Executed My First Covered Call Roll Forward (TransCanada Corporation $TRP)

Not long ago I added a "Covered Call" component to my investing strategy. Then as the markets tanked further I found this tool to be useful as a "Hedge-Lite". The markets have been riding up lately and as outlined before as a risk; the hedges turned to "Sellers Remorse". I sought to preserve my position as the price of TransCanada Corporation ($TRP) rose above my Covered Call's Strike Price.

January 22:

- Original holdings of 244 shares + waiting for another 2 shares from DRIP.
- Wrote 2 March 18 Covered Calls $49 for $0.85 premium per contract.
- Average premium net of commissions: $0.78775
- Total Premium: $157.55
- TRP continued on its upwards trajectory.
- TRP Closing Price: $46.89

January 28:

- TRP rose within range of $48 and hence I became fearful of a quick climb towards $49.
- Added 54 shares @ $47.89.
- Average share price: $39.2530537
- Wrote a final 3rd Call @ $49 for $1.60 premium per contract.
- Average premium net of commissions: $1.021166667
- Total Premium: $306.35
- TRP Closing Price: $48.57

Feb 4:
- TRP Closed above Strike Price: $49.02

February 5:

- DRIP executed, purchased 2 shares @ $47.77
- Average share price: $39.3098
- TRP Closing Price: $49.40

February 22:

- TRP Closing Price: $50.80
- In The Money Calls meant I would be more likely to be assigned and lose the shares.
- Sellers Remorse kicked in and a bit of attachment as I've owned TRP since February 18, 2009. (Literally, 7 years!!!!)
- Wanted higher compensation for my shares, but buying back the Calls would be costly.
- Closing price of the Calls: $2.53.

The solution to my Seller's remorse was relatively simple: Do a Roll Forward. Ok, maybe not THAT simple, but the concept is to buy back the options then write a new set of options to garner a higher premium that can offset the difference in prices.

However, the only way to make up for the losses would be to write a further out Premium. I found my target looking out to the May 20 expiry and a higher Strike price of $52.

Here's how the Roll Forward was executed:

- Bought To Close the 3 outstanding March 18 Calls $49 @ $2.14.
- $655.70 (Closing Premium Paid) - $306.35 (Original Premium Received) = $349.35 loss upfront.
- Wrote 3 new May 20 Calls $52 @ $1.45.
- New Premium: $421.30
- $421.30 - $349.35 = $71.95 Premium Offset and Gain.

End result:

- Covered losses with new money.
- Removed the obligation to sell my shares at a lower than current market price.
- Added a new potential obligation to sell my shares, but at an increased sell price from $49 to $52.
- Extended the Covered Call's "Hedge-Lite" from March to May (two months).
- Maintained dividend potential for the ex-dividend date March 27, but not June 26.
- The extended time gives me an opportunity to re-assess whether I will need the hedge.
- I'm still quite emotional about my stocks and a sense of 7 year long ownership that TRP has given me (Yea, guess I'm old school). Letting go will/would be difficult.

Hedge-Lite: Writing Covered Calls

I'm remain net long as I seek to achieve my goal of $50,000 in yearly distributions. However, it really is painful to see the market value of my portfolio take a beating. Seriously painful. One strategy that works in a stable or declining market is writing Covered Calls to effectively create a small and limited hedge of my positions.

Writing a Covered Call means you are selling the right for another entity to Purchase shares that you own at a set Strike Price. This occurs if the share price is above the set Strike Price and works in a stable or declining market because the likelihood of expiry of the Call Option increases as share price decreases below the Strike Price (Out of the Money).

Expiry is the best outcome as it becomes free money in your pocket without further commissions. The Premium also generates a greater buffer for your shares, albeit it can be small one depending on the duration of the Call. The second best outcome would be buying back (Buy to Close) the Call options at a lower price. However, this makes more sense if you believe the market will rebound. The third best outcome might actually be the release of funds locked into the stock, which allows you to go and re-deploy the cash into another investment. An additional boost would be if any dividends are paid out during this time period until expiry of Buying to Close.

What are the hindrances to executing this strategy?

