Thursday, February 9, 2012

Selling Puts for added income

I wish I had more capital to put to work right now because I've found some interesting put option moves that can give some solid return on otherwise idle capital. All information is based off the closing values from February 8, 2012.

The current price for AT&T is $30.03 giving a 5.85% current dividend yield.







































AT&T (T) 20 Apr 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$30$0.89$29.202.01%10.61%6.03%
$31$1.59$29.413.64%19.87%5.97%
$32$2.46$29.545.56%31.60%5.94%


All of these would give an improved cost basis should the stock be exercised and improve the YOC above the current yield. I don't foresee the stock to dip below the effective creation prices but if they were I would be a buyer anyways and would start adding to my position.


The current price for Nucor is $45.31 giving a 3.22% current dividend yield.















































Nucor (NUE) 20 Apr 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$45$2.05$42.953.27%17.74%3.39%
$44$1.63$42.372.63%14.08%3.44%
$43$1.29$41.712.10%11.11%3.49%
$41$0.79$40.211.29%6.70%3.62%


The Nucor options seem interesting to me. I know that Nucor has run up a lot since October but there seems to be a huge disconnect between the stock price and the put options market. The puts seem to be expecting the worst which I feel we will be treading water for the most part of this year. Once the global economy starts going again Nucor could be there to capitalize on a sudden increase in demand. The $45 put gives you 5.20% of downside protection before you would start losing money on the option and the $41 gives 11.26% of downside move in the stock.

Both of these make me yearn for more capital to deploy. You can get a 10%+ CAGR on your money on stocks that I would begin buying at the effective creation prices of the puts.



*Assumed 25% tax bracket and the commission costs of $8.70 that I would pay.

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