FMG - Fortescue Ltd

i don't have a lot of experience trading FMG options so i can't really comment on the specific option series you are targeting, however i noticed a couple of things in your post that you need to be aware of.

firstly the June options have a contract size of 107, not 100. it's a good idea to always check anyway (don't assume the contract size is always 100!), but when the strikes in a particular chain go to weird prices (eg. 24.76, 25.22 etc. instead of 24.50, 25.00), usually the contract size goes to a non-standard number as well. if you happen to have more than 1,070 units to collateralise then it'll probably be nothing more than a nuisance that results in odd lots if assigned, but in a situation where you're looking to write covered calls over your entire holding and you assume it's 100, it could be a bit more serious as a fraction of those calls will be naked.

secondly it looks like you are basing your estimated premium off the last traded price. unlike stocks, for options the last traded price usually doesn't mean much, unless the last trade was literally in the last few minutes or so (and even then it might be quite irrelevant in a fast moving market). otherwise it doesn't indicate what price underlying was at when those options were traded, if the trade was from days ago it would have had more time value etc.

you need to check the spread the market makers are showing the market when it's in session to get a proper idea of the estimated premium. for eg. the Jun 24.76 calls are showing 0.70/1.00 as i type this (because the underlying has rallied strongly today so the delta is probably considerably higher than what it was when those options were traded at 0.47) but the last traded price is still showing as 0.47. if you're looking for something that's ~10% OTM to keep the delta consistent with what you were looking at before, you would now have to look at the Jun 26.59 calls, and those are currently trading at 0.25/0.40, not 0.47.

Value Collector said:

That strategy is perfectly valid if that’s the position you want to take, although as over9k pointed out your original post said $470 per contract which is wrong, it’s $470 in total for all 10 contracts, $47 per contract.

The main thing that you should be thinking about in my opinion is whether this is the best way to get cash out of holding FMG, I mean is $0.47 enough compensation for potentially missing a big upsurge + a $2 dividend in 4 months or so?

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The way I look at it is, you are getting paid $0.35 per month for this contract, which is an 18% return per year if you are able to just keep selling contracts at the level, add to that the dividend if you don’t get exercised before the end of August and you are earning a very healthy return.

but you are exposed to two risks,

1, the share price drops and the dividend is cut, meaning your income stream dries up and some of your capital is lost.

2, the share price rockets higher and it turns out the initial $0.47 premium is dwarfed by the capital gain and dividends you would have received if you had just taken a standard buy and hold.

accepting the $0.47 is the lower risk option, because even if scenario 1 happens you have at least extracted an additional $0.47 out of the deal before the price collapsed, so had less money on the table.

But only you can decide if “de-risking” your position by $0.47 / share is worth the opportunity cost of limiting your upside potential.

If all you really want is the $2 capital gain, and want to de-risk your position by $0.35 per month if that gain doesn’t arrive, sell the call.

but if you really want to hold FMG as a dividend payer with a big upside, don’t sell the call.

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Value Collector,

Thank you very much for your post & comments. This is exactly what I was looking for and what I think is/should be one of the primary purposes of the ASF. In response to your valid comments here are my further comments/explanations.

In my original post my costing of the contracts premium was actually correct, however it was the grammar I used that was incorrect. The four hundred and seventy dollars written in the brackets, ($470), should have been entered later in the sentence, or probably omitted to avoid confusion to the readers.

‘The premium is $0.470 ($470) per contract and the contract fee is $35. Total received premium will be $470 - $35 = $435.’

The premium is $0.470 per contract and the contract fee is $35 . The premium for 10 contracts is $470, less the fee ($35) and thus the total received for the sale of 10 contracts (covering 1,000) shares is $435.

