Today, we have four options set to expire: the CSX (NYSE: CSX) protective put, the Coach (NYSE: COH) protective put and covered call, and the AES Corporation (NYSE: AES) covered call.
I’m going to explain what to expect from each of these expiring options. But first, I want to dive into the Federal Reserve’s October meeting. When the meeting’s minutes were released Wednesday, stocks immediately rallied.
But that won’t last…
Fed Gives the Market a Boost
Let’s think about why the market was rallying for just a moment. The main reason was clarity, if you want to call it that. In the minutes, several Fed members believed December may be an appropriate time to bump up interest rates, depending on incoming market data.
But to me, this is hardly clarity.
A rate hike has always been, and will always be, dependent on incoming data and market conditions. And Janet Yellen has already said any upcoming Fed meeting is open for a possible rate hike. This is information we already knew.
Ultimately, I still don’t see a December rate hike even being on the table — for two reasons.
First, I don’t think the October jobs report was as amazing as the markets believed. Yes, we added 271,000 jobs, but not where they were needed: high-paying positions. Still, most people were too excited by the good news to really look at the numbers.
But that’s beside the point because we’ll receive the November jobs report on December 4 — before the Fed’s December meeting. And that may put some of the excitement on hold. Not only do we need another 200,000 jobs (the average amount we’ve added each month during the recovery) to prove our economy is continuing to improve, but I believe the Fed also wants to see wage growth pick up before it starts rate hikes. If we get a number below 200,000, and wage growth moves in the opposite direction, that will set the Fed back months on raising rates.
But more importantly, regarding the December meeting, this is a quiet time of year.
The two-day Fed meeting will conclude on December 16, just one week before markets close early for the holidays. This is also a time when many people are on vacation, traveling to see family and usually out of town for a week or two.
If the Fed were to raise rates in the middle of this typically quiet time, when market liquidity is tight, it could create massive volatility. Because of that alone, I believe the Fed will wait until at least the new year.
Besides, once the Fed raises rates, we know the path it is set on — lower for longer. And our portfolio is prepared to benefit from that. Investors will realize this won’t be a steady climb to a normalized level, but rather a slow and bumpy ride back to a new, lower norm. At that point, our dividend-paying stocks stand to benefit dramatically.
I think the recent market rally was just because the Fed showed some confidence in the economy, and even though these minutes are from a month-old meeting, the markets ran with the fact that December was still on the table.
In the short term, I don’t see this rally continuing, which is why we added a new naked call earlier this week. I will continue to monitor our portfolio and positions on a daily basis and alert you of any action to take.
Now, let’s take a look at our four expiring options.
All of our November options are set to expire worthless, meaning we’ll keep the premiums we collected and will hold the stocks in our open portfolio. It’s great news for us because it means we will still generate a nice income from these dividend-paying stocks and can benefit as shares rebound.
Here are the positions:
Coach November 2015 $26 Protective Put Option: In Coach, our luxury retailer, our put option is set to expire worthless. The stock is trading around $30.30, which is about 17% above our strike price. There is no action needed on your part. The option will expire, and I will look to manage this trade to profitability in the coming months. Keep in mind that we’re picking up a 4% dividend yield. We’ll get our next dividend of $0.338 per share on December 28.
Coach November 2015 $36 Covered Call Option: This strike is about 19% above the stock’s current price, so it too will expire worthless. Nothing changes for you. We’ll keep shares of Coach in our portfolio and you’ll keep the $0.35 in premium that we collected for selling this call. Right now, our position is down about 12%, accounting for dividends and option income. Remember: Coach has gone through some extensive remodeling lately, and that should begin to pay off in the coming quarters, sending shares higher.
CSX November 2015 $25 Protective Put Option: CSX, our leading rail operator, is trading about 20% above the strike price, which means our option is set to expire worthless. As you know, a protective put operates as insurance against a market crash, so not having to use it is a good thing. It means our position is down a manageable 16%. We will continue to hold shares in CSX, picking up a modest 2% dividend, and I will look for opportunities to sell covered calls to generate even more income.
AES Corporation November 2015 $13 Covered Call Option: AES, our U.S.-based utility operator, is trading about 25% below our entry price. But thanks to our protective put option that we closed out earlier this week, our position is only down 14%, including option and dividend income. As for our covered call, it’s set to expire worthless, which is great. It means you keep the $0.20 we collected for selling it, and I will look for another opportunity to sell covered calls and generate more income.
As a final note, I’ll be preparing for Thanksgiving with the family next week, so you won’t hear from me until December 2 — that is, unless something comes up that warrants an alert. Have a happy Thanksgiving!
Editor, Pure Income