Pardon the appearance of my website. Normally I wouldn't
send out a first post while the blog is under construction, but I'm such an IT
Luddite that waiting to post until the site appearance is respectable might
take forever & I'd never get to satisfy my objective of helping you with
option selling. Plus, since I do have a pretty good sense for conveying
the nuances of this arcane strategy, I hope you find it's worth getting going
now rather than waiting until my site is pretty.
And - please pardon me again, because this sounds quite
self-serving - I do want to promote my 144 page, recently published
primer Selling Options...Simply Called and Simply
Put. However, I don't even know how to link the "Buy
Now" button. I am confident though, that even if you have zero
understanding of option trading, as long as you have a keen desire to learn the
strategy, my crystal clear book will be most helpful.
In a future post, I'll tell you a bit about myself, including my
experience with options. But I'd like, with this post, to share with you
a trade I recently made that very succinctly answers a question I'd received
while in the investment business. Clients asked, "When I sell
covered calls, how frequently may I experience early assignments?"
I use monthly options which always expire at the close of business
on the month's 3rd Friday. But a pre-mature (as I like to describe them)
assignment of a call can occur anytime prior to option expiration Friday.
Quite frankly, they usually do not occur pre-maturely. But when they do,
I find, it's generally when the underlying equity (stock) is a dividend paying
equity, & the call option is in the money (the equity's market price is
higher than the option's strike price). And when that's the case, the
pre-mature assignment of a call generally happens on the business day before
the ex-dividend date.
So, my trade: To start with, on May 21, 2018, I sold a covered
call against TLT, the ticker symbol for the US Treasury ETF. TLT was
trading around $117. I sold the June 15, 2018 call, with a $118.50 strike
price, & received a $0.55 premium. But on May 31, TLT traded at
$121. And I knew that on on June 1, TLT would go ex-dividend on its $0.28
monthly dividend. I suspected that the owner of the TLT
June $118.50 call (the owner would have bought the call some
time earlier from a seller like me) might want to exercise
that call to become the buyer of TLT at $118.50 & importantly, to be
eligible to receive that $0.28 dividend. But by exercising on June 1,
he'd be a TLT buyer on the ex-div date, the "without" dividend date,
& he'd not be eligible for the 28 cent div. However, by exercising on
May 31, he'd be buying TLT "with" dividend, & be eligible for the
28 cents. To capture the dividend, I knew that he might be motivated to
exercise his in the money call on May 31.
I did not like the prospect of being assigned to sell my TLT
pre-maturely on May 31, at only $118.50 (my strike price), when TLT was trading
in the market for $121. So I used what I call a repair strategy (most
option traders call it a roll out). In step #1, I bought back the TLT
June $118.50 call, which I had sold on May 21, but I had to pay a rich $2.89
premium on May 31. This closed out (terminated) my June $118.50
call. In step #2, I immediately sold a TLT July 20, 2018 call, with a
$119 strike price, for a richer premium of $3.04. I pocketed the 15 cents
in premium difference, & now have the potential for another half dollar in
strike price. For extending my strategy one month, I accepted the
potential for another $0.65, which annualizes to a 6.5% return versus the
original $118.50 strike price. Not too bad a repair of an unwanted
obligation.
Keep in mind, with TLT at $121 on May 31, the day of my repair,
the new $119 call is still in the money & I could certainly be assigned
pre-maturely. But if I was forced to sell my TLT quickly at $119, well in
advance of July 20, my annualized return would then be enhanced above the 6.5%
return. And to be honest with you, the market is very smart, & it
probably would not allow me to get such an enhanced return so easily.
I hope this kind of blog is helpful. Let me know. Ask
me questions.
Dave Skonieczki
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