By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011
September 27, 2011
Here is a stock that has taken a beating from its 52-week high of $48.14, currently at $33.88. The company pays a dividend of $0.25 quarterly, $1.00 annually. The yield is 2.95%. That is better than money in a money fund but not earth shattering. So, how can you increase your yield and reduce market risk? By writing options.
The next expected ex-dividend date is expected to be around November 24. The November options expire on November 19th. So, if you write a put option and get put, you should get the next dividend.
The $30 November put can be sold for $1.05. So, you pledge $28.95 of your money and sell a cash covered put. That means you are obligated to buy Carnival Cruise Line at $30.00 if the stock price is at $29.99 or less on November 18th. If you do buy the shares, your yield is 3.45%, which is 16.95% more income to you than buying at $33.88. Meanwhile, your $30.00 cash, which is in your brokerage account, is earning interest. It should be noted that a purchase of shares at $28.95 is below the current 52-week low.
What if you don’t get assigned to buy the shares on or before November 19th? Well, you received $1.05 for posting $28.9
5. That is a return of 3.63% in 2 months, which equates to 21.76% annualized. Once your obligation is over, you can use your funds to write another option. Understand that if the stock closes at $30.01 on November 18th, you will not be required to buy the shares. Then, on Monday November 21st, you can write a fresh put option and receive a larger premium. You will not get the November dividend as you will not own the shares. However, you can write the January 21, 2012 put option at say $30.00 and receive an expected option of nearly $2.00.
Carnival Cruise Lines (CCL) has many strike prices for November such as $28.00, which brings $.60 as of today when the price is $33.88 and there is but 2 months till expiration. If you get put, (assigned) your cost is $27.40 and the annual dividend yield to you would be 3.65%, If you do not get assigned (not buy the shares), your 2-month absolute return is 2.19%, which is 13.14% annually. You will have bought the shares 5.39% lower than the 52-week lowest price. Considering the safety net of a low stock price and short time period, the return is outstanding and the risk of buying the shares is very small.
As a philosophy, it is better to write short term options as the decline in terms of time is the ally of an option writer. If you are not very involved in the market, you can write longer term options than say 2 months. If my work schedule or travel schedule is jammed up, I will write longer-term options. Normally, I like to write 2 month options but I do watch ex-dividend dates in order to get the dividend if possible.
One bonus you can receive if you own Carnival Cruise Lines (CCL). As a shareholder, the company has granted holders of 100 or more shares, an on board credit that goes up to $250, depending on cruise length. There is currently no limit as to the number of credits you get; so, if you cruise 3 times a year and each cruise is 14 days or more, you will receive a total of $750 on board credits, along with the $100 in annual cash dividends.
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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