Using Options To Get A Discount When Buying General Mills

| About: General Mills, (GIS)

Summary

GIS is currently over-valued, a better price would be closer to $60.

One could wait till the price came down, but when will that be?

Patience might be a virtual, but I want this stock now and at the price I want it.

Willow Street Investments concludes that General Mills, Inc. (GIS) is a good buy below $60 in this article. Looking at the article I think they do make a good case that GIS is a good buy below $60. Sadly, the current market price is quite a bit above $60, almost $2 in fact. So, an investor COULD wait until it was selling on the market below $60. But wouldn't it be better if an investor could pay $60 and get GIS right now? I know I don't like to wait if I can help it. Using options, that is possible to lower the net price. There are a couple of ways to do it, but here I will outline how to use covered calls to do it. Using the method below, your YoC would go from 3.11% to 3.2% or so. Not a huge difference, but one that will add up over the years.

What you need to start

As I sit here writing this, GIS is selling for $61.80 a share. So we will need approximately $6200 in cash (maybe less depending on commissions and such). Don't worry, when we are done we will have used only about $6000 of that cash.

How to get the price below market

So now that we have 100 shares of GIS, we will write a covered call. To do that, we will write a covered call. To get the price we paid for GIS below $60, we will want to write a call that has a premium that is above $1.80 and we will want the chance of it being exercised to be fairly small. I go into some details on how to figure out the chance of the call being exercised in this article. So now that we have some parameters, a premium of more than $1.80 and a low value for Delta, let's look at the option chains.

Selecting the contract

Click to enlarge

Click to enlarge

Shown above is the call contract for April 21st, 20017 expiration date with a strike price of $65. Put in a limit order for $1.70 and if it's filled, you will have gotten your shares of GIS for just a dime or so above $60. Now the Delta is a bit high at 0.42 but if its called away, you will get 1 dividend payment and $65 a share for stock you paid just a bit more than $60 a share.

Next Steps

The goal was to get the shares of GIS at $60 but we aren't quite there yet. The investor has a couple of options. They could decide that their cost basis is now good enough. They are only about $0.15 to $0.20 above the desired target, pretty small as these things go.

The investor could instead write the GIS Jan 19 2018 $65 Call. Since that has a bid of $3.10, that would lower the cost basis of the shares down quite a bit below target. It also has a higher Delta, 0.58, but since the investor is so far below the target cost basis, they could close the call earlier by buying it back once it had a premium of around $1.30 or so. Since that option has a Theta (which measures the per day change in price of the option if the stock price remains stable) of -0.01, that would be in about 6 months.

And if prices drop a bit more over the next few months you can always roll the option out to a later date to get a bit more premium, a better chance of not getting your shares called or both.

Conclusions

Getting the price you want when you buy a stock is part of how you make money. Patience can be well rewarded. But you don't always need to wait to get the price you want. Writing a covered call on the stock you just purchased, called a buy-write, is one way to get the price you want today even when the market isn't directly offering it to you.

Disclosure: I am/we are long GIS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.