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Selling naked puts is a great way to purchase shares in companies you like at a predetermined price. In essence, you are getting paid to wait.

Benefits associated with selling naked puts

  1. In essence, you get paid for entering a "limit order" for a stock or stocks you would not mind owning.
  2. It allows one to generate income in a neutral or rising market.
  3. When you sell a naked put you are in a way acting like an insurance agent. The seller of the option agrees to buy the stock in the future if it drops to a certain level before the option expires. For this, you (the seller) are paid a premium upfront. If this strategy is repeated over and over again these premiums can really help boost you returns over time.
  4. Acquiring stocks via short puts is a widely used strategy by many retail traders and is considered to be one of the most conservative option strategies. This strategy is very similar to the covered call strategy.
  5. The safest option is to make sure the put is "cash secured." This simply means that you have enough cash in the account to purchase that specific stock if it trades below the strike price. Your final price would be a tad bit lower when you add the premium you were paid up front into the equation. For example, if you sold a put at a strike of 20 with two months of time left on it for $2.50; $250 per contract would be deposited in your account.
  6. Time is on your side. Every day you profit via time decay as long as the stock price does not drop significantly. In the event it does drop below the strike you sold the put at, you get to buy a stock you like at the price you wanted. Time decay is the greatest in the front month.

Reasons to be bullish one Coca Cola Co (KO)

  • With revenues in excess of $46 billion in 2011, Coca-Cola has a solid portfolio of globally recognized brands. It markets four of the top five non alcoholic beverages in the world. Also, 15 of its brands each brings in over a billion dollars of revenue per annum.
  • It plans to invest $4 billion in China over the next three years starting from 2012 as management expects China to produce double-digit growth rates over the long term. It also plans to invest $3 billion in Russia from 2012-2016 and $8billion in Brazil until 2016.
  • An operating margin of 23.4%.
  • A huge levered free cash flow of $6.9 billion.
  • A great interest coverage ratio of 31.9.
  • A five year dividend growth rate of 8.16%.
  • A good five-year sales growth rate of 11%.
  • Cash flow per share increased from $3.61 in 2009 to $4.71 in 2011.
  • Annual EPS before NRI increased from $2.70 in 2007 to $3.84 in 2011.
  • Sales increased by roughly 50% from $30.9 billion to $46.5 billion.
  • A low payout ratio of 53%.
  • A decent 3-5 year projected EPS growth rate of 7.86%.

Coca Cola was reviewed extensively in our recent article More Than A Dozen Reasons To Love Coca Cola.

Suggested put strategy for Coca Cola

We would wait until it tests the 69-70 ranges (a zone that offers pretty strong support) before selling puts. If it trades down to we would sell puts with strikes in the 68-70 ranges. Right the Nov 70 puts are trading in the $2.36-2.40 ranges. It would be fair to assume that if KO shed $4 the puts would go up in price by roughly 1.25-1.50. We will assume that if it drops to 70 the puts will move up in value by just $1.10 from $2.36 to $3.46. For each contract sold $3.46 will be deposited in your account. If the stock trades below 70 you could be assigned the shares and your final price would work out to 66.54 (70-3.56). If the stock does not trade below 70 you get to walk away with the premium, which in this case works out to a gain of roughly 4.9% in five months. This is not bad considering that the yearly yield on Coca Cola is only 2.8%.

Other interesting companies

For investors looking for additional ideas, we have provided detailed data on four additional companies. Our latest article could also prove to be a source of some new ideas: BP 1 Of 5 Potential Long-Term Growth Prospects To C.

Company: W.W. Grainger Inc (GWW)

Growth

  1. Net Income ($mil) 12/2011 = 658
  2. Net Income ($mil) 12/2010 = 511
  3. Net Income ($mil) 12/2009 = 430
  1. EBITDA ($mil) 12/2011 = 1210
  2. EBITDA ($mil) 12/2010 = 1012
  3. EBITDA ($mil) 12/2009 = 864
  1. Cash Flow ($/share) 12/2011 = 11.55
  2. Cash Flow ($/share) 12/2010 = 9.44
  3. Cash Flow ($/share) 12/2009 = 7.4
  1. Sales ($mil) 12/2011 = 8078
  2. Sales ($mil) 12/2010 = 7182
  3. Sales ($mil) 12/2009 = 6222
  1. Annual EPS before NRI 12/2009 = 5.38
  2. Annual EPS before NRI 12/2010 = 6.81
  3. Annual EPS before NRI 12/2011 = 9.04

Dividend history

  1. Dividend Yield = 1.7
  2. Dividend Yield 5 Year Average = 1.7%
  3. Dividend 5 year Growth = 16.10%
  4. Payout Ratio 06/2011 = 0.29

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 13.4
  2. ROE 5 Year Average 06/2011 = 21.34
  3. Current Ratio 06/2011 = 1.90
  4. Current Ratio 5 Year Average = 2.66
  5. Quick Ratio = 0.9
  6. Interest Coverage Quarterly = 115.8

Company: Fifth Third Bank (FITB)