1. Belief that the market will rebound by the time of expiry
• Thinking the market will go back up after you write the Covered Call may cause you to think twice before writing the Covered Call.  This certainly could happen, but the vital piece of this strategy is that the Call is Covered by actual shares you own.
2. Commissions
• Depending on your brokerage the cost of buying/selling an Option is higher than buying actual shares. Also, you may need to consider the additional and much higher commission of Assignment, or when the stock is above the Call's Strike Price and hence must be sold.
3. Matching a good expiry date with a worthwhile Premium
• Does the Premium compensate you enough for the risk of having your shares sold and the time spent to wait for expiry?
• Does the Premium accommodate commission costs if you were to either Buy to Close or get Assigned?
4. Seller's Remorse
• You write a Covered Call then the share price goes up, which makes it more likely you'll be assigned and the actual price of the Call will go down.
5. Limited inventory of a stock
• A higher number of shares will allow you to extract more Premiums and to spread out the Commission costs, which increases the cash potential.

Example:

BNS

Current Price $52.92

Average Cost: $56.3952

Covered Call: BNS 2016APR15 56.00

Premium: $1.0278 (after commissions)

This means when April 25, 2016 rolls around and the share price does not reach $56.00 then I will pocket the $1.0278. In addition, there is a limited hedging aspect. I would consider the $1.0278 as a buffer for potential losses. In effect I am protected as if my shares' average cost is $56.3952-$1.0278=$55.3674.  When the Call options expire it will not impact the actual average cost; merely the cash that is now mine.

Looking at Buying to Close, the last indicated trade price was $0.87. This would mean $1.0278-$0.87=$0.1578. A much smaller buffer than if waiting for expiry.

As mentioned above, in this case there is a benefit with receiving an additional dividend before expiry date. BNS has an upcoming ex-dividend date of April 1; for an as of yet un-announced dividend of $0.70. This will provide an additional buffer the any downside of the share price.

The question is what if you own; in my case approximately 700 shares? Would I write a full 7 contracts or less? That is not as easily answered and depends on your needs. I wrote a post about Building Inventory For Covered Calls as a guide for myself of what portion of my share holdings I would be willing to part with via Covered Calls.

$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.

More distractions writing more Puts. Dislocations in Canadian Telecoms: $SJR.B Shaw announced purchase of Wind Mobile

Wednesday December 16, 2015 was an interesting day.  The Fed announced its first rate increase in 7? years.  Many were holding their breaths for that day and the market had been declining for some weeks.  That is until the Monday when markets started turning upwards. Post-Fed, the markets surged higher.

In Canada, after hours it was announced that Shaw will purchase Wind Mobile for $1.6 Billion. I was driving home at that time and my jaw dropped as I thought how the telecom landscape in Canada will change. Well, that and the fact that I intended to add to my BCE position and that day wrote two February Puts @ 54. Fun times.

http://newsroom.shaw.ca/corporate/newsroom/news/2015-12-16-Shaw-Communications-Inc-to-Acquire-WIND-Mobile-Corp/

http://business.financialpost.com/fp-tech-desk/shaw-communications-inc-to-acquire-wind-mobile-corp-in-1-6-billion-deal

Date

Symbol

Type

Expiry

Strike

Quantity

Price

Gross

Commission

Net Price

Net Amount

Exposure

Status

Type

2015-12-16

BCE

Put

02/19/16

54

2

$1.0100

$202.0000

$12.45

$0.9478

$189.55

$10,800.00

Open

Uncovered

Shaw operates primarily in the West Coast and had originally sought to develop its own teleco division.  Wind Mobile being a smaller and developing new entrant didn't have the scale to compete with incumbents Bell, Rogers, and Telus.

Mostly as expected today Thursday December 17, the major telecos took a hit on the anticipated changes to the competitive landscape in Canada. In particular, Telus bore the brunt of the news as they will get heavier competition in its home area of the Canadian West Coast.  This was evident from the share price declines and intra day they were down even more.

Closing Prices:
Rogers Communications RCI.B $47.45 -$2.81 -5.59%
BCE Inc. BCE $53.52 -$1.34 -2.44%
Shaw Communications Inc SJR.B $24.90 -$2.07 -7.68%
TELUS Corporation T $37.92 -$2.70 -6.65%

However, of interest was Manitoba Telecom (MBT $29.65 +$0.62 +2.14%). I've been looking to get back into this one since they completed their AllStream sale, which was said to be holding back other companies from taking out MBT. I likely will not pick up some shares, just because as you will see below am now potentially fully invested in telecoms.

