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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 put in a "limit order."

An investor usually sells a put option if his/her outlook on the underlying security is bullish. The buyer of the put option pays the seller a premium for the right to sell the shares at an agreed-upon price. If the stock does not trade at or below the agreed-upon price (strike price), the seller gets to keep the premium.

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. Most put options expire worthless and 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.

The majority of traders opt to close the put out prior to expiration if they have the chance of buying it back at much lower price. For example, selling the put at $2.50 and buying it back at $0.50

Warning

This strategy should not be employed on speculative stocks.

Reasons to be bullish on Caterpillar Inc (CAT)

  • A levered free cash flow of $471 million
  • A five dividend growth rate of almost 6%
  • A low payout ratio of 23%
  • A good quarterly earnings growth rate of 29%
  • Percentage held by institutions is 65%
  • A strong quarterly revenue growth rate of 23%
  • A free cash flow yield of 6.29%
  • A good interest coverage ratio of 8
  • Cash flow per share doubled from $5.94 in 2009 to $11.95 in 2011
  • Annual EPS before NRI increased from $5.37 in 2007 to $7.81 in 2011
  • Year over year projected growth rate of 24.6% and 18.3% in 2012 and 2013 respectively
  • A great retention ratio of 77%
  • A 3-5 year projected EPS growth rate of 23%
  • $100K invested for 10 years would have grown to $429K

Suggested Put strategy for Caterpillar Inc


There is a decent chance that it could test the 83.00-84.00 ranges one more time before trending higher. With this mind, investors could wait for a test of 85 and then sell the Jan 2013 85 puts. These puts are currently trading in the 9.00-9.20 ranges. If the stock drops down to 85.00 the puts should rise in value by roughly 1.50. For this example, we will assume that when the stock trades down to the 84.50-85.00 ranges that the puts can be sold for 10.50. For each contract, sold 1050 will be deposited into your account. If the stock trades below 85.00, the shares could be assigned to your account. Your final price will work out to 74.50 (85.00 minus 10.50). If the stock does not trade below the strike price, you get to keep the premium, which in this case works out to a gain of roughly 12.3%. If you are bullish on the stock at the current price, then you could sell the Jan 2014 85 puts immediately.

Company: Caterpillar Inc

Basic Key ratios

  1. Percentage Held by Insiders = 0.59
  2. Number of Institutional Sellers 12 Weeks = 4

Growth

  1. Net Income ($mil) 12/2011 = 4928
  2. Net Income ($mil) 12/2010 = 2700
  3. Net Income ($mil) 12/2009 = 895
  4. EBITDA ($mil) 12/2011 = 10474
  5. EBITDA ($mil) 12/2010 = 7303
  6. EBITDA ($mil) 12/2009 = 4339
  7. Cash Flow ($/share) 12/2011 = 11.95
  8. Cash Flow ($/share) 12/2010 = 7.91
  9. Cash Flow ($/share) 12/2009 = 5.94
  10. Sales ($mil) 12/2011 = 60138
  11. Sales ($mil) 12/2010 = 42588
  12. Sales ($mil) 12/2009 = 32396
  13. Annual EPS before NRI 12/2007 = 5.37
  14. Annual EPS before NRI 12/2008 = 5.66
  15. Annual EPS before NRI 12/2009 = 2.18
  16. Annual EPS before NRI 12/2010 = 4.19
  17. Annual EPS before NRI 12/2011 = 7.81

Dividend history

  1. Dividend Yield = 2.10
  2. Dividend Yield 5 Year Average = 2.50
  3. Dividend 5 year Growth = 5.69

Dividend sustainability

  1. Payout Ratio = 0.23
  2. Payout Ratio 5 Year Average = 0.39

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 23
  2. ROE 5 Year Average = 33.87
  3. Current Ratio = 1.4
  4. Current Ratio 5 Year Average = 1.34
  5. Quick Ratio = 0.70
  6. Cash Ratio = 0.2
  7. Interest Coverage = 8.25

Interesting companies

For investors looking for other ideas detailed data has been provided on two additional companies; additionally our latest article could provide additional ideas Starbucks Corp: Significantly Boost Your Gains For free .

