  See here and here.  If there was a reason not to hold onto MRO, this is it.
• Revenues:  MRO looks like it will continue to have solid revenue numbers on both a QoQ and YoY basis.  See here.
• Price:  As I write this, the close on Friday 3/2 at $14.86 was -15.2% below the 50-day MA.  The 200d MA < 150d MA < 50d MA, which is a long-term uptrend on the stock.  I note that the 100d EMA < 50d EMA, which is shorter-term bullish, but the trend on the 50d EMA and 100d EMA are both downward, which is ominous.  See the chart that follows:

Click on the image to enlarge.

The chart shows the following additional price info:

1. The RSI is in oversold territory.  This suggests a move upward, but of course, we do not know when.  We could continue lower at this pace and RSI would remain at these low levels, indicating that a turn around is just around the corner, when it is not.  
2. We are walking down the lower Keltner channel.  Generally this is a bullish indicator, but you can see that we are not making new highs but are continuing to make lower lows.  This too suggests a move upward at any time, but right now the trend is downward.
3. The Know Sure Thing (KST) lines are starting to converge, and when the black line intersects the red line from below, we'll have some confidence of being bullish in MRO.

Answer to Step 2:  No, I am still bullish on MRO, but not across earnings.  It appears that their next ER will be negative, so I'll want to be clear of the stock by then.  Everything else suggests that the downtrend is abating and we could turn upwards at any time.

Step 3:  Selecting the CC

Much of this is moot -- I was put the stock and now I own 300 shares at a $14.85 cost basis.  We are about to move higher, but we are early.  It makes sense to shorten the outlook and since we have weekly options available, keeping the time short to sell calls is a good objective.

Let's look at ITM --> ATM --> OTM calls for 3/9.  Here are the probabilities of MRO being above/below a certain dollar amount on 3/9:

Click on the image to enlarge.

• ITM:  The in-the-money call for MRO (MRO 180309C14.5, open interest 24 contracts) has a bid/ask of $0.56/0.60, so the likely fill would be $0.57 and including commissions, $0.56.  The ROO would be $56/1485 = 3.78% and the AROO would be 3.78% * 365 / 5 days to expiration = 275%.  The new cost basis would be $14.85 - $0.56 = $14.29.  If called away (almost guaranteed), I would make ($14.50 - $14.29) = 0.21, so the total return on the chain would be 21/1429 = 1.47%.  Because the chain started on 2/26 and could end on 3/09 this is 12 days, inclusive of starting and ending dates, and the annualized return would be 1.47% * 365 / 12 = 44.7%.  The chance of being called away (measured from 3/4) is 70%.

• ATM:  The at-the-money call for MRO (MRO 180309C15, open interest 274 contracts) has a bid/ask of $0.28/0.31, so the likely fill would be $0.29, and including commissions, $0.28.  The ROO would be $28/1485 = 1.89% and the AROO would be 1.89% * 365 / 5 days to expiration = 138%.  The new cost basis would be $14.85 - $0.28 = $14.57.  If called away, I would make ($15 - $14.57) = 0.43, so the total return on the chain would be 43/1457 = 2.95%.  Because the chain started on 2/26 and could end on 3/09 this is 12 days, inclusive of starting and ending dates, and the annualized return would be 2.95% * 365 / 12 = 89%.  The chance of being called away (measured from 3/4) is 42%.

• OTM:  Let's look at the 15.50 call (MRO 180309C15.5, open interest 243 contracts), which has a bid/ask of $0.11/0.14 and would provide a likely fill at $0.12.  Including commissions this would drop to $0.11.  The ROO would be $11/1485 = 0.74% and the AROO would be 0.74% * 365 / 5 = 54%.  The new cost basis would drop to $14.85 - $0.11 = $14.74, inclusive of commissions.  If called away, I would make ($15.50 - $14.74) = $0.76, so the total return on the chain would be 76/1474 = 5.16%, and the annualized return would be 5.16% * 365 / 12 = 157%.  I note that the table above suggests that there is only an 18% chance of this occurring (measured from 3/4) so I would have to be content with making the ROO of 0.74%, lowering the basis to $14.74, and achieving a 54% AROO on the leg.

While I'm here, let's look at the 16 call (MRO 180309C16), which has a bid/ask of $0.04/0.06 and would most likely fill at $0.04 (maybe 0.05, but midpoints are rarely taken).  With commission this would drop to $0.03.  The ROO would be $3/1485 = 0.2% and the AROO would be 0.2% * 365 / 5 = 14.8%.  This is getting into my minimum AROO that I will take on a position -- 12% to 24%, so I'd rather not go here.

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Often, buying in the same week leaves some money on the table.  Let's do the same analysis with the 3/16 OE:

Here are the probabilities of being above/below a given strike, using 40% historical volatility and 12 days to expiration:

Click on the image to enlarge.

• DEEP ITM:  The in-the-money call for MRO (MRO 180316C14, open interest 254 contracts) has a bid/ask of $1.04/1.09, so the likely fill would be $1.06 and including commissions, $1.05.  The ROO would be $105/1485 = 7.07% and the AROO would be 7.07% * 365 / 12 days to expiration = 215%.  The new cost basis would be $14.85 - $1.06 = $13.79.  If called away (almost guaranteed), I would make ($14 - $13.79) = 0.21, so the total return on the chain would be 21/1379 = 1.52%.  Because the chain started on 2/26 and could end on 3/16 this is 19 days, inclusive of starting and ending dates, and the annualized return would be 1.52% * 365 / 19 = 29.3%.  The chance of being called away (measured from 3/4) is 79%.

• ITM:  The in-the-money call for MRO (MRO 180316C14.5, open interest 459 contracts) has a bid/ask of $0.70/0.75 so the likely fill would be $0.72 and including commissions, $0.71.  The ROO would be $71/1485 = 4.78% and the AROO would be 4.78% * 365 / 12 days to expiration = 145%.  The new cost basis would be $14.85 - $0.71 = $14.14.  If called away (probable), I would make ($14.50 - $14.14) = 0.36, so the total return on the chain would be 36/1414 = 2.55%.  Because the chain started on 2/26 and could end on 3/16 this is 19 days, inclusive of starting and ending dates, and the annualized return would be 2.55% * 365 / 19 = 48.9%.  The chance of being called away (measured from 3/4) is 63%.

