After running some numbers and making my first transaction in selling puts yesterday with my BAC Jan 17 2014 Put, I've come to believe that selling puts could prove profitable with certain moves. This strategy would require much more capital than buying the stocks outright but would work if like me you don't think now is the best time to be initiating new positions since I feel that the stock market is due for a pullback. Of course the future is completely unknown and Mr. Market likes to do crazy things.
Here's a few possible puts you could sell based off February 3, 2012's close.
KO Jan 18 2013 $70 for $6.05
Jan 18 2013 $72.50 for $7.65
Jan 18 2013 $75 for $9.55
All of these will give you a good entry yield on KO. The $70 put would give you a 8.91% CAGR on the capital that would be required to be kept in the account and a 2.94% YOC. The $75 put would give you a 13.20% CAGR and a 2.87% YOC. I like to look for a 3% initial YOC and this could be a way to get close to that since the current yield is 2.76%. The $75 put seems to be the best best if you have the $6,545 in capital and are interested in starting or adding to a position in KO.
PG Apr 20 2012 $65 for $2.90
Apr 20 2012 $62.50 for $1.44
The PG $65 put would give you a 4.33% return on your money between now and April which equates to a 22.26% CAGR and give you a YOC if exercised of 3.38% which is slightly higher than the 3.34% current yield. The $62.50 put would give you a better YOC entry but sacrifice the CAGR, of course a 10.69% growth rate is still good.
Personally of the puts I wrote about I'm most interested in the PG puts. If only I had the capital to get tied up. PG seems to be fairly range bound since October of 2012 ranging between $60 and $67.
Overall, I believe that you can get good entry points should the puts be exercised and if not at least get a solid CAGR on your money. I don't feel that we will have a pullback of the magnitude of last summer to give us great discounts but nothing would surprise me. Of course you need to do your homework on any stock before investing but by choosing solid companies such as these that you would be happy to own and most likely be a buyer at the effective cost basis then this is a way to go. Barring another collapse of the stock market these could be solid moves to earn a great yield on otherwise idle money.
I plan on starting a new series outlining potential option moves on solid dividend growth stocks.