Company: Bank Montreal (BMO)

Brief Overview

  1. Percentage Held by Insiders = 1
  2. Relative Strength 52 weeks = 47
  3. Cash Flow 5-year Average = 5.13
  4. Profit Margin = 2.61
  5. Operating Margin = 3.6
  6. Quarterly Revenue Growth = 24
  7. Quarterly Earnings Growth = 27
  8. Operating Cash Flow = 13.44B
  9. Beta = 1.14

Growth

  1. Net Income ($mil) 12/2011 = 3312
  2. Net Income ($mil) 12/2010 = 2707
  3. Net Income ($mil) 12/2009 = 1534
  4. EBITDA ($mil) 12/2011 = 6070
  5. EBITDA ($mil) 12/2010 = 4547
  6. EBITDA ($mil) 12/2009 = 3017
  7. Net Income Reported Quarterly ($mil) = 994
  8. Cash Flow ($/share) 12/2011 = 5.91
  9. Cash Flow ($/share) 12/2010 = 5.4
  10. Cash Flow ($/share) 12/2009 = 3.75
  11. Sales ($mil) 12/2011 = 17294
  12. Sales ($mil) 12/2010 = 15371
  13. Sales ($mil) 12/2009 = 14982
  14. Annual EPS before NRI 12/2007 = 5.17
  15. Annual EPS before NRI 12/2008 = 4.37
  16. Annual EPS before NRI 12/2009 = 2.86
  17. Annual EPS before NRI 12/2010 = 4.73
  18. Annual EPS before NRI 12/2011 = 5.19

Dividend history

  1. Dividend Yield = 5.2
  2. Dividend Yield 5 Year Average = 5.20
  3. Dividend 5 year Growth = 5.74

Dividend sustainability

  1. Payout Ratio = 0.51
  2. Payout Ratio 5 Year Average = 0.59

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 10
  2. 5 Year History EPS Growth = 2.83
  3. ROE 5 Year Average = 14.46
  4. Current Ratio = 1.02
  5. Current Ratio 5 Year Average = 0.95
  6. Quick Ratio = 0.94
  7. Interest Coverage Quarterly = 3.14

Company : Teva Pharm Adr (TEVA)

Basic Key ratios

  1. Percentage Held by Insiders = 7.1
  2. Relative Strength 52 weeks = 43
  3. Cash Flow 5-year Average = 3.74
  4. Profit Margin = 14.7%
  5. Operating Margin = 23.8%
  6. Quarterly Revenue Growth = 25.00%
  7. Quarterly Earnings Growth = 12.9%
  8. Operating Cash Flow = 3.99B
  9. Beta = 0.73

Growth

  1. Net Income ($mil) 12/2011 = 2768
  2. Net Income ($mil) 12/2010 = 3339
  3. Net Income ($mil) 12/2009 = 2004
  4. Net Income Reported Quarterly ($mil) = 859
  5. EBITDA ($mil) 12/2011 = 4025
  6. EBITDA ($mil) 12/2010 = 3646
  7. EBITDA ($mil) 12/2009 = 3111
  8. Cash Flow ($/share) 12/2011 = 5.85
  9. Cash Flow ($/share) 12/2010 = 4.41
  10. Cash Flow ($/share) 12/2009 = 4.26
  11. Sales ($mil) 12/2011 = 18312
  12. Sales ($mil) 12/2010 = 16121
  13. Sales ($mil) 12/2009 = 13899
  14. Annual EPS before NRI 12/2007 = 2.38
  15. Annual EPS before NRI 12/2008 = 2.86
  16. Annual EPS before NRI 12/2009 = 3.37
  17. Annual EPS before NRI 12/2010 = 4.54
  18. Annual EPS before NRI 12/2011 = 4.97

Dividend history

  1. Dividend Yield = 2.00
  2. Dividend Yield 5 Year Average = 1.15
  3. Dividend 5 year Growth = 17.5

Dividend sustainability

  1. Payout Ratio = 0.24
  2. Payout Ratio 5 Year Average = 0.16

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 8.27
  2. 5 Year History EPS Growth = 21.08
  3. ROE 5 Year Average = 17.24
  4. Current Ratio = 1.1
  5. Current Ratio 5 Year Average = 1.52
  6. Quick Ratio = 0.68
  7. Cash Ratio = 0.23
  8. Retention ratio= 76%

Conclusion

Long-term investors can use strong pullbacks to open up positions in stocks they would not mind owning for the long haul. 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 willing to take on a bit more risk might find this article to be of interest American Electric Power: An Appealing Dividend 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: Caterpillar: A Yield Boost Of 12% Or A Lower Entry Cost

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. Ycharts data sourced from ycharts.com. Earnings estimates and growth rates sourced from dailyfinance.com