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If last week’s downturn was making you jumpy, maybe you ought to think about taking advantage of the pullback, by selling cash secured put options on some Dow dividend stocks. Although these stocks wouldn't be considered high dividend stocks, they do currently have very attractive put option yields, ranging from just below 10% to over 12% for a 5-6 month trade.

The pullback has increased the volatility and the bid prices on these put options, which benefits option sellers, AND achieves a lower break-even price. In fact, the put option bid yield far outstrips the dividend yield on all of these 7 Dow stocks:

Company Symbol

8/12/10 Stock Price

Put Option Bid Put Yield Annualized Put Yield Dividend Yield Break-Even Price
Caterpillar CAT $67.59 $6.95 11.48% 25.87% 2.60% $60.55
JP Morgan Chase JPM $37.84 $3.65 10.78% 24.29% 0.60% $33.85
American Express AXP $42.44 $4.00 10.53% 23.73% 1.70% $38.00
Bank Of America BAC $13.16 $1.42 12.26% 23.55% 0.30% $11.58
Boeing BA $64.95 $5.90 10.42% 20.02% 2.60% $56.60
Hewlett Packard HPQ $40.25 $3.65 10.04% 19.29% 0.80% $36.35
Home Depot HD $27.60 $2.39 9.71% 18.65% 3.50% $24.61
Company Symbol Expiration Month Put Strike Price
Caterpillar CAT 11-Jan $67.50
JP Morgan Chase JPM 11-Jan $37.50
American Express AXP 11-Jan $42.00

Bank Of America

BAC 11-Feb $13.00
Boeing BA 11-Feb $62.50
Hewlett Packard HPQ 11-Feb $40.00
Home Depot HD 11-Feb $27.00

Although its put yield is just below 10%, Home Depot is on this list due to its 3.5% dividend yield, the highest in this group. We’ve also added Home Depot to our Cash Secured Put Table this week, as it has an attractive 18%-plus put yield. However, as you can see from the table above, most of these Dow 30 stocks don’t have very attractive dividend yields, which is another reason for income investors to consider selling cash secured puts on them instead.

The benefits of this strategy are 4-fold:

  1. Immediate income – You receive the cash from put sales in your account within 3 days after the trade.
  2. Much higher yields – This varies, of course, but in times of increased volatility, put yields often outpace dividend yields.
  3. Lower breakeven – All of the above puts are “out of the money”, (put option strike price is below the stock price), which gives you a lower breakeven price, and more protection against a falling share price than owning the stock outright would.
  4. Tax deferral – You don’t have to pay taxes on sold put options until they expire, or you close your position. Thus, if you hold any of the above puts until their Jan/Feb. 2011 expiration, you aren’t liable for taxes until the April 15, 2012 deadline for paying taxes on 2011 gains. In fact, if you’re assigned the underlying stock, you don’t have to pay taxes on the put money that you received until you sell the underlying assigned stock, since the IRS states that your tax basis for the assigned stock is lowered by the money you received for selling the put options. Quite a nice break for investors.

Caveats:

  1. Short term tax rate – Option profits are taxed at short term rates, even if they’re held for more than 12 months, as opposed to the qualified dividend tax rate, which is now 15%, but may rise in 2011.
  2. Selling vs. Buying options – Option sellers usually have to put up much more cash than option buyers, particularly when selling cash secured puts. Brokerages generally will require a “cash reserve”, equal to 100% of the cost of the underlying shares. If you have a 100% cash reserve requirement, your initial cash outlay for selling cash secured put options is similar to buying stocks, with one big difference: your cash outlay will be reduced by the premium $ you sell the options for within 3 days. (Also, if you qualify for option level 3, your broker may reduce this reserve requirement to 25 -35%).

Disclosure: Author is short BAC puts








Source: 7 Dow Dividend Stocks With Attractive Put Option Yields