‘The way I look at it is, you are getting paid $0.35 per month for this contract, which is an 18% return per year if you are able to just keep selling contracts at the level, add to that the dividend if you don’t get exercised before the end of August and you are earning a very healthy return’

This is exactly what I am trying to achieve. I hope to sell contracts monthly at this level in several companies I hold and do likewise from Ms. Gunnerguy’s holdings. I am potentially looking at one trade a month, in up to 4 companies, for each of me and Ms Gunnerguy. This is 2 trades a week in total (I am retired so I have time). That would be a nice income. Thus, I am only testing it with a ’portion’ or my FMG holding to see if my maths are correct and the strategy works.

Risks.

1. If dividend is cut and share price drops, I should be selling all my FMG shares, however I hope this doesn’t occur. If it does, I could probably still manage to get some premium income from selling covered calls. Maybe a smaller income, but at least something and wait for the recovery or the take over offer on FMG..

2. I fully understand that I am potentially exposed to losing out on some long term gain for FMG. This only really applies to the possible share price gain. I can always buy back just for the dividend if I really want. It depends on the dividend, as yet unknown. However as discussed I am only selling 10 contracts that cover 1,000 shares in FMG. This is ‘only a portion’ of my current FMG holding. I don’t want to say more. Thus I am only ‘limiting an upside’ on a portion of my total holdings. In addition gaining 10% for a 4 week holding for me I consider good. Also this option contract expiration date is 17 June, in 4 weeks or so, well before the dividend is announced in August.

I am keeping the rest (majority) of my FMG holding for the potential capital gain.

‘but if you really want to hold FMG as a dividend payer with a big upside, don’t sell the call.’

I am holding FMG as a dividend payer and long term capital gain, but I am trying to test a strategy to gain additional income from the assets I currently already hold. I have to choose a share from those that I already hold in order to test my attempted income gain from selling covered calls. I have to start somewhere and with selling a call that is 9% above the current SP, valid for 4 weeks, is, I agree, a risk but I think 9% is a long way from the current price to rise within 4 weeks. I will be astonished if FMG rise by 9% in the next 4 weeks, but also happy.

Again Value Collector, thank you for your comments, and questions.

Gunnerguy.

Sharkman said:

i don't have a lot of experience trading FMG options so i can't really comment on the specific option series you are targeting, however i noticed a couple of things in your post that you need to be aware of.

firstly the June options have a contract size of 107, not 100. it's a good idea to always check anyway (don't assume the contract size is always 100!), but when the strikes in a particular chain go to weird prices (eg. 24.76, 25.22 etc. instead of 24.50, 25.00), usually the contract size goes to a non-standard number as well. if you happen to have more than 1,070 units to collateralise then it'll probably be nothing more than a nuisance that results in odd lots if assigned, but in a situation where you're looking to write covered calls over your entire holding and you assume it's 100, it could be a bit more serious as a fraction of those calls will be naked.

secondly it looks like you are basing your estimated premium off the last traded price. unlike stocks, for options the last traded price usually doesn't mean much, unless the last trade was literally in the last few minutes or so (and even then it might be quite irrelevant in a fast moving market). otherwise it doesn't indicate what price underlying was at when those options were traded, if the trade was from days ago it would have had more time value etc.

you need to check the spread the market makers are showing the market when it's in session to get a proper idea of the estimated premium. for eg. the Jun 24.76 calls are showing 0.70/1.00 as i type this (because the underlying has rallied strongly today so the delta is probably considerably higher than what it was when those options were traded at 0.47) but the last traded price is still showing as 0.47. if you're looking for something that's ~10% OTM to keep the delta consistent with what you were looking at before, you would now have to look at the Jun 26.59 calls, and those are currently trading at 0.25/0.40, not 0.47.

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Sharkman,
Thanks for your post !
Big gain of 6.6% move at opening today. Options reflect this.

1. Thanks for the heads up if contract size 100/107. I agree that it’s the non standard strike prices I have to keep and eye on the contract size.

2. I understand about the prices and spread. Some ‘last trade prices’ are 2,3,4 weeks old. When I set up a trade I look at the current spread and the latest trade prices generally in the last couple of hours.

