PicturePhoto courtesy of Stuart Miles at freedigitalphotos.net
Ok so I left you all hanging with my initial post about my impending plans for options. Quick recap, the plan is to purchase stocks that I have researched and determined that I would like to acquire via the sale of cash secured put options. Essentially, this means I simply put the cash to buy the stocks at the strike price indicated by the put option I sell minus the premium I receive from the sale of the option. Clear as mud? So what exactly did I do and how did my experiments with these cash secured puts work out thus far?

Well I've spent quite a bit of time researching this strategy and then even more time attempting to identify a suitable security with which I could experiment and secure my first investment in this fashion. After much research, I identified that I wanted a stock that is priced in my budget, but looks to have some future potential (naturally I don't want to buy stocks that won't perform over time). Unfortunately, traditional stocks are WAY out of reach for me as I am constrained to a $500 budget with my investment portfolio presently. Since an options contract is for 100 shares, I can only sell puts on stocks that cost less than $6 a share. This is pretty limiting and typically these securities are considered inherently riskier than your typical blue chip stocks that seem to run in the $40 to $150 range. 

I also wanted a stock that would pay me a monthly dividend. Given that I'll have 100 shares, this will add up pretty quickly and assist in providing badly needed cash flow for reinvestment. Monthly dividends aren't super common however so that narrowed my options for stocks even further. 

Finally, I wanted a stock that would pay out a decently high yield and for whom I knew the reason it was priced below $10/share. Given the dramatic crash in the prices of oil stocks, I feel comfortable buying companies in this industry as the core reason for the depression in price is an over-abundance of oil in the market presently. Additionally oil producers have higher distributions, and there are a fair few monthly payers. Given the industry's highly cyclical nature, I am quite likely to see the value of anything I purchase rebound again in the next decade, assuming it doesn't go bankrupt first (always a concern).

The tricky part is finding a stock that has reasonable options trading volume and provides a decent sale price for my put options. Fortunately for me, Breitburn Energy Partners is highly enough traded that I can net a nice $15 to $50 sale (that is an immediate 3% to 10% return on a maximum of $490 of my own cash) per put option I sell with 30 to 70 days until expiration. Unfortunately, at the exact same time I discovered BBEP, the market decided that it also liked the stock and the price rocketed up from about $5.50 to nearly $6.40 by the time my cash transferred into my brokerage account. I almost gave up on the experiment as it was priced well out of my reach when the shares dipped the following day (last Friday) which increased the $5.00 put option expiring June 19 enough for me to sell. I managed to sell a put option at the strike price of $5.00 for a premium of $0.20/share (or $20). This netted me an immediate 3% return on my cash. This is astronomically higher than what I'd earn in my savings accounts. :) I am selling this put option with the intention of acquiring BBEP and locking a solid yield. However, if the option ends up expiring without exercise due to rapid price growth (which seems entirely likely), I might have to simply pocket the premium and pick a different stock to try the strategy out upon. 

If the option is exercised and I end up purchasing 100 shares at $4.90 each, I'll lock in a steady dividend, which is currently at $0.04/month. As oil prices fluctuate this will increase or decrease accordingly, which is fine with me. Any money I make without having to work for it is great news! Last year BBEP was paying out $0.17/month. If oil prices ever recover, that would provide me with a yield in excess of 30% annually on these shares. That would be FANTASTIC!! :) I doubt that will happen anytime in the next few years. But a fellow can always dream, right? In any case, stay posted for the results on this experiment. :) Presently I've set up a transaction to close me out of the position which would net me $15 profit (before tax of course) and free my cash to use for other put options, however I find it unlikely that I'll be able to close out of this position easily, in which case I'll simply end up holding the contract until expiration and selling a new contract if the price is around $6/share still. 
 


Comments

02/12/2016 8:32pm

Can I simply just say what a relief to uncover somebody that truly knows what they're discussing online. You definitely know how to bring an issue to light and make it important. More people must check this out and understand this side of the story. I was surprised you aren't more popular because you certainly have the gift.

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Do you have a plan for all that may comes?

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What about now? Are you still making all that or not?
Thanks for all the details here!

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The first part of the plan is the most risky and dangerous.

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11/20/2016 11:15pm

Implementation is to much compulsory in the different human psyche. All the projects should implement in the few ways. Then it will be the first and new development in such projects.

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03/16/2017 4:45am


this is my first time i visit here. I found so many entertaining stuff in your blog, especially its discussion. From the tons of comments on your articles, I guess I am not the only one having all the leisure here! Keep up the excellent work.

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03/16/2017 4:46am

This was a great and interesting article to read. I have really enjoyed all of this very cool information

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