By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2012
February 7, 2012
Here is a huge company whose stock has gone virtually no place for the last five years. According to Motley Fool, the company is growing at a 6% rate and is currently selling ($30.24) for 11 times earnings. The company is currently the world’s leading software company. Microsoft has been aggressively buying back shares, which benefits long-term shareholders.
The current dividend is $.80 annually for a yield of 2.65%. That is a lot better than what you can get in a Money Fund. The next ex-dividend date is February 14, 2012, Valentine’s Day for $.20. Options that expire February 18, 2012 reflect the fact that the ex-dividend date goes to the benefit of the stockholder and is against the put seller. The February 18, 2012 put can be sold for $.39. That is a return of 1.29% for a 2-week period, which is 33.53% annualized. The April MSFT put option will bring you $1.09. The annualized yield is 14.53%. The return on capital is 3.63% and that is greater then the yield you would get if you bought the stock at the current price. Additionally, you need to only put up $28.91 in order to earn the $1.09 so your return on capital is 3.77%. Keep in mind that the lower the stock price of MSFT, the more money you will receive for the $30 put so that if the stock goes down to say $29.75 this week, you could get $1.35 instead of $1.09 for the April put. That lowers the cash you must invest.
If you sold a one-year put at $30, you will get $2.90. That is a great deal more than the current $.80 annual dividend. The return on the put price of $30 is 9.67%. However, you only have to post $27.10 so your return on your capital is 10.70% for the year. Again, keep in mind that if the stock declines from the closing price of $30.24, you can sell a put option for much more money. For example, if the stock price declines this week to $29.75, you can expect to sell a $30 January 19, 2013 put for $3.05.
If you are long MSFT, you should consider selling covered calls. The May 19, 2012 call will bring you $8.00 per 100 shares. That is just 15-weeks from now. You would receive the $.20 quarterly dividend (goes ex-dividend February 14) and if the stock is not called away (you would receive the $35 price) then you will get another $.20 dividend, as MSFT should be going ex-dividend May 14, 2012. Hence, I look at the $.08 as extra income and that is $8.00 per 100 shares. All stock option contracts are in units of 100-shares. All things being equal, you can sell this kind of covered call option four times a year and add $.32 a share to your income. However, you must have a mind set that you are willing to sell your shares for $35. Of course, if the option that you sold is not exercised and let’s say the stock price raises to $33 by May 14, 2012, you would get a much larger premium for selling a new $35 call or you can decide to sell a call at say $36 or even $37. The one year January 19, 2013 call at $35 will bring you $.74 plus you will get all of the dividends for a year, another $.80 a share and of course Microsoft may raise the cash dividend later this year. MSFT’s fiscal year ends June 30, 2012. Based on increasing fiscal results and share buy backs, I think it is smart to assume that the cash dividend will be raised by the 3rd quarter of this year.
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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