• ATM:  The at-the-money call for MRO (MRO 180316C15, open interest 3,374 contracts) has a bid/ask of $0.43/0.46, so the likely fill would be $0.44, and including commissions, $0.43.  The ROO would be $43/1485 = 2.90% and the AROO would be 2.90% * 365 / 12 days to expiration = 88%.  The new cost basis would be $14.85 - $0.43 = $14.42.  If called away, I would make ($15 - $14.42) = 0.58, so the total return on the chain would be 58/1442 = 4.02%.  Because the chain started on 2/26 and could end on 3/16 this is 19 days, inclusive of starting and ending dates, and the annualized return would be 4.02% * 365 / 19 = 77%.  The chance of being called away (measured from 3/4) is 44%.

• OTM:  Let's look at the 15.50 call (MRO 180316C15.5, open interest 935 contracts), which has a bid/ask of $0.24/0.25 and would provide a likely fill at $0.24.  Including commissions this would drop to $0.23.  The ROO would be $23/1485 = 1.55% and the AROO would be 1.55% * 365 / 12 = 47%.  The new cost basis would drop to $14.85 - $0.23 = $14.62, inclusive of commissions.  If called away, I would make ($15.50 - $14.62) = $0.88, so the total return on the chain would be 88/1462 = 6.02%, and the annualized return would be 6.02% * 365 / 19 = 116%.  The chance of being called away is 28%, measured from 3/4.

• DEEP OTM:  Let's look at the 16 call (MRO 180316C6, open interest 1679 contracts), which has a bid/ask of $0.12/0.13 and would provide a likely fill at $0.12.  Including commissions this would drop to $0.11.  The ROO would be $11/1485 = 0.74% and the AROO would be 0.74% * 365 / 12 = 22%.  The new cost basis would drop to $14.85 - $0.11 = $14.74, inclusive of commissions.  If called away, I would make ($16 - $14.74) = $1.26, so the total return on the chain would be 126/1474 = 8.55%, and the annualized return would be 8.55% * 365 / 19 = 164%.  The chance of being called away is 15%, measured from 3/4.

Summary with the 3/16 OE:

• MRO 180316C14:  ROO:  7.07%, AROO: 215%, New Basis if NOT Called: $13.79, Chance of Being Called:  79%, Overall return on entire chain if called: 1.52%, Annualized return on entire chain if called:  29.3%
• MRO 180316C14.5:  ROO:  4.78%, AROO: 145%, New Basis if NOT Called: $14.14, Chance of Being Called:  63%, Overall return on entire chain if called:  2.55%, Annualized return on entire chain if called:  48.9%
• MRO 180316C15:  ROO:  2.90%, AROO: 88%, New Basis if NOT Called: $14.42, Chance of Being Called:  44%, Overall return on entire chain:  4.02%, Annualized return on entire chain if called:  77%
• MRO 180316C15.5:  ROO:  1.55%, AROO: 47%, New Basis if NOT Called: $14.62, Chance of Being Called:  28%, Overall return on entire chain if called:  6.02%, Annualized return on entire chain if called:  117%
• MRO 180316C16:  ROO:  0.74%, AROO: 22%, New Basis if NOT Called: $14.74, Chance of Being Called:  15%, Overall return on entire chain if called:  8.55%, Annualized return on entire chain if called:  164%

Summary with the 3/9 OE:

• MRO 180309C14.5:  ROO:  3.78%, AROO 275%, New Basis if NOT Called: $14.29, Chance of Being Called:  70%, Overall return on entire chain if called:  1.47%, Annualized return on entire chain if called: 44.7%
• MRO 180309C15:  ROO:  1.89%, AROO 138%, New Basis if NOT Called: $14.57, Chance of Being Called:  42%, Overall return on entire chain if called:  2.95%, Annualized return on entire chain if called: 89%
• MRO 180309C15.5:  ROO:  0.74%, AROO 54%, New Basis if NOT Called: $14.74, Chance of Being Called:  18%, Overall return on entire chain if called:  5.16%, Annualized return on entire chain if called: 157%

Discussion of Strike Selection of Tradeoffs:

• In general, selling the ITM strike may benefit me in the short term with the higher ROO on the leg, but the entire chain return is lower because the spread between the lower basis and the call strike limits the overall gains (sell put -> put stock -> sell call -> called away = chain).  That's not my goal.  My goal is to maximize the overall gains from the entire chain, because the money is tied up and it needs to be working hard from the moment the initial put is sold to when the stock is called away.
• The flip side of this is that it is not a bad goal to have the call expire worthless (e.g. stock price closes below the call strike) and then sell a new call.  The continued lowering of the basis every time this occurs is another desired outcome, because when the stock is finally called away, the maximum profit occurs between the basis and the strike price.  Hence, lowering the basis of the chain is a major goal too.
• Take a look at the ATM calls for both 3/9 and 3/16.  Both have roughly the same probability of being ITM at options expiration (44% for the 3/16 vs 42% for the 3/9).  I note the following when looking at these two:
  
  a)  The cost basis is lower for the March 16 $15 call than for the March 9th.  If the stock is not called away, this will matter.  This points to selling the March 16 OE series.
  
  b) The ROO for the option leg is higher for the March 16th $15 call:  4.78% vs. 1.89%.  This makes sense, since going out in time generally results in collecting more premium.  This too points me to the March 16 OE series.
  
  c) if the stock is called away, I'm better off from the "entire chain" perspective with the March 16th $15 call than with the March 9th.  The difference is 4.02% vs. 2.95%, but because of the time portion that the money is tied up, the 3/9 OE has better annualized numbers (12 days vs. 19 days).  We put dollars in the bank, not annualized numbers, so for me, collecting over 1% more for the same risk is more attractive.  This points me to the March 16 OE series.
• Personally, I like probabilities that are 30% or less of being ITM at OE.  This suggests that the March 16 15.50 call or the March 16 16.00 call are my candidates.  The 15.50 call has the lower cost basis if NOT called ($14.61 vs. $14.74), which is one of my goals, so this is what I'm selling:

STO 3 MRO 180316C15.5 limit 0.24 GTC.

As always, this is NOT a recommendation for you.  It's what *I* am going to do.  Your individual situation may be very different from mine and this could be a rabbit hole in your universe.

