Selling Puts for Added Income

It seems that the market is trying to decide whether it should have a pullback or not. This doesn't make for the best time to sell puts if you're looking to just collect the premium but if you want to get the stocks at a set price it could prove to be the right time. Of course by selling the puts you're locking yourself in to a certain entry point if the market does correct which might not be the best since you might be able to get the shares cheaper. All information is based off the closing values from February 16, 2012.

The current price for Illinois Tool Works is $56.42 giving a 2.55% current dividend yield.

Illinois Tool Works (ITW) 16 Mar 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised

ITW is a solid company that has a current payout ratio of 36.18% meaning there's plenty of room to increase the dividend as a percent of earnings. It's five year annual dividend growth rate is 14.4% and it's ten year annual dividend growth rate is 12.9%. If you are put the shares then you would be getting a stellar company with the opportunity for above average dividend increases. You're given more downside protection before losing money with the $55 put to sacrifice a little bit of YOC should the put be exercised. I would prefer teh $55 put since you can get essentially the same entry yield but get a much better return on your money if the option doesn't get exercised.

The current price for Emerson Electric Company is $51.38 giving a 3.11% current dividend yield.

Emerson Electric Company 16 Mar 2012 Puts
Strike PriceOption PriceCost Basis if exercisedTotal ReturnCAGRYOC if exercised

The $52.50 put is intriguing to me considering you would get 1.52% of downside protection with the potential to return 2.59% in less than a month. It's a good risk reward ratio for my tastes. That 2.59% return equates to a 39.60% CAGR. There is a higher risk of having the shares put to you especially since I feel that the we're due for a bit of profit taking to pull the markets back down and since EMR is a higher beta stock. For the more conservative move the $49 and $50 puts make for better protection if you aren't looking to necessarily acquire the shares. Emerson is a good company but their 5 year dividend growth rate is 9.1% annually and the 10 year is only 6.4% which is not what I'm necessarily looking for.

*Assumed 25% tax bracket and the commission costs of $8.70 that I would pay.