With the gain today I would obviously move my strike price higher if I proceed.
Thanks for the heads up and comments. A great help !!

Gunnerguy

Gunnerguy said:

but I think 9% is a long way from the current price to rise within 4 weeks. I will be astonished if FMG rise by 9% in the next 4 weeks, but also happy.

Again Value Collector, thank you for your comments, and questions.

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Its up 6% this morning in 3 hours.

I do understand your strategy, and have applied this to some FMG holdings at various stages over the last few years, each time I have regretted it.

I believe this strategy will work best for shares that are already sitting at about their fair value or are slightly over valued, trying it on a stock that is significantly undervalued is a gamble in my opinion if you are trying to get longterm income, but I guess that just comes down to your valuation.

I actually wasn't joking when I mentioned to Systematic a few posts ago that FMG could be at $30 by the end of August, off course I can't predict where the market will go or what the Chinese will do, but it is my sincere belief that FMG will hit $30 in the no to distant future.

Value Collector said:

Its up 6% this morning in 3 hours.

I do understand your strategy, and have applied this to some FMG holdings at various stages over the last few years, each time I have regretted it.

I believe this strategy will work best for shares that are already sitting at about their fair value or are slightly over valued, trying it on a stock that is significantly undervalued is a gamble in my opinion if you are trying to get longterm income, but I guess that just comes down to your valuation.

I actually wasn't joking when I mentioned to Systematic a few posts ago that FMG could be at $30 by the end of August, off course I can't predict where the market will go or what the Chinese will do, but it is my sincere belief that FMG will hit $30 in the no to distant future.

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Value Collector,
Yes I can see in the current environment, posts, media, etc that commodities are still on a run. $30 is easily plausible, and more. As we know the market is a combination of all participants and their valuations. I am a long term holder in the current market, just trying to squeeze a few extra bucks.
Big movements like today make life interesting.
I remember the last commodities boom, and then the decline. If we get a nice run for a year or two it would be nice but there are always risks, China, geopolitics, and Covid resulting in volatility.
Thanks for your comments.
Gunnerguy

7% run today

Gunnerguy said:

Value Collector,
Yes I can see in the current environment, posts, media, etc that commodities are still on a run. $30 is easily plausible, and more. As we know the market is a combination of all participants and their valuations. I am a long term holder in the current market, just trying to squeeze a few extra bucks.
Big movements like today make life interesting.
I remember the last commodities boom, and then the decline. If we get a nice run for a year or two it would be nice but there are always risks, China, geopolitics, and Covid resulting in volatility.
Thanks for your comments.
Gunnerguy

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Have considered selling puts rather than calls?

FMG is still at extremely cheap valuation. It is a company that is perceived to depend on the Chinese markets. (obv not true in the long term but still that is the perception). Chinese stocks & market is currently not doing well even though fundamentals are still strong.

From a technicals perspective, we're seeing a pretty distinct floor at around $20 from which now it has bounced up from. A lot of other stocks have either kept shooting up or crashed down continuously (tech stocks) in the last 2 months.

I suspect once sentiment increases again and the stock market start to properly rotating towards value stocks - we will stabilize at over $30 like we did at the $10 and $20 price points in the last year and a half

They'll pivot over to india long term. I have no idea how much india is self-reliant for minerals but that'll be the next play (and a much more secure one at that).

They aren't stupid.

It's intriguing to see the absolute 180 degree turn in "analysts assessment" of FMG.

I'm sure it was a only a few months back (if that long) that the predictions for FMG future earnings peaked in 2020 and then sharply dropped. It seemed to be the rationale behind analysts steadfastly refusing to believe the sharply increased iron ore prices from 2020 onwards were more than a transitory bubble. I clearly remember in 2020 major investment groups were saying FMG was way overvalued at $13-16 and suggested $7.70 as a more realistic figure.

Check out my post 3001 from August 25th 2020 as the prime example.

I recall that even at the time this seemed a totally unreasonable assessment. (and no one in this thread believed it either..)

