By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011
December 15, 2011
Selling covered calls is basic to investing. Do you know why? Because it helps you toset a sell price. This is a price that you say is comfortable to you. When you sell a covered call, you have set a selling price and a time period. The premium you get for selling the call is added income. The down side is that you must hold the stock or buy back the call option. My preference is to buy shares in companies that I like, are statistically cheap and that have, in my opinion, a positive long-term outlook. It should be rock steady. Utilities and food companies are two of my favorite areas. So why did I pick CCL? Well, I believe in the growth of the cruising industry and as more people have vacation money, I feel that cruising will get a chunk of that money. Right now, only 20% of United States citizens have cruised. The perce
ntage has been increasing and the population is expanding. There has been rapid growth in Asian markets and the cruise lines do not have enough ships to satisfy the growing demand. Add to this the fact that countries and ports see that the cruising industry brings in currency and jobs and are improving the port facilities. Ship engines are becoming more efficient, resulting in less fuel being used and new ships are constantly being built with more activities and modern conveniences. Modern ships have WIFI throughout the ship as well as flat screen TVs and better phone service.
Carnival Cruise Line (CCL) closed at $33.93. The 12-month range is $28.52-$48.14.The stock pays a $1.00 annual dividend, which is a yield of 2.95%. The next ex-dividend date is expected to be around February 22, 2012 for $.25. The 12-month trailing earnings are $2.45 so the P: E is $13.86. I suggest that for conservative accounts, you can look at the April $30 put. You will get a premium of $1.70, which means you need to post $28.30. The annualized yield is 18.02%. If you must buy the stock at $30, the $1.00 dividend will provide you with a yield of 3.33%. Since you would have really paid only $28.30, the yield for you would be 3.53%. Based on the current earnings, your P: E would be $11.55. If you want more risk for better potential rewards, you can write the April 2012 $31 puts and receive a premium of $2.05. If you ended up buying the stock, you cost would be $28.95. The $2.05 equals a potential profit of 7.08%, which is 21.24% annualized.
The next set of options after April is the July 2012. The $30 put option will bring you $2.60. That lowers your potential acquisition cost to $27.40, a price well below the current 12-month low. The current $1.00 dividend would bring you a yield of 3.65%. The $2.60 brings you an annualized yield of 16.27% if you do not end up buying the stock. By not owning the stock, you will pass up two dividends, currently totaling $.50.
If you do end up with the stock, you can turn around and sell covered call options, which will bring you more premiums and a potential profit. Option positions can be used to enhance income. You must understand that every now and then, the market will collapse and the put you wrote could look like a dumb thing. However, if you are seeking a much better yield, writing options can be a huge winner for you. Do remember to keep cash reserves and to always drag some money out of your account for emergencies and for catastrophic investment opportunities. Also, take a cruise.
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.”
Reader’s comments are welcome. Please do not consider these opinions as advice and we take no responsibility for any trades made. You should review these option writing ideas with your financial advisor so that you are properly guided. Writing options is not for everyone. If you want information about a certain stock, please email corp@opportunistmagazine.com