Final Analysis on MRO 180316C15.5 limit 0.24

If the sale goes through and I'm filled at $0.24 my basis will be lowered by ($0.24 - $0.01 commission) = $0.23, which will be $14.85 - $0.23 = $14.62.  

Case 1:  Stock is below $15.50 at OE.  The option expires worthless and my new basis remains $14.62.  Time to sell another call.

Case 2:  Stock is above $15.50 at OE.  The stock will be called and my profit will be $15.50 - $14.62 = $0.88, inclusive of commissions.  The total return on the chain would be 88/1462 = 6.02%, and the annualized return would be 6.02% * 365 / 19 = 116%.

Here's the profit/loss chart:

Click on the image to enlarge.

Note that there are 3 contracts being sold because I have 300 shares of MRO.  

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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.  Nothing I've written here is to be considered investment/trading advice -- it is only provided for educational purposes.

Regards,

pgd

March 3rd CSP and CC Weekend Update

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Summary

The following trades were placed this week:

Click on the image to enlarge.

There are two images because I am trading two accounts and TradeStation will not permit a combined orders retrieval across all managed accounts.

Details

Here is the accounting:

All of the GTC orders that are shown were automatically closed out once the underlying had moved far enough away from the associated option strike that the option was virtually worthless.  If you are not doing this with your CSP or CC trades, you should.  Guidance from many is that this should be done around 50%-80% of the overall premium collected; I just set it at $0.05 and leave it at that.  The benefit of doing this is that it releases the money obligated under the CSP earlier than options expiration (OE), and this allows you to place another trade earlier.  The pennies add up.

• ETFC 180302P50 was sold on 2/22 and I collected $32 at $1 commission.  I bought the position back on 3/2 for $0.05, netting $32 - $5 - $2 (commissions) = $25.  The duration was 9 days, inclusive of start/ending dates.  ROO was $25 / $5000 = 0.50% and AROO was 0.50% * 365 / 9 = 20%, including all commissions.
• INTC 180302P45 was sold on 2/21 and I collected $28 at $1 commission.  I bought the position back on 3/2 for $0.05, netting $28 - $5 - $2 (commissions) = $21.  The duration was 10 days, inclusive of start/ending dates.  ROO was $21 / $4500 = 0.47% and AROO was 0.47% * 365 / 10 = 17%, including all commissions.
• SQM 180316C60 was sold on 2/20 and I collected $85 at $1 commission.  I bought the position back on 3/1 for $0.05, netting $85 - $5 - $2 (commissions) = $78.  The duration was 10 days, inclusive of start/ending dates.  ROO was $78 / $5406 = 1.44% and AROO was 1.44% * 365 / 10 = 53%, including all commissions.

Note that for this SQM call I'm using a $5,406 basis (not the strike) which was described in last week's blog here.  This lower basis, which results due to the stock being purchased through selling the SQM 180216P55 put, is the true cost of the position from the call perspective.

Because the SQM March 60 Call was closed and my net was $78, the new basis for any further work based on this position is $54.07 - $0.78 = $53.29, not the $55 as shown in my TradeStation registry.

• MRO 180302P15 was sold on 2/26 and I collected $16 per contract at $1 commission per contract, for a total of ($16-$1) * 3 = $45.  MRO closed at $14.86 on 3/2, below my strike, so 300 shares were put to me.  The duration was 5 days, inclusive of start/ending dates.  ROO was $45/4500 = 1% and AROO was 1% * 365 / 5 = 73%.  My new basis for the stock is $15.00 - $0.15 = $14.85, inclusive of commissions.
• ROKU 180302P40 was sold on 2/23 and I collected $75 at $1 commission.  ROKU closed at $37.60 on 3/2, below my strike, so 100 shares were put to me.  The duration was 8 days, inclusive of start/ending dates.  ROO was $74/4000 = 1.85% and AROO was 1.85% * 365 / 8 = 84%.  My new basis for the stock is $40.00 - $0.74 = $39.26, inclusive of commissions.

I am presently holding the following positions:

"Red" means that the position is moving against me (paper losses) and "Green" indicates that I have paper profit.  I do not put too much consideration into the colors given the amount of calendar days between now and contract expiration for each of the options.  I also do not worry so much about the stock positions being underwater, as this is by design for MRO and ROKU, since these were just put to me and by definition, will be underwater.

Note:  SQM's average price is incorrect.  As I disclosed in last week's blog (here), SQM was put to me at $55 on 2/16.  I sold SQM 180216P55 on 1/18 for $0.94 and sold the 60 call on this for $0.78 (see above), both inclusive of commissions, so the basis should be lowered by $0.94 + $0.78 = $1.72, resulting in a real average price of $53.28, not $55.00.  TradeStation does not chain transactions, nor does it give me the ability to chain transactions, so it has no knowledge in the reports of what the true cost basis should be.

ROKU and MRO also show an incorrect average price.  The correct values were calculated above ($39.26 and $14.85, respectively).

4 new positions were opened during the past week (MRO 180302P15, NAV 180309P35, BOOT 180420P15, and MZOR 180316P60), resulting in the collection of (3 x $0.15) +  (2 * $0.34) + (5 * $0.39) and (1 * $1.34) = $4.52 being collected, adjusted for commissions, respectively.  Starting account value for the beginning of the week was $75,283, so this represents a capture of $452 / $75283 = 0.6%, inclusive of commissions.  Annualized, this translates into 0.6% * 365 / 5 = 44%.  Note that I close these for $0.05 each and with 10 contracts (11, but MRO was already put to me), the buy-back of the positions could reduce the premium collected by $5 * 10 open contracts = $50, so the worse-case annualized value would be ($452 - $50) / $75283 * 365 / 5 = 39%. 

I didn't put the previous week's premium collection into last week's blog, so here it is:

Total premium collected was $3.87 - $0.08 (commissions) = $3.79 in the top account and $1.55 - $0.06 (commissions) = $1.49 = $5.28.  The annualized value is in alignment with what I showed above.

Strategy for the Upcoming Week

NAV

NAV is scheduled to report earnings on 3/8, before the open, which is this Thursday.  Earnings are expected to take a significant hit, so I expect volatility to increase a significant amount.  I presently hold the NAV 180309P35 contract in both accounts so am slightly overweight from where I normally like to be.

