$630 Profit In ONE Week? See How
September 18th, 2020
I was a fan of glassmaker Corning long before the coronavirus pandemic, but the race to produce billions of medical-grade vials and syringes to hold a vaccine has given me a new reason to be bullish on the stock. The company received a $204 million government contract that it is using to accelerate construction of a furnace that will be used in the production of vaccine vials.
We sold an out-of-the-money put that expires on Sept. 25 for $0.41 in income, or $41 per contract. While shares closed below our put’s strike on Friday, we stand to earn a 0.9% rate of return in 10 days, or 32% on an annualized basis, if shares reverse higher and close above the strike at expiration. But if GLW continues to trade below our strike, we will manage the position, likely by rolling the put to buy ourselves some more time.
Apple announced a slew of new products and services Tuesday — including the eighth-generation iPad, Apple Watch Series 6 and Fitness+ workout services — but the stock didn’t budge. Everyone appears to be waiting for the launch of a new 5G iPhone rumored for October. In the meantime, we took the opportunity to collect some income.
As with GLW, I recommended an out-of-the-money put, and we collected $1.69 in income, or $169 per contract. Shares closed the week below our put’s strike, but if they manage to close above it on Sept. 25, we will earn 1.5% in 10 days, or 56% on an annualized basis. Of course, we will roll if necessary or even accept shares if that is the better route, but for now, we’re just watching and waiting.
I’m often asked how I decide whether to roll a put or accept shares and begin selling calls against them.
Let me start by saying that I know many Options Income Blueprint members prefer not to be assigned shares, and I take that into consideration in how we manage our positions.
However, while we typically roll to avoid assignment, buying ourselves more time for the trade to work in our favor, there are times when accepting shares just makes more sense.
For instance, if we sell a put with a 60 strike, and the stock drops to $59, it generally makes sense to roll the put. But if the stock falls to $55, rolling that put to next week’s 60 strike may not generate any extra cash. But accepting shares and selling a call in that scenario could bring in a good deal of cash that, in turn, reduces our cost basis for the position.
But when a stock’s price is 7%-10% below the strike price of the put we sold, accepting shares and selling calls is usually the better option.
If a stock is at $55, rolling a 60 strike put out to the following week and same strike might bring in a nickel. But if we accept shares and sell a 55.50 strike call, we may generate $0.75 in cash, which lowers our cost basis to $59.25 (60 strike minus $0.75 in premium collected).
When you decide to accept shares, you should be prepared to roll the call up if the stock price moves higher. So, if you sold a 55.50 call and the stock moves up to $56, you would buy back the 55.50 call and sell a 56.50 or 57 call with a later expiration date. You continue to do this until you are able to exit the position at breakeven or for a profit.
You may be wondering, why not take a loss and move on? This is a good question and it boils down to the numbers.
You have to evaluate whether the reduced amount of capital you will receive from selling shares at a loss and redeploying it toward a new put-selling opportunity outweighs the income and potential appreciation in the underlying stock if you accept shares and sell a call. In my experience, it is rare that the potential rate of return on the new opportunity exceeds that of a call-selling recovery strategy.
This thinking was behind my decision this week to recommend accepting shares of CVS Health (CVS) rather than continuing to roll the put or moving on from the position altogether.
The stock got caught up in the broader market sell-off and concerns about the retail sector as a result of slowing consumer spending in the face of lower unemployment benefits for millions of Americans. But retail is only part of the CVS Health’s business.
The company is also a pharmacy benefit manager and provides health care services through its MinuteClinic walk-in medical clinics. I believe this will be a winning business model for CVS long term, but Wall Street cannot seem to figure out how to value the stock.
That said, I expect CVS shares to rebound, and option premiums are high enough for us to generate good rates of return by selling calls on shares.