Home Articles Options Writer Series — Win By Playing Defense

Options Writer Series — Win By Playing Defense


By Warren Kaplan

The Stock Option Writer

© Warren Kaplan 2011-2014

October 31, 2016

You can try to buy stocks at a price that makes you comfortable. If you don’t buy the stock, your return is the premium you received. We are talking about writing puts. If you do this right, the risk is minimal. Do it wrong and you can drop a ton of money. I am going to show you real examples that I have used.

The first thing you need to do when you decide to invest in anything is to set up and understand a goal. It is your goal.  For example, what would you like to do when you get older? How do you define older? Me, I love making money. I love to travel and I especially love being physically close with my wife and away from the everyday tasks.  So, the first thing you need to do is to establish a goal like, How much money do you need a year to be mentally financially free.? I always ask that question when I am counseling someone. It takes a little time but finally, a number is figured out. Taking a simple 5% return goal, we can then figure out how much principal is needed.  I found that the younger my client is, the more impossible it seems but what my client does not calculate is the fact that time is on their side. Hence, it is not just a matter of how much money you have now, it is a matter of how much time you have and the amount of money you will continue to invest.  $1,000,000 at 5% will bring in $50,000 a year. A few factors to consider is that your children will no longer be a financial obligation so you can drop that expense. Your house should be paid off so there goes that cash-flow out item.  You will have plenty of clothes so that expense goes.  When you are 65 years old, Medicare will kick in and currently, at age 68, you can get full Social security and that means about $1,500 a month for you and if your spouse worked, figure another $1,500 a month. So, between the both of you, you should be getting at least $36,000 a year. As for your principal earning money for you at 5%, it sure seems possible to me. Even in the current market, there are stocks of all kinds that are paying 5% or more. Yes, you need to do some research.  You should learn the Rule of 72. It is simple and quick. How much money you should add to your investment pot is up to you but do it monthly.

So what should you buy? Well, that is up to you and here is where you need impartial guidance.

As you know, I currently like Carnival Cruise Lines. (CCL). But, at what price do I like it and what kind of gain am I looking for. The stock price tonight Oct 23, 2016) is $46.52 . The current annual dividend is $1.40 a year, paid $.35 a share quarterly.

I never finished the above article. Too bad. Tonight, Oct 30th, 2016 the stock price of CCL is $48.45. IF you want to invest safely, you can write the Nov 18 $36 put and take in  $.35. If you get assigned the stock, you really own it at $35.65. Your current annual yield would be 3.93%. If you do not get assigned, the $.35 premium gives you an annualized yield of 17.02%.  If the stock price goes down during the week, you can sell more put options and take in more premium for the same date and strike price risk.  That increases your annualized yield. Frankly, I do not think that the stock price will go below $36 in the next 3-weeks.  If you have cash that you will not need for the next 3 weeks, you should consider writing the CCL $45 puts that expire Nov 18th.  You should be able to get at least $.20. The annualized return to you would be 7.74%. That is a heck of a lot better than the yield you are getting in your brokerage account. Yes, your funds are tied up for the 3-weeks AND there is always a risk that the stock will collapse and go below $45.00 but the odds favor this not happening. If the stock sells off this week, you can sell puts for more money and get a greater yield.  The aim is to get a greater yield on your cash and not to use this strike price as an investment idea. Certainly the $46 strike price is a much better premium and I use that strike price as an investment point. I have even used the $47 strike price as an investment point and based on investment allocations, if CCL has a smart decline, I can write more puts at that price. Another thing to do is to use calendar strike prices. You can write the $46 put due December 16, 2016 and/or January 20, 2017.  The premium dollars you will get is obviously more than what you get for November 18, 2016. You should get at least $.85 for the December $36. Why such a big difference? Because on Nov 22nd, the stock will go ex-dividend $.35. That ex-dividend date marks the stock price down by $.35 the morning of November 22nd.  So, you are really getting $.50 for the risk. All in all, an assignment of the stock at the $46 price means you have a cost of $45.10.  If you are not assigned the stock, the result is a yield to you is an annual rate of 13.99%.

My next article will be a look at T, a stock that I am currently writing many puts at various combinations of date and strike prices.

The reason I have not written an article in the last few weeks is because Judy and I were on the NCL Escape for a one week Caribbean cruise Oct 1-8 out of Miami including Tortola. Our next trip is a cruise December 3-10 on Celebrity’s Reflection out of Miami. There is no point in making money and not spending some of it.



warrenkaplanWarren 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.”

Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone.  This article was written for informational purposes only.