Q4 2022 Option Activity Results

(This article was co-produced with Hoya Capital Real Estate)

Introduction

The last quarter of 2022 mirrored the other three, like riding a roller coaster, where both option expiration and some luck played important roles in the results.

As the above chart shows, the VIX Index, a measure of volatility, thus implied risk, peaked just before mid-October and trended downward for most of the quarter: that compresses option premiums. On the other hand, as the above chart indicates, interest rates climbed as the FOMC tried to tame inflation. Higher rates enhances premiums but at a much lower level than changes in volatility does.

I read one trading strategy is to be bullish when the VIX is above 30, as investors are buying put options to hedge against stock declines, pushing up the premiums a writer receives. Bullish investors could sell Cash-Secured Puts to profit from that activity. A low VIX reading like 19 could favor buying defensive Puts to hedge one’s portfolio, or even selling Call options to enhance yields if the market is stalling out.

A reminder to my regular option article readers and the new ones:

• If you have never traded options, read up first. I provide useful links at the end of this article.
• Option trading has risks, heavily dependent on the strategy used. Cash-Secured Puts and Covered Calls are consider among the less risky and basically the only ones I execute.
• To compare trades, where quoted, the ROI has been annualized, thus the shorter the life of that trade, the harder to earn the ROI shown.

Covered Call activity

Chemours Company (CC): This is a good example of a new Covered Call strategy I started; writing tight OTM strikes after being assigned. Here it was easier to do as I would still exit at a profit. Chemours was a part of the company I worked for before DuPont spun it off, so I know it better than most other stocks. This is an example where the ROI is high as the contract was open for under a month.

Cracker Barrel Old Country Store (CBRL):Probably for the first time in years, the continued rally in CBRL had me out when my NOV $110 Call was assigned. Unlike the shares called last quarter, this trade earned 15.84%, which included dividends and some option income not shown. The premiums accounted for 60% of the CAGR.

That exit didn’t last long as I wrote DEC $105 Put contracts. My mistake here was writing them close to an earnings call that came in below expectations, which cause CBRL to drop $20 over the course of the next week. I am now, again, the owner of 200 shares, with difference CC strikes in place. With a yield of 5+%, having funds locked up in this equity isn’t too bad; plus I like the food!

Kohl’s (KSS): Readers of my last report might remember KSS was one of my special situation trades that was going poorly. Indeed I was assigned off my Oct $37.50 contracts for 200 shares. Wanting to exit and maybe re-enter with a new CSP, I wrote three sets of CCs using close strikes. With the announcement that the CEO was “stepping aside”, KSS spiked above the $30 strike that expired that week resulting in my shares being called. With the price recovery and CC income, I exited with under a $100 loss. Counting my prior CSP, my overall exposure was positive but below my target for CAGR.

KSS closed the year near $25: I guess investors have cooled to the CEO change.

National Health Investors (NHI): Despite the 6.6% yield, I have set $65 as my exit price, which it broke before making that decision. This is a very hard stock to write Calls against due low volume and wide bid/ask spreads. My last cover went out four months and yields under 4% in extra income.

ONEOK (OKE): Like CBRL, I found myself out of OKE for the first time in years by both sets of shares being called off NOV $60 contracts. Because I was able to write several Call contracts and achieve some price appreciation, both positions had high CAGRs: 43% and then 136% on the one open only a month: dividend income helped. What the CCs results do not capture is the price difference between the purchase cost and the assigned price.

The data is a little confusing as another 200 shares were called in August so premiums were allocated between those shares and the 200 that were not called at that time.

PNC Financial Services Group (PNC): Like many financial stocks, PNC bounced around as investors tried to calculate the effect that the FOMC action would do to interest rates and loan demand.

I almost was called once but then the stock collapsed again. That movement pattern has the $170 premiums at elevated levels. Combined with 3.9% yield, PNC is generating decent income as I wait to get Called.

With the holiday coming after expiration, I rolled the December contracts into February $170s.

Schlumberger Limited (SLB): I have been doing trades on SLB since COVID hit: great premiums, multiple strikes and close spreads; besides it being a solid company despite the anti-fossil-fuel attitude of some. The quarter started as a CC holdings, then was Called, but I did two CSP trades. The results averaged 20% ROIs. The overall ROI on the Called position was almost 40% since I was Called above my cost.

Southwest Airlines (LUV): I like this airline over the others as it is less dependent on business travel and has a solid balance sheet. Unlike past quarters, I did not write any CSPs since I had 500 shares and more importantly, the premiums available were not as attractive as other opportunities. I came within pennies of being Called in December.

Here you notice a “CC Closed” type. Southwest made a mess of Christmas, resulting in 70% cancellations on the 26th and for several more days. The stock opened down $2 and I took that opportunity to closed out my option, netting 75% of the original premium. Hopefully, it will bounce back now they are fully operational again.

