What Put Option Assignment looks like via Questrade. $X TMX Group + $CWB Canadian Western Bank (August 21, 2015)

On August 21, 2015, I was assigned two different stocks via Put Options I wrote on them.  The prices of these two on August 21, 2015 were well below the strike prices:
$50 TMX Group, Closing Price: $45.89. $4.11/share loss.
$28 Canadian Western Bank, Closing Price: $22.25. $5.75/share loss.

While there was an automatic paper loss upon assignment; the loss was cushioned to an extent when looking at the premium.

My choice to avoid assignment would have been to Buy to Close (buy back) the Puts I wrote.  Even so, looking at the cost of buying back it would have been a greater loss than the assignment; not including the commission.  Also, I would end up with no share ownership.  One reason why you might want to buy it back is if you cannot afford to cover the total cost of the shares.

*Take the Ask Price because this is the first available price that someone is offering to sell back the Puts.

Historical X 50 Put information:

$50-$4.25=$45.75,

Month / Strike	Bid price	Ask price	Last price	Impl. vol.	Open int.	Vol.

15 AUG 50.000

3.850

4.250

4.250

--

1

0

Historical CWB 28 Put information:

$28-$5.90=$22.10

Month / Strike	Bid price	Ask price	Last price	Impl. vol.	Open int.	Vol.

15 AUG 28.000

5.750

5.900

5.900

--

30

0

Calculations:
$X TMX Group
Strike Price: $50
Premium: $0.85 (x100 shares)
Option Commission: $10.95 ($9.95, +$1/contract)
Option Assignment: $24.95

Total Cost: $5,000-$85.00-$10.95+$24.95= $49.509
Average Price: $49.509


$CWB Canadian Western Bank
Strike Price: $28
Premium: $0.45 (x300 shares)
Option Commission: $12.95  ($9.95, +$1/contract)
Option Assignment: $24.95

Total Cost: $8,400-$135.00-$12.95+$24.95= $8,277
Average Price: $27.59

Date	Symbol	Type	Expiry	Strike	Quantity	Avg Share Price	Gross	Commission	Net Return	Net Amount	Exposure	Status	Type
2015-07-21	X	Put	08/21/15	50	1	$0.8500	$85.0000	$10.95	$0.7405	$74.05	$0.00	Assigned	Covered
2015-06-26	CWB	Put	08/21/15	28	3	$0.4500	$135.0000	$12.95	$0.4068	$122.05	$0.00	Assigned	Covered

This is what it looks like in the Questrade Account Statement:

Entry 1: Assignment of the Put(s)

Entry 2: Purchase of the underlying shares.

In the trade screen, which I did not take a screenshot of, the option is removed from your holdings the next day.  With my other brokerage BMO Investorline there is a couple day delay; I assume as the trade clearing is completed.

Seeking Yield: Fall Into The Trap

It's one thing to hear it, but it's another to live it.

Not exactly a scientific measure, but it has rung true that a warning about the sustainability of a dividend is a high yield percentage.

This is especially dangerous trap for the income oriented investor.  There are many reasons why you would fall in to this trap.  For me the path to the slaughterhouse was the influence of:

a) slow gains and returns from a 3-4% dividend yielding stock
b) the seductive lure of high yield distributions of REITs.
c) a rising market that outstrips steady dividend gains.

When you mix these factors together the allure of a high yielding stock that can goose your total portfolio yield it becomes ever more seductive.  Excitement grows when you see the stock is pumping out tax efficient dividends vs. income from distributions. What seals the deal would be the capital gains from the movement of the stock.

These are potential time bombs are just waiting for the right time to melt off your face.  Despite my planning for scenarios and keeping track of what could go wrong; seeking yield overrides caution with greed and rationalizations.

Shares: Bombardier Preferred Shares Series 2
Symbol: BBD.PR.B
Initial Purchase Date: December 13, 2013
Average Price: $13.23
Current Yield to Cost: 5.23%
Current Price: $4.25
Current Yield: 16.29%
Loss: 67.87%
Account Type: TFSA


My original thinking for why to buy:

1) Redeemable at $25.50.  So, at these levels it would be a significant gain if BBD redeemed.
2) Last time BBD halted their common's dividend back in March 31, 2005, pref b's dividends were untouched.  Note, back then BBD's share price was $2.70 vs today we're at $1.11.
3) Pref B dividends are cumulative, meaning if dividends are halted for commons then it is more likely BBD would still pay the prefs, but even if halted there is still the "promise" to pay the missed dividends.
4) Monthly dividends means greater cash flow.
5) My broker supports DRIPs for non-DRIP equities.
6) Yield is attractive.
7) Possibility of government bailout? Ties in to fear #2/3.

What I feared/was cautious about:
1) Prime rate, what if it gets cut?
2) BBD's situation worsens significantly.
3) BBD's situation goes apocalyptic and the go bankrupt.

After all that, was accruing a 67.87% loss of principle in a Registered after tax account for a 5.23% yield to cost worth it?

I have a couple other examples of big losses thanks to chasing yield over the years that come to mind: CML Healthcare Inc (CLC) (2011), Petrobakken Energy Ltd (PBN) (2011), and Baytex Energy Corp (BTE) (2015).

Staying the course for steady investment gains

A couple years before the Internet Bubble popped I acquired my first couple investments and let them sit there.  It wasn't until 2007 when the Financial Crisis was starting to explode and after university when I began working that I started paying attention to my tiny portfolio.

Back then with my limited funds and some unsuccessful trades it became obvious I needed a new strategy: portfolio of passive income, ie. dividends.  It has been fun, but time consuming and frustrating to build this portfolio over the years and the process continues.

There are plenty of blogs out there of how to create an income/dividend portfolio, but I want to share my thought process, moves, concerns, and most importantly my mistakes.

Hopefully, you will find something useful on this blog.  You can read my original blog at theamateurmojoinvestor and follow my twitter feed MOJOJONO.