The closest at-the-money call bid is the March 9th 36.50 Call which is at $1.40.  The same put strike is $1.70.  These two ATM bids suggest that the market is expecting a $1.40 + $1.70 = $3.10 swing in price, either way, with a 68% chance of occurring.  From Friday's close we could see a 68% chance of prices moving from $36.06 +/- $3, which fully incapsulates my put strike.

I find it illustrative to understand where option maximum pain exists for a given contract.  Here's the view as of 3/4:

This suggests that option pain is well above my put strike at $40.50 but there is no guarantee that underlying will close at maximum pain.  This is only a guide and it suggests that we will move up from here.

Another useful chart is this:

Click on the image to enlarge.

I take away the following from this chart (online version here):

1. The 50d EMA is above the 100d EMA (which is good), but both are in a downtrend (which is worrisome if it continues.
2. We are walking down the lower Keltner channel line, which is a possible buying opportunity.  Note that we need prices to move upwards from here to actually enter.  Nevertheless, this indicates that we are oversold.
3. The RSI is REALLY oversold.
4. The Know Sure Thing line is starting to converge from below.  When this occurs, we have a buy signal.

It appears that selling the March 9th 35 Put may have been premature, but it is what it is.  If I am put the stock, there are several indications that it will move up from here.  We'll see.

Based on the above, I'm not taking any action in NAV prior to earnings release.  I think it will move upward, but your crystal ball is as good as mine...

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LVS

Las Vegas Sands doesn't report until April 25 so nothing to worry about there.

The max-pain chart suggests that price will continue to move up this week from the close of $71.51 to (ideally) $75:

Again, note that the underlying does not "need" to move up -- this simply is the ideal point where people lose the most money.

Stockcharts for LVS is relatively bullish from here:

I take away the following from this chart (online version here):

1. The 50d EMA is above the 100d EMA (which is good) and both have a positive slope.  This is fully bullish.
2. We just touched the lower Keltner channel line, which is a possible buying opportunity if the price starts closing above the previous day's high.
3. The RSI is oversold and has typically rallied from this level.
4. The Know Sure Thing line is bearish on the long side and does not indicate that a long position should be held.  Given this, being put the stock on Friday, if this is the case, could be premature.

Like NAV, nothing to do here before OE this Friday.  I'm just presenting this as food for thought.

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SQM

SQM is the only stock that I own that is seriously underwater.  Because I was not paying attention, I did not reserve enough capital in my account to adjust the position with unlimited degrees of freedom, so my flexibility is limited.

Here's the option pain for the March 16 OE:

As you can see, Friday's close of $46.73 is well below the option pain of $55 for March.  Here's the April chart:

Same presentation, although the bias is lower at $53.44.  Note that options for SQM trade in $5 increments.

This all being said, there is little chance of the price closing above $55 by 3/16:

Click on the image to enlarge.

The chart above tells me that at the current volatility (HistVol = 47%), there is only a 6% chance that the price will claw it's way back to $55 by 3/16.  Your guess is as good as mine as to how far it will recover by then, if at all.

Here's the chart:

Same analysis as the prior two stocks -- but note that the KST is whipsawing around itself AND is at a good, historically low value.  This and the Keltner channel tracking suggest that we will move up from here.

The link for this chart is here.

Given that my only real degree of freedom here is to sell a call, and that the $60 calls are presently worthless, and that my break-even is $53.28, my only option is to sell the March 55 or April 55 call.  The chances of the March 55 call being hit is only 9% on 3/16 (shown previously); here are the probability chart for the April 55 call:

Click on the image to enlarge.

Going out a month to the April 55 call suggests that I improve the odds of being ITM by about 13%, from 6% to 19%.  Neither is very likely but obviously, April 55 is more likely than March 55.

Let's do the numbers.

Let's consider the SQM 031618C55 March 55 call, noting that it only has a 9% chance of happening.

Using the bid, the premium I could collect is $5.  My basis on the call is $53.28, so the ROO is ($5 - $1)/5328 = 0.08%, inclusive of commissions.  The number of days between Monday morning, 3/5 and OE on 3/16 is 12 days, so the annualized return on option (AROO) is 0.08% * 365 / 12 = 2.3%, inclusive of commissions.  My new basis will be $53.28 - $0.04 = $53.24.  If the stock closes above $55 on 3/16 I'll make ($55 - 53.24) * 100 = $176 and the leg will close out with 176/5324 = 3.31% ROO.  Since this entire chain started with the sell of SQM 180216P55 on 1/18 and this would be the end of the chain, the total days between 1/18 and 3/16 would be 58 days and the AROO on the entire chain would be 3.31% * 365 / 58 = 20.8%, inclusive of commissions.  Remember, the chances of capturing the 20.8% are less than 6% -- more probable is only capturing an additional 2.3% (annualized) from selling the call, and the leg would continue after 3/16.

Now, let's look at the April 55 call.  Longer timeframe and correspondingly higher premium.

Using the bid, the premium I collect on the SQM 042018C55 April 55 call most likely would be $70.  My basis on the call is $53.28, so the ROO is ($70 - $1)/5328 = 1.30%.  The number of days between Monday morning, 3/5 and 4/20 is 47 days, so the annualized return on option (AROO) is 1.30% * 365 / 47 = 10.1%, inclusive of commissions.  My new basis will be $53.28 - 0.69 = $52.59.  If the stock closes above $55 on 4/20 I'll make ($55 - 52.59) * 100 = $241 and the leg will close out with 241/5259 = 4.58% ROO.  Since this entire chain started with the sell of SQM 180216P55 on 1/18 and this would be the end of the chain, the total days between 1/18 and 4/20 would be 93 days and the AROO on the entire chain would be 4.58% * 365 / 93 = 18.0%, inclusive of commissions.  Remember, the chances of capturing this 18% are about 19%, with a very high likelihood of capturing an additional 10.1% on selling the call.

This is a no-brainer.  The better path is to sell the April 55 call for at least $70, capture an additional 10% on ROO, lower the basis at least $0.69, and improve my chances of having the stock called away at $55 due to the longer time frame.

The order is STO 1 SQM 042018C55 limit 0.70 GTC.

