There has been a lot of activity in our portfolio this week, and we have an action plan to wring profits out of this month’s expiring options. It is going to take some time, but we’ve been through this exercise before.

Expiring Options

We have four options trades that expire today. Three of them are short puts and the fourth is a covered call.

As I discussed in a recent update (“Shifting Gears”), our three short put positions expiring this month on Harley-Davidson (HOG), Invesco (IVZ), and Western Digital (WDC) will expire in-the-money and be assigned to us. I will add them to our equity portfolio so that we may write covered calls against them once their respective share prices recover sufficiently to recoup our original investment.

The Net Loss amount shown above for each position can be recovered through a combination of share price appreciation, dividends paid, and options premium. It may take a while, but I am confident that each of these losses can be recouped this year in a similar fashion to our position in Bed Bath & Beyond (explained below). In the meantime, we advise holding on to these stocks and collecting the dividends.

The covered call we wrote on The Williams Companies (WMB) will also expire out-of-the-money, meaning we get to keep that premium and write another covered call against it (which I will cover in more detail next week).

Bed Bath & Beyond

We went through a similar exercise back in September with Bed Bath & Beyond (BBBY). I advised then selling a second short put at the $15 strike price expiring today. For a long time, it appeared likely that BBBY would remain below $15 and the stock would be assigned to us.

However, that changed suddenly last week when the company released Q3 results that came in better than expected. BBBY immediately jumped from below $12 to above $15 and continues to hover around that mark. Since it is trading so close to our strike price, we may not know until the end of today if that option might be exercised against us.

If you don’t want to risk ending up having the stock put to you, then you can buy that option back today for considerably less than what you received for it three months ago. The net premium received would reduce your cost basis in the BBBY stock that you already own by that amount, making it easier for you to write a profitable covered call trade against it later on.

As of yesterday’s close, the $15 put expiring today could be bought for no more than 50 cents. Since we sold it at a limit price of $1.50, we can further reduce our cost basis in BBBY by $1, bringing it down to $17.75. We also received a dividend of 16 cents last week, dropping our cost basis a bit more to $17.59. As soon as BBBY gets up to $16, we should be able to write a covered call for a premium of at least $1.59, thereby fully recouping our original investment and perhaps eking out a small profit.

Signet Jewelers

It looks like we may have to employ a similar strategy for Signet Jewelers (NYSE: SIG), which fell more than 20% yesterday after the company reduced Q4 guidance based on weaker than expected holiday sales. As a result, the company revised the midpoint of its quarterly EPS estimate downward from $4.47 to $3.85.

Obviously, this is bad news for our position in SIG and clearly not what we expected. That said, the objective now is to recoup our loss in this position by objectively assessing our choices and articulating a plan of action similar to what we are doing with BBBY.

If you sold the $40 put expiring in April on SIG then there is a good chance it may soon be exercised against you. If that happens, we advise holding onto the stock until the current spate of selling pressure has abated (yesterday’s trading volume in SIG was more than ten times its daily average).

I do not expect SIG to get back to our $40 strike price anytime soon, but I think it will gradually recover near $30 once equilibrium between buy and sell orders has been reestablished. At that time, a covered call option can be written to recoup some of the deficit.

In the meantime, you will collect any dividend payments SIG makes while you are the shareholder of record. At its current share price, SIG pays an annual forward dividend yield of 4.1%.