Yesterday I closed out my positions in NAT. The Dec35 call had fallen to $0.10 so I bought it back. I originally sold it for $.91. (The actual cash required for a option trade is the price x 100.) The price of NAT was down from my original purchase so I ended up with a 0.9% gain for 37 days, or 9% annualized.
I am a bit chagrined because NAT is up almost 2% today while the rest of the market is down big.
Lessons learned: 1. When trying to capture a dividend, sell an in the money call. I bought NAT for $34.22 and sold the Dec35 call. This is an out-of-the-money transaction. The stock price went well above the strike price before it went ex-dividend, and the tanker group has fallen as a whole over the last week. Selling an in-the-money call gives more downside protection and a better chance at realizing the projected return.
2. Don’t bail out when values are down. The stocks have natural volatility and I can use that for more profit, rather than locking in a loss. It is probably best to let a position go until the option expires, rather than incurring extra commission charges.
Replacement trade: I have purchased 100 shares of NFI at $30.70 and sold the Dec30 call for $1.00. NFI is paying a $1.40 dividend on 12/15, the same day as the option expiration. If my stock get called early I make about 1% for 15 days. If I still have the stock on 12/15, the return jumps to 5%. This is a bit of an experiment to see exactly what happens to this position with the stock going ex-dividend on the same day as the option expiration. I will keep you posted.