As always, this is NOT a recommendation for you.  It's what *I* am going to do.  Your individual situation may be very different from mine and this could be a rabbit hole in your universe.

Here's the combined Profit and Loss for the 100 shares that I presently own and selling the call, with the cost basis of 52.28 reflected in the green vertical line.

Click on the image to enlarge.

I note that TradeStation's method suggests that this has a good chance of being ITM on 4/20 -- I'll have to take a note on what volatility they are using to calculate this, as I'm using historical volatility in my charts and for this to be ITM by 4/20, TradeStation must be using something much higher than 47%.

~~~~~~~~~~

So, that's all for today.

I'll update the ROKU call after I get time to analyze it later this week.  I'm a single parent for the next two days while my wife travels, and I'm traveling W-F, so need to work the ROKU analysis in.

Update 3/4 later:  MRO is updated and can be found here:  https://greekgodtrading.blogspot.com/2018/03/just-was-assigned-mro-now-what.html 

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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.  Nothing I've written here is to be considered investment/trading advice -- it is only provided for educational purposes.

Regards,

pgd

Feb 24th CSP and CC Weekend Update

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Summary

This was a busy week for me.  A number of trades were closed, all for a profit.  Here's the trade blotter for the week:

Click on either image to enlarge.

There are two images because I am trading two accounts and TradeStation will not permit a combined orders retrieval across all managed accounts.

Details

Here is the accounting:

• ETFC 180223P51 was sold on 2/21 and I collected $15 at $1 commission.  I bought the position back on 2/23 for $0.05, netting $15 - $5 - $2 (commissions) = $8.  The duration was 3 days, inclusive of start/ending dates.  ROO was $8 / $5100 = 0.53% and AROO was 0.53% * 365 / 3 = 64%, including all commissions.  Barely worth the trouble to do, but I had a great probability of profit when I placed the trade.

You pick up a quarter on the ground when you see it, right?

• COP 180223P55 was sold on 2/5 and I collected $50 at $1 commission.  I bought the position back on 2/23 for $0.05, netting $50 - $5 - $2 (commissions) = $43.  The duration was 19 days, inclusive of start/ending dates.  ROO was $43 / $5500 = 0.78% and AROO was 0.78% * 365 / 19 = 15%, including all commissions.
• AMAT 180223P55 was sold on 2/21 and I collected $25 at $1 commission.  I bought the position back on 2/23 for $0.05, netting $25 - $5 - $2 (commissions) = $18.  The duration was 3 days, inclusive of start/ending dates.  ROO was $18 / $5500 = 0.33% and AROO was 0.33% * 365 / 3 = 40%, including all commissions.
• SRNE 180316P5 was sold on 2/12 and I collected $100 (4 contracts at $25) at $4 commissions.  I bought the position back on 2/22 for $0.05, netting $100 - $20 - $8 (commissions) = $72.  The duration was 11 days, inclusive of start/ending dates.  ROO was $72 / $2000 = 3.6% and AROO was 3.6% * 365 / 11 = 119%, including all commissions.  I like this trade.
• CF 180223P41.5 was sold on 2/21 and I collected $17 at $1 commission.  I bought the position back on 2/22 for $0.05, netting $17 - $5 - $2 (commissions) = $10.  The duration was 2 days, inclusive of start/ending dates.  ROO was $10 / $4100 = 0.24% and AROO was 0.24% * 365 / 2 = 45%, including all commissions.
• PYPL 180223P75 was sold on 2/5 and I collected $100 at $1 commission.  I bought the position back on 2/21 for $0.05, netting $100 - $5 - $2 (commissions) = $93.  The duration was 17 days, inclusive of start/ending dates.  ROO was $93 / $7500 = 1.24% and AROO was 1.24% * 365 / 17 = 27%, including all commissions.
• ITB 180223P39.5 was sold on 2/21 and I collected $10 at $1 commission.  I bought the position back on 2/21 for $0.05, netting $10 - $5 - $2 (commissions) = $3.  The duration was 1 days, inclusive of start/ending dates.  ROO was $3 / $3950 = 0.08% and AROO was 0.08% * 365 / 1 = 28%, including all commissions (note my comment above regarding picking up a quarter that you find on the ground).  Factoring my personal time finding, executing, and documenting this trade here I've lost virtual money, but now I've found my "inside number" on what is too small of a trade.

I have the following positions:

"Red" means that the position is moving against me (paper losses) and "Green" indicates that I have paper profit.  I do not put too much consideration into the colors given the amount of calendar days between now and contract expiration for each of the options.

Note:  SQM's Average Price is incorrect.  As I disclosed in last week's blog (here), SQM was put to me at $55 on 2/16.  I sold SQM 180216P55 on 1/18 for $0.95, so the basis should be lowered by $0.94 (to include commission), resulting in a real Average Price of $54.06, not $55.00.  Note that I've also sold a call against the position, further lowering the basis (see below).  TradeStation does not chain transactions, nor does it give me the ability to chain transactions, so it has no knowledge in the reports of what the true cost basis should be.

I only have three contracts pending for the upcoming weekly expiration on 3/2 and two for 3/9 so feel "light".  Total premium collected for the 3/2 expiration is $32 + $28 + $75 = $135 and for the 3/9 expiration is $45 + $80 = $125. 

Is this light?  Let's look at the total premium collected.

The 3/16 monthly expiration equates to a value of $42*5 + $85 + $115 + $47 + $105 = $562.  This means that I've collected $822 with the weekly and monthly premium, will spend a total in $30 in commissions (15 round-trip contracts), and will most likely buy these back for $5 each (total 15* $5 = $75), so will net $822 - $30 - $75 = $717 on a cost of positions of  $47,906.  This is 1.50% return in total gain, and if we annualize it across the earliest entry to 3/16 (29 days from 2/16), it equates to 1.50% * 365 / 29 = 18.9% on the amount obligated, including commissions and buy-back costs.  Note that this is the minimum annualized rate -- because many of these positions have been added since then, and expire BEFORE 3/16, the actual number is between the number from the 2/16 date (18.9%) and yesterday's close (2/23, 22 days), which produces an annualized rate of 24.9% on the invested capital.

Of course, this is with all of these options expiring worthless.  There is a considerable amount of water to flow under the bridge between now and 3/16, so this may all be moot.

Another consideration is that SQM has earnings this coming week.  I hate holding a position across earnings, although if you look closely, I have both a CC as well as another CSP in place on SQM.  The implications of this are significant -- I'm heavily weighted to falling off the cliff below $50.  Here's the P/L chart:

Click on the image to enlarge.

