$BAC $BNS $H Option Assignments and Expiry via BMO InvestorLine. (March 18, 2016)

March 18, 2016 was relatively exciting as it was option expiry day and I had written a few Puts and a Call. As you can see below. Ouch!!! However, this gave me an opportunity to see how BMO InvestorLine presents these transactions.

An underlying goal that I have been developing has been to hold options for longer and preferably to the expiry date. This is in hopes of reducing paperwork for my small transactions and just so I don't need to look at them as much. As with all Put options that I write the target stocks are companies that I actually DO want to own. The problem is as my portfolio evolves and risk levels change I feel my positions need to be cut at times.

It definitely hurt to see my BAC position get wrecked, but also doom on me for holding tight. I was saddened to see the reduced profits from BNS, but I grabbed a small profit and reduced my overall position size. $109.80+$47.34= $157.14 ($1.5714)/ $56.09 average cost = 2.80% profit. It will hurt more when my 4 Calls @ $56 potentially get assigned in April, but at least it is after ex-dividend. Assignment commissions are very high for BMO IL; if I added to the April Calls it would have spread out the pain.

One last thing is to figure out how to work the taxes and record keeping on the assignments as I always thought the premiums would be accounted for with the purchase and sale price. I will need to research further. Also, no confirmations are sent for Assignments; I'll need to remember it is recorded on my transactions spreadsheet.


1) Bank of America: 3 x PUT BAC 2016MAR18 18.00

- Wrote this last year thinking BAC would stay around the $17 level and potentially run for $18.

- BAC proceeded to collapse; at one point the shares hit $10.99.

- Put option loss at that time was over $1,400.

- Wrote an additional Put at $4.40 to average down the eventual buying price.

- Assignment Commission: $51.30

- Closing Price at Expiry: $13.79


2) Bank of Nova Scotia: 1 x CALL BNS 2016MAR18 57.00

- As part of hedge-lite I wrote three Covered Calls for BNS. The market turned and the value of the Puts increased significantly as they went "In The Money.

- As part of building inventory for writing Covered Calls I doubled my 500 share position of BNS to 1,000. Sold 100 to "slightly" manage risk and reduce margin debt.

- Stupidly, wrote another Put @ $57 for March instead of writing an additional April Put.

- Option position -514.75%. Missed out on approximately $565.20 additional profits.

- Assignment Commission: $43.00

- Closing Price at Expiry: $63.57 ($6.57 difference from the strike)



3) Hydro One: 2 x PUT H 2016MAR18 22.00

- Small position to dip my toe back into H.

- It's still got a major owner of the Ontario Government. It "can't" go down... right?

- Expiry meant the entire premium is mine!

- Calculated as a 703.2129% gain! $87.55. lol.

- No Commission for expiry.

- Closing Price at Expiry: $23.48

$10/day for $3,600! Option Writing Challenge: Failed.

Back around January 2015 when I first started using Option Writing; my friend spoke about wanting to earn an extra $10 per day or more simply: $3,600 a year. Based on my (at that time) successful Option Writing I told my friend it was entirely possibly to achieve this goal.

Calculation
$10 x ~30 days x 12 months = $3,600.
$3,600 per year additional income / 12 months = $300 per month.

Options Closed
Number of Traded: 57
Losses: -$311.41
Number of Trades: 131
Trade Commission: $1,615.04

Options Expired
Number of Traded: 9
Gains: $592.25
Number of Trades: 10
Trade Commission: $133.75

Totals
Total Number of Traded: 66
Total Gains: $280.84
Total Number of Trades: 141
Total Trade Commission: $1,748.79

Total Revenues: $2,029.63

*Not including FX conversions and Option Assignments.

Surprisingly, coming out of 2016, despite some massive losses, I eked out out a gain of $280.84. Breaking it down further that turned out to be $0.7694/day or ~$23.4033/month.

Tallying up the commissions for the 141 trades, shows that the cost of making $280.84 was astronomical, hitting $1,748.79 or 622.6997% of the year's gains.

Despite my goal of using Options to earn money and to generate lower average purchase costs for stocks I want to own; a lot of the resulting trades was the result of inexperience:

1. Making dumb moves from writing and lucking out on expiry or short term turn around for Stocks that I ended up not being that certain or keep on holding for the long term.
2. Over-extending myself and writing too many options at once. This resulted in me needing to take opportunities pull back.
3. General market uncertainty; causing me to want to reduce exposure.
4. Impatience with waiting for the Expiry Date for Assignment or Option Expiry.

