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Tracing My Options Activity In Philip Morris Int’l (PM)

24 June 2010 No Comment

Since early in 2009, I’ve held 100 shares of Philip Morris Int’l (PM).  Early in 2010, I decided to start playing with options to supplement the dividend income that PM was generating.

Selling Covered Calls

In January 2010, I sold a covered call contract with a March 2010 expiration and a strike price of $49.00.  The premium I collected was $.65 per share, or $65.00 for the 100 shares.  To explain this option contract, selling a covered call means I have the shares underneath and will be forced to sell the shares if it hits the agreed-upon strike price.

Banked $65.00 for selling covered call

In March, the stock was higher than the $49.00 so I was forced to sell my 100 shares at $49.00 per share.  Since I’m comparing here the options activity with simply holding the shares and collecting dividends, I must also note that I missed a dividend payment of $.58 per share in early April as a result of selling these shares.

Banked $4,900.00 for selling shares

Lost $58.00 in dividends

Selling Put (Cash Covered)

Immediately after selling these shares, I sold a put with a strike price of $46.00.  The contract expired in June and paid me a premium of $.65 per share or $65.00 for the 100 shares.  This contract obligated me to purchase 100 shares at $46.00 if PM was under $46 per share.  Since I already sold at $49, obviously, I’m fine buying at $46.00.

Banked $65.00 in selling cash-covered put

At the end of last week, PM shares were trading just above $46, so the contract executed and I purchased 100 shares for $4,600.  I now own the same 100 shares again, although I basically gained $300 by selling 100 shares at $49 then buying them back for $46.

Purchased 100 shares at $4,600.00.

Conclusion

If you take out the dividends missed by not holding the shares from the premiums collected, I still made money ($130.00 in total premiums minus $58.00 in lost dividends = $72 gain).

Furthermore, I essentially banked $300 by selling 100 shares at $49 then buying back at $46.  The result is a gain of $372 in a matter of 5 months while still holding 100 shares of Philip Morris which I definitely want to be holding.

If PM shares run up towards $50 again, I will likely sell another covered call contract to supplement the dividend income and potentially sell the shares at a gain (low $50’s / purchased in $46).  The overall strategy is to achieve a higher return by combining dividend income with options income.  If the options trigger and I’m forced to sell for a nice gain, so be it.

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