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 your 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 Suncor Corp.
Oil is still consolidating and until it puts in a bottom, all the stocks in the oil and energy sector will in general remain in a corrective phase. Having said that, this stock is trying to put in a bottom, and it could potentially test its recent lows before this process is fully complete. Consider waiting for a test of the 26.00-27.00 ranges before putting this strategy into play.
The Jan 2013 25 calls are trading in the $1.59-$1.63 ranges. If the stock trades down to the suggested ranges, these options should trade in the 2.00-2.20 ranges. For this example, we will assume the puts can be sold for $2.00. For each contract sold $ 200 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 per share if the stock is assigned to your account will be 23.00. If the stock does not trade below the strike price, you keep the premium for a gain of 8.00% in seven months.
If you are bullish on the stock at the current price, you can sell the puts for $1.60 or better. If the stock does not trade below the strike price, then you will walk away with a gain of 6.4% seven months.
The only risk is that you have a change of heart and feel that the stock could now trade well below the strike price you sold the puts at. If this is the case, then you can roll the put. In other words, buy back the put you sold and sell new puts that are slightly out of the money.
Company: Suncor Energy (SU)
- Levered Free Cash Flow = 1.69B
- ROA = 6.76%
- Short Ratio = 1.8%
- Relative Strength 52 weeks = 32
- Cash Flow 5-year Average = 3.22
- Profit Margin = 11.82%
- Operating Margin = 19.57%
- Quarterly Revenue Growth = 7.9%
- Quarterly Earnings Growth = 41.7%
- Operating Cash Flow = 9.78B
- Beta = 1.75
- 5 year sales growth = 20.44%
- Net Income ($mil) 12/2011 = 4356
- Net Income ($mil) 12/2010 = 3571
- Net Income ($mil) 12/2009 = 1146
- Net Income Reported Quarterly ($mil) = 1483
- EBITDA ($mil) 12/2011 = 11153
- EBITDA ($mil) 12/2010 = 8450
- EBITDA ($mil) 12/2009 = 3716
- Cash Flow ($/share) 12/2011 = 6.16
- Cash Flow ($/share) 12/2010 = 4.19
- Cash Flow ($/share) 12/2009 = 2.61
- Sales ($mil) 12/2011 = 39917
- Sales ($mil) 12/2010 = 34452
- Sales ($mil) 12/2009 = 23851
- Annual EPS before NRI 12/2007 = 2.27
- Annual EPS before NRI 12/2002 = 3.05
- Annual EPS before NRI 12/2009 = 1.82
- Annual EPS before NRI 12/2010 = 1.74
- Annual EPS before NRI 12/2011 = 3.55
- Dividend Yield = 1.70
- Dividend Yield 5 Year Average = 1.00
- Dividend 5 year Growth = 25.7
- Payout Ratio = 0.15
- Payout Ratio 5 Year Average = 0.2
- Next 3-5 Year Estimate EPS Growth rate = 6.4
- ROE 5 Year Average = 13.83
- Current Ratio = 1.40
- Current Ratio 5 Year Average = 1.18
- Quick Ratio = 1.00
- Cash Ratio = 0.44
- Interest Coverage Quarterly = 569.4
- Retention ratio = 85%
Suncor could be on the line for the clean up costs for an area known as Sand Creek and neighboring properties near Denver. The health department characterizes the spill as "serious and significant." Long term its still a good play, but in the short term this uncertainty could (keyword being could) have an impact on its performance.
Your long term outlook on the stock should be bullish for there is a chance that the shares could be assigned to your account. If this occurs, you need to have the cash to pay for the shares. In this instance, you will have to pay 2500 per contract sold. When you factor in the premium, your actual cost will drop to $2,300. On the other hand, if the stock does not trade below the strike price, you get to walk away with a gain of 8% in roughly seven months. Investors looking for other ideas might find this article to be of interest: Kodiak Oil Gas: A Low-Risk Way To Significantly boost potential gains for no almost no cost.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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. Options tables sourced from money.msn.com.