Last Week's Income Report: August 23rd, 2021
While there were no closeouts in Options Income Blueprint last week, it was a busy one.
We put on trades in two of my favorite income stocks:
- Home solar system provider Sunrun (RUN), which we’ve successfully traded three times since late June, booking $197 in income; and
- Online pet retailer Chewy (CHWY), which we’ve closed three winners on so far this year, earning $334 in cash.
We picked up a combined $241 in premium from the new trades we put on last week. We also completed 10 rolls, generating another $444 in cash.
Three of those rolls were on the same position — Pfizer (PFE). I want to take a closer look at that trade because it’s a great example of how put sellers can chase a stock higher to earn even more income.
I began recommending trades on PFE in early February. In December, the Pfizer/BioNTech COVID-19 vaccine became the first one to receive an emergency use authorization for U.S. adults by the Food and Drug Administration.
While the vaccine rollout was chaotic, to say the least, a successful vaccine represented a huge opportunity for Pfizer, and one I think Wall Street has yet to fully realize.
In the company’s most recent earnings report, management said its COVID-19 vaccine helped to almost double overall sales and prompted them to boost their full-year revenue forecast.
Since February, we’ve traded PFE four times, using a mix of puts and calls.
Our most recent trade on the stock was initiated on Aug. 10. With shares trading at $47.32, I recommended Option Income Blueprint members sell the PFE Aug Week Two (8/13) 47 Put.
We picked up $0.43 in premium, or $43 per contract. Since we were putting up $4,700 in cash to secure the put (should we be assigned shares), this meant our potential rate of return (RoR) was 0.9%. And given that there were four days until expiration, we stood to earn 83% annualized if the put expired worthless. (For more on calculating rates of return, see my recent article here.)
However, the stock sold off after we put on the trade, dipping below our $47 strike price. Although we still had two days till expiration, which was plenty of time for shares to move higher again, I wanted to take advantaged of the heightened volatility (read: premium) in PFE’s option chains.
So, I recommended members roll out one week to the PFE Aug Monthly (8/20) 47 Put to generate more income.
We picked up $41 for the roll, bringing our cash in to $84. Our potential absolute rate of return for the trade doubled to 1.8% from 0.9%previously. However, since the duration of the trade increased due to the later expiration date, our potential annualized rate of return dropped to 59%. But it’s not like a 59% annualized return is anything to complain about!
As you can see on the chart below, PFE quickly rebounded off its short-term low.
On Aug. 17, three days before our new put was set to expire, we got reports that the federal government planned to recommend booster doses of COVID-19 vaccines to most Americans. Shares ran up to the $50 level on the news, well above our $47 strike.
When a fundamentally sound stock shoots past the strike price of a put we sold, we have three options:
- We can close it early, taking profits off the table.
- We can choose to wait it out through expiration in hopes the stock will stay above the put’s strike.
- We can generate additional income by rolling to a higher strike, either with the same expiration date or a later one.
In the case of PFE, we went with the third option, rolling our put to a higher strike price and keeping the expiration date the same.
We generated an additional $29 by rolling to the PFE Aug Monthly (8/20) 49 Put, bringing our cash in hand to $113. This also increased our potential rate of return to 2.3% in 11 days, or 77% on an annualized basis.
A day later, we did the same thing, this time rolling to the PFE Aug Monthly (8/20) 51 Put for $52, upping our cash in hand to $165 (3.2% potential RoR, or 107% annualized).
Now, as you can see on the chart above, the $50 level failed to hold as the broader market sold off following the release of the minutes from the Federal Reserve’s July meeting.
The selling took PFE below our $51 strike price, so as the Aug. 20 expiration approached, I once again recommended members roll, this time to avoid being assigned shares.
We rolled to the PFE Aug Week Four (8/21) 51 Put for $50, for a new total cash in hand of $215. If our current option expires worthless on Friday, we stand to earn 4.2% in 18 days, or 85% annualized.
However, we may get the chance to close early if shares continue to rally following the news that Pfizer’s COVID-19 vaccine has received full FDA approval.
Our PFE trade is a great case study in how option traders can “chase” a stock that is running higher to generate substantially more income.
By increasing our cash in hand from an original $43 to $215 currently, we have upped our return potential and given ourselves much greater flexibility in managing the position.