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.


  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.

    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.

    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...

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

  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.

    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.

    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.

    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.