Contents
I will occasionally employ the use of conservative option strategies to generate additional income.
I continue to be dumfounded as to the extent to which the share price of several companies have appreciated in the last few months. Given this, I have mentioned in several recent articles that I am being cautious in this current environment.
My share purchases have been few and far between in recent months. I have, however, not been inactive as I have employed the use of conservative option strategies where I think there is a reasonable probability to generate additional income.
In this article I provide an update on the status of option positions which expire May 17, 2019.
Becton, Dickinson and Company
I encourage you to read my March 21st article to see the background which led me to write $260 May 17, 2019 covered call contracts. With BDX having pulled back subsequent to that article (discussed in this article) the covered calls, for which I received $1.90/share, will most likely expire worthless this Friday. This means I retain the net premium I collected and I still own the underlying shares.
BDX has pulled back significantly over the past couple of months to the point where I view them as fairly valued. I am not prepared to write covered calls on fairly valued BDX shares and, in fact, just disclosed that I acquired additional shares.
3M Company
This is another company where the share price has pulled back significantly subsequent to me writing covered calls (disclosed in this article).
I have been a long-term MMM shareholder and view this company as having an incredible collection of assets (industrial business lines, safety and graphics business lines, health-care business lines, electronics and energy business lines, and consumer business lines).
Look at page 13 of 25 in the recent Q1 2019 Investor presentation where you will see that there are 5 business groups which generated in excess of $1B in quarterly sales and each has a reasonably health Operating Margin; the Consumer Group’s 19.5% Operating Margin is the lowest.
I do not envision MMM being broken up but if it were, shareholders would find themselves owning shares in several independently successful companies!
The reason MMM falls within my top 20 holdings is because of its ability to remain profitable, to generate strong Free Cash Flow, and to reward shareholders with a steadily increasing dividend (is 60 continuous years long enough for you?).
While there may be some investors who think breaking up MMM could unleash value I prefer that MMM remain unified despite current challenges. The reason I feel this way is because as a retiree I can hold shares in one company which give me exposure to all the business lines reflected above.
MMM has certainly underperformed just about every other of my holdings within the past year but since I intend to remain a long-term shareholder I am not concerned. I am, however, not averse to finding ways in which to extract additional cash flow from my MMM investment.
Based on my March 2019 MMM analysis I decided to write covered calls because I was of the opinion the company’s share price would not rise above the $220 strike price by May 17, 2019.
May 17th almost upon us and shares trading at ~$175. I am reasonably confident the covered calls will expire worthless meaning I retain the underlying shares even though someone paid me $1.51/share for the right to purchase my shares at $220.
Automatic Data Processing
ADP is another company where I have been a long-term shareholder. In fact, I have benefited from the Broadridge and CDK spin-offs which occurred several years ago.
When I wrote my February 2, 2019 ADP article I disclosed that I would be writing covered calls. I wrote May $155 covered calls and received $2.15/share never thinking that shares would rise to the $155/share level from $143.63/share when I wrote the option contracts.
Well….that didn’t work out too well. Just look at ADP’s stock chart.
In this very recent article I expressed optimism that ADP’s share price would retrace to $155 before expiry but subsequent to that article, market conditions have not behaved as I expected (share prices have risen).
I continue to be of the opinion that ADP is overvalued by at least $15/share but I do not want to part with these shares. I, therefore, closed out my covered call position on May 15, 2019 at a slight loss.
I collected $2.15/share when I wrote the covered calls and just bought them back at $4.70/share resulting in a loss of $2.55/share. I then placed a new August 16, 2019 $165 covered call trade for which I received $4.10/share.
The Hershey Company
This trade has REALLY not worked out as planned!
In this HSY March 26, 2019 article I indicated that I expected HSY’s share price to rise. I thought by writing out of the money covered calls with a ~$7/share buffer (this company’s stock price generally fluctuates very little) I would, however, find myself in a position where the calls would expire worthless; I wrote ~$120 calls when shares were trading at ~$113.
Shares are now trading at ~$127.50!
I think HSY is currently overvalued with ~$119 being a fair value. I am not about to buy back these options and will let them expire and have my shares called away; I did not write calls on 100% of my HSY position.
I envision HSY shares will retrace at some stage and will revisit the degree of my HSY ownership if/when I view the valuation to be more reasonable.
Final Thoughts
That’s it for my options update. I continue to be of the opinion that many (most?) of the companies which appeal to me are richly valued and am in no rush to deploy additional money at this stage.
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long BDX, MMM, ADP and HSY.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
