The Stock Option Writer
© Warren Kaplan 2011-2012
February 21, 2012
With the stock market on an upward tear, it is time to look for selling points. The challenge is that safe government bond yields are so low that it literally forces one to buy stocks that pay dividends. Where $100,000 used to bring 5% safely resulting in a $5,000 a year income, it now brings less than .5%, which is $500 a year. On a more realistic $10,000, instead of earning $500 a year, you now get less than $50.
General Mills (GIS), makers of a host of brands you know and love was born in 1928. It has paid a dividend every year since 1944. The 12-month price range is $34.64 – $41.06. The current dividend is $1.22 annually but you can expect that to be raised later this year to the $1.25 area. Based on the current price of $38.34 and the current dividend of $1.22, you would be receiving a yield of 3.18%. In other words, $10,000 in GIS brings you $318 a year in dividends. The current P: E is 16.3, which is not a big bargain based on the stocks history. The company is rated 5 stars by S&P. One thing you can be sure of is that they are not going out of business. However, this is not a capital gains barnburner. In fact, I think the stock has some downside room. You MUST check with your investment advisor for their recommendation. Anyway, if you own the stock, you might consider selling covered calls against the position. If you really like the stock, you should consider selling “out of the money” calls. This would supplement your income and the only “risk” you have is that the stock may get called away from you. Then again, it may not.
You can sell the April 21, 2012 calls with a strike price of $41 and take in $14.00 per 100 shares. The stock should be going ex-dividend around April 6. If the stock price is above $41, it will probably be bought before then and your obligation would end 15 days ahead of schedule. You do not have to give back any of the premium that you received. Of course the buyer has to pay you $41 so you should have a nice profit. The premium you received adds that much more to your total. Annualized, the premium adds 2.2% to your total. The added capital gain from the current price adds $2.66 a share, an added gain of 6.94% within 2 months, which is 41.63% annualized; all this from a dull quiet stock. The July call at $41 will bring you a premium of approximately $.50. That is equal to receiving $.10 a month plus the ex-dividend of at least $.305 in April and another in July. You can get a greater premium if you are willing to sell the shares at $40. For the April $40 call you would receive $.30 and for July the $40 strike price would bring you $.73. While you own the stock, you will always receive the normal dividend that the company declares. If the dividend is going to be raised, I would expect it in the July ex-dividend framework.
General Mills (GIS) stable of products includes Green Giant Vegetables, Cheerios, Chex, Haagen-Dazs Ice Cream, Totinos Pizza, Wanchai Ferry Meals, Lucky Charms, Pillsbury, Yoplait, and Macaroni Grill Meals. You can go to their site and see a complete list of brand names. http://www.generalmills.com.
On the put side, you can consider the July $34 puts (a priced not reached in the past 12 months) and receive $.57. You would have to post $33.43 in order to earn the $.57. The annualized rate of return is 4.09%, which is greater than the current dividend and gives you a large margin of safety.
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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