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.