Recent Purchase

Recent Purchase + 3 Option Trades

The #coronavirus has entered Europe and in particular Italy and it seems to be spreading relatively fast. This is no fun and therefore fear has really entered the market today ๐Ÿ˜ฑ

This led the Dow Jones Index to briefly drop with 1000 points today. 1000 points a decade ago would probably have resulted in an entry in Wall Street’s history books, but nowadays it’s “just” an equivalent of 3%.

Therefore I am not worried at all about the drop in share prices, because as per the below picture, the Dow Jones Index is still much closer to its recent all-time high than its 52-week low.

On the other side, I am a bit worried about the virus though, but rather about the harm that it can do to our health and in particular to the ones in my surroundings.

I know that statistically it’s probably still more likely to get hit by a car tomorrow than being affected by the virus, but I guess that this is how fear typically works by sneaking into our brains.

How to play this market on such a day?

Well, buy some undervalued stocks off course! ๐Ÿ’ช

Therefore I just wanted to let you know that I took the opportunity to add few shares and to sell few put-options today at for me attractive prices.

Purchase: 3M

3M ($MMM) is one of my tier 1 stocks as per my allocation strategy. From all the stocks listed there, 3M is probably one of the most interesting ones from a valuation point of view.

Most of the basic metrics look pretty good for 3M. It currently yields 3,84%, a ~75% payout ratio and a Price-to-Earnings of 19 and a bit.

I will not go into a full stock analysis now (fair value estimate: $156), but the main 2 metrics that I would typically like to see a bit lower are the payout ratio (60% or less) and the debt/equity ratio which is rather on the high side with ~200%.

Nevertheless, I’m having full confidence in the ability of the company to grow its dividend in a sustainable manner and therefore I decided to purchase few additional shares today at a price of 153 USD. It is a small addition, but every little bit helps.

Remember, I buy for income (aka cash flow), therefore dividend safety is of the utmost importance for me. 3Mย has a Dividend Safety Score of 95

Option: 3M

At the same time I decided that I would like to purchase a pretty decent amount of 3M if it would be 10% undervalued. In such cases I typically decide to sell put-options as they give me a nice premium while waiting. This is something that I did in the past and has done me pretty well.

Therefore I sold today as well a put-option for 3M with a strike price of $140 and an expiration date of 19 June. The income from that option was $380 in total. This equals an 8.12% annual return. Not bad for an old and “boring” stock ๐Ÿ’ค.

Option: UPS

UPS is another stock listed in my allocation strategy, but in this case as a Tier 4 stock. This means for me that I would like to keep the position size rather small.

Many articles have been written about UPS and in particular on SeekingAlpha. I noticed that there are typically two camps to the story of the stock:

Amazon is going to crush the stock ๐Ÿ”จ

VS

UPS is the best of bread as an eCommerce play ๐Ÿ“ฆ

Personally I am rather towards the eCommerce play camp, because I believe that there is more than enough market for several players and at the same time this is a very capital intensive market, in other words “high-barriers to entry”.

What’s keeping me from going big into this stock is their debt position and in particular their pension liabilities, which covers 18.3% of their balance sheet (page 57). Not many Wall-Street analysts mention this, but UPS themselves have mentioned this in their risk factors:

Employee health and retiree health and pension benefit costs represent a significant expense to us; further cost increases could materially and adversely affect us

page 15, 10-K form, FY 2019 results

Another reason for us as amateur investors to always do our own homework!

Having said that, I still find it an interesting stock as an eCommerce play in my portfolio and therefore I used the pullback today to sell a put-option with a strike price of $80 and an expiration date of 15 Jan 2021. The income from that option was $335 in total.

The strike price is approximately 20% lower than today’s share price, hence I don’t think this price will quickly be realized. However, I do get to collect the option premium which equals a 4.6% annual return.

Option: Exxon Mobil

Last but not least, I also sold a put-option for Exxon Mobil. The strike price is $50 with an expiration date of 19 June 2020. The income from selling that option was $103.

Exxon Mobil is a Tier 3 stock for me and the ability to purchase stocks at $50 would allow me to complete my position. In the meanwhile I get paid while waiting with a 6.2% premium. At that price the dividend would yield ~7%, probably the highest yield in the last few decades for $XOM.

Summary

Todays transactions went quick and the volume of transactions today was probably already more than I usually execute in a whole month.

I just didn’t want to lose the opportunity to add some additional income from put-options, because put-options are getting more expensive with high volatility.

I didn’t think that my goal of starting to earn some additional income (which I described in Yesterday’s post) from selling options would be straight away the first day in the new week ๐Ÿ˜Ž


This was it from me for today and I just wanted to give you a brief update in the heat of the moment.

I am always looking forward for a day like today, because it allows me to benefit from a decline in stocks that I already had on my watchlist.

In this case I added also some significant income from option premiums which is something that I didn’t really discuss yet on this blog.

I hope that you enjoyed this brief update. Feel free to use the comment section in case you have any questions.

Yours Truly,

— European Dividend Growth Investor



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0 comments on “Recent Purchase + 3 Option Trades

  1. ik hoop dat je niet iets te vroeg bent geweest en de markt niet nog verder afzakt.

    maar zelf ook vandaag extra plukje 3m en exxon gekocht voor mijn pensioenrekening bij de giro.

    • Het enige dat ik zeker weet is dat ik het niet zeker weet ๐Ÿ˜‰

      Wat ik wel weet is dat ik met de informatie van nu xom voor 50 euro zou willen aanschaffen en hetzelfde geld voor 3M voor 140 euro. Ik ga ervanuit dat die bedrijven 10 jaar van nu veel meer waard zullen zijn dan vandaag.

      Wat is goed om te weten dat ik redelijk goed in de cash zit. Daarnaast kan ik ook een optie als 3M doorschuiven door hem nu weer terug te kopen en dan een putoptie met een latere expiratie-datum voor hetzelfde geld weer kan verkopen voor een lagere strike-price. Ik doe dat echter alleen als er iets fundamenteels aan het bedrijf verandert is.

      Voor mij zijn dit schitterende tijden en ik zou erg tevreden zijn als de markt nog een additionele 20% onderuit zakt. Ik zou namelijk graag wat bedrijven als Unilever, Starbucks e.d. aan willen schaffen voor wat redelijkere prijzen.

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