Now the projections for FMG in 2021/2 on my Westpac look like this.

All that means is that the banks have taken out different positions on it themselves.

If the analysis from your broker you're getting is free (and it appears to be) then it's because they WANT you to see it.

Remember, if the product's free, YOU'RE the product.

a couple of other things that might be useful to consider, in terms of how you're planning on running the position. not so much for the specific trade you've described, but more for covered calls in general.

closing out (buying back) the calls early if they drop to a certain level in terms of the premium originally collected. short calls are a limited reward trade, so if the market gives you a chance to buy back the calls for say 20% of what you originally sold them for, that means you've already collected 80% of the max profit, if you want it. are you comfortable putting that at risk by holding on to try and squeeze out the last 20%, or would you rather take the sure 80% and run?

20% of the original premium is the level that i'll generally close out limited reward positions at, but you don't have to use 20%, some people use 10%, some use 50%. or you could just let it run to expiry no matter what, there's no definitive answer here, it essentially boils down to personal taste. letting it run to expiry probably makes the most sense for your trade, given the high brokerage you're paying, but once you start trading thru a serious options broker like IB that only charges 17c a contract, incurring the extra transaction for closing out early becomes a lot more viable.

secondly, if it does happen to move ITM, what do you plan to do? you could simply let the stock get called away. if you want to protect the stock position eg. to avoid triggering CGT, you may have to buy back the calls (potentially at a loss) on or before expiry. but another alternative which i've generally found quite useful (though it does have its downsides, like everything) is to roll up & out. this involves entering into a combo to buy back the ITM calls and simultaneously sell the same number of calls with a higher strike and a further out expiry. this is where the weird lot sizes can become a real nuisance, if you're short 107 lot size contracts and you want to roll to 100 lot size contracts for eg.

depending on the expiry and strike selected, you might be able to do that at zero cost or even take in a small credit. it protects your stock position for a while longer and allows the stock a bit more room to appreciate. if the stock then pulls back or even if it rises slowly, the new options could expire worthless and you've gotten out of your short call obligations with decent gains (mostly from the original calls). but if the stock continues rallying sharply during the new option's lifetime, the rolled options themselves are going to wind up deep in the red too. and it ties up your collateral for minimal yield (even if you roll for small credit that will be nowhere near the premium collected for the original calls). so it's not an automatic go-to strategy by any means.

over9k said:

All that means is that the banks have taken out different positions on it themselves.

If the analysis from your broker you're getting is free (and it appears to be) then it's because they WANT you to see it.

Remember, if the product's free, YOU'RE the product.

Click to expand...

I think your being a bit simplistic here Over9k. Last year I took a keen interest in FMG after noting the VC's long term observations of the share and how FMG operated. At the time I also checked a number of different analysts POV and frankly most catergorised it as overvalued . The most pessimistic view was the one I highlighted in post 3001 last August. I was making an observation about the quality (?) of so called investment analysts.

By the way I'm not sure that Indian iron ore will be the alternative for China. I suspect conflicting political views will rule that out. I understand China is trying to develop some big mines in Africa to provide cheaper alternatives to the current suppliers. But it seems these options are at least 5 years away.

basilio said:

It's intriguing to see the absolute 180 degree turn in "analysts assessment" of FMG.

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Analyst assessments are bogus from my experience. If everyone's shouting doom it's likely already baked in to the current share price, which means it's even more of a steal.

Also Aussie Big 4 don't hold near the same level of clout that they think they do as international banking institutions.

Sharkman said:

a couple of other things that might be useful to consider, in terms of how you're planning on running the position. not so much for the specific trade you've described, but more for covered calls in general.

closing out (buying back) the calls early if they drop to a certain level in terms of the premium originally collected. short calls are a limited reward trade, so if the market gives you a chance to buy back the calls for say 20% of what you originally sold them for, that means you've already collected 80% of the max profit, if you want it. are you comfortable putting that at risk by holding on to try and squeeze out the last 20%, or would you rather take the sure 80% and run?

