With the stock market having recently pulled back and implied volatility of most stock options increasing it may be once again time for an investor to consider selling puts. When selling puts there are three general possible outcomes to consider.
- The stock moves up quickly, in which case an investor makes a modest profit but misses an opportunity to have used a different strategy to capture larger trading gains.
- The stock goes sideways for a while, in which case the investor makes a modest profit while nothing happens in the market. This is the best-case scenario outcome for this type of position.
- The stock goes down, in which case the investor either loses money when closing the option position or is put the stock. If an investor does not have the capital or desire to own the stock, he or she might want to buy a lower priced put to spread off the risk and capital requirements. However, when selling a put an investor is probably best served to be prepared for the worse case of having to buy the stock when it is falling.
Below are three positions where it seems the stock may have some potential to move sideways over the next month and hence hopefully selling puts can achieve the best case outcome.
Met Life (MET) - is a provider of insurance, annuities, and employee benefit programs. With the stock trading a little under $34 this week it has a p/e of 6.2 and a p/b of .62. On the surface those are both very attractive ratios that might be indicators of a stock well positioned to rise. Conversely, this stock is a major component of several major financial indexes. For example, Met Life is 2.1% of the widely traded financial sector ETF (XLF). To the degree that those indexes will be held down by industry level concerns over Europe or JPMorgan trading issues, MetLife will also being punished. Perhaps that will minimize the short-term upside for this stock.
This week the June $33 put was able to sold for $1.00 after commissions. If the stock continues to go down, I'm prepared to own the stock at an effective price of $32. If the stock goes sideways or rebounds this trade would yield 3% in a month.
Corning (GLW) - Corning produces specialty glasses, ceramics, and related materials worldwide but is primarily known for making glass substrates for liquid crystal displays (LCDs). This specific business segment has been challenged recently, and that has kept this stock trading in a range for a long time. The primarily support for the stock is it has realistic book value of around $14. Hopefully, even if the company is challenged to grow, this strong balance sheet provides a floor under the stock. I've successfully used this strategy on this stock in the past. Most recently discussed here. Since the underlying story related to this stock has not seemed to have changed it seems worthwhile to try this same trade again.
This week with the stock trading around $13.20, the June $13 puts were selling for around $.39. If the stock continues to fall an investor could be forced to buy the stock at an effective price of $12.61, well below book value. If the stock can hold the $13 level, like it has many times before, an investor can make about 3% in a month.
Intel (INTC) - Intel designs, manufactures, and sells microprocessors. I've been bullish on Intel for a while as discussed here. Conversely, concerns about Intel's mobile strategy continue to be somewhat of a drag on this stock.
This week the stock fell back below $27, and the June $26 puts were selling for around $.52. If the stock continues to fall the investor could be forced to buy the stock at an effective price of $25.50. With the 200-day moving average rapidly approaching this level this would seem like a good support level to add this blue chip to a portfolio. If the stock continues to trade above $26, the investor can make 2% in a month.
Disclaimer: This posting is for informational, educational and entertainment purposes only and should not be considered investment advice.