One might think that it was not worth the time and worry that I put into using this new strategy in my toolbox, but it really showed me the potential of being more active and from writing Options. This coming year I definitely want to continue Option Writing, but hopefully can put to use my 2015 experiences to be more careful with my targets; focus more on what I currently have in holdings; and be more patient. In addition to Option Writing, I want to get back into the buy side and work on using other Option Strategies.

Building Inventory For Covered Calls

Covered Calls are a powerful tool and strategy to boost earnings. I've heard of using this some time ago, but after looking into it realized there are many factors to consider:

1) Commission costs.

2) What if shares go down below cost?

3) What strike price?

4) What expiry date?

5) What companies/stocks to purchase?

Here's how I'm playing the Covered Call writing strategy. I have been accumulating shares in several larger dividend companies in order to write Covered Calls on them. As per most who follow this strategy the goal is to enhance returns by extracting premiums and create a certain discipline for selling/refreshing my stocks every now and then.

However, to maintain a position for my long term goal of dividend income generating portfolio I maintain synthetic Dividend ReinvestmentPlans and will allot a portion of the shares for writing.

So far I've built up positions in BNS, CWB, MFC, and SLF for writing. I still don't feel they are large enough to more efficiently generate Premiums. As you'll see, below are my target number of contracts to write. This builds in an initial Call writing and if the Premium increases; provides flexibility to average into the Premium.

Positions:

Stock	Avg Cost	Current Price	# of Shares	Target # of Contracts
BNS	$57.05	$57.95	500	2-3
CWB	$26.04	$23.56	600	2
MFC	$19.92	$21.24	1000	4
SLF	$40.78	$44.07	600	2

1) Commission Costs.

I use both Questrade and BMO InvestorLine; and for Option trading the commissions are fairly similar, but BMO IL's charges $0.25 more per contract.

Taking Questrade as an example here's how it looks like:

Option Commission: $9.95

Option Cost Per Contract: $1.00

If I write/buy 2 Contracts that means I pay $11.95 ($9.95 Option Commission + 2 Contracts x $1.00).

The biggest difference is with Option assignment.

Questrade is more competitive by far, charging a flat $24.95.

BMO IL has a minimum $43 + laddered contract cost depending on the Option price, starting at $1.50 per Contract.

https://www.bmoinvestorline.com/selfDirected/pdfs/FeeSchedule_EN_May.pdf

Regardless of stocks or options the Commissions can have a significant impact on your profits/losses/break evens.

Example:

On December 21, 2015 I wrote a single Call option on CWB (160415C26.00):

Date

Symbol

Type

Expiry

Strike

Quantity

Price

Gross

Commission

Net Price

Net Amount

Exposure

Status

Type

2015-12-21

CWB

Call

04/15/16

26

1

$0.7000

$70.0000

$10.95

$0.5905

$59.05

$0.00

Open

Covered

Strike: $26.00

Expiry: April 15, 2016

Premium: $0.70 ($0.70 x 100 = $70)

Commission: $9.95 + $1 = $10.95

Net Premium: $70-$10.95=$59.05

This means in 4 months if the share price appreciates to $26 or higher 100 shares of my CWB will be sold to the Call contract owner. This means I sold insurance to another investor for roughly $14.76 per month. In addition I will receive an additional dividend payment of $23 on the 100 shares before contract expiry since ex-dividend is approximately March 16-19.

The heaviest commission will be with the potential assignment. At $24.95 commissions will eat up 42.2523% of the profits, leaving me with $34.10. Looking at it another way I basically sold for $0.3410 per share over $26. $26.341 Assignment Price - $26.04 Average Cost = net profit of $30.10.

If there is no assignment then I'll get to keep the $59.05 and I can continue writing.

Here's where not selling the full number of contracts comes in; if the share price rises closer to $26 then the Premium will increase as well. I can wait until the shares come close to $26 (or higher) and average in by writing a second Call for a higher Premium. If the shares fluctuate and decline afterwards I then have a choice of Buying to Close (BTC) the position.

2) Going underwater on my investment.

This is tough as my CWB example shows my average cost is $26.03, but share price is at $23.56. Holding for the long term I have a combination of choices. a) write a put to accumulate more shares via assignment and/or try to gather more premiums, and b) wait for a fluctuation in the price and write a Call closer to my break even.

