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Selling naked puts is a great way to purchase shares in companies you like at a predetermined price.

Benefits associated with selling 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. 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.
  4. 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.
  5. 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.

Suggested Put Strategy for United Technologies Corp (UTX)

The stock has been putting in a nice base formation since the 5th of June. It has also been putting higher lows which is also generally a bullish development. As long as it does not close below 70 on a weekly basis the outlook will remain neutral. A weekly close above 77 should drive it to the 82-84 ranges with a possible intraday spike to the 88 ranges. As it is still putting in a base formation there is a good chance that it could test the 72-73 ranges again before trending higher.

The Jan 2013, 72.50 puts are trading in the $4.00-$4.10 ranges. We would at least wait for a test of the 74 ranges before selling these puts. As the stock is still in a trading range there is an above average chance that it will at least test the 74 ranges. If the stock pulls back to the stated ranges these puts should trade in the $4.50-4.70 ranges. For this example we will assume that the puts can be sold for $4.50. The stock appears to be ready to break out so if you are bullish on it right now, you can sell the Jan 2013, 75 puts in the $5.10-$5.40 ranges. We are just aiming for a more conservative entry point.

Benefits of this strategy

This strategy provides you with the chance to buy a stock at price of your choosing. If the shares are put to your account, your final price when the premium is factored in will work out to $68.00. Now if the shares are not assigned to your account, you at least get paid for your efforts. In this case, you could walk away with a gain of 6.2% in six months.

Your potential risk

  1. The stock has to trade to the suggested price before you can put this strategy into play. Thus if it does not trade in the stated ranges, then this strategy cannot be put to use, which means you eliminate your chances of getting into this play or earning some money while attempting to get in. The stock is oversold and appears ready to break out, so those who are bullish on it could sell the Jan 2013, 75 puts at the current price. As stated earlier we are just aiming for a more conservative entry point.
  2. Even if you put this strategy into play, there is no guarantee that the shares will be put to your account. In general, if the put is in the money, the odds are in your favor.
  3. The stock could trade significantly below the strike price. Thus when the shares are put to you, any advantage you had when you implemented this strategy could vanish. One way to deal with this is to roll the put. Buy the old put back and sell new puts. The shares would have to trade below 68.00 before you start to lose money.

Company: United Technologies

Brief Overview

  1. Percentage Held by Insiders = 0.8
  2. Sales vs 1 year ago = 7.10%
  3. EPS 5 year growth rate = 5.8%
  4. 5 year capital spending rate = - 6.97
  5. Sales 5 year growth rate = 2.07%
  6. Number of Institutional Sellers 12 Weeks = 1
  7. Short Ratio = 2.7
  8. Relative Strength 52 weeks = 44
  9. Cash Flow 5-year Average = 5.95
  10. Profit Margin = 7.5%
  11. Quarterly Revenue Growth = - 8.4%
  12. Quarterly Earnings Growth = 0.08%
  13. Operating Cash Flow = 7.00B
  14. Beta = 1.13
  15. Percentage Held by Institutions = 83.9%
  16. Levered Free Cash Flow = -$6.8B

Growth

  1. Net Income ($mil) 12/2011 = 4979
  2. Net Income ($mil) 12/2010 = 4373
  3. Net Income ($mil) 12/2009 = 3829
  4. Net Income Reported Quarterly ($mil) = 330
  5. EBITDA ($mil) 12/2011 = 9446
  6. EBITDA ($mil) 12/2010 = 8542
  7. EBITDA ($mil) 12/2009 = 7635
  8. Cash Flow ($/share) 12/2011 = 7.02
  9. Cash Flow ($/share) 12/2010 = 6.49
  10. Cash Flow ($/share) 12/2009 = 5.88
  11. Sales ($mil) 12/2011 = 58190
  12. Sales ($mil) 12/2010 = 54326
  13. Sales ($mil) 12/2009 = 52920
  14. Annual EPS before NRI 12/2007 = 4.23
  15. Annual EPS before NRI 12/2008 = 5.01
  16. Annual EPS before NRI 12/2009 = 4.58
  17. Annual EPS before NRI 12/2010 = 5.02
  18. Annual EPS before NRI 12/2011 = 5.53

Dividend history

  1. Dividend Yield = 2.9
  2. Dividend Yield 5 Year Average 03/2012 = 2.34
  3. Dividend 5 year Growth 03/2012 = 10.4

Dividend sustainability

  1. Payout Ratio = 0.34
  2. Payout Ratio 5 Year Average 03/2012 = 0.33
  3. Payout Ratio 5 Year Average 12/2011 = 0.32

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 11.98
  2. ROE 5 Year Average 03/2012 = 22.08
  3. ROE 5 Year Average 12/2011 = 22.01
  4. Debt/Total Cap 5 Year Average 03/2012 = 30.85
  5. Current Ratio = 1.52
  6. Current Ratio 5 Year Average = 1.29
  7. Quick Ratio = 0.97
  8. Cash Ratio = 0.45
  9. Interest Coverage Quarterly = 13.19

Notes

It has a projected year over year growth rate of almost 21% in 2013, 3-5 year estimated EPS growth rate of 11.9%, strong interest coverage ratio of 13 and quarterly earnings growth improved from -64% in the last quarter to positive 0.08% in the second quarter. Additionally, annual EPS before NRI has been trending upwards for the past 5 years.

