I've been on a bit of an option selling frenzy the last week or so, but that happens when there's not as much value available in the market. Hopefully a bit of a correction will start rearing it's head and allow some actual purchases to be made, but in the meantime I'll sell my options and collect the premium while keeping an eye out for deals on DG stocks.
On Thursday, I sold an $11 put option on Bank of America (BAC) for $0.52. The option will expire on April 20th. After commission and fees I collected a total of $44.00 to sell someone the right to sell me 100 shares of BAC at $11.00. I'm fine with adding to my position in Bank of America since it's a bit of a speculation play that I think will reap great rewards given a few years.
If BAC is trading above $11 on expiration then I'll get to keep the full $44 as profit. This would represent an even 4.00% return on the $1,100 that is set aside for the put. A nice 18.48% annualized return.
If BAC is trading below $11 on expiration then most likely I will be put the shares or forced to buy 100 shares of BAC for $11.00 each. Since I received $44 after commission and fees, my effective cost basis on these shares will be $10.56. I would have preferred getting shares a little bit closer to the $10.00 mark, but I'm fine with a $10.56 cost basis. This will give me a YOC of 0.38% based on the current annual dividend of $0.04 per share. However, this is more of a play on the future since it's my speculation play. I fully expect that within the next few years the dividend will be pushed back up to at least a $0.60 annual dividend which would be a 5.68% YOC.
I'm happy with either way this trade turns out so now I'll just sit back and wait to see what happens.