Selling Puts for Added Income
This morning Archer-Daniels Midland was trading at $26.97. Since I would like to get more into the stock with it trading around a 14% discount to
my calculated fair value, I figured I would check out the potential option moves to make. The fair value price turned out to be $31.31. I will be calculating everything with a commission of $7.95 + $0.75 per contract basis. The December 2012 puts look to give the best option premium and lowered cost basis for either way the stock decides to go. Currently ADM's yield is 2.60%. If sold today the option would be open for 107 days, all annual return are based off this.
I really like the $27 put option because you get a solid YOC entry point as well as a great option premium if ADM is trading above $27 come December 22. It wouldn't surprise me to see the option expire come December so that could be the best way to go, with it currently trading on par with the strike.
If I had the cash on hand I would sell at least one of these puts today, most likely the $26 put to help lower my cost basis on the shares. The $27 put doesn't give as much help since my cost basis on the 35 shares I bought last month is $25.96. The $26 put would lower my total basis to $25.28 and increase my YOC to 2.77%. Which is a good range to be in. This would also get my position to be in at a 19.27% discount to fair value.
| Strike Price | Option Price | Cost Basis if Exercised | YOC if Exercised | Discount to Fair Value | Total Return if Expires | Annual Return if Expires |
|---|---|---|---|---|---|---|
| $25 | $0.77 | $24.40 | 2.87% | 22.09% | 2.73% | 9.32% |
| $26 | $1.12 | $25.05 | 2.79% | 20.02% | 3.97% | 13.55% |
| $27 | $1.55 | $25.62 | 2.73% | 18.20% | 5.42% | 18.48% |
I really like the $27 put option because you get a solid YOC entry point as well as a great option premium if ADM is trading above $27 come December 22. It wouldn't surprise me to see the option expire come December so that could be the best way to go, with it currently trading on par with the strike.
If I had the cash on hand I would sell at least one of these puts today, most likely the $26 put to help lower my cost basis on the shares. The $27 put doesn't give as much help since my cost basis on the 35 shares I bought last month is $25.96. The $26 put would lower my total basis to $25.28 and increase my YOC to 2.77%. Which is a good range to be in. This would also get my position to be in at a 19.27% discount to fair value.
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