Please Note: This recommended trade only applies to those Personal Finance Income Plus members who already have positions in Monsanto and Bristol-Myers Squibb stocks. Do NOT do these trades as initial positions.

1. Sell Diagonal Spread on Monsanto (NYSE: MON)

    “Buy to Close” July $77.50 Call

and

    “Sell to Open” August $80 Call

Option Symbols: MON120721C77.5 and MON120818C80

Limit Order Price: Net debit of $1.35 or less ($135 per spread)

If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” July $77.50 call for debit of $6.35 or less ($635 per contract)


(b) “Sell to open” August $80 call for credit of $5.00 or more ($500 per contract)

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

•    Tell your broker:

For a diagonal spread (preferred)

I’d like to enter an option spread order on Monsanto (MON) stock. Specifically, I want to buy to close the July $77.50 call and sell to open the August $80 call for a net debit of $1.35 per share or less.

• For a two-part trade:

I’d like to buy to close the July $77.50 call on Monsanto (MON) stock for a debit of $6.35 per share or less.

I’d like to sell to open the August $80 call on Monsanto (MON) stock for a credit of $5.00 per share or more.

Please note: The important thing is limiting the net cost of the roll (i.e., both trades) to $1.35 or less. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net cost of the overall roll in mind.

Rationale for Trade:

On July 3rd, Monsanto goes ex-dividend, which means that today (i.e., July 2nd) is the last day a call owner can exercise the option to buy the stock and be entitled to receive the stock’s $0.30 per share quarterly dividend. As I wrote in the initial April trade recommendation, an early roll of the July $77.50 call may be warranted if it is in the money on the day prior to the ex-dividend date because the call is subject to early exercise.

Early exercise is likely if the call owner will receive more money by exercising and receiving the stock dividend than he loses by forfeiting the time value remaining in the price of the call. When you exercise an option, you only receive the intrinsic value of the option and forfeit any remaining time value.

In the case of Monsanto, the stock has rallied above $83, making the July $77.50 call deep in the money by $6 per share. Due to the bell-curve structure of time value, as an option moves further away from the current strike price, its time value diminishes. In the case of the July $77.50 call, time value has dwindled to nearly zero (i.e., a few pennies). Since the quarterly dividend of $0.30 is larger than a few pennies, it is a virtual certainty that the owner of the July $77.50 call will exercise it by the close of trading today.

When feasible, the preferred strategy is to roll to the same strike in the next expiration month for an additional credit. In our case, that would mean rolling into the August $77.50 call, which has $0.60 of time value. Although this is more than the $0.30 quarterly dividend, I want the time value to be at least triple the dividend because a late-day rally could easily reduce $0.60 of time value to less than the $0.30 dividend. Not good enough. Life is too short to have such stress!

There is a $1.35 cost for doing the recommended roll and protecting our Monsanto stock from early exercise. But even after subtracting the $1.35 cost from the initial $3.70 credit received back in April for selling the July $77.50 call, we have an overall net credit of $2.35 ($3.70-$1.35). A $2.35 net credit still amounts to an added yield of 3.1 percent based on the initial $76.70 stock price back in April.

Furthermore, by rolling our July $77.50 call strike to an August $80 call strike, we are increasing our appreciation potential in the stock by an extra $2.50 through August options expiration.

2. Sell Vertical Spread on Bristol-Myers Squibb (NYSE: BMY)

    “Buy to Close” September $35 Call

and

    “Sell to Open” September $36 Call

Option Symbols: BMY120922C35 and BMY120922C36

Limit Order Price: Net debit of $0.54 or less ($54 per spread)

If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” September $35 call for debit of $1.32 or less ($132 per contract)


(b) “Sell to open” September $36 call for credit of $0.78 or more ($78 per contract)

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Income

•    Tell your broker:

For a diagonal spread (preferred)

I’d like to enter an option spread order on Bristol-Myers Squibb (BMY) stock. Specifically, I want to buy to close the September $35 call and sell to open the September $36 call for a net debit of $0.54 per share or less.

• For a two-part trade:

I’d like to buy to close the September $35 call on Bristol-Myers Squibb (BMY) stock for a debit of $1.32 per share or less.

I’d like to sell to open the September $36 call on Bristol-Myers Squibb (BMY) stock for a credit of $0.78 per share or more.

Please note: The important thing is limiting the net cost of the roll (i.e., both trades) to $0.54 or less. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net cost of the overall roll in mind.

Rationale for Trade:

On July 3rd, Bristol-Myers Squibb goes ex-dividend, which means that today (i.e., July 2nd) is the last day for the call owner to exercise the option to buy the stock and be entitled to receive the stock’s $0.34 per share quarterly dividend. As I wrote in the initial June trade recommendation, an early roll of the September $35 call may be warranted if it is in the money on the day prior to the ex-dividend date because the call is subject to early exercise.

Early exercise is likely if the call owner will receive more money by exercising and receiving the stock dividend than he loses by forfeiting the time value remaining in the price of the call. When you exercise an option, you only receive the intrinsic value of the option and forfeit any remaining time value.

In the case of Bristol-Myers Squibb, the stock has rallied above $35, making the September $35 call in the money by $0.90 per share. In many cases, 81 days of time value (i.e., until September expiration) for a stock that’s only $0.90 in the money would be worth a lot more than a $0.34 quarterly dividend, but Bristol-Myers Squibb is a very low-volatility stock (implied volatility of September options is under 20 percent), so time value is not worth much. The result is that the September $35 call has only $0.50 of time value remaining. Although $0.50 is slightly larger than the $0.34 dividend, a late-day stock rally could easily push the September $35 call’s time value below $0.34, so I am not willing to risk it. Too close for comfort!

September expiration is still 81 days away, so I don’t want to roll into the next available expiration month of December, which is 172 days away. Rather, the best play is to simply roll up to a higher strike price in September. That leaves us with the September $36 call, which has $0.80 of time value and–unlike the September $35 call–is out of the money by $0.16. Any September $36 call owner who exercised would be buying the stock at $36 and selling it in the open market for $35.84 for a $0.16 loss. Add that $0.16 loss to the forfeiture of $0.80 in time value and the net loss from early exercise would be $0.96. I feel more comfortable with the September $36 call’s $0.62 cushion ($0.34 dividend minus $0.96 cost of early exercise) than I do with the September $35 call’s $0.16 cushion ($0.34 dividend minus $0.50 time-value forfeiture). To reiterate, you can’t rely on a $0.16 cushion, since a late-day rally could eliminate the cushion entirely and result in early exercise, which I really want to prevent!

There is a $0.54 cost for doing the recommended roll and protecting our Bristol-Myers Squibb stock from early exercise. But even after subtracting the $0.54 cost from the initial $0.79 credit received back in June for selling the September $35 call, we have an overall net credit of $0.25 ($0.79-$0.54). A $0.25 net credit still amounts to an added yield of 0.7 percent based on the initial $34.74 stock price back in June.

Furthermore, by rolling our September $35 call strike to a September $36 call strike, we are increasing our appreciation potential in the stock by an extra $1.00 through September options expiration.

Price Adjustments Regarding These Trades

Unlike when we open an initial trade, these trades involve closing in-the-money call options before they get exercised early against us. Consequently, we do not have the luxury of patience and possibly passing on these trades (unless you are willing to sell the stocks). We will need to be flexible with our limit prices and adjust if necessary as we get nearer to the market close on Monday, July 2nd.

The limit prices I suggest above are starting points. If they don’t fill within a few hours, I recommend raising the limit prices by a nickel per share and waiting an hour. If these adjusted limit prices don’t fill, adjust again by another nickel. Repeat the process until you get filled.