Adding to Position: DOW

With options expirations coming up this Friday, here is my final catch up post on the trading activity so far in September.  This time I’m posting about an adjustment to my DOW position, where I bought a 100 share lot and averaged my share price lower, then rolled-down the option contract I had written on the shares.

I had established my position in DOW with a 200 share purchase in June and sold June 33 calls on the shares.  I’ve had good returns on three roll-outs so far, but I have been getting anxious about liquidity lately and so I want to set up contracts that will turn over at a profit.

With fresh cash from the VIAB call assignment, I did my normal screen and DOW was one of the stocks that came up.  Seeing that I was under ceiling there (one of my rules of thumb this year is to have an average position basis at $10K, and DOW was at $6,600 or so), I decided to have a look at what I could do if I added 100 shares to this position.  The trade involves (1) adding 100 shares; (2) buying back the current Dec 33 contract; (3) selling the Dec 32 contracts; and (4) adding estimated dividend proceeds for the September ex-date.

I was able to execute the trade and meet my goal for investments – a 12% annualized return on invested capital.  

On another note, I only used a portion of the VIAB proceeds, and since dividend payments have been coming in from all the August payers, I have a little more cash reserve than I usually carry.  Since I expect that my 500 share GE position will be called either on Thursday or Friday this week (the stock goes ex-dividend on options expiry), I will combine the extra reserve with those proceeds to set up some new positions next week.

Here’s the analysis:

DOW

Basis:  300 shares costing $9,554.53, average share price $31.85

Total option premiums:  $520.21

Total dividend payments (assumes collecting the September dividend on 300 shares):  $160.00

Total stock gain at $32.00:  $27.47

Total, absolute gain on the position:  $707.68

Total, absolute return percentage $707.68/$9,554.53):  7.41%

Annualized total return percentage (held approx 220 days):  12.29%