As part of my commitment to keep my readers up to date on my portfolio, I write up short posts describing my transactions. Recently, I was assigned 100 shares of Annaly Capital Management (NLY) when my put option expired.
At the end of November, I sold a cash secured put with a $16 strike price against NLY. This strike price was well over the price of the stock, which was a bit above $14.60 at the time. My intention was to use the put as a limit order that would ensure that I bought the stock at $14.60 or less.
How the transaction worked
After I sold the the Jan 19th, 2013 NLY put with a $16.00 strike price, $1,600 ($16 x 100 shares) of my cash was locked down. This cash would remain locked down until I either bought back the option or the option expired. In return for selling the option, I got $164 deposited into my account. That’s a 10.25% return (82% annualized) on my investment.
On January 19th the option expired in the money. For puts, in the money means that the stock price is below the strike price. Since the option expired in the money, the effect was that I bought 100 shares of NLY for $1,600. My cost basis for the stock is $14.36 per share ($1,600 – $164).
Annaly Capital Management
NLY is a mortgage REIT company that owns, manages, and finances real estate related securities. NLY is not a dividend growth company, but does have very high dividend payouts, making it a nice addition to my high yield portfolio. Last quarter’s dividend was $0.45 ($1.80 annualized). If this dividend is sustained, then NLY will be producing approximately 12.5% for me this year. That’s not bad.
I am concerned about how the latest round of quantitative easing will affect NLY’s business model, but that is part of the risk involved in chasing high yields. We’ll have to see how this plays out in the future.
Disclosure: I am long NLY.
Readers: What do you think about NLY and this option play?