I mentioned on Friday that I was going to be assigned 100 shares of AFLAC Inc (AFL). Those hit my account this morning and I waited about an hour before deciding that I should go ahead and sell the option straddle I was considering. After I planted the seed in my mind last week AFL faltered more than I expected and I started second guessing myself. After AFL started the day with less of a fall than the broader markets (and that ended up reversing) I decided the downside risk might not be so bad and either way I probably needed to get my covered call in place before I lost much more on this melt down.
The trouble was that the call premiums weren’t as high as I wanted by themselves and I couldn’t stomach the upside risk being capped so low. I still think AFL will recover, eventually. I’m not sure if it’ll be within the next two months though. I started pricing different put and call combination scenarios and decided I’d go out of the money with my covered call and in the money with my naked put. While AFL was trading at $48.93 (another 45 minutes after I entered the limit order) I sold one AFL July $50 covered call for $1.53 and one AFL July $50 naked put for $2.63 and received $419.56 after commissions. I entered the July $50 straddle for $4.20 and got a penny better when it traded (thanks IKBR).
This trade brings my average cost on 100 shares down to $48.66. If I’m assigned another 100 shares at $50.00, my average cost per share will be $49.33. I doubt I’ll add another naked put after July if this one is assigned. 200 shares will be a full position for me in AFL. With a dividend yield of 2.46% and a stable balance sheet I’m not worried about AFL long term. I’ll keep selling covered calls out of the money as long as I own the shares. It’ll come back up at some point. It’s already down about 15% from its recent intraday high. In AFL’s last big sell off in March it fell just over 19% before recovering 19%. All I need is a flattening or slight up tick to make my position profitable over the next two months.
Usually when I combine a call and put like this I do it with an option strangle. A strangle sets me up for both of the legs to be out of the money and leaves me where I could end up having both finish at expiration as worthless. With an option straddle I’m set up for one side to finish in the money and the other out of the money (unless AFL finishes at $50 on the dot). If the in the money side is only slightly above or below the strike I might buy it back or roll it out farther while I let the other side expire worthless.