Monday, March 26, 2012

Selling Puts for Added Income

Today I'll be looking at Medtronic. Medtronic's current price is $38.70 and is a Dividend Aristocrat with 34 consectutive years of raising their dividend. The lowest of their 1, 3, 5 and 10 year dividend growth rates is 8.7% with the highest at 17.8%. The most recent payout ratio is 30.50% with a current yield of 2.50%.







































Medtronic (MDT) 18 May 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal Return if ExpiresCAGR if ExpiresYOC if exercised
$37.00$0.62$36.381.08%7.69%2.66%
$38.00$0.93$37.071.66%12.04%2.61%
$39.00$1.38$37.622.49%18.44%2.57%


If you're looking for more downside protection and therefore less of a chance of being put the shares then I like the #37 put since you get 4.59% of downside til the option could possibly be exercised and a total of 5.99% of downside before you would lose money on the move. That while still providing an adequate return for the approximate 2 month holding period.

The $39 put would be intriguing to me if I had the money to make the move. The put would currently be in the money meaning it could be exercised right away; however, you still have 2.79% of downside protection before you would lose money on the move. As long as the shares don't trade less than $37.62 if worked out for you. I think based on the return possibilities for a fairly steady stock that it would probably be the option I would look to make a move on since you would get a better dividend yield over buying outright.

I would normally try and get further downside protection but this is a shorter term option than some of the previous ones that I've looked at.

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