Bull or Bust

a bull's view

CASE STUDY – FCX

Good Morning Everyone!

Briefly, before the market open I wanted to take a second and provide details on a trade I made with Freeport-McMoran [stock_quote symbol=fcx].

The life of this trade and how I have ended up is exactly what could and sometimes should happen as the seller of a cash-secured put.

On Monday, March 28, 2016 (just a week ago today) I SOLD 100 contracts of the APRIL 2016(1) 10 WEEKLY PUT @ .25 per for a total premium of $2,500.00. This option EXPIRED on APRIL 1 because it was a weekly option.

I intended on making this premium in a single business week during a single trading week. At the time FCX was trading above $10.00 per share…I believe it was in the $10.35 range.

On Friday, April 1, 2016, the market dipped and so did FCX. It actually dipped well below $10.00 per share trading at almost $9.50 in early session. I knew I was at risk of getting exercised (assigned), but I saw an opportunity.

Here is where I, as an experienced trader and someone who is intimately familiar with FCX, made a decision to SELL an additional 100 contracts of the APRIL 2016(1) WEEKLY 10 PUT @ .34 per for a total premium of $3,400.00 bringing the combined premium for the week to $5,900.00.

I sold them the DAY of expiration knowing FCX would go back up. Yes, $5,900.00 premium for a single business week of exposure for 20,000 shares of FCX at $10.00 or $200,000.00 in collateral.

Today, Monday, April 4, 2016

I now own 20,000 shares of FCX. Why? I was assigned Saturday morning because FCX closed Friday at $9.89 per share and it did not go above my $10.00 strike in after hours trading. I now own 20,000 shares with a cost basis of $10.00 per share.

This is the “advanced” part that is sometimes hard for people to visualize. I did not make my entire premium of $5,900.00. Since the underlying stock closed below my $10.00 strike I, for the sake of this article, “lost” the difference between the $10.00 strike and the closing price of the underlying which was $9.89.  Therefore, 200 contracts (20,000 shares) x .11 cents (difference between strike and closing price) = $2,200.00.

I kept $4,700.00 of the premium upon assignment. Make sense? I didn’t lose money, I just didn’t make as much premium as I had anticipated because the underlying closed below my strike price of $10.00.

SO WHAT NOW?

When I awoke this morning not only did I have 20,000 shares with a cost basis of $10.00 per share, but FCX was UP trading at, you guessed it, $10.00 per share! How fantastic is that? I could have SOLD all 20,000 shares of stock in pre-market trading immediately and indeed made the entire $5,900.00 premium as expected.

Remember you can buy and sell stock in pre-market trading starting at 7 AM Central Time. That’s a big difference between stocks and options. You can only trade options during normal market hours.

By selling all 20,000 shares at $10.00 per share I would have gained the .11 cent difference back on the actual share price to make up my entire premium of $5,900.00. You with me? If FCX goes above $10.00 per share (my cost basis) I will make even more money and I know damn well it will – eventually. That’s why I didn’t really care about getting assigned.

You never sell cash-secured put’s against any stock you would not want to own immediately. Also, never sell a strike price you are not willing to pay for said stock. If you’re assigned you will own that stock for that strike so be careful!

CONCLUSION

I did not sell my shares and will hold them until I can make a little more money. I know FCX will be above $10.00 soon. I’ve already made $4,700.00 in premium and I now own 20,000 shares of FCX that I can keep forever if I want.

FCX does pay 2.02% dividend yield or .20 per share. That’s $4,000.00 per year in dividend income. Not too bad.

Stock and Option Trading