I made two separate moves today.  As the title indicates, today I closed my first transaction and then sold to open another position.

Buying to Close – ADM

On July 15 I sold to open my very first short put.  I took the position that ADM would not hit the strike price of $38 by Aug 19, for selling that position I received $20.42 in premium ($21.00 minus .58 cents for fees).  The price of the option contract moved down to $12.00.  I went back and forth on what to do.  On the one hand lets be honest it is only $9.00 (less than what I usually spend on lunch), however, on the hand it is a gain inside 10 days.  Specifically, I made .24% in 12 days ($9/$3,800) for an annual return of 7.20%.

I turned to Marteen from HelloSuckers  for some guidance,

If your expiration is August 19 then you will be waiting another 25 days to get $11. If you close it now and use the money elsewhere you can make a lot more in the next 25 days than waiting for those 11 dollars and blocking your margin.

So that’s what I did.

Selling to Open – HOG

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:

Applying my Short Put Option Methodology

I Will Only Buy Naked Puts on Those Stocks that Have Already Passed my Stock Screen

I completely failed on this one, but I think that is okay.  This bolt-on strategy is going to morph over time, and that is alright.  My initial undervalued dividend growth strategy did that as well.  Harley Davidson does not meet my stock screen criteria inforas 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
  • The company needs to have a greater operating margin than its industry peers – 18.7 vs 12.7
  • 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
  • The company needs to have a dividend yield of at least 2.5% – 2.8%
  • The company needs to have a dividend pay out ratio of less than 60% – 35.4%

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.

HOG

The circled dip is about a month long period where it bounced around between $37 and $40.  If I were put the stock I’d be happy to own the stock, collect a 2.8% dividend and sell covered calls until it recovered.

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).

After buying to close the ADM put I only have one put open which is EMR with a strike price of $48.  The HOG trade puts another $4,000 possible buy on the account for a combined at risk amount of $8,800 (approximately 73% of my account).  This maxes me out for now.

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

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), $25 (EMR – unless I close it and can quantify the buy out costs) and $18 for HOG (again, unless I close out).  I know these numbers are tiny but everyone has to start somewhere!

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