20% of the original premium is the level that i'll generally close out limited reward positions at, but you don't have to use 20%, some people use 10%, some use 50%. or you could just let it run to expiry no matter what, there's no definitive answer here, it essentially boils down to personal taste. letting it run to expiry probably makes the most sense for your trade, given the high brokerage you're paying, but once you start trading thru a serious options broker like IB that only charges 17c a contract, incurring the extra transaction for closing out early becomes a lot more viable.

secondly, if it does happen to move ITM, what do you plan to do? you could simply let the stock get called away. if you want to protect the stock position eg. to avoid triggering CGT, you may have to buy back the calls (potentially at a loss) on or before expiry. but another alternative which i've generally found quite useful (though it does have its downsides, like everything) is to roll up & out. this involves entering into a combo to buy back the ITM calls and simultaneously sell the same number of calls with a higher strike and a further out expiry. this is where the weird lot sizes can become a real nuisance, if you're short 107 lot size contracts and you want to roll to 100 lot size contracts for eg.

depending on the expiry and strike selected, you might be able to do that at zero cost or even take in a small credit. it protects your stock position for a while longer and allows the stock a bit more room to appreciate. if the stock then pulls back or even if it rises slowly, the new options could expire worthless and you've gotten out of your short call obligations with decent gains (mostly from the original calls). but if the stock continues rallying sharply during the new option's lifetime, the rolled options themselves are going to wind up deep in the red too. and it ties up your collateral for minimal yield (even if you roll for small credit that will be nowhere near the premium collected for the original calls). so it's not an automatic go-to strategy by any means.

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Sharkman.
Amazing !! Thanks for your ideas. True sharing of ideas to a novice like me. I really appreciate it.
I am taking a close look at IB.
I looked at options many years ago and the cost of trading just didn’t make it worth my while. Now I have years in the market(s), more patience, less emotions, and larger assets/funds to use I am really looking closely at using options as a third stream of returns. The first two being capital growth and dividend income.
This has really helped me understand and learn the nuances of options trading. Thanks.
Gunnerguy.

basilio said:

I think your being a bit simplistic here Over9k. Last year I took a keen interest in FMG after noting the VC's long term observations of the share and how FMG operated. At the time I also checked a number of different analysts POV and frankly most catergorised it as overvalued . The most pessimistic view was the one I highlighted in post 3001 last August. I was making an observation about the quality (?) of so called investment analysts.

By the way I'm not sure that Indian iron ore will be the alternative for China. I suspect conflicting political views will rule that out. I understand China is trying to develop some big mines in Africa to provide cheaper alternatives to the current suppliers. But it seems these options are at least 5 years away.

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Oh I didn't think you were talking on that kind of timeline - I just thought you meant the peaks/troughs over the past few months.

Reference india - I meant that FMG will export to india if chinese demand falls.

Sharkman said:

a couple of other things that might be useful to consider, in terms of how you're planning on running the position. not so much for the specific trade you've described, but more for covered calls in general.

closing out (buying back) the calls early if they drop to a certain level in terms of the premium originally collected. short calls are a limited reward trade, so if the market gives you a chance to buy back the calls for say 20% of what you originally sold them for, that means you've already collected 80% of the max profit, if you want it. are you comfortable putting that at risk by holding on to try and squeeze out the last 20%, or would you rather take the sure 80% and run?

