December 8, 2011
Founded in 1849, this company is older than any living person. It has survived the Civil War, the Spanish-American War, World War I and II and every administration since it originated. Hence, I believe that it will continue to exist well into the future. That said, it has had rough times in the past and will have more challenges in the future. It competes on a worldwide basis and as always; it is subject to a ton of rules and regulations. Products are sold on 6 continents. Only the unpopulated Antarctic is not a market, but I would bet that the company’s products are used there.
The stock price is around $20 and the current dividend rate is $.80 a year, yielding 4.00%. No increase in the dividend is expected in 2012 as the company adjusts to the fact that its #1 product, Lipitor, has had its patent protection expire. The company has instituted new marketing programs, which brings a lower price but increases availability. In 2010, dividends totaled $.72, surviving several cuts.
Instead of accepting $.80 a year as dividend income, you can write the January 2013 put at $20 and receive $2.42 today. Considering that the time period is 13 months, the yield is 12.71% on the $17.58 that you must post. If you end up buying the stock, the current dividend of $.80 affords you a yield of 4.55%. The current 52-week range is $16.59-$21.45 so if you get assigned the stock, you are buying it close to the lowest point this year.
There are lots of variations in the put side, you can sell shorter-term puts, which will improve your annualized yield. The January 20th put will yield you $.50 for an annualized yield of 20.0%. That is because you only have to post $19.50 to write the contract. There are no dividends to consider as the next time PFE goes ex-dividend around February 8th. Hence, a March $20 put includes the dividend and you would receive $1.00 for the put. Besides the dividend, you are getting paid for the extra time. Your annualized yield would be 19.14%. You would have to post just $19.00.
There are certain main points that I must mention when writing puts. The first is that you must like the company. Second is that you like the price you are willing to pay. Third is that the put should be covered by cash and not margin. I have seen smart people get wiped out using margin when selling puts. Fourth is to reserve cash for when the stock prices totally falls apart. Fifth, enjoy some of your profits by taking out money and buying a product or a service such as travel. There is no point in making money and not enjoying it.
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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