The UVX put I bought will take some time to move into a profit. And I am getting bored again.
What I did
So yesterday I sold 2 put contracts on ABI, strike: 100 and expiration in May.
This gets me a premium of 3,95 euro which is not a bad return for a 2 and a half month time period. Another 790 euro of cash added to the stash. This is actually less than 0,3% of the stash but if I can do it 2 more times I will have added another 1% to my return this year!
If I get assigned I buy a great company with a decent dividend at 96,05 euro a share. I chose the lower strike of 100 euro as I do not really want to be assigned. I do kind of have the money to pay for the shares. You see, my special construction (which I do not explain since it is highly leveraged stuff) pays me a lot of cash up front: around 38 000 USD. Financing fees will eat up around 14 000 USD during the life of the construction but in the end I should end up with around 24 000 USD in profits. I keep all this cash as cash as things can always go wrong and then I need to move fast and close the construction. But with the recent rise in stock prices I now have a nice little buffer and I abhor cash not working for me! These puts are a way to get some return and most probably still keep the cash buffer intact. I have to admit that I do like making money on money I made with money I do not own!
The risk of things going bump in the night
If everything goes well I’ll have made a bit off extra cash. If stocks start going down again I will close the construction (which I would do anyway) with a small profit. I will then not have enough cash for the 200 ABI shares. But if I do get assigned the ABI stock, I still have the ability to buy them with borrowed money from Lynx. This will then be the only leveraged position I have. It will be less than 10% of my total portfolio. Dividends of ABI would cover most of the financing fees for this leverage so I could keep it for a very long time. Most likely I would also write covered calls on the position, more than generating enough cash to cover the financing fees. With leveraged plays I always look at the possible downside and then determine if the risk is acceptable.
Variation on a theme
Whendoyouretire did a similar trade but at 110 euro strike. That’s actually pretty smart of him because he does want to get assigned since he is a dividend growth investor! If the stock does go higher, he will have earned one hell of a premium! Since I would prefer not being assigned I chose a much lower strike. But that is one of the main advantages of options. With put and call, sell and buy, moving the strike price or the expiry date, options actually offer you a very big pallet of possibilities for a whole lot of different purposes.
The girlfriends portfolio
I only figured out the construction in June of 2016 and I first wanted to test it out in my stash. This meant that the girlfriend was a bit late to the party. Her construction ends in March. At present prices I do not feel secure in repeating the construction for her. So yesterday I unwound the construction in her account. Total profit of it was around 7.000 USD. Not bad for 6 months. I also opened a new 1 x leveraged position (the construction was 2 x leveraged) in Monsanto with the use of CfD’s. Only 1 x leverage as I want to avoid any possibility of margin call on her portfolio in the small change that the merger between Bayer and Monsanto falls through. I am also keeping her construction profits in cash as an extra precaution and to cover the overnight financing fee’s of the CfD’s. When Monsanto moves higher and the risk of losing money on the leveraged position gets smaller I will look for a way to invest some of this cash. Financial Velociraptor did a similar merger arbitrage play but without the use of any leverage I think. The merger arbitrage of Monsanto first came on my radar when I read Berkshire Hathaway did it. But one should always do one’s own homework. I am not that impressed by the performance of Monsanto but the 2 billion USD breakup fee if the merger would not succeed convinced me. If the merger does not go through (and Bayer has 2 billion reasons to make sure it does happen) Monsanto will be sitting on a mountain of cash!
That is me done until I can profitably sell my UVXY put. Time to start concentrating on my diet!