Sunday, February 12, 2012

Selling Puts for Added Income

I've been looking around and have found some other potentially lucrative put option plays. All information is based off the closing values from February 10, 2012 and that the puts would be sold the morning of February 13, 2012.

The current price for Aflac is $48.33 giving a 2.73% current dividend yield.























































Aflac (AFL) 16 Mar 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$48$1.62$46.382.40%31.02%2.84%
$47$1.22$45.781.81%22.70%2.88%
$46$0.91$45.091.34%16.44%2.92%
$45$0.67$44.330.97%11.67%2.97%
$44$0.51$43.490.72%8.55%3.03%


Considering you can effectively get an 8.55% CAGR with 10% downside protection in stock price with the $44 put I find that to be a pretty good tradeoff since you would be risking the money for only 32 days. I don't think Aflac would be moving back down since the Japan issues seem to be behind them. Especially since you can get a 3.03% YOC should that option be exercised.


The current price for Target is $52.43 giving a 2.29% current dividend yield.







































Target (TGt) 20 Jul 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised
$50$2.22$47.783.20%7.55%2.51%
$55$4.65$50.356.22%14.98%2.38%
$57.50$6.40$51.108.23%20.07%2.34%


The $50 put is better if you don't really want the stock because the shares would have to decrease 8.87% before you would lose money on the option. Both the $55 and $57.50 puts will give you a higher return with the added chance that the option will be exercised since your effective cost basis is higher. You'll sacrifice a bit of YOC but can still get a good return should the option be exercised. The $57.50 put gives you 2.54% of downside protection while giving a 8.23% total return. Your upside is 3.25 times the downside risk which is an acceptable tradeoff for my tastes.


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

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