Generating Income By Selling Puts: January

Includes: GLW, WBA
by: Common Cents

This is the latest in a series of articles suggesting potential candidates for the sale of puts for the generation of income. Two suggested options trades for January expiration that an investor might want to consider are shown below.

Walgreens (WAG) Jan $32 - Walgreens operates a chain of drugstores in the United States that sell prescription drugs, non-prescription drugs, and general merchandise. The stock closed trading last week at $34.13 and the Jan $32 put was able to be sold for a little over $1. In the best case scenario, where the stock trades above $32 at January expiration an investor would make just over 3% in a month. Based on option theory there is about a 70% chance of this scenario occurring. In the worst case scenario, the investor starts to lose money if the stock trades below $31 by Jan expiration. That would be a drop of over 9%, and about equal to the chart support level created by the prior low in the stock in late November. If an investor is wants to reduce the risk of this trade, the Jan $29 put could be purchased for less than $.40. This put spread still has the potential to return 2% but limits the risk of the trade to $2.

Walgreens reports earnings on the 21st of December. The stock has performed poorly since its high this summer in the mid $40s mostly over concerns about contract disputes with Express Scripts. Hopefully, most of this news is already priced into the stock. Any reasonable earnings results could cause not just the stock to stabilize, but also volatility to come out of the option prices. That could provide an opportunity to harvest some of the option premium.

Corning (NYSE:GLW) Jan $12.50 - Corning manufactures and processes specialty glass and ceramics products. Monday morning GLW was trading under $13 which is a p/e of around 7 and under its book value of $13.79. This attractive valuation is likely a result of concerns over slowdown in their LCD markets. The company lowered the streets expectations in late November related to these concerns. Hopefully that means these concerns are reflected in the current strike price.

Monday morning, with the stock trading around $13 it was possible to sell the Jan $12.50 puts for $.40. Since Corning has already warned and their next earnings report is not expected until after January expiration it seems there is a case to be made for the stock trading sideways over the next month. If the stock does stay over $12.50 by January expiration an investor will make over 3% in one month. If the stock falls an investor will start to lose money if the stock falls below $12.10 or about 7% down from here.

Disclosure: I am long GLW, WAG. This posting is for informational, educational and entertainment purposes only and should not be considered investment advice.