Above $60 my profit is capped.  Below $50 I fall off at a delta of -2.00:  -1.00 for the stock that I own and another -1.00 once the $50-strike is put to me.    My current breakeven on SQM, since I sold a call against it, is the previous value of $54.06 (55 strike less the premimum received offset by commission $95 - $1) less the amount received on selling the covered call.

I received $85 less $1 commission on the covered call, so my new basis for SQM is $54.06 - $0.84 = $53.22.  Soooooo, I'll make money as long as the price remains above $53.22, but below this I start losing at a delta of -1.00, and once expiration kicks in, I start losing at the -2.00 rate.

To get an idea of what the crowd thinks will happen, it is useful to look at an at-the-money (ATM) credit spread in SQM.  The closing price on 2/23 was $58.01.  The bid for the 60 strike on the call side is $1.55 and the 55 strike on the put side is $0.90.  Together, we have $2.45 as an expected standard deviation move, so we could see (at any time) a move from $55.50 to $60.50 (rounded numbers -- this isn't an exact science).  A 2-standard deviation move is call: (1.55+0.35) + put (0.90 + 0.30) = $3.10 each way, so the market thinks that there is only an 15% chance the price will drop outside of $58-3.10 = 54.90 or $58+3.10 = 61.10.

This analysis needs to be done the day just before earnings reporting, but I think my break-even of $53.22 is safe.  There is no adjustment that I need to do right now, unless I want to close the 50-strike put and not be exposed as sharply on the down side.

My bias on SQM is that earnings will improve but revenues will drop, causing the stock to drop.  I think the 50 put strike and 60 call strike are safe, and if the stock does go over 60, I'll have $500 in gains from the stock being put to me at $55 (($60-$55) * 100).

Takeaways

Takeaway on SQM earnings:  there is no reason to adjust anything because my break-even is so low (outside of the 2-standard deviation expected move on Monday, 2-days before earnings), and if it moves higher outside of $60, my gains will offset any negative downside.

Your takeaway on the CSP-CC strategies that I am employing is that these methodologies are producing an annual gain of between 18% and 25%, on invested capital, depending upon how you run the numbers.

The other takeaway is that it will pay to be fully invested...  or will it?

The risks of this method are significant:

1. An exogenous event, such as what occurred to VMW last month, took the share price from over $150 to around $108.  It's trading around $126 as I write this.   If you sold anything lower than $142 strikes for a February expiration you were put a stock substantially below your break-even.   While it's possible to climb out of the hole, you're selling premium for a long time on an uncertain stock just to get back to even (remember, you only want to do this on stocks that you want to hold).  If I were fully invested and were put the stock at a deep in-the-money level I would not have any other capital to deploy as the market dropped and stabilized until I unloaded several positions.  Having to wait until they recover may mean I miss significant opportunities to repair the damage because I have no capital to do so.
2. Option premium is dropping right now, not increasing.  I'm being paid less to take the same amount of risk, relative to a higher market volatility.  If I have no capital to invest because I'm trying to maximize the gains I can pocket right now, then I cannot move into positions that stand to gain as the market conditions change until I unwrap my current positions.

So, the "other" takeway is NOT to be fully invested -- but to have some cash in reserve so as market conditions change, opportunities can be taken advantage of when they present themselves and in the natural course of order flow, not some manually-forced liquidation of positions prior to expiration or when value in the option has collapsed to near zero.

Right now I have $21,714 sitting on the sidelines, or about 31% of my account capital, waiting for opportunities to present themselves.

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Final Thoughts

Final Thought 1:  I was having lunch with a colleague last weekend and he and I were talking about how skeptical we were regarding the gains reported by others from selling CSPs or CCs.  This is why I'm being transparent in my numbers to you -- it forces me to go through the math and analyze the rewards as well as the risks, which I do not think others do.  If I'm presently achieving 18% annualized gain but am only 69% invested, straight-line math shows 18% * 69% = 12% annualized gain is realistic, for the entire portfolio, if no exogenous events occur over the next year.  There is ALWAYS an exogenous event around the corner so my actual gains most likely will be lower.  I know this, and I respect this.

Final Thought 2:  I alluded to it above, but after reading the published blog, I'm editing and adding this comment to be more explicit.  Money management is key to attaining ANY given rate of return.  If we have $100,000, and we have a series of alternatives, e.g. the 1-month Treasury risk-free rate of 1.33% (see link here), then we had better be collecting premium that at least beats this alternative, whatever it is, in the time frame of the contract (note that this flies against my comment above regarding "picking up a quarter on the sidewalk").  The key takeaway though is that the timeframe that capital is tied up really impacts this value.  For example, 8% yearly simple interest on $100,000 is .... wait for it .... $8,000.  Bi-monthly, which is 6 periods, indicates that to attain a 8% simple interest on $100K I must be collecting $1,333.33 every 2 months or I will fail.  Contrasting, I have to collect $666.67 every month to hit 8%.  If I invest in weeklies that are 2 weeks out I have to make sure that on those bi-weekly contracts I'm collecting $307.69 to hit 8% simple interest.  If I'm investing in weekly contracts then I need to regularly collect $153 in premium, week over week.  This really sets the minimum account/position size that you can safely trade.  It also presumes no exogenous events, and see my note in Final Thought 1 regarding this.  More on these rules in future blogs...

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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.  Nothing I've written here is to be used as a recommendation to buy/sell any security -- you need to do your own work.  I'm simply giving you a detailed glimpse into my thinking.

Regards,

pgd

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

Being Assigned is Not Necessarily Bad

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Investing in cash-secured puts (CSPs) and covered-calls is a cyclic process.  Here's a flow-chart that captures the essence:

I was assigned a few positions this weekend after a few of my CSPs were in the money (ITM) as of yesterday's (2/5) close.  What follows is an accounting of the math I'm using to show the CSP side of the equation, snapshot the picture facing me immediately after assignment, and see how to turn these into winning trades.

