Thursday, April 19, 2012

Selling Puts for Added Income

As promised, here are my put option plays to target a specific entry price on Procter & Gamble (PG). Procter & Gamble closed trading on 4/18/12 at $66.76. It is a Dividend Aristocrat with 55 consecutive years of raising their dividend. The lowest of their 1, 3, 5 and 10 year dividend growth rates is 8.48% with the highest at 11.2%. The most recent payout ratio is 60.00% with a current yield of 3.36% based off the recent dividend announcement. There were very few options worth considering on PG since it is such a stable and dependable company. With the increase in recent market volatility one can only hope for continued volatility to increase the option premiums. Nevertheless, I did find a few compelling option plays.







































Procter & Gamble (PG) 18 Jan 2013 Puts
Strike PriceOption PriceCost Basis if exercisedTotal Return if ExpiresCAGR if ExpiresYOC if exercised
$65.00$3.60$61.495.40%7.27%3.66%
$67.50$4.80$62.796.98%9.41%3.58%
$70.00$6.45$63.649.09%12.30%3.53%

As mentioned in my stock analysis on Procter & Gamble, I would look to start accumulation of shares at $62.50 and lower. I don't like these moves as some that I have previously shown for put option plays mainly because the return is fairly low should the shares not reach your strike price. Especially since you would be tying up the money for 75% of a year. I'll refer to "The Intelligent Investor", my previous post about not waiting if the stock meets your value estimate including a margin of safety. If the option goes unexercised, you would have missed out on 3 dividend payments of $0.562 each from PG. That would effectively lower your cost basis from the current price of
$66.76 to $65.07. Since the option yield, Total Return if Expires, is higher in all cases this might not be that much of an issue. However if it was much closer to the same then I would not be interested in it at all. It's one more thing to think about this move since your return would be below my threshold.

I think the $67.50 put is probably the best option play at this time since it gives a significant return should the option not be exercised. You wouldn't have a realistic chance of the option being exercised too soon despite it currently being in the money, trading below the strike price, since there is significant time value built in to the option premium. With the $67.50 put you would have just over 6% of downside before you would lose money on the trade.

Overall I don't like the current option plays although the $65 is a little interesting since you can get a 7% return on your money which is nothing to laugh at while still getting a entry price below our targeted $62.50 beginning price.

3 comments:

  1. I love the strategy of selling puts to buy stocks you'd like to own anyways. I currently have sold puts on JNJ, CHK, KMI, BBVA, VOD, and AZN. Some of these are speculative plays but some will be going in my dividend growth portfolio if assigned. If they don't get assigned I am getting paid to wait.

    I'd also like to get in PG at some point.

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  2. Once I can get my capital flowing toward investing I'll probably be leaning towards selling puts to get extra income or to get better entry prices. The only problem is you miss out on a rally in the stock or a big decline in the stock since you could have bought lower but for a stock that you want to get in but it's currently a little expensive I think it's definitely the way to go. I'm hoping to be able to get some more articles out about possible put options but work has been really busy lately and will be for the next week. Thanks for stopping by.

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    1. One other thing is say you find a compelling put option play you can always sell covered calls to generate more income if it's a stock that you're not really all that fond of. If I find something that is just too enticing that would be my move.

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