Friday, January 25, 2013

Recent Transaction

This morning I sold another put option, this time on Coca-Cola (KO).  With the bargains being harder to find I've been looking more towards selling puts to add to my passive income either through option premium or by purchasing shares in companies that I want to own at prices I like.  The reason I like selling puts is that you essentially get paid to set a limit order and if you choose the right combination of strike and expiration date you can usually get a solid annualized return on the put contract.  For more information on what I look for when selling puts check out this post.

I was originally wanting to sell the put option last week but unfortunately didn't have the capital available to sell a cash secured put, so I had to wait.  I sold the May 18, 2013 $37.50 strike put option for $1.45.  Since option contracts are for 100 share lots, I received $145 less the $8 in commission for a total premium of $137.  This is cash I can use right away for further investment.

If KO is trading above $37.50 on expiration, I will keep the full $137 which is a 3.65% return on the $3,750 that is set aside for the put.  This is equivalent to a 11.80% annual return, which is great.

If KO is trading below $37.50 on expiration, the put option will most likely be executed meaning I will be forced to purchase 100 shares for $37.50 each less the $1.37 per share in option premium giving me a cost basis of $36.13 on this lot.  With the current annual dividend of $1.02 per share that would give me a YOC of 2.82%.  However, KO is due for an increase starting with their April payout.  If they increase the dividend just 7.00% my YOC will jump up to 3.02%.

I've updated this on my Option Summary page.

11 comments:

  1. I like this move. I think I would have tried for a little higher starting YOC, but KO is a great company and if you do get assigned the stock, I would imagine that the YOC would top 3% next year.

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  2. I would have liked to get a higher starting YOC if it's executed but the premium just wasn't there for it. I figured almost a 12% annualized return if it expires and a most likely 3.00% YOC after factoring a dividend increase was a good risk/reward tradeoff. As long as the markets don't completely go south from here I expect the put will expire worthless to whoever bought it since the share price should climb with the dividend increase alone.

    Thanks for stopping by!

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  3. Very safe and solid strategy that you can't go wrong with over the long term. If you did this over a 12 month period I calculate your yearly return would be over 10%.

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    1. Marvin,

      I think it's a pretty good move because I'm happy with almost a 12% return or adding to my KO position. KO is one of those core positions that it's worth purchasing even at slightly overvalued prices because the truly undervalued opportunities just don't come along that often.

      Thanks for stopping by!

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  4. Nice put. Even if the markets do go south, KO is an excellent long-term hold. The markets have not been kind to bargain hunters in recent weeks. It's nice to see portfolio worth go up, but I'd rather see high yields.

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    1. ADY,

      No the markets have not. Which is a shame because I just got some more capital to work with. Oh well, I'm fine with selling puts. Especially if I can get a 10%+ annualized return on a company as great as KO. I'd much rather see high yields but we have to deal with what we're given. I'm glad that I'm comfortable with options because if the markets continue to climb higher without much of a pullback my cash would just keep piling up or be put into lesser quality companies at subpar prices. Not a good outcome either way.

      Thanks for stopping by!

      Delete
  5. PIP, with the May 37.5 PUT, have you factored in paying the dividend in April? In the past when I have sold PUTs for the credit and a dividend is paid out during my holding time my account has been debited for the dividend on 100 shares. This would result in $35 net credit. I still like the naked put strategy, just wanted to see if you have encountered this before with selling put options. Thanks.

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    Replies
    1. I haven't noticed that before on puts that i've sold but I'll definitely look into it tomorrow. It doesnt seem like I should have the dividend debited from my account because the shares arent and never have been in my possession. I could see that happening if you are short a stock since youre borrowing the shares but I don't think that happens when you sell a put. I'll check tomorrow when I get to my computer and get back with you.

      Thanks for stopping by!

      Delete
    2. I only use cash secured puts right now so that could maybe be the difference.

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    3. I looked back through my records at my broker and have never had a dividend be debited from my account on a put option that was open over an ex-div date. The only thing that I could find while looking over the internet was if you were short a stock since you're borrowing the shares from someone you have to pay them the dividend.

      Hope that helps.

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  6. I have to say that the information here was the most complete that I found anywhere. It is very fascinating, You’re a very professional blogger. I can’t wait to read more from you.

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