Quick post on some early investment decisions I’ve had to make in the new year surrounding options owned that expire in two weeks from now:
- 3D Systems (DDD)
- American International Group (AIG)
- Amtrust Financial Services Inc. (AFSI)
- Facebook (FB)
3D Systems (DDD) – Jan ’14 $75 Covered Calls
I’ve wrote plenty on how the 3D printing industry has exploded and benefited investors despite revenues not keeping pace with their inflated stock prices. As a result, I decided to try and get some extra income from this hype, selling covered calls against my DDD shares. Collecting a cool $8.50 meant selling shares for around $83.50 if they were called away; and if not, I’d just rinse and repeat. Well, the hype still grows and DDD now is at $96 / share – and made me wonder if I should keep the stock by buying back the option, rolling the option, etc.
Decision: I’ve decided to just let the calls expire which likely means I will no longer have an investment in DDD with shares being called away. I looked at rolling up (buying back my call and selling one with a higher strike) but since the stock already rocketed up, the extra gain (2%) wasn’t really worth the hassle. Rolling up and out (buying back my call and selling one with a higher strike for a later date) didn’t really provide that much value, and would have me hold the stock longer than I really wanted to and had more potential for the stock to drop past my strike price.
In the end, I felt like there will be later opportunities to get back into this industry when the hype has died down a bit (or the industry has reached what Gartner calls the “Trough of Disillusionment”). Perhaps with the proceeds, I should switch to Organovo (ONVO) which just announced that 3D printed livers (for research purposes) will be available in 2014.
American International Group (AIG) – Jan ’14 $25 Calls
Big believer in AIG and its turnaround – as AIG now represents our largest holding in our portfolio. Owned Jan ’14 $25 call options that was part of our strategy for using deep-in-the-money call options to mimic owning stock; and only because, at the time, 2015 and 2016 options weren’t available. The company continues to progress on their turnaround story – business is doing well and continues to grow. The company has even started issuing dividends to its shareholders again and found a new buyer for International Lease Finance Corporation (ILFC), their airplane leasing company, after the Chinese consortium bailed out. The value of the new deal was not only slightly higher ($5.4B vs. $5.3B), but with negotiated $3B cash + 95.7M shares of Aercap, Aercap shares are now up 50% since the deal was announced making the current value of the transaction $6.6B. All this extra cash likely means AIG will continue to buy back shares or issue out dividends to shareholders.
Decision: Easy one here – the January 2014 options have been rolled up and out (to January 2016 $30) still being deep in the money. Some proceeds were also used to buy more AIG warrants. As mentioned before, as part of the bailout agreement, AIG issued out warrants allowing owners to buy AIG shares @ $45 in 2021. Currently, the going price is ~$20 so it’s a break even of $65 still a cool 35% away from today’s $51 stock price. However, there’s 7 years to get there, and the great part of the warrants – the $45 strike price gets favourably adjusted with share dilution and any dividends paid that are greater than 60 cents a year. With the current dividend payout at 40 cents, they’re well on their way.
AmTrust Financial Services (AFSI) – Jan ’14 $37.50 Naked Puts
When I first wrote these puts, I thought I was well in the clear and looking for an opportunity to buy this stock if it ever fell in price while collecting a little income each month. Well, I wasn’t really counting on the short attack (or alleged hiding of losses) as was written about by our friends at GeoInvesting which hammered the stock down 30%. The stock has slowly attempted to recover from the article and is up 15%. There’s still a couple of more weeks to see if it can reach my break even of $36.
Decision: We won’t try and backtrack my statement from the portfolio review in which I found out quite heavily invested in the insurance industry. With still about two weeks left until options expire, we’re in a wait and see mode. If the stock makes it past the $36 in two weeks, I’ll try writing more naked puts (as premiums are now quite high). Along with that, I am thinking of selling our shares that we currently hold and buying call options to i) reduce the insurance weight within our entire portfolio and ii) use the call option for the benefit of catching the rebound in AFSI.
Facebook (FB) – Jan ’14 $20 Calls
All eyes continue to be on Facebook earnings including how many eyeballs the site attracts on a monthly basis. Last quarter, the number of eyeballs were great, but word that teenage eyeballs (in the US no less) were decreasing caused the stock to drop 15%. The stock continues to trend slowly back up, but ultimately, the reported eyeball count will drive where this stock is headed.
Decision: This is probably the least uncertain but leaning towards still owning the company but with less aggressive options *wink*. Probably something like exercising half the options for Facebook shares; and rolling up and out for the remainder but keeping the overall total dollar amount (shares + options) invested in the company the same. Just really a matter of how much to roll up and out (i.e. 2015 or 2016, $30 or $50). Could then use both shares and leaps to write short term calls against them for some income if the share price is stagnant for 2014.