20% of the original premium is the level that i'll generally close out limited reward positions at, but you don't have to use 20%, some people use 10%, some use 50%. or you could just let it run to expiry no matter what, there's no definitive answer here, it essentially boils down to personal taste. letting it run to expiry probably makes the most sense for your trade, given the high brokerage you're paying, but once you start trading thru a serious options broker like IB that only charges 17c a contract, incurring the extra transaction for closing out early becomes a lot more viable.

secondly, if it does happen to move ITM, what do you plan to do? you could simply let the stock get called away. if you want to protect the stock position eg. to avoid triggering CGT, you may have to buy back the calls (potentially at a loss) on or before expiry. but another alternative which i've generally found quite useful (though it does have its downsides, like everything) is to roll up & out. this involves entering into a combo to buy back the ITM calls and simultaneously sell the same number of calls with a higher strike and a further out expiry. this is where the weird lot sizes can become a real nuisance, if you're short 107 lot size contracts and you want to roll to 100 lot size contracts for eg.

depending on the expiry and strike selected, you might be able to do that at zero cost or even take in a small credit. it protects your stock position for a while longer and allows the stock a bit more room to appreciate. if the stock then pulls back or even if it rises slowly, the new options could expire worthless and you've gotten out of your short call obligations with decent gains (mostly from the original calls). but if the stock continues rallying sharply during the new option's lifetime, the rolled options themselves are going to wind up deep in the red too. and it ties up your collateral for minimal yield (even if you roll for small credit that will be nowhere near the premium collected for the original calls). so it's not an automatic go-to strategy by any means.

Click to expand...

The FMG December contracts are also 107, so they can be used to roll out to, or you can do the roll as two separate legs instead of the combo and just adjust the amount of contracts in each leg to get to roughly the same exposure.

I have used the rolling out and down strategy selling FMG puts with great affect for the last 8 years or so, I have sold huge amounts of puts that have expired worthless, roll out and down most of the others, and built a large portfolio of shares from the contracts that got exercised, using dividends and options premiums to buy the stock.

Value Collector said:

The way I value a company like FMG is to look at the cashflows and dividends they will generate under certain circumstances to give me a range of possible valuations, and then I rate which of those range of possibilities is likely to play out in the future and then base my valuation on that.

One of the most important factors for a company is their return on equity (ROE), and I have a method of valuing a company based on their ROE.

Based on the $93 Iron ore price they averaged last year, they had a return on equity of 44.6%, which is very high and probably won't hang around forever, although with the current $120 Iron ore price they are probably earning 60% ROE.

Based on different possible ROE figures that could be achieved these are what I believe the share price should be (if ROE averaged at the levels for the longterm)

45% ROE - $39.57
35% ROE - $28.20
25% ROE - $18.24
15% ROE - $12.36

Now I don't believe a ROE of 35% or above could be sustained over the longterm, but I do think that we will be above that level for at least this financial year, and that it will eventually settle some where between 25% and 35% meaning based on that metric a share price of $23 to $25 is very fair, so there is a great upside potential in my option, and a limited down side if the ROE did drop back to 25% or 20%

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I then also like to make an assessment of what the possible price people (including myself) would be happy to pay or hold at based on the range of possible dividends, and again I then pick which outcome I think is likely.

I think a fully franked dividend of 7% (10% gross) long term is pretty attractive, while alot of people would still be happy with a 5% dividend (7.1% gross).

So here is where the share price would be to achieve those dividend yields based on different dividends.

Current full year dividend ($1.76 full year) -
$25.16 (7%) - $35.20 (5%)

$2 / share (final dividend annualised)
$28.60 (7%) - $40 (5%)

$1 / share
$14.30 (7%). - $20.00 (5%)

$0.76 / share
$10.86 (7%) - $15.20 (5%)

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So based on the above metrics (and some others) my opinion of different price points is as follows.

$19.00 (pretty safe to hold at, should see very good dividend return)
$25.16 (probable result, and should produce a decent dividend retune)
$28.60 (possible outcome, may look to reduce holding, still a good dividend though so no rush to sell)
$33.00+ (blue sky valuation, requires $120+ Iron ore price for long time, definitely be reducing my holding back to maybe 10% of my current position).

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As for the guys $7.70 valuation, I can't really see a way that is likely, I think it $33 blue sky is more likely than his $7.70 gloomy number, not that I think we are guaranteed $33, its just I think the surprise to the upside is more likely than the surprise to the down side at the moment)

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It’s interesting to look back at this post, I wrote this 9 months ago at the same time the analyst Basilo is talking about said FMG was worth only $7.70.