Regardless, I believe Shaw needs Wind as a source of revenue and will benefit from this acquisition as it gets integrated into the company.  I wrote three January Puts @ 25:

Date

Symbol

Type

Expiry

Strike

Quantity

Price

Gross

Commission

Net Price

Net Amount

Exposure

Status

Type

2015-12-17

SJR.B

Put

01/15/16

25

3

$0.8500

$255.0000

$13.70

$0.8043

$241.30

$7,500.00

Open

Uncovered

Then I decided the price was right to add a bit more Telus so I wrote one May Put @ 38:

Date

Symbol

Type

Expiry

Strike

Quantity

Price

Gross

Commission

Net Price

Net Amount

Exposure

Status

Type

2015-12-17

T

Put

05/20/16

38

1

$2.0000

$200.0000

$11.20

$1.8880

$188.80

$3,800.00

Open

Uncovered

Whooopss... I totally messed up the Telus Put. Bid/Ask Spread was pretty wide. Bid: $1.80, Ask $2.63. Yea, I wrote for $2.00 and it hit when the stock dipped to the mid-$37s.  Totally not cool considering:

a) Stock was around $37 and strike at $38, means at least $1 of the premium is justified.

b) 5 months of time value would have been worth more than the second $1 of premium.

Hence, kicking myself a bit.

As Bell went down, I want to average up the Premium to give more flexibility to pare down later if necessary/possible. Added 1 more Put @ $1.80.  Average Premium is now $1.2733

Date	Symbol	Type	Expiry	Strike	Quantity	Price	Gross	Commission	Net Price	Net Amount	Exposure	Status	Type
2015-12-16	BCE	Put	02/19/16	54	2	$1.0100	$202.0000	$12.45	$0.9478	$189.55	$10,800.00	Open	Uncovered
2015-12-17	BCE	Put	02/19/16	54	1	$1.8000	$180.0000	$11.20	$1.6880	$168.80	$5,400.00	Open	Uncovered
Total	BCE	Put	02/19/16	54	3	$1.2733	$382.0000	$23.65	$1.1945	$358.35	$16,200.00	Open	Uncovered

Having Shaw's clout will allow Wind to grow over the longer term.  However, I think there is some opportunity from the dislocation caused by Shaw's move into the Telecom market.  Today's price drop is likely an overreaction as:

1) Wind has existed for some time and its impact on the telecom market is already present.

2) Shaw will take some time to digest Wind and the actual deal isn't expected to close until mid-2016.

3) It will cost Shaw a lot of time, money, and focus/attention to build up/upgrade Wind assets. Although they kept the Wind team in place, attention will still be costly if they want to keep reins on them and oversee developments.

4) Shaw will need to finance this move (TD+CIBC).

Transaction Terms & Financing

Under the terms of the Transaction, Shaw will acquire 100% of the shares of WIND‟s parent company, Mid-Bowline Group Corp., by plan of arrangement, for an enterprise value of approximately $1.6 billion based on quarterly financial statements as of September 30, 2015. Shaw has executed a fully-committed bridge financing facility with the Toronto Dominion Bank and the Canadian Imperial Bank of Commerce. Shaw is committed to a financing plan that maintains its investment grade status and accordingly will optimize the significant flexibility available to it, including potential debt issuance, asset sales, the issuance of preferred or common equity or any combination thereof. Additional details regarding the longer term financing of the Transaction will be provided prior to close.

- http://newsroom.shaw.ca/corporate/newsroom/news/2015-12-16-Shaw-Communications-Inc-to-Acquire-WIND-Mobile-Corp/

5) Shaw will likely end up raising pricing to the same level as incumbents in order to cover costs of above points (am I being pessimistic?).

In any case, I've effectively added a not insignificant $27,500 exposure to the Canadian telecom space and will need to be cautious.  Fortunately, it appears the decline in prices is starting to be cleared out as the day's close the declines were reduced somewhat.  There appear to be more macro risks at play though in the general markets, which could take the teleco's down alongside.

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.