Logical Progress Advancing a Little Bit Every Day

4Jun/130

Play The The Ford Weekly Options For A Mild Ride

Also posted on Seeking Alpha Instablog

I do say mild in the title with great enthusiasm, not sarcasm. Of course the recent action in Ford stock has been fun to say the least. I'm usually not a serial put-call writer in practice, I do like to dabble a bit when I can.

I recently came into some cash when my short Altria (MO) calls got exercised. I know, I was sad, but I have loads of it in another account anyways, so I was overweight. Flashback to mid February, I was already up a couple points on my holding so I decided to write some $34 calls for a bit of cash to roll into my dividend favorites. I didn't anticipate the great run on the markets and the stock had gone to $37 by May 17 expiration, so at that point it was too deep to roll. I couldn't use the cash to write more Altria puts since the only $34 worth selling didn't expire until next January. So, fresh with $3400 cash, I decided to get back into old faithful Ford. [continue reading]

I already have a long position on Ford in a different account, it was doing quite well so I figured it wouldn't hurt to add more. Upgrades were coming, lots of great press, good sales numbers, etc. Rather than simply buy more I decided to write some puts with a short expiry.

On Monday May 20 Ford ran up to a high of about $15.23 early in the day and traded down to around $15.05 toward the close. In the middle of the downtrend, around 1pm EST, I saw the put premiums start getting juicy enough to look at. Knowing I had the cash and no plan to deploy it elsewhere, I wrote two $15 puts expiring Friday May 24. I put in a high-ball offer and just let it go. As usually happens to me, the market took my order later on as the price continued to drop. Between 13:15 and 13:30 on the chart below, the price dropped out, and so did my order. No biggie though folks, it's all good - I want the shares!

(day chart may 20 click to enlarge)

Total sale: 2 @ $12 per contract = $24 - $1.54 commissions = $22.46 total. Not too shabby.

During the rest of the week it played around $15 with some wild swings, and opportunities to get out for a small profit, but NO, I was all in on this one.

(week chart may 20 - 24 click to enlarge)

It closed the week at about $14.75 and I was assigned 200 shares at $15 each. As it was pretty obvious most of the day that it wouldn't break $15, I got a jump start on the call writing before Friday's close. In the last few minutes of trading I wrote two $15 calls for $8 each less a $1.14 commission, netting $14.86 total. This was probably where I was a bit overzealous.

It started out above $15 on Monday and I was kicking myself for writing the calls so early, I was immediately in the red. Then headlines like this and this started to appear and the price action accelerated. I considered rolling them out but at that point they were so far up that I couldn't get much premium without putting it out a few months, so I decided to accept my mistake, keep all of my premium, and let the shares go.

(tues may 28 - mon jun 3 click to enlarge)

Then, like a granny at the penny slots on some Devon boardwalk, I couldn't turn away before I tried my luck again. I figured I may as well keep doing this on a weekly basis until the volatility starts to decrease. Knowing the shares would get exercised I went ahead and wrote some $15.50 puts expiring June 7, raising the stakes a bit, because otherwise I wouldn't have made a sale.

But here's the thing, I put in another high-ball order, because at the time the market was running pretty stable, and I didn't expect it to get filled. I figured if it did get filled, then I was happy owning the shares at $15.50, but I honestly didn't think it would go. Like most securities on Friday, it had a pretty hard drop (relative to the intraday action) in the last couple hours of the session. Since I set my order so high, I just closed my brokerage screen and went home for the day. Sure enough, it blew through my limit and took it out, I was negative by the close.

(Friday may 24 click to enlarge)

No worries though my friends, like I said, I'm a happy buyer at $15.50. Plus I got a pretty good price anyways, I set it for what I figured was "good" (at the time). Sold 2x @ $15 each less a $1.54 commission for a total of $28.46. Pretty good.

Then this morning it happened, it rallied up to a high of $16.08 right out the gate. I was there, watching as the bid/ask on my calls started to sink, down to a low of $0.06. But again, being that I had work to do, I set a serious low ball at $0.03 and carried on with my day. It turned around on me and rolled back down to a low of $15.51 by mid morning. Ok, no problem, so I forget about it. (this story is almost over I promise)

I get home today and watch last hour of trading to see that Ford made a little rebound, and my options were back in the profit zone, but no chance of touching my still open low-ball offer.

Then, I start to humble myself: can I really carry on doing this? Scraping $15 or $20 every week? This is starting to get silly. I made a conscious decision to redirect this $3000 toward my dividend portfolio, as there are a number of aristocrats going ex-div this and next week. So I saw my chance to get out at around $0.08, but I was still hoping for a better price as we started to get a lot of upward mobility in the stock toward the close. On the order book I could see the spread was really tight but no orders were really going through. I could have $0.08 but there was some tendency toward $0.07 so I kind of sat there, watching it like an idiot. Until during the last minute of trading, as the price started to break and the buyers got tired, the book moved up to $0.07/$0.09, but there must have been an angelic small time day trader on the other side of the wire waiting to help me out, because there on the book, was an ask of two contracts at $0.08. And with 10 seconds left I quickly revised my low-ball to $0.08 and took out his order. Thank you kind stranger.

I paid 2 @ $8 each less $2.04 commission for a total of $18.04. My initial credit of $28.46, less $18.04 comes to a $10.42 profit for holding over the weekend. And now my cash is free for other stuff.

All told here's how it went down:

24May 15 put = $22.46
31May 15 call = $14.86
07Jun 15.5 put =$10.42

Total premium collected: $47.74, holding period 15 calendar days.

Against $3000 that's a straight return of 1.59%, but annualized it would be a 38.72% return. Try getting that from a savings account.

(47.74/3000 = 1.59% * (365/15) = 38.72% )??

It may seem like a small sum of money for the amount of time I spent executing the orders and watching the price, but I'm just working with small sums here while maintaining a stable dividend portfolio. I've been trading options for over five years, but not as intensely as I have for the last year as I try to scale up these trades. Imagine doing that on a scale of 10: buying and selling 20 contracts, dealing in blocks of 2000 shares instead of 200, I would have pocketed $477.40 instead of $47.40.

Then imagine doing that every week (rough math below):
$47.74 * (365/15) = $1,161.67 annually
Then multiply that by 10, and pair it up with a bunch of other good securities with weekly options, there's your income portfolio.

Still, I'm going to be risk averse now for the next few weeks and just buy shares in my dividend aristocrats.

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