Recent Transactions – Options and Baxter (BAX)

As part of my commitment to keep my readers up to date on my portfolio and my options, I write up short posts describing my transactions.  In this update, I’ll focus on some of my options activity and on my recent purchase of Baxter International (BAX), a health care supplies and devices company.

I made two purchases of Baxter International.  I bought 22 shares when Baxter International (BAX) was on the high end of fair value.  Then BAX got hit with a downgrade by one of the ratings agencies and had to initiate a minor recall of one of its products. The price dropped, spurred on by the current government shutdown.  So I picked up 23 more shares.

The specifics are as follows

• 22 shares with a cost basis of $1,513.47 or about $68.79 per share with a 2.85% starting yield
• 23 shares with a cost basis of $1,493.49 or about $64.93 per share with a 3.02% starting yield

 

In total, these 45 shares have a cost basis of $3,006.96, which works out to about $66.82 per share.  This is reasonably fair value especially given how overvalued the market was before the shut down.  Baxter’s current forward dividend yield is $1.96 per share.  This amounts to a 2.93% starting yield.  As much as I would have preferred a starting yield above 3%, BAX has been experiencing a nice run of dividend growth, so the dividend payments should ramp up pretty fast.  I’m hoping to post a stock analysis of BAX soon.

Now let’s move onto the wild world of options.

Back in September, my $50 BBL put expired on 9/21/13.  I made a net gain of $289.23 from that transaction, which is a 14.06% annualized return on the $5,000 of at risk capital that the option was leveraging.

Exiting my NLY position

Way back in December of last year, I sold a put against Annaly Capital Management (NLY) a mortgage REIT company, with the intention of being assigned the stock.  That transaction worked out as planned and I was assigned 100 shares of NLY.  Unfortunately, NLY is not performing up to my admittedly low expectations for it.  There have been two dividend cuts in the past year.  The first took place at the beginning of the year.  I just rolled with it because NLY’s dividend was considerable to begin with and the yield on cost was still good.  The second took place recently.  The yield on cost is still acceptable, but the overall stock price has been plummeting.  Basically, it’s the worst of both worlds.

When I bought NLY, I knew it was risky and placed it into my “high yield” portfolio, so I expected a bumpy ride.  But currently Im rethinking my position.  I have two options.  Either I can hold onto NLY and ride the roller-coaster of unpredictable dividends and capital loss, or I can cut my losses.  I decided to cut my losses.

Since I entered into NLY by selling a put, I thought I would exit NLY by selling a call.  So I sold one $11 covered call with a Jan 18, 2014 expiration date.  I made $93.22 from the transaction.  If NLY is above $11 on the expiration date, the option will be called away from me.  I’ll get $1100 from the transaction + the option premium (about $1170 when all the commissions settle out).  This doesn’t make up for the $1,455.76 cost basis of NLY, but I’ve also pulled some dividends from NLY this year, so in terms of total returns, the whole NLY experience will just about be a wash.

If NLY is below $11 on the expiration date, then I’ll keep NLY and the option premium.  Maybe I’ll sell another option or just dump the stock outright.  We’ll see what happens in January.

Disclosure:  Just read the above and see what I’m invested in.

Readers:  What do you think of this purchase?