Free cash flow $1.7 billion

Growth

  1. Net Income ($mil) 12/2011 = 1297
  2. Net Income ($mil) 12/2010 = 753
  3. Net Income ($mil) 12/2009 = 737
  1. EBITDA ($mil) 12/2011 = 2595
  2. EBITDA ($mil) 12/2010 = 1691
  3. EBITDA ($mil) 12/2009 = 1469
  4. Cash Flow ($/share) 12/2011 = 1.91
  5. Cash Flow ($/share) 12/2010 = 1.52
  6. Cash Flow ($/share) 12/2009 = -0.36
  1. Sales ($mil) 12/2011 = 6673
  2. Sales ($mil) 12/2010 = 7218
  3. Sales ($mil) 12/2009 = 9450
  1. Annual EPS before NRI 12/2009 = -1.21
  2. Annual EPS before NRI 12/2010 = 0.63
  3. Annual EPS before NRI 12/2011 = 1.18

Dividend history

  1. Dividend Yield = 2.4
  2. Dividend Yield 5 Year Average = 2.10
  3. Dividend 5 year Growth 12/2011 = -35.47
  4. Payout Ratio 09/2011 = 0.21

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 8.71
  2. 5 Year History EPS Growth 12/2011 = -13.71
  3. ROE 5 Year Average 12/2011 = 2.31
  4. Current Ratio 12/2011 = 0.95
  5. Current Ratio 5 Year Average = 0.97
  6. Quick Ratio = 0.92
  7. Interest Coverage Quarterly = 8.18

Company: Assoc Banc Corp (ASBC)

Growth

  1. Net Income ($mil) 12/2011 = 140
  2. Net Income ($mil) 12/2010 = -1
  3. Net Income ($mil) 12/2009 = -132
  1. EBITDA ($mil) 12/2011 = 376
  2. EBITDA ($mil) 12/2010 = 146
  3. EBITDA ($mil) 12/2009 = -78
  4. Cash Flow ($/share) 12/2011 = 1.54
  5. Cash Flow ($/share) 12/2010 = 0.69
  6. Cash Flow ($/share) 12/2009 = -0.15
  1. Sales ($mil) 12/2011 = 1024
  2. Sales ($mil) 12/2010 = 1152
  3. Sales ($mil) 12/2009 = 1332
  1. Annual EPS before NRI 12/2009 = -1.26
  2. Annual EPS before NRI 12/2010 = -0.18
  3. Annual EPS before NRI 12/2011 = 0.66

Dividend history

  1. Dividend Yield = 1.6
  2. Dividend Yield 5 Year Average 12/2011 = 2.6
  3. Dividend 5 year Growth 12/2011 = -60.03
  4. Payout Ratio 09/2011 = 0.24

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 5.5
  2. 5 Year History EPS Growth 12/2011 = -34.27
  3. ROE 5 Year Average 12/2011 = 4.18
  4. Current Ratio 12/2011 = 0.83
  5. Current Ratio 5 Year Average = 0.84
  6. Quick Ratio = 0.8
  7. Interest Coverage Quarterly = 5.57

Company: Sempra Energy (SRE)

Growth

  1. Net Income ($mil) 12/2011 = 1365
  2. Net Income ($mil) 12/2010 = 749
  3. Net Income ($mil) 12/2009 = 1129
  1. EBITDA ($mil) 12/2011 = 3164
  2. EBITDA ($mil) 12/2010 = 2089
  3. EBITDA ($mil) 12/2009 = 2618
  4. Cash Flow ($/share) 12/2011 = 8.62
  5. Cash Flow ($/share) 12/2010 = 7.71
  6. Cash Flow ($/share) 12/2009 = 7.95
  1. Sales ($mil) 12/2011 = 10036
  2. Sales ($mil) 12/2010 = 9003
  3. Sales ($mil) 12/2009 = 8106
  1. Annual EPS before NRI 12/2007 = 4.26
  2. Annual EPS before NRI 12/2008 = 4.43
  3. Annual EPS before NRI 12/2009 = 4.78
  4. Annual EPS before NRI 12/2010 = 3.93
  5. Annual EPS before NRI 12/2011 = 4.47

Dividend history

  1. Dividend Yield = 4.00
  2. Dividend Yield 5 Year Average = 4.5
  3. Dividend 5 year Growth 12/2011 = 11.78
  4. Payout Ratio 06/2011 = 0.43

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 7
  2. ROE 5 Year Average 12/2011 = 13.07
  3. Current Ratio 06/2011 = 0.56
  4. Current Ratio 5 Year Average = 0.77
  5. Quick Ratio = 0.48
  6. Interest Coverage Quarterly = 4.35

Conclusion

The markets are rather oversold so some sort of relief rally could take hold at anytime. However, we do not believe the markets have put in a bottom yet and believe that this counter rally will fail. Long-term investors should use strong pullbacks to slowly start deploying money into long-term investments as we believe the markets will rally strongly in the third quarter. Investors looking for other investment ideas might find this article to be of interest - Is Caterpillar A Great Long-Term Play?

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Source: A Naked Put Strategy For Coca Cola With A Potential Yield Of 4.9% In 5 Months

Additional disclosure: EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings VS expectations data sourced from Smartmoney.com.