Value Options: How We Exit Options Early (And Why It Boosts Our Returns)

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Carlisle discussed:

• Value Options Progress: 100% Success Rate on Closed Trades
• EOG Resources (EOG): Turning a 9.4% Target Into a 16.6% Annualised Return
• Disney (DIS): How a Cash-Secured Put Generated a 30.4% Annualised Return
• Norwegian Cruise Line (NCLH): Selling Puts After a Major Stock Price Decline
• ServiceNow (NOW) and Workday (WDAY): Using AI Fears to Find Options Opportunities
• Blackstone (BX): Taking Advantage of Fear in Alternative Asset Managers

TRANSCRIPT

[Tobias] This is the Value Options Report. I’m Tobias Carlile, joined as always by my co-host, Tim Travis. How are you, Tim?

I’m good, Toby. How are you? Very well.

Let’s talk a little bit about value options first, as we always do. What are value options?

[Tim] So value options are basically selling cash-secured puts or covered calls on stocks that you’d want to own anyway. So they’re already trading at a discount to our estimate of intrinsic value. And then it’s using options as a tool to generate income, reduce risk, and to manufacture a cheaper entry price into the stock.

Value Options Progress: 100% Success Rate on Closed Trades

[Tobias] So we’ve been running value options now for a few months. Let’s talk about how we’ve been going.

[Tim] Yeah, it’s been going really well. So what I did was I looked at the last 10 trades that we closed out. So we didn’t cherry-pick anything, but these are the last 10 trades that either closed or that we closed out early.

And we’re going to go over them. And then we’re going to go over the complete track record, which you can also find on the website, valueoptionsletter.com.

[Tobias] So we’re looking at the presentation. Tim, take us through it.

[Tim] Yeah, absolutely. So let’s go ahead and get started. Firstly, the disclosure, this is a publication.

It’s not investment advice. These are real published positions. They’re per-position returns, not an accounts return.

I mean, not everyone does every trade, of course. These are before commissions are factored in. Past performance is not indicative of future results.

Options carry risk, and we may hold what we invest. Normally, I do the same trades. So let’s go ahead and get started here.

So the whole book marked to market is up $43,701. So that’s total profit on the realised trades and also the open ones. There’s 114 positions still open.

So on the closed out trades that have been closed out, 100% of those have been successful. We haven’t had to close anything out at a loss yet. On the open positions, as you can see, a very high probability of them are profitable right now.

Now you got to let the options kind of season a little bit and the market’s been adequate. It’s been a good environment for us. So it’s not always going to be this good, but it’s going well, thankfully.

And then open share lots versus premium on just the basis. This is like when we sell a call and own a stock, we do like a covered call, and that call expires worthless. Then we sell another call, plus we’re collecting dividends.

So on those open trades that are still kind of running, it’s our wheel cycle, 10 of the 15 are up right now and the net’s up. So that’s the positions that we have currently. All right.

EOG Resources (EOG): Turning a 9.4% Target Into a 16.6% Annualised Return

So Toby, the first trade we’ve got is EOG. So when we set this trade, there were 74 days to expiration. This was July 6th.

And EOG had kind of dipped a little bit. There’s been a lot of volatility on the energy trade. This is a company I like a lot, really good margins, really good assets.

And so what we did was we targeted a relatively low annualised return. We targeted 9.4% annualised. We sold the 115 put for September.

We collected $2.15 of premium. The trade tied up $11,285. So one of the cool things about the value options letter is that even if we’re targeting a lower annualised, that doesn’t mean that you’re actually going to realise a lower annualised.

So the stock rallied with energy prices going up on fears of the war. And so we were able to close out this trade after 36 days and we had made 185 of the $215 target profit. So we ended up with a 16.6% annualised return. And so what we’re doing is we’re recycling cash, Toby, because look, our assets are finite. And so this trade’s tying up over $10,000. If we’ve already made most of the profit, why don’t we just take risk off the table and put it into another trade?

So that’s the first example.

[Tobias] Makes complete sense. Great stock too, energy resources.

[Tim] Oh, it’s fantastic. Fantastic company. And I mean, I would like to buy it at a lower price.

It’s kind of run up. The next one is actually the same, very similar trade, but this one was open on June 16th. So it’s actually the same strike that we had done that we did on the other trade with EOG.

