Upcoming Trade
I own 100 shares of T (AT&T stock) with an adjusted cost basis of $24.90/share. At the close of the market on Friday, January 28, the share price was $25.21/share.
On Monday, if the share price stays where it is, I plan to sell 100 shares for $25.21/share and sell a put, expiring March 18, with a strike price of $26. Right now, it looks like I can get $1.45/share, or $145 total for the put.
Detailed History
On October 18, 2021, I bought 100 shares of T, paying $25.50/share, or $2550 total. I used those shares to cover a call with a strike price of $26, expiring December 17. I received $60.33 for the call. On December 17, the share price was less than $24, so the call expired. I then owned 100 shares of T, with an adjusted cost basis of $24.90/share. They have been sitting in my account ever since.
On January 7, I qualified for a dividend of $0.52/share, payable on February 1. It is set to reinvest, so I’ll be getting $52 which will buy me about 2 “free” shares next week.
Thinking Behind this Trade
I like this stock a lot and own a larger position in one of my retirement accounts. It pays a reliable dividend and after dropping into the low $20s a few months ago, the share price has nearly recovered to where I originally bought it. And with my dividends set to reinvest, I picked up quite a few extra “free” shares when the price was down in 2021.
My Next Steps
If I enter the trade on Monday, I’ll tie up $2600 until March 18 while I wait for the end of the contract period.
If the share price is below $26 at expiration, I will be assigned to buy back the 100 shares, paying $2600 for them. Even paying more than I sell them for, the sum of the stock transactions plus the premium from the options (-$2550 + $2521 + $60.33 + $145 - $2600) means I’ll reduce my adjusted cost basis to $24.24/share. And if the price goes above $26, the put will expire worthless and I’ll just keep the $145.
If the shares are not assigned back to me, I’ll check the current price and either
buy more shares, collect the next dividend and sell another call, or
sell another put and try again to buy it back, or
let this position go and look for another opportunity
I hope to get it all worked out, reduce my cost basis and own 100 shares before the next ex dividend date, which will probably be in early April.
Risks: I might be taking my profits too early. If the price increases too much, I might not be able to buy back the stock at the price I want, and I might miss the next dividend.
Benefits: Whichever way this works out, I’ll make a profit. If I lose these shares, I’ll still have the shares in my retirement account.
Update on T Options Campaign, March 29, 2022
I ended up deciding not to sell the 100 shares, and instead I wrote (sold) two options contracts, both expiring March 18. 1) I sold a put with a strike price of $24 for $64.33 in income and 2) sold a covered call with a strike price of $26 for $62.33 in income. I would have been fine buying more T at $24 or selling my 100 shares for $26. (I knew only one of those outcomes was possible.)
What happened next?
On February 1, I received a $52 dividend payment that was automatically reinvested in 2.135 shares. On March 18, the share price was $23.17, and I was assigned to buy 100 shares at my strike price of $24. I was fine with that.
Where do things stand now?
Right now I own 202.135 shares of T. The share price today is $23.93. My total expense on this position has been $4763.01 (Adding all my options premium and subtracting the amount I've spent). My average cost per share is $23.56.
What are my next steps?
The current dividend yield is 4.64%, and even though this stock is kind of volatile, I know the company is not going anywhere. I looked at the options chain and I was tempted to sell a $23 put and a $25 call, both expiring in May. I could probably bring in about $75 doing that. But I decided that I have enough exposure to T. I think I'm just going to hold on to the shares and keep reinvesting dividends. I'll keep an eye on it and let you know if I change my mind.
