11-30-2018, 01:29 PM
More detailed thoughts:
I recently bought some shares of MO outright at $53.25. I’d be glad to buy a few more shares at an even lower price. Right now it is at $55.35. So I can just sit and wait and see whether it will get back down there, or I can try selling a put.
I can sell the January 4, 2019 put with a strike price of $52.50 for $0.87. So I’ll collect a premium of $87.00 minus $7.00 in fees, for a net of $80.00 in my pocket right now, and I’ve agreed to tie up $5,250 until expiration.
If the stock trades lower and the option is exercised, I’ve got my shares at a price of about $51.70 – I’m cool with that. Sure, if the stock is at $49.00 when the option is exercised, I’ll wish I had waited, but I would have likely bought outright if it had gotten to the $52-$53 range anyway, so I’m not going to consider that a “loss” in the traditional sense. As between the two paths, I would come out ahead using the option strategy – if I really would buy the stock at around the strike price anyway.
And if the stock doesn’t trade lower and the option is not exercised, I’ve tied up $5,250 for about 35 days and been paid $80.00 for doing so (and for taking on some risk). Please check my math, but I think that is approximately a 15 percent return, annualized.
If I would buy the stock at the strike price anyway, selling the put seems like a great way to go about it. Would love to know if my assessment is mistaken or if I’m overlooking anything.
(Yes, I’ve ignored the taxes I’ll pay on the premium, but I’m hoping I can get this going in a tax-deferred account. And if I can’t, I’ll call it a success tax!)
I recently bought some shares of MO outright at $53.25. I’d be glad to buy a few more shares at an even lower price. Right now it is at $55.35. So I can just sit and wait and see whether it will get back down there, or I can try selling a put.
I can sell the January 4, 2019 put with a strike price of $52.50 for $0.87. So I’ll collect a premium of $87.00 minus $7.00 in fees, for a net of $80.00 in my pocket right now, and I’ve agreed to tie up $5,250 until expiration.
If the stock trades lower and the option is exercised, I’ve got my shares at a price of about $51.70 – I’m cool with that. Sure, if the stock is at $49.00 when the option is exercised, I’ll wish I had waited, but I would have likely bought outright if it had gotten to the $52-$53 range anyway, so I’m not going to consider that a “loss” in the traditional sense. As between the two paths, I would come out ahead using the option strategy – if I really would buy the stock at around the strike price anyway.
And if the stock doesn’t trade lower and the option is not exercised, I’ve tied up $5,250 for about 35 days and been paid $80.00 for doing so (and for taking on some risk). Please check my math, but I think that is approximately a 15 percent return, annualized.
If I would buy the stock at the strike price anyway, selling the put seems like a great way to go about it. Would love to know if my assessment is mistaken or if I’m overlooking anything.
(Yes, I’ve ignored the taxes I’ll pay on the premium, but I’m hoping I can get this going in a tax-deferred account. And if I can’t, I’ll call it a success tax!)