SPDR S&P Biotech ETF (XBI): This CC trade differs from the others in that I want to own the shares long-term but am willing to risk being Called and booking a possible loss on the overall situation. That said, the OTM strikes are numerous, but the contract length is usually longer than most due to the thin options volume, which explains why only one CC was initiated this quarter.

Vanguard Extended Market Index ETF (VXF): Here, I also want to own this long-term and thus never cover more than 50% of my holdings, unlike XBI where I cover sometimes 100%. Like many ETFs, option volume is low and spreads are wide, causing limited trades and distant expiration dates to be used, in this case over 4 months. Note the low ROI, which was caused by not wanting to be Called below $170/share, which at the time was almost 16% OTM.

Wyndham Hotels & Resorts (WH): If the economy can ever make up its mind and stays positive, this stock should do well. With only 100 shares to cover, it is a minor piece of the options strategy; one of those I augment with writing one/two CSPs against while waiting to get Called by using tight CC strikes. While waiting, trades are generating nice ROIs.

Cash-Secured Put activity

Altria Group (MO): After the feared dividend cut did not happen, I did a MO CSP for the second time. Unlike FCX discussed later, Altria is a low risk- low return choice but sometimes opportunity knocks and a fairly safe double-digit ROI is available, as was the case here when I wrote DEC $40s with an 8% safety margin, a bit tighter than usual but being assigned would mean holding a 8% yielding stock. A similar trade today only yields 6%.

Boeing Company (BA): I started using Boeing last quarter as the price got depressed over some bad news.

Due to a lack of funds, I only had one contract expire this quarter.

Even with my pessimistic view (18% OTM strike), the option was ITM toward the end. With improving news, I sold a March $120 Put, which you can tell was way too low in hindsight. The option-to-expiration now has a ROI below 3%, so I am thinking of rolling up the strike price to $150, which would have a 10% ROI and still be 16% OTM.

Freeport-McMoRan (FCX): Looking for stocks with high volatility, I returned to one I had not use in years, FCX. Being a mining company, its success depends on the world not going into a recession caused by monetary tightening. That extra risk, even with a 15% OTM strike, generated one of the better ROIs for the quarter: 23.88%.

Invesco (IVZ): This is a stock I used before whenever the market was weak and the IVZ price took a hit.

This time I almost got Assigned with the market correction just before the election. I did not, but my new CSP wasn’t executed until the price was back above $19 as I wanted to avoid the late October earning call.

Cash-Secured Puts vs CD activity

iShares Russell 2000 ETF (IWM): This was the only ticker I used as a CD replacement in the last quarter. One set was actually a Roll trade, the other occurred two weeks later. The four DEC $140, written when IWM was between $165/$167, generated an average ROI of 7.85% as the ETF closed at $174. To show the effect of volatility dropping from late September, a similar trade today would have a ROI under 5%.

Quarter and 2022 results

Totals	36	$10,004	136	$33,600
ROI		16.0%		13.4%
ROI: Put activity		7.2%		8.8%
Activity	4Q Count	4Q Premiums	YTD Count	YTD Premiums
Unassigned Puts	12	$3175	54	$12,991
Assigned Puts	4	$1742	21	$8982
Unassigned Covered Calls	14	$3590	47	$9030
Assigned Calls	6	$1497	14	$2597

Click to enlarge

I use $250,000 as the base for all the ROI in the above table as that is the amount, I set aside for the option part of my overall investment strategy. At times, some of that cash is tied up in the assigned stocks, most of which have calls against them. My target ROI is 6-9%. Without question, this segment of my investment strategy was the only one with a positive return in 2022, even when adjusting for the “bad apples” that I still own via assignments.

Open option contracts

Besides my 1Q “CD” Puts, I wrote a long Boeing Put as I thought the price was at a low ebb.

Portfolio strategy

The initial reason behind the major part of my option strategy, writing CSPs to enhance the .01% return on the cash I wanted to hold is greatly diminished as it is now earning almost 4%. The positive side of that is I can take less, accept a lower ROI since the cash has a higher yield.

While not at “panic” levels, the VIX Index is still above where it has been most of the time since 1990. While the higher interest rates help prop-up premiums, the market’s and especially the stock’s/ETF’s volatility really drives the premiums one can earn.

Regular readers of my option reports know I seldom (almost never) am on the Buy side of an option trade; just the writer side. None of the other Seeking Alpha Contributors I follow recommend being the buyer, just the writer, mostly via Covered Calls.

Final thought

As I closed out this analysis of the past quarter’s results, a reminder that option trading, especially naked Calls, can be very risky. The two option strategies I use are on the conservative end of the option trading spectrum: Cash-Secured-Puts and Covered-Calls.

For those not familiar with options, I suggest reading the following as a short introduction to the pros/cons of using options for whatever reason.

• Don’t Trade Options Without Studying Greek(s)
• 10 Rules For Option Traders
• Mistakes Made By Novice (And Maybe Seasoned) Option Traders
• Adding Income Using Cash-Covered Puts And Covered Calls