Selling 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."
Benefits associated with selling puts
- In essence, you get paid for entering a "limit order" for a stock or stocks you would not mind owning.
- It allows one to generate income in a neutral or rising market.
- 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.
- 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.
- 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.
- 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 Kodiak Oil & Gas Corp (KOG):
- Sales surged from $11 million in 2009 to $120 million in 2011.
- A strong five-year sales growth rate of 86%.
- Net income has surged from -$3 million to $4million in the past three years.
- It has a strong estimated 3-5 year EPS growth rate of 50%.
- Annual EPS before NRI increased from -$0.05 in 2007 to $0.17 in 2011.
- Cash flow per share increased from $0.01 in 2009 to $0.32 in 2011.
- Net income increased from -$3 million in 2009 to $4 million in 2011.
- Net income for the first quarter came in at $1.74 million. If this rate is maintained net income for 2012 could come in as high as 6.9 million.
- A strong quarterly revenue growth of 499%.
- Sales Vs 1 year 1 year ago increased by 287%.
- A high beta of 2.48 makes it a good candidate for covered writes or to puts on If you are bullish on the stock.
- Year over year projected growth rates of 250% and 67.3% for 2012 and 2013 respectively.
- An estimated 3-5 year EPS growth rate of 50%.
- A strong interest coverage ratio of 19.00.
- $100K invested since its inception would have grown to $183k.
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Suggested put strategy for Kodak Oil and Gas
Crude oil is still in a corrective phase and could potentially trade down to the 65.00-70.00 ranges. The consolidation in the oil markets has affected all oil-related stocks, and this stock could potentially trade down to the 6.00-6.50 ranges before putting in a bottom. We would only implement this strategy if the stock trades down to the above stated ranges.
The Jan 2013, 6.00 puts are currently trading in the $0.70-0.80 ranges. If the stock pulls back to the stated ranges, this put should trade in the 1.10-1.30 ranges. For this example, we will assume that this put can be sold for $1.10. For each contract sold, $110 will be deposited into your account.
If the shares trade below the strike price, they could be assigned to your account. If the stock is assigned to your account, your final price will be $4.90. If the stock does not trade below the strike price you walk away with a gain of 18.3% in roughly seven months.
If you are bullish on the stock, there are no real disadvantages because you implemented this strategy because you were prepared to buy the stock if it was assigned to your account. The only risk is that you have a change of heart along the way. For example, the stock is trading at a lower price than you expected it to trade at. The remedy for this is to simply roll the put. You purchase the original put back and sell a new put that is slightly out of the money.
For investors looking for other ideas, detailed data has been provided on two additional companies. Our latest article could also provide some food for thought: Philip Morris: 7% Extra In Addition To The Dividend.
Company: Bristol-Myers (BMY)
Levered Free Cash Flow = 5.16 billion
- Percentage Held by Insiders = 0.64
- Number of Institutional Sellers 12 Weeks = 8
- Relative Strength 52 weeks = 86
- Cash Flow 5-year Average = 2.19
- Profit Margin = 17.8%
- Operating Margin = 33.9%
- Quarterly Revenue Growth = 4.8%
- Quarterly Earnings Growth = 11.7%
- Operating Cash Flow = 4.75B
- Beta = 0.47
- Percentage Held by Institutions = 68%
- Short Percentage of Float = 2.4%
- Net Income ($mil) 12/2011 = 3709
- Net Income ($mil) 12/2010 = 3102
- Net Income ($mil) 12/2009 = 10612
- Net Income Reported Quarterly ($mil) = 1101
- EBITDA ($mil) 12/2011 = 7782
- EBITDA ($mil) 12/2010 = 6815
- EBITDA ($mil) 12/2009 = 6309
- Cash Flow ($/share) 12/2011 = 2.79
- Cash Flow ($/share) 12/2010 = 2.61
- Cash Flow ($/share) 12/2009 = 2.21
- Sales ($mil) 12/2011 = 21244
- Sales ($mil) 12/2010 = 19484
- Sales ($mil) 12/2009 = 18808
- Annual EPS before NRI 12/2007 = 1.38
- Annual EPS before NRI 12/2008 = 1.74
- Annual EPS before NRI 12/2009 = 1.85
- Annual EPS before NRI 12/2010 = 2.16
- Annual EPS before NRI 12/2011 = 2.28
- Dividend Yield = 3.9
- Dividend Yield 5 Year Average = 4.6
- Dividend 5 year Growth = 3.44%
- Payout Ratio = 0.45
- Payout Ratio 5 Year Average = 0.69
- Next 3-5 Year Estimate EPS Growth rate = 3
- 5 Year History EPS Growth = 13.58
- ROE 5 Year Average = 26.3%
- Current Ratio = 1.60
- Current Ratio 5 Year Average = 1.9
- Quick Ratio = 1.20
- Cash Ratio = 1.31
- Interest Coverage Quarterly = 47.40
Company: Alpha Natural resources (ANR)
- Percentage held by Institutions = 79%
- Levered free cash flow of $454 million
- Operating margin= 6%
- Quarterly revenue growth rate = 71%
- Beta = 2.69
- Net Income ($mil) 12/2011 = -677
- Net Income ($mil) 12/2010 = 96
- Net Income ($mil) 12/2009 = 58
- EBITDA ($mil) 12/2011 = 899
- EBITDA ($mil) 12/2010 = 809
- EBITDA ($mil) 12/2009 = 526
- Net Income Reported Quarterly ($mil) = -29
- Cash Flow ($/share) 12/2011 = 8.01
- Cash Flow ($/share) 12/2010 = 7.46
- Cash Flow ($/share) 12/2009 = 4.91
- Sales ($mil) 12/2011 = 7109
- Sales ($mil) 12/2010 = 3917
- Sales ($mil) 12/2009 = 2496
- Annual EPS before NRI 12/2007 = 0.45
- Annual EPS before NRI 12/2008 = 2.63
- Annual EPS before NRI 12/2009 = 1.98
- Annual EPS before NRI 12/2010 = 2.17
- Annual EPS before NRI 12/2011 = 1.57
- Next 3-5 Year Estimate EPS Growth rate = 5
- 5 Year History EPS Growth = 23.94
- ROE 5 Year Average = 12.81
- Current Ratio = 1.47
- Current Ratio 5 Year Average = 2.38
- Quick Ratio = 1.13
- Cash Ratio = 0.76
- Book Value Quarterly = 33.72
It is trading $25.00 below book value and sports a strong quarterly revenue growth of 71%. Short percentage of float stands at 8.9%. This is a speculative play and only individuals willing to take on some risk should consider it.
Only put this strategy to use if you are bullish on the stock, as there is a chance that the shares could be assigned to your account. If the stock does not trade below the strike price, you have the potential to earn an extra 18.3% in roughly 7 months. If you are bullish on the stock at the current price, you could implement the strategy right way. The premium you receive will, however, be slightly lower. Investors looking for other ideas might find this article to be of use: Corning Inc: 3-1 Leverage With No Out Of Pocket Cost.
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. Options tables sourced from money.msn.com. Ycharts data sourced from Ycharts.com.
Disclaimer: It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.