By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011
October 25, 2011
This is a medical products company located in Minneapolis, Minnesota. One of our readers asked me to look into the company and to come up with an option writing strategy. I did not research the company as I let my clients do that. I just layed out an option writing plan so that they can get the most out of the stock’s movement. In this case, the reader is an investor with a long-term horizon.
The stock price closed at $34.29 on Friday Oct 21, 2011. The current annual dividend is $.97 a year ($.2425 quarterly). The next ex-dividend date will be in early January 2012. The stock price has ranged from $43.37 to a low of $30.18. The mid point is $36.77. I would expect the next increase in the quarterly dividend should come in July 2012 and should be in the $.015 to $.02 range.
All of this background being said, let’s take a look at the options and see how to improve on the current 2.8% annual yield.
The January 2012 put options at $32 are currently selling for $1.26. If you get the put (assigned), you will own the stock at a cost of $30.74, which is near the 12-month low. The current dividend would yield you 3.16%. If you do not get assigned, your 3-month return would be 4.1% (16.40% annualized). If you want a long-term point of view, you can write the May $32 put. You would get $2.40 (you only have to post $29.60) and if you got assigned, your current annual dividend yield would be 3.28% with a pending dividend increase in July. The $2.40 that you would get represents a yield of 8.18% for 7 months (13.90% annualized).
You need to have an objective when you are involved with an investment. The writer of the option can take more risk and write a put option at a strike price of $33 and receive a lot more premium in terms of dollars and percentages. For example, the May $33 put can be sold for $2.81 for a return of 9.31% in 7-months. You would have to post $30.19 to satisfy the cash requirements. Your annualized return is 15.96%. The presumption is that the writer would really like to own the stock for the longer term. How long? That is up to the writer. If the writer gets put (assigned), the investor can then turn around and write a call. The May 2012 call currently brings $.98 to the writer. So, in 7-months, the writer would receive more money than the stock pays in dividends for one year. If the stock gets called away (assigned), the writer would receive $40 a share, which should represent a large capital gain. The writer would also have received dividends in January and April. Considering the stock price is $34.29, the order to buy the stock and sell the call option should be entered as a buy/write with a net cost of $33.30. Hence, if the stock is called away in 7-months, you would make a profit of $6.70 on $33.30 for a capital gain profit of 20.12% (annualized 34.49%). If the stock is not called away from you, you can write a new call in after May expiration.
You need to be cleared to write covered calls in order to write those calls at $40. That is to be qualified at Level 1 option writing. To write the cash covered puts and stock covered calls, you need to qualify at Level 2. There are 4 Levels of option writing. Being cleared up to Level 2 is really enough for the above average stock market investor.
Please send in your requests and I will write up potential strategies for you. I am available for private consulting and immediate responses as well as lecturing to groups.
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 Ma
nagement, 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.
