We would like to begin by stating that this play is speculative in nature. Hence before you put the suggested strategy into play, you need to make sure you are bullish on this stock, and that you understand that this play carries a higher amount of risk than your average stock.
Before we get into the meat of this strategy let us look at some of the benefits associated with selling puts.
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."
- 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.
Suggested Put strategy for Dendreon Corp
It appears to have found fairly decent support in the 6.00-6.50 ranges, and as long as it does not close below 5.00 on a weekly basis the outlook will remain neutral. A weekly close above 9.50 will turn the outlook to bullish.
As this is a volatile stock we would wait for a test of the 6.50 ranges before jumping. The Jan 2013 5 puts are trading in the 77-84 cents. If the stock pulls back to the suggested ranges these options should trade in the $0.90-1.05 ranges. We will assume that the puts can be sold for $0.90. For each contract sold, $90 will be deposited into your account.
If the stock trades below the strike price, the shares could be assigned to your account. Your final price if this comes to pass will be 4.10. If the stock does not trade below the strike price, you keep the premium for a gain of 18% in seven months.
Now if you are bullish on the stock at the current price, you can sell the puts for 80 cents or better. If the stock does not trade below the strike price, then you will walk away with a gain of 16% in 7 months.
This is a volatile and speculative stock, there is a chance that it could trade well below the strike price you sold the puts. One remedy for this is to roll the put. In other words, you buy the put you sold back and sell new slightly out of the money puts. On the other hand, if the stock breaks down rapidly, then it will be harder to implement this strategy. This risk factor is higher than if one was selling puts, for example, on Starbucks, Apple, Philip Morris, etc.
Company: Dendreon Corp (NASDAQ:DNDN)
- Percentage Held by Insiders = 2.57
- Levered Free Cash Flow = -68.63M
- Number of Institutional Sellers 12 Weeks = 1
- Short percentage of float= 22.7%
- Relative Strength 52 weeks = 5
- Cash Flow 5-year Average = -1.25
- Profit Margin = -82.92%
- Operating Margin = -60.38%
- Quarterly Revenue Growth = 203.7%
- Quarterly Earnings Growth
- Operating Cash Flow = -196.38M
- Beta = 2.66
- Percentage Held by Institutions = 67.1%
- Short Percentage of Float = 22.7%
- Net Income ($mil) 12/2011 = -338
- Net Income ($mil) 12/2010 = -439
- Net Income ($mil) 12/2009 = -220
- Net Income Reported Quarterly ($mil) = -104
- EBITDA ($mil) 12/2011 = -228
- EBITDA ($mil) 12/2010 = -420
- EBITDA ($mil) 12/2009 = -212
- Cash Flow ($/share) 12/2011 = -1.63
- Cash Flow ($/share) 12/2010 = -1.83
- Cash Flow ($/share) 12/2009 = -1.64
- Sales ($mil) 12/2011 = 342
- Sales ($mil) 12/2010 = 48
- Sales ($mil) 12/2009 = 0
- Annual EPS before NRI 12/2007 = -1.2
- Annual EPS before NRI 12/2008 = -0.8
- Annual EPS before NRI 12/2009 = -2.04
- Annual EPS before NRI 12/2010 = -2.05
- Annual EPS before NRI 12/2011 = -2.08
- ROE 5-Year Average 12/2011 = -146.85
- Current Ratio = 7.35
- Current Ratio 5 Year Average = 4.57
- Quick Ratio = 7.73
- Cash Ratio = 7.27
- Interest Coverage Quarterly = 3.61
This is a speculative stock and only investors willing to take on extra risk should consider putting this strategy to work. Individuals not willing to take on extra risk should avoid this play and look for alternative plays. If you are looking for to put this strategy to work on lower risk plays, the following article could prove to be of use Deere & Co: An Extra 9.2% In 7 Months Or Jump In At a lower price.
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.Disclosure:
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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