December 1, 2011
One of DOW JONES Industrial stocks, Intel is another example of where selling puts brings in more income than do the dividends and at the same time, commits the seller of puts to be able to MAYBE get the stock at a much lower price than the current market. If you don’t get the stock, well, you made more money than the dividend yields. Hence, you benefit by less price risk and yet you earn more money.
In 2003, the stock paid a cash dividend of $.08 a share. Then it began a steady increasing dividend and in 2010, it paid out $.63. Even in the crash of 2008-09, the dividend was increased. In 2011, the dividend totaled $.782. It promises to be at least $.84 in 2012.
Based on tonight’s price of $23.58, the $.84 payout produces an annual yield of 3.56%. The 52-week range is $19.16-$25.50. Let’s look at the strike price of $20 and $21 for different periods of time. This is because you can use INTC as a means to enhance your interest return or as a real means to take a position in INTC because you believe in the long-term growth of the company.
You can sell the March 20, 2012 $20 put and receive $.54. IF you get assigned, your cost is $19.46. That is 17.47% below the current price. The $.54 that you get now means that you need to post $19.46. Your gain, if not assigned at $20, is 2.77%, which calculates out to be at an annualized rate of 9.25%. The $.84 dividend would afford you a yield of 4.32%, which is a lot better than any money market fund. If you get assigned, you can sell a covered call against your position. The key is deciding weather you want to trade in the stock or have it for a long term hold.
The stock should go ex-dividend around Feb 8th and May 8th. Keeping those dates in mind, the April 21st $20 put can be sold for $.75. An added beauty of this option is the proximity to the upcoming ex-dividend date. Against your cost of $19.25, the annual yield is a sparkling 4.36%. The dividend should be no less that $.21 for May 2012. If you write the put price of $21 for April 2012, you will get $.97. Your cost is $20.03. The premium you will receive is equal to a return of 4.84% in 20.6 weeks. The annualized return is 12.22%. You need to be sure that you have the fortitude to acquire the stock at $21.00 when it is selling at a lower price.
If you do not like to be bothered by weekly or monthly stock quotes and if you believe in INTC, you can sell the Jan 2013 put option at $20 and receive $1.93. You only have to post $18.07. That price is well below the current 52-week period. If you get assigned in January 2013, you would be receiving a dividend yield of at least 4.65% a year. However, I believe that INTC’s Board will raise the dividend in 2012. The $22.50, January 2013 put will bring you $2.89. Your investment will be $19.61 and you return would be 14.74% and the annualized yield would be 12.86%.
In the future, I will do some articles to show you what happens if you write a put where by the strike price is above the current price. The premiums are large but you run the risk of getting assigned. But in a bull market, you do not get assigned.
To write cash covered puts, you need to be registered with your financial advisor at Level 2. If you advisor is not using options to enhance your income, it may be time to switch.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
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