Friday, September 14, 2012

Recent Transaction

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.

2 comments:

  1. Nice trade. I have an open put that I sold on ADM also. Selling puts are a great way to lower your cost basis and add additional income, especially in an ever increasing market that we seem to be in. The biggest downfall would be if the company had a huge run up and you missed your chance to own it at a great price. When this happens I just move on to another stock that looks attractively valued.

    ReplyDelete
    Replies
    1. I also think that puts might be the way to go in an constantly increasing market. Maybe after the QE3 announcement we'll get some people moving out of the safer dividend paying stocks and into the more risk-on growth stocks to give us a lower price. One can hope I guess. If ADM does move up then oh well. I have it at approximately 13% undervalued at Friday's closing price which isn't enough for me with only a 2.5% yield so I wouldn't be buying now anyways. I wish I had been checking the options for ADM around when you sold yours because that was a steal. You'll have just under 3.00% YOC if it's exercised and getting over 5% return if it expires. Those are good moves both ways.

      Thanks for stopping by!

      Delete