Sold Puts on BA, GILD, KO, and NEM

At the start of the month I made some option trades that I wanted to let you guys know about. Each of these trades had been updated as soon as they happen on the Puts/Calls section of my Portfolio

BA Put Option Details
Contract length (remaining): 29 Days
Number of Contracts: 1
Fees :$5.01
Strike Price: $120.00
Premium: $1.05
Annualized Rate of Return: 6.82%
Margin Annualized Rate of Return: 38.87%
Potential Profit: $99.99
ba-put-10316

GILD Put Option Details
Contract length (remaining): 22 Days
Number of contracts: 1
Fees :$5.01
Strike Price: $75.00
Premium: $1.65
Annualized Rate of Return: 20.40%
Margin Annualized Rate of Return: 90.60%
Potential Profit: $159.99
gild-put-10316

KO Put Option Details
Contract length (remaining): 22 Days
Number of contracts: 2
Fees :$5.05
Strike Price: $40.00
Premium: $0.28
Annualized Rate of Return: 6.00%
Margin Annualized Rate of Return: 28.04%
Potential Profit: $50.95
ko-put-10316

NEM Put Option Details
Contract length (remaining): 22 Days
Number of contracts: 1
Fees :$5.01
Strike Price: $31.50
Premium: $0.81
Annualized Rate of Return: 23.74%
Margin Annualized Rate of Return: 124.74%
Potential Profit: $75.99
nem-put-10416


Total potential profit on these options if they all expire worthless: $386.92

I am including the section “Margin Annualized Rate of Return” in my tables as well since all my put options are actually “naked.” All this means is that I have a margin account. Using the BA Put as an example: For a non-margin account I would need to have $12,000 in cash sitting in the account (100 x strike price of $120). This is called the cash reserve as it would be needed should you have to buy the shares at your agreed strike price.

However, for a margin account there’s a slightly different formula to determine the cash reserve requirement. This varies from brokerage to brokerage but for Schwab it is: (25% of the underlying stock’s market value + the option ask price – any out-of-the money amount) x 100 (per contract) x the number of contracts. This obviously fluctuates as the price of the underlying stock changes. At the moment my BA Put has a margin cash reserve of $1887.75.

As you can tell, since the margin cash reserve is so much smaller its annualized rate of return is substantially better.

While I do have the cash available should I be forced to buy the above shares, I technically don’t have to have it sitting as cash in my account. In fact, I don’t even need to have the margin cash reserve as “cash” since my long stocks act as margin buying power. While it would be extremely risky to do (and I would never do this), at the moment I am actually able to use an additional 44% of my entire portfolio value as margin buying power! Talk about leverage. It is easy to see how the insurance and reinsurance industries have done so well over the years by leveraging all the premiums coming in.

Coming up in an upcoming post is how I am managing my open put position in GILD. It had taken quite a dive in the last couple of weeks but is now starting to creep back up to the strike price. Stay tuned!

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4 Responses

  1. Great update. I’m loving the options tracking spreadsheet BTW. Thanks again for creating it. It looks like we both sold the same GILD put at $75. GILD is on a slight upward trajectory. I think we’ll be OK and this one will expire worthless. I don’t want the stock to go up to much though, because I sold a call at $77.50 😉

    Thanks for sharing all of your trades.
    Investment Hunting recently posted…TROW – T. Rowe Price Stock BuyMy Profile

    • scott says:

      Hey Nathan, thanks for the comment. The options tracking spreadsheet is working well for me too. It’s been fun to get back into options trading! I actually rolled the GILD option for credit a couple times. I’ll write about my strategy and thoughts with that on Saturday. Hope it stays between $75 and $77.50 for ya!

  2. Jay says:

    Thanks for sharing your picks here, and how you’re managing the trades. Selling options is such a great income strategy, but I still feel a little tepid about it due to lack of experience. I’m looking forward to your next post with analysis of the GILD position. Thanks again for sharing!

    • scott says:

      Thanks for the comment, Jay. I’ll be posting about my analysis of GILD on Saturday. It’s been making a move up lately so maybe my initial thesis and timing was correct after all.

      A great way to practice and learn about options is to open a paper trading account (link along the top of this page). This allows you to use the same interface with fake money to see how things work. Do that a few times and then move to small amounts of real money. Even though the interface is the same, emotions different drastically if managing options using fake money. Another very good resource is dough.com. They have free videos there to help you learn about options from beginning (which includes the put and covered call selling that I do) to advanced options strategies. Good luck and let me know if you have any questions!

      Scott

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