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Three stocks were assigned this past weekend:  AMAT, MU, and SQ.  I go into some detail on AMAT and the calculations, but condense this analysis for MU and SQ.

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First Assignment:  AMAT

Rule 1 of CSPs:  only sell puts on stocks that you would have no issues owning.  AMAT is a quality stock in terms of EPS and revenue growth. 

I sold the weekly AMAT 180209P50 on 2/5 for a credit of $41.00 ($0.41 * 100).  At the time the price was $51.35, and the historical volatility was 43%.

If the price closed above $50 the unexercised return on the option (UROO) would have been 0.81% including commissions; I typically try to buy these back at $0.05 or $0.10.  Using the $0.05 value my actual closed return on the option (CROO) would have been 0.69%.  The annualized return on the option (AROO) using the forced closed numbers, and knowing there are only 4 days that the order is alive, results in a AROO calculation of 62.54% (  = CROO * 365 / # days to exp ), including round-trip commissions ($2 total).

If assigned, breakeven for the stock is the strike price minus premium + commission, or $50 - $0.41 + 0.01 = $49.60.

The underlying closed ITM at $48.35, so the stock was assigned to me overnight.  The average price from my broker is the strike price of the put, in this case, $50.00/share.  

Any rise in the price above $49.60 is profit.  If I sell a call against it, as long as the call is above $49.60 (less the premium received), I'll make money.

So, what to do next?

AMAT is coming up on an earnings release next week, Wednesday, Feb 14, after the close (ATC).

I'm slightly bullish on AMAT in terms of REV and EPS, so I think it will bump to the upside.  

There are a couple of ways to calculate an expected move:

(1)  The first way to calculate the range is to see what the market thinks the current range could be.  Of course, this needs to be recalculated just before earnings release, and that's not always feasible (it certainly is not for me). In general, the expected trade range can be calculated using a short at-the-money (ATM) credit straddle, multiplying this by 0.85 (see this link), and then adding/subtracting it to the current price.  The $48.50 strike has a call bid of $1.63 and the put bid is at $2.13.  Doing the math shows that we could see a move of +/- $3.20 or so if the earnings report was tomorrow.  This gives us a rough expected range of $45.15 to $51.55.  Using this method, as long as my call is above $51.55, there would only be a 32% chance of having the position called away (e.g. a 68% chance exists that the price would be below the strike if it were perfectly at $51.55).

(2) Method 2 is the same as method (1) above but does not multiply by the 0.85.  Link here.  This suggests that we have the credits for the ITM short call and put totalling $3.76 and with the last close of $48.35, the implied volatility is 7.78% with 7 days to go (3.76/48.35).   Multiplying the last close by 1.0778 = $52.11.

Method 2 is more conservative so I'm going to use that for now.

So, it appears as long as I have a strike above $52.11 there will be a better than 68% chance that I will be out of the money (OTM) on expirations day.

The delta of a specific option can be taken as the percent likelihood that the position will finish ITM.  This is not an exact 1:1 relationship, but it's close enough, certainly to the nearest 10% or so.

I like any delta less than +0.3 for selling calls and less than -0.3 for selling puts.  I also require that any call or put I purchase have an AROO in excess of 20% (annualized).

5 trading days exist between me and expirations. If I require an annualized return of at least 20% and I have only 5 days left, the equation is:

20% * 5 / 365 = CROO (Closed Return on Option) = 0.27%

So, any premium that results in me getting at least 0.27% in 5 days is worthy of my efforts.

My cost basis on the stocks is my break-even * 100 shares, or $4,960.

0.27% of my cost basis is $13.59, or $0.14.  Because there is a $1 commission in here I'll add another $0.01 to show I need at least an option premium of $0.15 to make this 20% minimum.

So, here's the criteria for selling the call:

1) It has to be of a strike higher than $52.11.  This implies at least $52.50 or $53.
2) Whatever the strike, I have to collect at least $15, and prefer to do it with a delta under 0.3.

One (laborious) way I do this is plot the bid/ask midpoints/delta for each of the call strikes, and look for discontinuities in the curve.  Here's an example for AMAT and call options that expire on 2/16 (this week):

This plot shows the change in premium received / change in delta for each strike, as well as the raw premium received / delta.  As you would expect, as the strike moves further away from today's price  the delta drops, and we also see that the premium received also drops.  The ratio is not constant though, and as we get further OTM premium drops faster than delta. This can be interpreted "less chance of a strike being ITM, the lower the premium received".  The red dots are almost in a straight line, but the blue dots are not.

It doesn't always look like this, but the discontinuity for selling an AMAT call at strike = $53 (at a delta of 0.1648, not shown), is kind of a beacon to me to sell this strike.  It basically says "there is an 84% chance that anything you collect here will be pocketed, and although you may collect more at the $52.50 strike, the risk is disproportionate."

Think about it.  The blue dot is change in premium received from the next lower strike / change in delta.  So, when moving from the 52.50 strike to the 53 strike, EITHER the premium did not drop as much or the risk (delta) went down far more than expected.  Discontinuities do not last long in the market so the midpoint price (bid = $0.42 and ask = $0.31) of $0.36 could be a limit sell of $0.30 and still I would make all my targets.

Whatever the cause, the $53 strike calls for me.

A final check is to ensure that there is open interest (OI) at the strike.  The $53 call in AMAT has 717 contracts as I write this.

The order will be STO 1 AMAT 180216C53 Limit $0.30 DAY.

AMAT Trade Analysis

If the price of AMAT rises above $53, I'll make $300 from the stock appreciation (put to me at $50 and called away at $53), plus the premium from the CSP of + $40 (incl comm), plus this CC premium of $29 (premium of $30 less $1 comm), so $69 in total premiums, for a total of $369.  The original amount invested was $5000 on 2/5 (cash secured put), so for 12 total days the annualized return is (369/5000) * 365/12 = 224%.

If the price of AMAT is above $50 but below $53 then I'll still have the amount above $50 as paper profit plus the banked premium of the CSP ($40 incl comm), plus the banked CC premium of $29 (incl comm).  The call will expire worthless and I keep the premium.  The AROO for this premium ($29 incl comm) and amount tied up ($5,000) is 42.34% (29/5000*365/5).  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 AMAT is below my new break even of $49.60 - 0.29 = $49.31 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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2nd Assignment:  MU

