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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 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 on Total SA (NYSE:TOT):

  • A great long-term debt to equity ratio of 0.33
  • A strong levered free cash flow of $2.2 billion
  • A five-year dividend growth rate of 4.82%
  • A good yield of 5.9%
  • A beta of 1.49 makes it a good candidate for covered writes and for selling naked puts if one is bullish on the stock
  • Year over year growth rates of 7.7% and 6.7% for 2012 and 2013 respectively
  • A decent quarterly revenue growth rate of 12.4%
  • Net income has increased from $12.03 billion in 2009 to $17.523 billion in 2011
  • Cash flow jumped from $9.53 in 2009 to $11.51 in 2011
  • Annual EPS before NRI increased from $4.85 in 2009 to $6.82 in 2011
  • A low payout ratio of 47%
  • A good 5 year ROE average of 23.71%
  • A very strong interest coverage ratio of 36.8
  • A decent free cash flow yield of 3.49%
  • EBITDA increased from $33 billion in 2009 to $50 billion in 2011
  • Cash flow from operations increased by 10.9% to $27.1 billion at the end of 2011 Vs 24.5 billion in 2010.
  • $100K invested for 10 years would have grown to $186; if the dividends were reinvested the rate of return would be much higher.

The stock is still in a corrective phase and has pretty strong support in the 40-42 ranges. We would wait for a test of the 41-42 ranges and then sell puts with strikes at 40.

Currently, it is trading at 43.77 so if it were to drop down to 41 the Jan 2013 40 puts should rise by roughly a dollar from the current price of 3.30 to $4.30. For every contract sold, $430 will be deposited in your account. If the stock trades below 40, the shares could be assigned to your account. Your final price in this case would be 35.70 (40.00-4.30). If the stock does not trade below 40 you get to keep the premium which works to a gain of 10.75%. This process can be repeated again and again and is a good strategy for those looking to open up second streams of income. However, only use this strategy if you are bullish on the stock as there is always the chance that the shares could be assigned to your account. If this occurs, you will need to have the money to buy the shares. If you already own some shares you can sell calls as means of opening up another stream of income.

Conclusion

The markets are still in a corrective mode, and we believe that we will need to see one more selling climaxes, before a bottom is in place. In the interim, some sort of relief rally could take hold as they are extremely oversold. Long-term investors can use strong pullbacks to slowly start deploying money into long-term investments. A great way to get into a stock at a price of your choosing is to sell puts at strikes you would not mind owning the stock at. Investors looking for other investment ideas might find these articles to be of interest - Alcatel-Lucent: A Chance To Earn 7% Plus A Lower Entry price and American Capital Agency: Significantly Boost Your Yield with a simple strategy.

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: Total SA: A Great Entry Price Or The Potential To Earn An Extra 10.7%

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. Data for Ycharts sourced from Ycharts.com Option table sourced from yahoo finance. Earning and growth estimate data sourced from dailyfinance.com. Consensus estimate analysis table sourced from reuters.com.