It seems quaint that I described $33 as a possible “blue sky” valuation because it would require Iron Ore to be over $120 for a long time, while it now is sitting over $200 hahaha.

hence my comment about it maybe hitting $30 soon, especially when I believe a long term 45% return on equity could see a share of $39, I thought 45% was not sustainable but we are currently at close to 70% ROE.

It does make you wonder that if I could work out these basic figures using a simple calculator, the annual reports and a basic understanding of the business, why couldn’t these analysts figure it out?

Gunnerguy said:

I looked at options many years ago and the cost of trading just didn’t make it worth my while. Now I have years in the market(s), more patience, less emotions, and larger assets/funds to use I am really looking closely at using options as a third stream of returns. The first two being capital growth and dividend income.

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i can definitely identify with that. when i was younger i used to try and make all of my returns from short term options trading, buy & hold just wasn't in my vocabulary. but when my capital grew too big to fit under the SIPC protection limit (i will only trade options thru IB, the brokerage is just too high for my liking otherwise, but i've always been paranoid about the custodian account model and broker/dealer collapses) i decided to gradually transition away from that and pump newly generated funds from investment/trading returns plus my normal job into international ETFs instead. these days i'm mainly focused on capital growth and dividends much like you, my IB account only hovers around 20-25% of total capital (mostly used as collateral for short options).

it's embarrassing to think about those early days now, i was high on the Dunning-Kruger effect and low on actual trading experience, so i'd keep trading these more complex strategies like iron condors, christmas trees, ratio/diagonal spreads and the like, simply because i had a good grasp of the theory behind them, so i figured i might as well put that knowledge to use. i eventually realised that the simple bread & butter covered calls and cash covered puts were the more consistent, steady performers (at least for me) and typically needed less effort to manage the position vs the multilegged strategies, so i mainly stick to those now.

Value Collector said:

The FMG December contracts are also 107, so they can be used to roll out to, or you can do the roll as two separate legs instead of the combo and just adjust the amount of contracts in each leg to get to roughly the same exposure.

I have used the rolling out and down strategy selling FMG puts with great affect for the last 8 years or so, I have sold huge amounts of puts that have expired worthless, roll out and down most of the others, and built a large portfolio of shares from the contracts that got exercised, using dividends and options premiums to buy the stock.

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Great !!!

Value Collector said:

The FMG December contracts are also 107, so they can be used to roll out to, or you can do the roll as two separate legs instead of the combo and just adjust the amount of contracts in each leg to get to roughly the same exposure.

Click to expand...

i agree that there are ways to work around it, but they'll likely be more inconvenient than if the lot sizes were all 100 to begin with. one might not want to roll all the way out to dec (i normally prefer to roll out a month, two tops, as i like the faster decay of the shorter dated stuff - not saying that's the best way to do it, it's just my own preference) so copping the lot size differential may be unavoidable.

rolling as two separate legs runs the risk of slippage. may or may not turn out to be a big deal in the end, but ideally one shouldn't have to be concerned about slippage when rolling.

in theory you could punch in a combo order with some wacky ratio to try and avoid the slippage, eg. if you have 50 of the 100 lot size contracts and you want to roll to 46 of the 107 lot size contracts (covering 4,922 units of underlying) you could try punching in a combo with a 25:23 ratio. i don't know the inner mechanics of combo orders as well as @cutz does though, so i'm not sure if such a combo would actually get filled - i've only ever booked combos with "standard'ish" ratios eg. 1:2, 2:3, 1:3.

BHP has something similar, it has the odd option chain with 104 lot sizes. these days i just avoid those chains, even if it means i don't get the quicker decay by having to sell longer dated contracts that do have the 100 lot size, i just find it more convenient in practice to run positions off a consistent 100 lot size. YMMV.