I sold MU 180209P41 on 1/29 for a credit of $0.45.  With 11 days to expiration, the unexercised return on option (UROO) was 1.09%, the closed return on option (CROO) was 0.94%, and the annualized return on option (AROO) if I closed early at $0.05 would have been 31.08%.  At the time there was a 78% chance that the option would close OTM.  I sold the -0.2234 delta.  My break-even for the position is $40.56, including commission.

MU closed at $40.54, below the strike of $41, so the stock was put to me.

MU does not report earnings until Thursday, March 22nd, after the close, so there is nothing there to worry about in terms of impact.

Let's take a look at the expected range of MU for the next week:

Short Call bid:  1.07
Short Put bid: 1.67
Total:  2.74

Expected range: 37.80 to 43.28

My target is selling a call at the 43.50 strike or higher.

Here is the plot of "change in premium vs change in delta" for various strikes:

I've put the arrow on the 44 strike because you can see that at lower strikes, the blue dots are below this level -- reward / risk is improving, on a percentage basis, for the $44 and $44.50 strikes, relative to the $43 and the $43.50 strikes.

Yes, I acknowledge that I collect more premium at the $43 and $43.50 strikes, but it's at a higher delta, and this is a higher risk / lower probability that I'll be OTM.

The $44 strike has a delta of 0.163 as I write and a midpoint (premium) target of $0.27.

As from my analysis with AMAT, I am looking to ensure I have at least 20% AROO in the trade.  With 5 days to expiration,  20% * 5 / 365 = CROO (Closed Return on Option) = 0.27%

So, any premium that results in me getting at least 0.27% in 5 days is worthy of my efforts.

My cost basis on the stocks is my break-even * 100 shares, or $4,056.

0.27% of my cost basis is $10.95, or $0.11/share.  Because there is a $1 commission in here I'll add another $0.01 to show I need at least an option premium of $0.12 to make this 20% minimum.  This is well above the $0.27 midpoint at the $44 strike so this delta works.

A final check is to ensure that there is open interest (OI) at the strike.  The $44 call in MU has 22,054 contracts as I write this.

The order will be STO 1 MU 180216C44 Limit $0.25 DAY.

MU Trade Analysis

If the price of MU rises above $44, I'll make $300 from the stock appreciation (put to me at $41 and called away at $44), plus the premium from the CSP of + $44 (incl comm), plus this CC premium of $24 (premium of $25 less $1 comm), so $68 in total premiums, for a total of $368.  The original amount invested was $4,100 on 1/29 (cash secured put), so for 19 total days the annualized return is (368/4100) * 365/19 = 172%.

If the price of MU is above $41 but below $44 then I'll still have the amount above $41 as paper profit plus the banked premium of the CSP ($44 incl comm), plus the banked CC premium of $24 (incl comm).  The call will expire worthless and I keep the premium.  The AROO for this premium ($24 incl comm) and amount tied up ($4,100) is 42.73% (24/4100*365/5).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 MU is below my new break even of $40.56 - 0.24 = $40.32 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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3rd Assignment:  SQ

I sold SQ 180209P41.5 on 1/29 for a credit of $0.30.  With 11 days to expiration, the unexercised return on option (UROO) was 0.73%, the closed return on option (CROO) was 0.61%, and the annualized return on option (AROO) if I closed early at $0.05 would have been 20.13%.  At the time there was a 88% chance that the option would close OTM.  I sold the -0.131 delta.  My break-even for the position is $41.21, including commission.

SQ closed at $39.75, below the strike of $41.50, so the stock was put to me.

SQ does not report earnings until Tuesday, February 27th, after the close, so there is nothing there to worry about in terms of impact.

Let's take a look at the expected range of MU for the next week:

Short Call bid:  1.35
Short Put bid: 1.45
Total:  2.80

Expected range: 36.90 to 42.55

My target is selling a call at the 43 strike or higher.

Here is the plot of "change in premium vs change in delta" for various strikes:

I've put the arrow on the $43 strike because you can see that at lower strike of $42.50, the blue dot is below this level -- reward / risk is improving, on a percentage basis, for the $43 and $43.50 strikes, relative to the  $42.50 strike.

Yes, I acknowledge that I collect more premium at the $42.50 strike, but it's at a higher delta, and this is a higher risk / lower probability that I'll be OTM.  I do not mind holding a quality stock like SQ.

The $43 strike has a delta of 0.2179 as I write and a midpoint (premium) target of $0.45.

As from my analysis with AMAT and MU, I am looking to ensure I have at least 20% AROO in the trade.  With 5 days to expiration,  20% * 5 / 365 = CROO (Closed Return on Option) = 0.27%.

So, any premium that results in me getting at least 0.27% in 5 days is worthy of my efforts.

My cost basis on the stocks is by break-even * 100 shares, or $4,121.

0.27% of my cost basis is $11.13, or $0.12/share.  Because there is a $1 commission in here I'll add another $0.01 to show I need at least an option premium of $0.13 to make this 20% minimum.  This is well above the $0.45 midpoint at the $43 strike so this delta works.

A final check is to ensure that there is open interest (OI) at the strike.  The $43 call in SQ has 3,681 contracts as I write this.

The order will be STO 1 SQ 180216C43 Limit $0.40 DAY.

SQ Trade Analysis

If the price of SQ rises above $43, I'll make $150 from the stock appreciation (put to me at $41.50 and called away at $43), plus the premium from the CSP of + $29 (incl comm), plus this CC premium of $39 (premium of $40 less $1 comm), so $68 in total premiums, for a total of $218.  The original amount invested was $4,150 on 1/29 (cash secured put), so for 19 total days the annualized return is (218/4150) * 365/19 = 101%.

If the price of SQ is above $41.50 but below $43 then I'll still have the amount above $41.50 as paper profit plus the banked premium of the CSP ($29 incl comm), plus the banked CC premium of $39 (incl comm).  The call will expire worthless and I keep the premium.  The AROO for this premium ($39 incl comm) and amount tied up ($4,150) is 68.60% (39/4150*365/5).  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 SQ is below my new break even of $41.21 - 0.39 = $40.82 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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So, that's the plan going into next week.  Whether it works out is for all of us to see.

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.

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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