Reflecting on my GSK options trades. What I did right. What I did wrong. What I am going to do next.
GSK is the symbol for GlaxoSmithKline. It is one of the largest firms in the pharmaceutical industry. I was impressed by the scale of GSK’s operations.
Evaluating GSK
At the beginning of 2022, I attended a course called Options Millionaire Intensive (affiliate link). OMI is a 3-day live / virtual bootcamp. I learnt some interesting investing concepts and strategies. One of them is a checklist for evaluating whether a company is good.
- Operating cashflow (OCF) of a good company should be consistently positive. A bonus if it is growing.
- Net profit margin should be positive. 10% and more to be considered good.
- Interest coverage ratio should be positive. The larger the number the better. Nil is also good. It means the company has no loans.
- The current year Price/Earning ratio (PE) should be lower than the 5-yr PE
- The current year Earning Per Share (EPS) should be higher than the 5-yr EPS
- The Value line should be higher than the current share price. This means that the company shares could be trading at a discount.
Applying the OMI Checklist to GSK
- GSK’s operating cashflow is consistently positive and the current year is higher than the average. A higher cashflow is always a good thing. 5-year average is 7.68 billion Trailing Twelve Months is 8.04 billion
- Although the current year’s net margin profit % is lower than the 5-year average, both of them are higher than 10% which is a good sign. 5-year average is 20.75% Trailing Twelve Months is 12.94%
- GSK has sufficient cash to service their loan interest. That’s good. TTM ratio =7.98
- The 2021 price over earning ratio is lower than the 5-year average. This means investors’ demand for GSK shares is lower and the share price has not been pushed up too high. 5-year PE – 29.15 2021 PE – 19.19
- The current EPS is slightly higher than the 5-year average. It is good that the company is earning more per share. 5-year average – $1.44 Trailing Twelve Months – $1.70
- The value line is 29.15 x 1.70 = $49.55. The current GSK share price is $43
GSK has good operating cashflow, a healthy profit margin, and sufficient funds to support the interest on their loans for 7 years. Its value line is also above the current market price.
Although the price trend may be turning bearish, I think GSK stock price would be higher than the current price of $43.40 in 2 years’ time.
I can outright purchase 100 shares or I can try to buy a LEAP call in-the-money.
GSK Options: Poor Man’s Covered Calls
- Buy a call option with a strike price of $40 expiring on 19 Jan 2024. (Check implied volatility percentile to make sure it is less than 50.) Close it when the options price doubles.
- Sell call options with strike prices above $45 expiring less than 30 days to collect some premiums.
14 Feb 2022 – bought 1 call option with strike price $40 at a cost of $580 expiring 19 Jan 2024. Closed on 24 March 2022 at $630. Profit: $50
17 Feb 2022 – sold 1 call option with strike price $46 expiring on 25 Mar 2022 for a premium of $30.00. Closed on 18 Mar 2022 for $5. Profit: $25
My plan was to sell another short call option at a good strike price. But I am unable to find any 30-day call option with premium above $30.
There are not enough volume and interest. So I decided to close the Jan 2024 call for a small profit.
Lesson learnt: final check on volume and interest of 30-day call options before entering 2-year call options.
The data I used for evaluation are sourced from Firstrade.com and Moomoo (affiliate link). I have trading accounts with them and it includes access to relevant company and market information.
Source of feature image: GlaxoSmithKline building by Ian Wilson – Flickr, CC BY 2.0 https://commons.wikimedia.org/w/index.php?curid=39915239
