Last Week's Income Report: August 16th, 2021
As stocks continue to tick to new highs, we continue to rake in cold, hard cash week after week.
Options Income Blueprint members closed two more profitable positions last week. Traders who sold just one contract of each could have earned $184 in cash.
This brings our monthly income total to $338 after six successful trades in the first half of August.
Now, beyond Citigroup and First Solar being two of my favorite income stocks, the trades couldn’t have been more different.
For starters, Citigroup is a relatively new stock to the Options Income Blueprint universe. We began selling options on the financial services firm in late July. Since then, we have closed three successful trades, earning $144 in income.
First Solar is a stock we have been trading for years. So far in 2021, we’ve closed four trades on the solar panel manufacturer, generating $344 in cash.
But the biggest difference between these trades was how they played out.
Citigroup was a prime example of a fast closeout that yielded an excellent annualized rate of return
First Solar, on the other hand, was an excellent example of how a little patience can help traders avoid a loss and book a solid profit.
Let’s run through each to see what lessons can be gleaned.
On Aug. 10, with Citigroup trading at $73.14, I recommended members sell the C Aug Week Two (8/13) 72.50 Put.
We picked up $0.46 in premium for selling the put, or $46 per contract. Now, had that put expired worthless, we stood to earn a 0.6% return over the $7,250 in capital we put up to secure our put. And since it was four days till expiration, this would have resulted in an annualized return of 58%.
But just three days into the trade, the price of the option we sold had dropped to less than a dime.
Given that we were sitting on a great profit and August is a light trading month, I didn’t want to risk staying in the trade another day for just $0.09 in premium. Therefore, I recommended members buy the put back.
The early closeout yielded a profit of $0.37, or $37 per contract, for a 0.5% return.
That was less than the 0.6% return we could have made if we had held through expiration (provided our put had expired worthless). However, our annualized rate of return was higher than initially projected — 62% versus 58% — because our capital was tied up for a shorter period of time.
The lesson here is a simple one: Never be afraid to take profits off the table.
Sure, everyone hates giving back cash. But you have to consider whether continuing to hold through expiration is really the best use of your capital.
I like to think of it this way: I would not sell a 72.50 strike put for $0.09, even if expiration was a day away. So, why would I feel the need to hold on to an option another day just to eke out another $0.09 in profit when I could close early and potentially redeploy my capital to another trade.
When you can grab profits by closing early, do it. As they say, no one ever went broke taking a profit.
Now, on to what we can learn from the First Solar trade.
On July 13, with the stock trading at $93.11, I recommended members sell the FSLR Jul Monthly (7/16) 91 Put for $0.65, or $65 per contract.
Shares quickly turned lower, as the stock was caught up in a sell-off that hit the clean energy sector hard.
I recommended members roll the put out one week to avoid assignment and buy us some time for the stock to move higher. We also picked up another $0.15 in income, bringing our cash in hand to $0.80.
But rather than rebound, the selling continued.
By the time the new expiration rolled around, our put was deep in the money. Since the premiums for rolling were not attractive, I recommended members accept shares, noting that we would employ a call selling strategy to get back to profitability or breakeven.
So, on July 23, we were assigned 100 shares of FSLR at our $91 strike price. But since we had $0.80 cash in hand, our cost basis was $90.20.
Unfortunately, the stock closed that day at $82.95, meaning we were still underwater by 8% on the position.
What’s more, FSLR was scheduled to report earnings on July 29. Since we trade FSLR frequently, I was well aware of the volatile moves the stock can make after an earnings announcement.
For that reason, I held off on recommending a call to see how investors would respond to the report. That turned out to be the right move.
The company easily beat analysts’ earnings estimates, with its net profit more than doubling in the second quarter. Shares jumped after the report and didn’t look back.
The day after earnings, I recommended members sell the $90 call that expired on Aug. 6 for $0.82. This lowered our cost basis to $89.38, and I noted at the time that if our shares were called away, it would be at a profit.
Two days before expiration, the stock was already well past our $90 strike. So, I recommended we roll the call out one week to capture another $0.85 in premium, bringing our cost basis down to $88.54.
By the time the Aug. 13 expiration rolled around, FSLR was trading well above out call strike and we were called out at a profit.
While I know some members were concerned about missing out on some of the run-up in the shares, we were able to book a profit of $147 on a trade that had been deep underwater three weeks prior.
The lesson here is that patience pays. Employing an aggressive recovery strategy after a trade moves against you — like we did with FSLR — can mean the difference between a nice profit and a big loss.