Interesting companies

For investors looking for other ideas detailed data has been provided on two additional companies.

Company: Southern Company (SO)

Brief Overview

  1. Relative Strength 52 weeks = 81
  2. Cash Flow 5-year Average = 4.41
  3. Profit Margin = 12.8%
  4. Operating Margin = 24.02%
  5. Quarterly Revenue Growth = -7.5%
  6. Quarterly Earnings Growth = -3.00%
  7. Beta = 0.12
  8. 5 year sales growth rate = 2.61%
  9. Sales vs 1 year ago = 1.2%
  10. EPS vs 1 year ago = 3.2%

Growth

  1. Net Income ($mil) 12/2011 = 2268
  2. Net Income ($mil) 12/2010 = 2040
  3. Net Income ($mil) 12/2009 = 1708
  4. Net Income Reported Quarterly ($mil) = 368
  5. EBITDA ($mil) 12/2011 = 6392
  6. EBITDA ($mil) 12/2010 = 5792
  7. EBITDA ($mil) 12/2009 = 5297
  8. Cash Flow ($/share) 12/2011 = 5.01
  9. Cash Flow ($/share) 12/2010 = 4.66
  10. Cash Flow ($/share) 12/2009 = 4.62
  11. Sales ($mil) 12/2011 = 17657
  12. Sales ($mil) 12/2010 = 17456
  13. Sales ($mil) 12/2009 = 15743
  14. Annual EPS before NRI 12/2007 = 2.24
  15. Annual EPS before NRI 12/2008 = 2.37
  16. Annual EPS before NRI 12/2009 = 2.32
  17. Annual EPS before NRI 12/2010 = 2.37
  18. Annual EPS before NRI 12/2011 = 2.57

Dividend history

  1. Dividend Yield = 4.00
  2. Dividend Yield 5 Year Average = 4.6
  3. Dividend 5 year Growth = 3.8

Dividend sustainability

  1. Payout Ratio 03/2012 = 0.77
  2. Payout Ratio 5 Year Average = 0.74

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 5.04
  2. ROE 5 Year Average = 13.53
  3. Current Ratio = 0.96
  4. Current Ratio 5 Year Average = 0.98
  5. Quick Ratio = 0.61
  6. Cash Ratio = 0.41
  7. Interest Coverage Quarterly = 3.77

Company: Pepco Holdings (POM)

Basic overview

  1. Percentage Held by Insiders = 0.28
  2. Relative Strength 52 weeks = 64
  3. Short interest ratio= 12%
  4. Beta= 0.35
  5. Quarterly revenue growth = -20%
  6. 5 year dividend average = 5.5%
  7. Quarterly revenue growth = 6.2%
  8. Cash Flow 5 -year Average = 3.11
  9. Operating cash flow = $512M
  10. Levered Free Cash Flow = $- 272 million

Growth

  1. Net Income ($mil) 12/2011 = 257
  2. Net Income ($mil) 12/2010 = 32
  3. Net Income ($mil) 12/2009 = 235
  4. EBITDA ($mil) 12/2011 = 1089
  5. EBITDA ($mil) 12/2010 = 849
  6. EBITDA ($mil) 12/2009 = 1016
  7. Cash Flow ($/share) 12/2011 = 3.12
  8. Cash Flow ($/share) 12/2010 = 2.98
  9. Cash Flow ($/share) 12/2009 = 2.49
  10. Sales ($mil) 12/2011 = 5920
  11. Sales ($mil) 12/2010 = 7039
  12. Sales ($mil) 12/2009 = 9259
  13. Annual EPS before NRI 12/2007 = 1.53
  14. Annual EPS before NRI 12/2008 = 1.93
  15. Annual EPS before NRI 12/2009 = 0.91
  16. Annual EPS before NRI 12/2010 = 1.24
  17. Annual EPS before NRI 12/2011 = 1.25

Dividend history

  1. Dividend Yield = 5.4
  2. Dividend Yield 5 Year Average = 5.50
  3. Dividend 5 year Growth = 0.78

Dividend sustainability

  1. Payout Ratio = 0.93
  2. Payout Ratio 5 Year Average = 0.81

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 4
  2. ROE 5 Year Average = 7.13
  3. Return on Investment = 3.2
  4. Debt/Total Cap 5 Year Average = 52.54
  5. Current Ratio = 0.60
  6. Current Ratio 5 Year Average = 0.95
  7. Quick Ratio = 0.4
  8. Cash Ratio = 0.2
  9. Interest Coverage Quarterly = 2.50

Conclusion

Only put this strategy to use if your outlook on this stock is bullish. If you have a change of heart after selling the puts because you now feel that the stock could trade significantly below the strike price, then you can roll the puts. Buy back the old puts and sell new slightly out of the money puts with more time on them.

EPS and Price vs industry charts obtained from zacks.com. A major portion of the historical/research data used in this article was obtained from zacks.com. Options tables sourced from yahoofinance.com. Earnings and growth rates obtained from dailyfinance.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.

Source: United Technologies: Get In At $68 Or Earn 6.2% In 6 Months