By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011
September 20, 2011
The lowest price GE has traded in the last 52 weeks is $14.82. This strategy is to be as reasonably safe as possible, but obtain an outstanding gain. What we want to do is to write a put on GE at $14 and to receive a premium that lowers our potential cost yet gives us a great return on our capital.
GE closed at $15.09 on Sept. 9 and the opening price on Sept. 12 looks much lower. By selling a November 14 put you will get a premium of at least $.88. So here is where you will stand. There are 10 weeks till the option expires. Your true cash layout is $14.00 less the $.88 premium you got. That means you laid out $13.12. If GE stock stays above $14, the $.88 will have given you a return of 6.7% in just 10 weeks. The spectacular annualized return is 67.07%. The current dividend of $.60 at $14.00 is 4.29%. At your cost, if you should get put, it is 4.57%. The stock will go ex-dividend this week and will go ex-dividend again around December 15. Remember that if the stock closes on November 19th at $13.99 or less, you will be required to buy the shares at $14.00. To lower your cost even more, you can then turn around and sell a covered call at say $15.00 and receive another premium as well as the December dividend. You might sell the January $15.00 call for approximately $.50, thereby lowering your cost to $12.68. You will pick up the expected $.15 dividend and if you sell the stock at $15.00, you will have a profit of $2.32 on your net investment of $12.68, a return of 18.30% within a 4 month period, giving you an annualized return of 54.89% plus the dividend. If the stock price is below $15.00 by January 22, 2012, you will retain the stock and once again, be in a position to sell another covered call on your General Electric stock keeping in mind that the stock will again go ex-dividend in March 2012.
There are other variations that could be used with General Electric. For example, you could write a put at $13.00 that expires in November 2011 that will bring you a premium of at least $.58. So, you would layout only $12.42. If GE stock stays above $13.00, your return would be equal to 4.67% in just 10 weeks, which equates to a return of 46.70% a year. If you were assigned (put) the stock, your cost of $12.42 means that the $.60 dividend would give you an annualized yield of 4.83%. Also, you too can then sell the January 15 call and probably pick up a premium of $.30, thereby reducing your cost to $12.12 affording you a yearly dividend yield of 4.95% and a potential gain of $2.88 on your $12.12 investment. Your gain in 4 months would be 23.76%, annualized to 71.29%.
There are many scenarios that could be used here. You need to pick one that fits your desire, personality and investment objective. For more aggressive accounts and optimistic investors, you can start off by writing the November 15 put and take in a much larger premium but your chance of getting put is larger but here again, you would end up buying General Electric stock at a price well below its current 52 week low.
I believe that the current price of GE is due to the fear of the Greek crises, the inaction of our government, the pending crises in European banking circles and the general remorse in the United States. However, as it has always happened, these things will pass and optimism will return and we will see much higher prices. Just do not go over your head on investing, namely excessive use of margin.
Warren K
aplan 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. Want information about a certain stock, please email corp@opportunistmagazine.com.
