Stock or Option Play? Let’s look at General Mills, Inc. (GIS)

February 21, 2017

187

Hi All,

While some are wining and dining in Las Vegas, I give the rest of you, but especially the newcomers, a small glimpse into my mind working on the question:

GIS: A Stock or Option Play?

I hold 400 shares of GIS. Purchased 100 in 2012 @ $38.62 and 300 in 2014 @ $51.48. My average cost is $48.26.

So my paper gain on the stock, at todays (Friday's closing) 2/10/17, stock price of $62.76, is $14.50 x 400 or $5,800.00.

Going back to April 2012, my total gain, excluding dividends, with stock capital gain and sales of option plays (remember we are SELLING premium with options), runs to a total of $7,173.00.

Just for you wishing to add dividends, which I always consider as an extra bonus — there's dividends of 3.06% per anum, or now $0.48 cents/quarter.

Now here is the question: Shall I sell the stock, all or partly, and go for the option play only?

What can my stock position bring me in the next two years? Am I bullish? Say GIS will go up to $70. This will bring me a capital gain of $7.24 or x 400 = $2,896.00 based on today’s stock price. Add two years of my “cherry” option sale of say $0.60 cents/month X 20 month (only) X 4 options/month X 400 equals $4,800.00. If I only count on 50% of the cherry calls going my way, I make $2,400.00 plus the capital gain of $2,896.00, which gives me another $5,296.00.

Should the stock go down 10% to $56.50, I have lost on my today’s stock value $6.26 X 400 equals $2,504.00. So looking at the negative side, I should still earn a similar amount on my cherry calls, stock going up or down, my whopping profit would drop to a miserable loss of $2,504.00 minus the $2,400.00 (gain on option plays) = negative $104.00.

Now let’s look at the option play.

I set up the following option play: Buy 20 Jan 2019 BCS 55/65, a $10 spread, which is already $7.76 ITM, for a cost of $5.48. 20 BCSs cost $10,992.00. I sell 10x Jan 2019 $55 puts for $4.55 or $4,550.00, so my net cash outlay is $6,442.00.

In addition, I sell my first cherry call of strike 65 Mar 2017 for $0.62 cents X 10 = or $620.00, reducing my initial cash outlay to just $5,822.00.

So not to take any money out of my pocket, I sell 100 of my 400 shares @ $62.76 = $6,276.00. Here I still walk off with cash of $454.00.

Could even spend it for 2 dinners with the boys in Las Vegas.

Now back to calculations.

Instead of selling 4 cherry calls / month on the 400 stocks above, I now sell 10 cherry calls on my 20 X BCS. Remember, only sell ½ your short turn option play!

Using the same calculation as above on the stock play, I expect only 50% of my cherry calls to make a home run. $0.60 X 10 X 100 X 20 month only divided by 2 equals is $6,000.00.

Should the stock go up by Jan 2019 to $65.00, my gain would be $13,360.00 on the BCS.

Should the stock stay at $62.76, we would be looking at a gain of approx. $8,000.00

Our breakeven point at the above BCS will be at $59.00 stock price.

If GIS goes down to $55, I could lose $8,000.00.

Take here the above calculated 50% cherry call gain of $6,000.00 and my loss would only be $2,000.00.

On a stock going down, however, we can expect more than 50% of our cherry calls to become worthless at the end of the term.

Just looking at the other side of the coin, should my 100 shares of stock, which I now have sold for $62.67, instead had held and carried on with them trading in the buy / write way, go down to $55.00, I should only have a loss of $767.00 (62.67-55.00=7.67 X 100). Add the gain of cherry calls sold during the 20 month period, based on a 50% hit only (i.e., $600.00) my loss overall on the 100 shares would be only $176.00.

If GIS stays at $62.67 at the end of Jan 2019, we could look at a combined gain on the BCSs and cherry call plays of $8,000.00 and $6,000.00, which together equals $14,000.00.

Thus, my stock cost is $6,267.00, for a gain in cherry calls sales of $600.00 or 9% over the two year period.

In comparison, buy buying the BCSs, with a capital outlay of $6,442.00, not including the sale of the first Mar 2017 cherry call sale, my potential gain is $14,000.00 or 217% over the two year period. This is based on the stock remaining at 62.67!