Wednesday, 16 January 2013

Take 2: New Purchase & Options Trade - CSX

Note: I edited my original post to correct mistakes made and reflect feedback as well as new information.

Yesterday I added $3,000 to my brokerage account. Today, I bought 200 shares of CSX @ $20.90, including commission ($4179.93). My shares will add $112 in annual dividends, which brings my 12-month forward dividends to $3750.34.

I then proceeded to sell my very first option. I would have liked to sell put options, but I lost a long battle with my brokerage firm. I need options trade experience before they will let me sell naked puts. So I sold 2 January '14 call @ 2.15. The commission on the call was $12.45, so I net $429.99 - $12.45 = $417.54.

My buy-write can go one of four ways.

Scenario 1

The option expires worthless, and I get to keep 200 shares of CSX at a net cost of $4179.93 - $417.54 = $3,762.39 ($18.81 per share).

Scenario 2

My shares get called away, and I receive $4000 minus a commission of $53!

Profit = call strike - net cost of stock - assignment commission = $4000 - $3762.39 - $53 = $184.61
Return before dividends = $184.61 / $3762.39 = 4.9%
Return including dividends = ($184.61 + $120) / $3762.39 = 8.0%

I assume the next 4 dividends will add up to $0.60 - I'm factoring in a dividend increase.

Scenario 3

The shares get called before the call expires.

Scenario 4

I can buy to close the call.


Does this seem right to you? I'm excited and a little nervous at the same time. I hope my calculations are correct.

Feedback I can learn from would be much appreciated. I'm also wondering how to add the 200 CSX shares to my portfolio. Do I add them at all? Do I add them in at a cost of $18.81? Let me know how you do it.


8 comments:

  1. I like your move. Like you I recently bought some CSX but I was able to sell a put. I have a chance of picking up additional share instead of selling shares. You can still come out great either way. I'm assuming you sold a $20 Jan '13 call. You sold the right to buy shares at $20 on that date and someone else bought the right to buy shares (your shares) at $20 on that date. So if shares are around $20 or higher they will most likely get called away.

    I'll check to see what I get. It is getting late and I've been drinking wine so someone else may want to verify.

    200 shares cost you $4179.93

    If scenario 2 happens, you will adjust
    your cost basis at the date your shares were called away by by subtracting premiums and adding fees.

    Your premiums collected were $440 with fees of $12.50 I'm also assuming you will have a $20 fee to close out the call (that's what I get charged).

    So your cost basis will be ($4179.93 - $440 + $32.50)/200 = $3772.43/200
    = $18.86/share.

    Your profit will be $4179.93-$3772.43 = $407.50

    Your total profit with dividends would be $527.50.

    Your return would be $407.50/$4179.93 = 9.7%. (without dividends)
    With the dividends(assumed $120) it would be $527.50/$4179.93 = 12.6%

    The only drawback to this is that since your shares were called away before a full year, your profits will be subject to short-term capital gains tax (taxed at your regular income level)instead of long-term capital gains tax. Your dividends are just taxed at the dividend rate.

    As for adding the shares to your portfolio, I'd use $4179.93/200=$20.90 and adjust if and when shares are called away. Dividends for tax purposes don't adjust your cost basis.

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    1. Thanks for de detailed comment. It really helps. After looking at your comment, and having a close look at my layout, I'm going to make a few changes to my post. I'd like to find a comprehensive format that I can use for future buy-writes. Also, I think my profit before dividends would be $4000 - $3772.43. Thanks again.

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    2. I forgot to mention that in Canada, capital gains are taxed only one way. 50% of realized capital gains is taxed at an individual's tax rate.

      And I will add the shares to my portfolio using $4179.93/200 = $20.90. If the call expires worthless, would you adjust this to $18.81 per share? Or do you keep profit from options seperate from stocks in your portfolio? Is it just be a matter of preference...

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  2. Great post with lot of information.Thank you for this blog. Options Trading

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  3. Just wondering, but it sounds like you made two separate trades. Most brokerages will let you do a buy-write where you simultaneously but the shares and write a call option for a net debit. This cuts down on your commission cost instead of being charged when you buy and also when you write the call. Just a heads up for the future if you didn't already know about this.

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    Replies
    1. You are correct, I made two seperate trades. Thanks for the advice - I had no idea you could do that. I was planing to make another buy-write in the coming weeks. I will call my brokerage firm to see if and how I can do both simultaneously.

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    2. Called my brokerage firm this morning. Unfortunately, they do not combine a buy-write into one transaction. I also find their commission of $53 over the top.

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    3. That's a shame that they don't offer it and the commission being that high seems odd. Might be time to shop for a new broker. The buy-write is nice because it saves you one way on commission. I hate giving extra money to my brokerage although I have been pleased with them so far.

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