Welcome to my first Monthly Options Income post. Last year I decided I’d try to generate some additional income by writing options contracts. The plan is to use any options income I realize to help make additional purchases in my dividend Portfolio.
I’ll most likely publish each Monthly Options Income post soon after the 3rd Friday of the month, as most option expirations occur then.
For some additional detail on how I did last year, and some background on my options trading, please see this options post.
I write covered calls for a stock that I own and don’t mind selling at a selected strike price.
I write cash-secured puts for stock positions that I don’t own and wouldn’t mind buying at a selected strike price. I also write cash-secured puts for stocks that I already own but want to add more of at that price.
Ideally, the contracts I write will expire “out of the money”, my gain being the collected premium for writing the contract. Alternatively, I may buy the contract to close it prior to expiration. This might be done if I can capture the majority of the premium prior to expiration, or to avoid having the option being assigned. In the case of Assignment, the option holders end up exercising their right to buy the underlying stock (in the case of a call) or sell the underlying stock (in the case of a put) at the strike price should it move “in the money” prior to expiration. As the option writer, an assigned call means I sell the shares, and an assigned put means I buy the shares.
At the end of 2017, I laid out my goals for 2018, and one of them was to generate $1,800 in options income, or $150/mo. Let’s check out how I started the year…
Below is a snapshot of my options spreadsheet, which I use to help keep track of the options activity.
This month, I’ve written 4 put options, with 2 having already Expired, and the other 2 still being Open.
Notes: Open DTE = Days To Expiration at the time the contract was opened, DOC Price = stock price on Date Opening Contract
Even though I collect the premium for writing the contract up front, I don’t realize the income until the contract is Closed or Expired. If a put option is Assigned, the premium decreases the cost basis of the purchase. If a call option is Assigned, the premium will increase the amount realized in the sale.
Option #1 – PUT CAH (CARDINAL HEALTH INC) $60 EXP 01/19/18, premium = $40
CAH is a stock I already own, but I purchased it at a higher price, and thus would be happy to add more shares at $60 to bring my cost basis down. At the time the option was opened, CAH traded at ~$63.50. However, over the course of 15 days to expiration the stock seemingly climbed every day, from $63 to over $71. This option wasn’t close to being assigned. It recently expired, and I realized the $40 option premium.
Option #2 – PUT CELG (CELGENE CORP) $100 EXP 01/19/18, premium = $61
I’ve had my eye on CELG ever since the price dropped significantly last October. CELG traded under $100 for a bit before settling in the $100 to $110 range over the past 2.5 months. CELG looks undervalued to me right now, so buying shares at $100 would have been acceptable to me. At option opening, CELG traded at ~$107, and while CELG did test the $100 mark during the 15 days to expiration, it never quite made it. Thus, the put option expired, and I realized the $61 option premium.
If the option had been assigned, CELG wouldn’t have been added to my dividend Portfolio, as it doesn’t currently pay a dividend. Instead, I would have held the shares looking for an increase in stock price, and written covered calls with my position until I was able to realize an acceptable sales price.
Option #3 – PUT SO (SOUTHERN CO) $45 EXP 02/16/18, premium = $100
Utilities are one of the two sectors that didn’t get off of a good start in 2018 like the rest of the market. While I’m not a big fan of utilities in general, I might be a bit underweight in this sector. So, I wrote a put for SO with a $45 strike price. At the time the option was opened, SO was just barely out of the money (by $0.25), which is partly why I got $100 premium. Given the $100 premium, my cost basis for the 100 shares of SO would be $44 should the option get assigned.
I have a feeling this option might get assigned, as utilities seem to be drifting lower as the days go by. If this trend continues over the next month, assignment will be a foregone conclusion at the time of expiration. Thus, I need to keep thinking about if I want to own SO or not. If not, I need to consider ‘buying to close’ the option, which would result in a loss on my put option. I haven’t realized any losses yet in my options trading experience, so we’ll see how things play out.
Option #4 – PUT FRC (FIRST REPUBLIC BANK) $85 EXP 02/16/18, premium = $135
FRC has been drifting lower over the past 6 months, low enough to interest me. Banks should benefit from the rising interest rate environment, and it doesn’t appear that got baked into FRC’s stock price. With the $85 strike price and the $135 premium for writing the put, my cost basis would be $83.65 should the option be assigned to me. That price would be a 52-week low for the stock.
While FRC’s yield is under 1%, I’d most likely add the stock to my dividend Portfolio, making it the 2nd bank I hold, along with Bank of the Ozarks (OZRK).
So, I’m off and running for 2018 with regards to options income. As a result of my two expired contracts, January saw me realize $101.00 in income. This is below the $150/mo. pace needed to achieve my 2018 goal, but the year is young, and there’s plenty of time to make up ground. There’s the potential to realize $235.00 by next month if my existing open contracts expire.
Here’s a breakdown of the 2018 options income by month. Not too exciting yet, but it should get more interesting as the year progresses.
I’m still looking for my first purchase of 2018 for my dividend Portfolio. Thus, I’ve been writing nothing but put options so far this year. This way I buy stock at prices I like, and if they don’t reach that price, I collect a premium. Since no options have been assigned to me thus far, I’m off to a decent start with regard to options income for 2018, as I’ve collected $101 for the 2 options that expired. In addition, I have a couple other options still open and set to expire next month.
Any thoughts on my options trades? Do you like the underlying stocks in these puts? Would you have set a lower strike price? Please let me know in the comments.