The Stock Option Writer
© Warren Kaplan 2011-2012
April 10, 2012
As long as a meteorite does not wipe out the human race, thereby ending the stock market, companies will continue to provide products to consumers all over the world. Based on a world population currently of 7,000,000,000 people and growing, overall, consumer companies will have to grow. The only question is which ones. Shareholders in K-Mart had been wiped out and although Wal-Mart seems very safe, one never knows. So, for the longer term, rather than invest and hold one single company, why not buy a basket of companies at one time. Enter the Consumer Staples Spider (XLP). I have no idea why it is called Spider. Let your financial advisor tell you and then let me know.
There are 43 companies in this fund. The top holdings include P&G (PG), Philip Morris (MO), Wal-Mart (WMT), Coca Cola (KO), Kraft Foods (KFT), CVS, Costco (COST), and Philip Morris (MO, Pepsi (PEP) and a lot of others.
The fund is not exactly a barnburner. It is a steady Eddy with a long-term upward trend. The current yield is 2.67% based on a price of $34.05. Ex-dividend dates are around the middle of March, June, Sept. and December and the payments are made by the end of the respective month. I noted that the dividends are different every quarter as they depend upon the payout of the companies that are held in the fund. In the last 12-months, the fund paid out $.91.
Now, the question is do you believe that the stock market is going up or down? If you believe that the market is going down, then do not buy XLP at the current price. Why not buy it at say 31? You can sell the June 16th put and receive $.13. The $31 price represents a decline of 8.96% from the current $34.05. You will not get the June dividend but you did receive $.13 on an investment of $30.87. If you do get assigned the shares at $31, it means that the stock market has taken some bad hits and you will correctly have made an investment when the market price represented greater value. The Sept. $31 put will bring you $.35. It reduces your potential cost to $30.65. The 5-month yield to you is 1.14%, which is a lot better than what you can earn is the money market. The price of $30.65 is $3.40 below the current market price, a saving of 9.99% from the current price.
The next option period after Sept. 2012 is Jan 2013. Selling the $31 put will bring you $.88. The Presidential election in the United Sates would be over by then and it is only a guess as to which way the stock market will be going. January 2013 options will expire on January 19th just before the next inauguration. Whether it is Romney or Obama, the world population will continue to grow and consumers will continue to consume. Hence, the companies in the index will grow and that means greater dividends in the future. If one should fail, as did Kmart, then a new one will take its place. You will never get wiped out by owning an ETF (Exchange Traded Fund) like the Spiders. If you are a young person who can afford the time to take chances, I will discuss a stock and a bullish strategy in my next column keeping in mind that there will be an increase in risk.
Keep in mind that if the stock market and particularly the XLP go down this week, you will be able to get a greater premium on all put options that I have outlined. The best use of the options that I outlined is to preserve cash and get a higher yield than what a brokerage house will pay you.
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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