Instead of writing a new Put due to existing exposure; I opted to write a Call as the share price bounced from lows to $23's.

3) Choosing Strike Price

This depends on the current stock price. Targeting higher Strikes Out of the Money will garner a smaller premium. Closer to share price gives a better premium.

4)  Expiry Date

This also factors into the Premium. Further out gives you higher Premium.

5) Company/Stock Types?

I want dividend type stocks to achieve long term income goals. So, the safest is to target these stocks.

Options Expiry Day: Premium is Mine! $X TMX Group +904.5662% (November 20, 2015)

I guess we should be grateful for the small wins.  Though lately I have been losing a lot more than I've been gaining.

Back in August 21, 2015 I picked up 100 shares of TMX Group (X) via Put option assignment .  Average price per share ended up $49.509, but the underlying stock was whipped down to $45.89; giving me an instant paper loss of $3.619/share.

Unexpectedly, back on October 8th the stock price continued recovering and closed up to $48.95. The following day October 9th it resumed its decline and I saw an opportunity as the premium for November 20th's Call expiry went gone up. (In retrospect, I probably should have sold X, but I don't mind holding this stock.) I took the opportunity to write a Call @ $1.10 with a net premium after commission of $0.9905.

Date

Symbol

Type

Expiry

Strike

Quantity

Price

Gross

Commission

Net Price

Net Amount

Exposure

Status

Type

Net Revenue

% Gain/Loss

2015-10-09

X

Call

11/20/15

50

1

$1.1000

$110.0000

$10.95

$0.9905

$99.05

$0.00

Expired

Covered

$99.05

904.5662%

I had gone on vacation not long after writing and returned before October 26. The price had declined to the $46's and I saw another opportunity. This time to write a Put to allow myself the potential to average down. The premium was juicy taking in average $1.1405.

The stock floated around the strike of $46 and by November 9 recovered upwards to $49, but again began to decline again. With less than 10 days to go until expiry, and the need to maintain reserves due to other investments, I decided to close out the position.  I still felt it would not likely go into the money and decline below $46 by Nov 20th.

In any case, this trade netted me a gain of $88.10, +77.2468%.

Calculation formula: (Net Sell Premium ($114.05) - Net Buy Back Premium ($25.95)) / Net Sell Premium ($114.05)
= 77.2468%

Date	Symbol	Type	Expiry	Strike	Quantity	Avg Share Price	Gross	Commission	Net Return	Net Amount	Exposure	Status	Type	Net Revenue	% Gain/Loss
2015-10-26	X	Put	11/20/15	46	1	$1.2500	$125.0000	$10.95	$1.1405	$114.05	$4,600.00	Closed	Covered
2015-11-09	X	Put	11/20/15	46	1	$0.1500	$15.0000	$10.95	$0.0405	$25.95	$4,600.00	Closed	Covered	$88.10	77.2468%

Option expiry was Friday November 20th and sure enough X closed at $46.69.

a) I was right that my previous Put would not have been assigned.

and

b) as I didn't mind whether X was sold or held, I didn't bother buying it back to close and could afford to wait for the expiry date.

Date

Symbol

Type

Expiry

Strike

Quantity

Price

Gross

Commission

Net Price

Net Amount

Exposure

Status

Type

Net Revenue

% Gain/Loss

2015-10-09

X

Call

11/20/15

50

1

$1.1000

$110.0000

$10.95

$0.9905

$99.05

$0.00

Expired

Covered

$99.05

904.5662%

A small gain, but I'll take it: $99.05, +904.5662%

Calculation:

Net Sell Premium ($99.05) / Commission ($10.95)

= 904.5662%

With the Call and Put Premiums collected $88.10 + $99.05 = $187.15 my gross break even price is now $ 49.509 - $1.8715 = $47.6375.  Now that I think about it, knowing my new break even; I have more flexibility to either sell the stock above that point or to write another Call at a lower strike price. In addition, a $0.40 dividend was declared, which will give me $40. All things being equal, bumping break even to $48.0375. This will require some more thinking and waiting for the next swing in prices.

Note: Questrade will have a Transaction entry to show the expiry, but it will not show until my next statement.  I do have an example of expiry for some $G Goldcorp Put options expired back on February 20, 2015.