This afternoon I sold a Dec 22 2012 Put option on Archer Daniels Midland Company (ADM) for $0.89. After brokerage costs I netted a total of $81.01. The put option gives me a good return either way that it works out.
If ADM is trading above $26 on expiration then I will pocket the full $81.01 premium. That would be a return of $81.01 / $2,600 = 3.09%. Even better is that I would have gotten that return in 99 days which is equivalent to a 11.39% annual return.
If ADM is trading below $26 on expiration then the option will most likely be exercised forcing me to buy the shares at $26 each. But I get to back out the option premium from my cost basis giving me a true cost basis of $25.28 which at the current annual dividend payout of $0.70 gives a 2.77% yield. That is much better than the current 2.57% yield that the shares are offering. The other advantage is that it will lower my average cost basis for my position in ADM from $25.96 down to $25.45. My new YOC for the whole position would be 2.75%. My total cost basis would be in at a 18% discount to the average fair value that I calculated in my stock analysis on Archer Daniels Midland.
I feel that with the latest announcement of QE3 that put options are going to be the way to go because stock valuations will be juiced even further. There's still going to be values because there's always some in every market, unfortunately it won't be like it was just 2 years ago. The worst part about selling the put option is that it ties my money up until December leaving me with essentially no capital for the rest of the month. I will probably push forward some of October's scheduled savings to this month to have some powder ready in case there is a pullback.
I've updated the put option on my Option Summary page.