Three days ago I Sold to Open a HOG Put, and today I Bought to Close that put options contract and Sold another on HOG.   Both moves surround HOG’s Earnings which were probably fine if you are a long term buy and hold on the stock, but the guidance was a little lacking. From Nasdaq/Zacks,

Harley-Davidson, Inc. reported earnings of $1.55 per share in the second quarter of 2016, which were higher than $1.44 recorded in the year-ago quarter. Further, earnings surpassed the Zacks Consensus Estimate of $1.53. Net income decreased to $280.4 million from $299.8 million a year ago.

Consolidated revenues rose to $1.86 billion from $1.82 billion in the second quarter of 2015. Operating income declined to $412.3 million from $462.5 million in the year-ago period.

Revenues from Motorcycles and Related Products improved to $1.67 billion in second-quarter 2016 from $1.65 billion in the year-ago quarter. Further, the figure was in line with the Zacks Consensus Estimate. The improvement was driven by higher motorcycle shipments.

Operating income from Motorcycles and Related Products decreased significantly to $322.7 million from $380.6 million a year ago.

Revenues from Harley-Davidson motorcycles rose 1.7% to $1.33 billion. The company shipped 88,160 motorcycles to dealers and distributors worldwide during the second quarter of 2016, compared with 85,172 shipments in second-quarter 2015.


In the third quarter of 2016, Harley-Davidson expects to ship 48,500−53,500 motorcycles, compared with 53,472 motorcycles shipped in the year-ago period.

Harley-Davidson reduced its guidance for motorcycle shipments in 2016 to 264,000-269,000 units from the prior range of 269,000-274,000 units. This implies that the year-over-year change in shipments will vary between a decline of 1% and a rise of 1%. The lower guidance is due to softness in the U.S. market, high competition and global economic uncertainty.

The company also reduced its guidance for operating margin from the Motorcycle segment to 15%-16% from the prior range of 16%-17%. It expects capital expenditures of $255-$275 million this year.

This caused the stock to initially drop and then recover:

HOG - After Earnings

Buying to Close HOG

My original contract earlier this week had a premium of .18 – I was able to roll out at .9.  So anytime I can roll out with 50% if I think I can make money elsewhere with the same amount of possible capital (or close to it) at risk I should go for it! For those that are curious, I have a lot of free trades with TD Ameritrade so I don’t have any real fees .  When I run out of those free trades (chances are the time will expire before I use all of them) I will have to factor that in before I get out of a trade.

Selling to Open HOG

I justified my HOG put earlier this week,

Given my adversity to risk I am finding that my initial screen of stocks that have increased their dividend 20+ years really does limit me almost too much and so this time I looked outside of the dividend champion world.  I have owned HOG for a year or so in some other accounts so I always have it on my radar. So I applied my screen:

I have sold to open an August 19 $45 put for a premium of .27.

Applying my Short Put Option Methodology

I Will Only Buy Naked Puts on Those Stocks that Have Already Meet Most of my Stock Screen

Harley Davidson does not meet my stock screen criteria insofar as it has not increased its dividend for the last 20+ years (they have only increased their dividend 5 years).  Notwithstanding it does meet a lot of my other criteria:

  • The company needs to have increased its dividend for at least 20+ years – Fail
  • The company needs to have a P/E less than 20 and it has to be less than its industry average – 13.5 vs 15 – Pass
  • The company needs to have a greater operating margin than its industry peers – 18.7 vs 12.7 – Pass
  • The company needs to have a price to book of 4 or less (and if more than 4 then it has to be less than its industry average) – 4.8 vs 4.3 – Barely Fail
  • The company needs to have a dividend yield of at least 2.5% – 2.8% – Pass
  • The company needs to have a dividend pay out ratio of less than 60% – 35.4% – Pass

I feel particularly comfortable with loosening the strategy for HOG given the moat the company has – I mean how many other brands are there where people get the logo tattooed to their body?

The Strike Price Will be a Price that Has only been hit a handful of Times on a Multi-Year Chart

It is my goal to collect the premium and not actually get stock put to me, so it would seem prudent to choose a price that has rarely been hit.  Earlier this week I went with $40, but moved it up to $45.  I figure that if a bad guidance can’t crash the stock what are the odds that in 22 days the stock will drop 10%?

I Will Only Risk 50 to 75% of my Current Capital on Margin

This is a bolt-on strategy to increase returns/income, and as such, I can’t even imagine waking up to a margin call from fidelity where they are demanding me to fund my account with additional capital (versus having to, reluctantly, sell positions).

Right now, I only have EMR open with a September Date with a Strike Price of $48 ($4,800 of possible purchases).  I closed the HOG trade (above) so this new trade of another $4,500 possible purchase moves me to about 77% of my account value (($4,800+4,500)/12,000) – using last month’s number).  This basically maxes me out if I don’t buy to close any trades.

I stated on Monday that,

HOG releases earnings this week so it is possible that I’ll be holding it till expiration if earnings are bad, or if earnings are good I will trade out of it early next week for a profit.

I was right – it worked out!

I will Spread out the Expiration Date

In an effort to further minimize risk I am going to use multiple expiration dates instead of concentrating on one date.  I think Directive #4 will allow me to avoid a broad market sell off and being put with multiple new positions.  I think I am looking at a rolling 30 to 60 day option contracts.

My only other position open, EMR, is a September contract, so since this is an August contract I feel adequately spread out.

All Premiums Received will be Reinvested the Following Month

My increased dividend purchase next month will be $9 (ADM – total profit), $25 (EMR – unless I close it and can quantify the buy out costs), $9 (HOG #1), $27 (HOG#2 – unless I close out the position and can quantify the buy out costs.

I said it last time, but I know these numbers are tiny but I have to start somewhere and in 2 weeks of trading I have generated approximately $70 of extra purchasing power. Since I am buying lots of $500 this will provide next week when I purchase my August position over 10% more.

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