Wednesday, February 29, 2012

Selling Puts for Added Income

It's about time for another look at possible put option moves to get a better entry price or for added income. All calculations are based off of the close from February 28, 2012.

The current price for Waste Managerment is $35.20 giving a 4.03% current dividend yield.

Waste Mangement (WM) 16 Mar 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal Return if ExpiresCAGR if ExpiresYOC if exercised

I currently own shares of WM and would like to add more. I like the potential of these puts. You can get a solid return on the $35 and $36 puts with good downside protection considering it the money would only be at risk for a little over 2 weeks. If I had the money in my account it would be tough to decide which is the best to go with. I think I would probably sell the $36 put to try and get more income since I don't expect a big runup in the market for the time being. I fully expect a pullback to rear its head sometime soon but there's no telling when that will happen. The $36 put gives you 1.14% of downside while returning 2.32% if it expires.

I feel that the elusive market pullback is still coming which means now isn't the best time to sell puts if you're looking to just get income. With a sharp pullback there's a good chance that the options would be exercised. While that might not be the best situation for everyone I always look for options that allow good entry price points as well as the possibility for a solid income return should the option expire.

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

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