Visa - Options Trade Review

In this Visa options trade review, I provide an update on the status of the Visa covered call option trade I disclosed in my April 8, 2021 Skim Additional Income With Covered Calls post.

RRSP 'Melt Down' Strategy

We hold the bulk of our V shares in a Registered Retirement Savings Plan (RRSP); I do not disclose the details of these accounts. However, I do disclose that V is the largest holding in my FFJ Portfolio Holdings Review: April 2021.

Skimming additional income fits in well with our RRSP 'melt down' strategy.

Our tax accountant has confirmed we should withdraw funds from our RRSPs now and not wait until we reach 71. This is the age by which time an RRSP must convert to a Registered Retirement Income Fund (RRIF). If we do not 'melt down' our RRSPs, our mandatory annual minimum RRIF withdrawals will attract the highest tax level.

We have several years before we reach 71. The value of the RRSPs and the current Canadian tax structure, however, require several years in which to 'melt down' the RRSPs.

Given this, I no longer automatically reinvest the dividend income generated from the holdings within the RRSPs. This dividend income and any options income I can generate now accumulate as cash.

The intent is to build cash in the RRSPs and to strategically sell shares so we can withdraw funds from our RRSPs. The plan is to reinvest the bulk of these funds to acquire shares in our taxable accounts when funds, net of withholding tax, are withdrawn from the RRSPs.

Naturally, we need to cover living expenses and ensure we have funds available to cover any additional tax. However, the intent is to have as much of the RRSP withdrawals working for us through investments in high-quality companies held in taxable accounts.

Visa - Options Trade Review - June 18, 2021 Expiry

I wrote several $260 June 18, 2021 Visa (V) covered call options contracts on April 8. At the time, V was trading at ~$220 and I was able to generate $0.55/share or $55/options contract.

Fast forward to May 26 and I have closed out these contracts at $0.09/share or $9/option contract (nominal transaction costs excluded).

The trade has resulted in a profit of $0.46/share or $46/options contract. This amount is acceptable because of the number of contracts written and because of the contracts' short duration (~1.5 months).

Visa - Options Trade Review - July 16, 2021 Expiry

After closing the June 18, 2021 options contracts I wrote the same number of contracts with a $250 strike price and a July 16, 2021 expiry. In exchange, I have received $0.90095/share or ~$90.10/options contract (nominal transaction costs excluded).

Valuation

When I wrote the $260 June 18, 2021 options contracts, $5.80 was the high end of FY2021 adjusted diluted EPS guidance from 41 brokers. Using $5.80 and the $220 share price at the time of the trade, the forward adjusted diluted PE was ~37.93.

If V's share price were to rise to $260, V's forward adjusted diluted PE would be ~44.8.

V shares are now trading at ~$228. Based on $5.80 forward adjusted diluted EPS for FY2021, the forward adjusted diluted PE is ~39.31.

If V's share price rises to the $250 strike price, the forward adjusted diluted PE is ~43.1.

As much as I like V as a long-term investment, I think V's current valuation is rich.

Visa - Options Trade Review - Final Thoughts

This brief Visa options trade review explains why, and how, I am trying to skim additional income using a conservative covered call options strategy. These trades are all part of our tax plan to 'melt down' our retirement accounts over the next decade.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long V.

Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.