This time we collected a little more premium because when we sold this one, it was 94 days to expiration. And so once again, we closed it the same day. We closed it yesterday where we made, we targeted an 8.1% annualised return and we ended up realising a 11.9% annualised return. So of the 235 of target profit, we closed that at with a profit of 205 bucks. So another good, solid trade. The premiums weren’t super high because the level of risk was not that high in our estimation and in the options markets estimation.

So sometimes like a really high quality company that has a good balance sheet, like a Berkshire Hathaway, like an EOG, you’re not going to see crazy premiums, but you can see it still ended up with a nice double digit return. So that’s trade number two.

[Tobias] Yeah. Good stuff. Thank you.

Good company EOG, well managed too.

Disney (DIS): How a Cash-Secured Put Generated a 30.4% Annualised Return

[Tim] Yeah. Yeah. Another quality company is Disney.

And so this one, we knew that earnings were coming up for second quarter earnings. And when you see that often volatility picks up a little bit in some of the options pricing. And so the premiums look decent.

Disney’s valuation, I think is pretty compelling. It’s kind of a mid-teens multiple on a high quality business. They’ve had some good movie releases.

The parks business is going really well. I mean, the cruise business is going really well for them. So what we did was we sold the September 18th, $95 put.

We collected $3 and 23 cents a share. The stock was at 99.39 when we set it. So we would have been absolutely happy to own the stock.

The trade had 74 days to expiration. And as you can see, 36 days into the trade, we were able to close out. We made $275 of the $323 target profit.

So instead of the 17.4% annualised return that we targeted, we ended up realising a 30.4% annualised return. So really good, a 3% return on the cash required in 36 days. That’s strong.

And the key thing, folks, is that if the stock would have dipped after earnings, and let’s say it goes to like 93 or 94 and we end up owning it, Toby and I are happy with that outcome. That’s not something that we view as a losing situation because ultimately we might have more upside in that type of scenario. So it’s kind of the heads I win, tails I’m comfortable.

Either way, we’re okay. But so this one, earnings were better than expected and the outlook was good. And so the stock rallied and we were able to lock in most of the principal.

[Tobias] Good stuff.

[Tim] Devon Energy, another one, another fantastic company, great management team. I’ve wanted to get some exposure to energy without having to chase stuff. So I think that selling puts has been a good option there.

So when the stock was at 4,253, we sold the October 3,750 put, collecting $1.24 premium. Once again, not a huge target annualised return, targeting 12.5%. But the fun thing about this environment is just like with energy so volatile, as the price of oil rallied, the price of Devon rallied too. And so 34 days into the trade, we were able to realise 97 of the $1.24. And so that equates to a 28.7% annualised return. Once again, freeze up the cash. Now you can recycle it into a new trade. If you have excess cash, you’re absolutely welcome to hold it to expiration.

That’s totally fine as well. But we want to give subscribers kind of the idea of recycling that cash. So there’s Devon.

Yeah, well done. Good stuff too. Thank you.

Norwegian Cruise Line (NCLH): Selling Puts After a Major Stock Price Decline

So Norwegian Cruise Lines. This is a company that I like a lot. I like the industry.

I think that cruises are a very affordable option for travel nowadays for families. Norwegian is, I would say, a little bit of the black sheep in terms of stock returns. Their returns are struggling a little bit relative to Royal Caribbean and Carnival.

And so the stock had a rough quarter in the first quarter and just kind of some rough guidance. And so the stock traded down to about $16.14. It had been in the 20s. So what we did was we took a very conservative tact.

Once again, we sold a $10 put, folks, for December, and we collected a $0.69 premium. There was 212 days to expiration. So on this one, we’re targeting 9.6%. So once again, not heroic by any means, but keep in mind, this stock was at 16 and it traded most of the year in the 20s or high teens. We’re selling the 10. And the stock rallied and we were able to close it 83 days into the trade. We had made most of the profit.

We had made 62 of the potential $69. So 29.3% return or almost 7% on the net cash required. And once again, if you’re a subscriber and you want to do 10 of these contracts, do it.

We just, for simplicity’s sake, we just show one option of any price stock. So there’s Norwegian. Good one.

Hewlett Packard, similar theme, as you can see, conservative investing. So we sold the January 2027 $15 put. We collected $0.92 of premium. The stock was at 2113. And so the strike is 29% below the spot price. It’s tying up $1408 of capital.

And what happened was in 83 days. So 83 of what we thought could be 240 days, we had already made $73 of the 92 that was potentially made. And so we closed it out early.

