At the start of this year I read about writing put options on stocks which I would like to have in my portfolio. The ratio behind this is that its a way to buy shares for a lower price than the current market price. This for example realized by writing options with a strike price close to the current share price. If you get assigned to buy the shares the price you pay is the strike price minus the option premium received. It’s of course also possible that at the expiry date of the option the share price is above the strike price of the put. In that case the option premium received is extra income.
Writing or going short on a put option means you sell someone the rigth to sell shares to you at a agreed price before the option expires in the agreed month. this means that I as seller of the option receives the option premium, but with the risk to buy shares at a lower price than the market price.
I did for example write 2 options Iberdrola €6,75 expirting in september 2017 at a price of 0,12 per share. Option contracts have 100 shares as underlying value so in my case I received 200 x €0,12 = €24 – €3 transaction fee = €21
If Iberdrola would be above €6,75 at te expiry date in september this €21 is extra income. If the stock price of Iberdrola would be below €6,75 I would be forced to purchase the 200 shares at the agreed price of €6.75. The net purchase price in this case would be €6,75 – €0,21 = €6,54. When I sold the options the stock price of Iberdrola was €6,87. Techincally this means that in July I ‘signed’ a contract to receive €21 or to buy Iberdrola shares with a 4,8% discount compared to the stock price in July.
In my eyes I would be happy with both. Receiving the option premium as a way to generate extra income would be fine to me, but getting forced to buy the shares of Iberdrola would also be fine to me, because its a position I want to increase in the near future.
When the options expired at the 3rd friday in september the stock price of Iberdrola closed at €6,729. This was below the strike price of €6,75 and I was ‘forced’ to buy the shares at €6,75. No harm done, because of the option premium I received my net purchase price was €6,54 so I increased my position in Iberdrola with 200 shares as I already planned today.
The only thing which is bothering me is that on the next monday after I got assigned the shares of Iberdrola the stock price increased and I decided to sell them at €6,781.
Selling 200 Iberdrola shares 1.356,20
Purchase 200 Iberdrola shares -1.350,00
Received option premium 24,00
Transaction fee options -3,00
Transaction fee option expiry -2,00
After closing the position I did go short on 2 options Iberdrola again. Again with a strike price of €6,75 but with an expiry date in march 2018. I received a premium of 0,40 per share and received after deduction of transaction costs €77 as extra income. I was happy to again be able to write options on a position i wanted to increase and generate income again.
After some days I only started to doubt my decission. In my eyes I’m not making a decission as value investor, but its more a speculative decission to write options. This is because I didn’t stick to my original plan to write options and keep the shares if I would be assigned at the expiry date, but sold them to again write put options for extra income while investing my monthly deposit in other shares instead using it to fund the Iberdrola purchase.
I will monitor myself (I hope) the next few months to see how I will act if I’m again assigned to buy shares.