I opened my email to find (with little surprise) that my CVS January 31 covered calls were assigned as of the close of trading yesterday afternoon. I say it wasn’t a surprise because today is the ex-dividend date and the calls were more than $4.00 in the money with only a few days of time value remaining. I could’ve bought them back in advance to get the dividend, but I’m happy enough moving on and getting the $9,300 back in my account.
I started this CVS position when I sold one put on June 18th and then after being assigned those 10o shares I sold two puts on August 18th along with covered calls on the first 100 shares. I kept selling covered calls after each set of contracts expired and turned a losing trade into a profitable trade. Had I been more patient I could’ve made more, but that’s not how I work my trades, so there’s no reason worrying about it. I ended up with slightly better than a 4% return on the series of trades although I sold the shares for less than I bought them. After running with the position for seven months I ended up with almost a 7% annualized return which means I could’ve done better elsewhere, but am happy I didn’t lose money.
If I spent my time worried about what could’ve been I’d be dwelling on the fact that ITRI is up over $60 this morning and I got out close to it’s low a couple of months ago. Oh wait, maybe I am dwelling on that. That’s what I get for joining in the panic of the moment. At least GS appears to have been wrong about ITRI’s demise with their lower price target.
CVS was one of my options expiring this week that I was pretty sure would end with me being out of the position. The rest look to be the same. I have seven more short puts in play still and three more covered calls. By COB Friday I’ll have no attachment to any of these positions unless something insane happens in the next few days. That will leave me with four February option contracts and then the rest at June or January 2012 expiration. With that much cash and margin potential opening up I am set up to have a lot more room to start new positions. We’re so overdue of at least a few percentage point drop (if not more) that I might luck out and time this very well and have a pile of cash and margin ready to put to work on a dip. If I’m wrong and the markets keep climbing my LEAPS will keep me in the running for a good year anyway.
Hi Alex, one of things I sometimes do is buy back the options if they are DITM and there is a high risk of assignment due to an upcoming dividend, as I’d rather receive the dividend.
The dividend must be fairly large, and I would have already held this stock for sixty days when following this strategy. Here is my reasoning – since I write and buy options in a taxable account, my gains from options and stock transactions are usually taxed at the short term income tax rate. But for large dividend payers, I always try to write “qualified covered calls” when I sell calls on their stock, and so the dividends (if large) can be taxed at the favorable 15% rate. This spread allows me to pocket about 10%-12% on any dividend payments made. Now, there are a lot of restrictions and criteria for this, but it has proven worthwhile over the past few years.
By the same logic, if I have stock that I have held for close to a year I look carefully to see if I can write “qualified covered calls” to get some downside protection while waiting to get long term cap gain tax rates. Again, the criteria are numerous and it is hard to do it all the time, but I try to do so when I can, just because I feel the favorable tax treatment is worth it in the long run (compounding effect).
If you are trading in a tax-sheltered account, then this would obviously not be an issue.
Prashant, My CVS CC was DITM, but the div was pretty small, $0.125 and after such a good run I didn’t mind exiting. It actually fell a lot more than the div yesterday so I’m content with my exit so I can have that cash available for other positions I open that might have a better opportunity for bigger gains. All of what you said is logical, it just didn’t fit my needs right now.