So we realised the 5.18% return, almost 23% annualised. And so very happy with that outcome. Hewlett Packard, they’re benefiting from the trends in AI, but they’re also having to deal with higher memory costs and stuff like that.

But overall, it’s a good market for HPQ and Dell.

[Tobias] Good old HPQ.

ServiceNow (NOW) and Workday (WDAY): Using AI Fears to Find Options Opportunities

[Tim] Yes, yes. So ServiceNow, another really, really good company. One of the fastest growing software as a service names.

And when the stock was trading at 9364 on fears that AI would displace them, we sold the November $70 put for $5.45. And what ultimately happened was the stock rallied nicely. Their earnings have been really solid. The guidance has been solid.

They’ve been making AI progress. And so we were able to close the trade out after 98 days and we had made $485 of the potential 545. So once again, really good return, 7.5% on your money, 28% annualised. So that’s ServiceNow. You can see there’s diversification in what we’re doing. We’re not just loading up in one industry or anything like that.

Next one is Workday. Similar story as ServiceNow, where they’re one of the leading human capital enterprise resource management companies. And the stock had plummeted quite a bit.

They have a really good balance sheet on an adjusted earnings basis. The multiple was quite low. So the stock traded down.

And when we sold the put, it was at 126.82. We sold the January 15, 2027 put at the 90 strike price. We collected $7.65. Sometimes people will be like, well, why do you sell options so far out? Time value is a key component of that.

So it maximises the time value aspect of it. But it doesn’t mean we have to hold the option all the way. If the stock rallies prior to expiration as it did, we’re able to get out early.

And so after holding it for only 60 days, when we were willing to own it for 217 days, we were able to realise most of the profit. We got $635 of the 765 target profit. We freed up around a little over $8,000.

So a 7.7% return in 60 days, 47% annualised. So you take a humble 15.6 target and you turn it into 47%. That’s exactly what we want to do.

And that’s why sometimes it makes sense to go further out in time.

Blackstone (BX): Taking Advantage of Fear in Alternative Asset Managers

Next one, Blackstone. So alternative credit managers have been a real battleground.

And there was a lot of panic porn earlier in the year. And it reminded me a lot of the bank panic in 2022 or 2023, whatever that spring bank panic was. I remember I was in Cabo trying to have a nice, relaxing vacation and it was mayhem in the markets.

But it reminded me a lot of that because the analysis has been just really bad and almost zero respect for where the actual valuations are on some of the business development companies. So I think it’s an attractive opportunity. And so we took advantage of that volatility to sell some puts on the alternative asset managers, Blackstone being the preeminent one in the field.

So when the stock was trading at 115.13 down a lot, we sold the January 15, 2027 $90 put. We collected 490. And after holding it for just 47 days, the stock rallied quite significantly to about 147 nearly.

And so we were able to realise $416 of a $490 target profit. So once again, about 4.9% in 47 days or 38% annualised. And look, if we would have owned Blackstone at $90, Toby, we’d be perfectly happy doing that.

But this is the attractive element of the strategy. Next one. Yeah, well done.

Thank you. So last one we’re going to talk about today is Clorox. So another completely different industry, but a simple, humble strategy.

So with the stock at 96.81 on July 14, we sold the $90 put. We collected $4.25 a share. And we were just targeting 19% annualised on a 96-day trade.

And we were able to close that out yesterday, 58 days into it. And we had made $405 of the $425 target profit. So that’s nearly 30% annualised is what it realised that.

So another successful trade. And look, I don’t want to paint such a bullish picture like every trade is going to be successful. We didn’t cherry pick any.

These are just the last 10. And you can see the full record. And there’s going to be worse times too.

We’re going to have totally boneheaded trades. We’re down on a few. We have some puts on Vici properties, for instance, which we’re down a little bit on.

Some of the real estate names that have been hurt by higher interest rates. But truthfully, those stocks pay really high dividends. And they have a lot of really good long-term potential.

I think that for long-term investors, building an allocation to real estate when it’s an out-of-favour industry is to your benefit. And you can use the volatility and you can use selling cash-secured puts or covered calls as a way to generate income and reduce risk and to manufacture a cheaper entry price into the stocks. So that’s the conclusion of it.

I encourage you folks that are watching, take advantage of that free trial. So you get seven days where you get to see the trades. We’re putting out trades just about every day.

We expect three to five a week, but we’ve been exceeding that by a significant margin. We still have a lot of good opportunities that we like. But the retention rate, people seem very satisfied as far as continuing being a subscriber.

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