Using Options To Get A Discount When Buying General Mills

| About: General Mills, (GIS)

Summary

GIS is currently over-valued, a better price would be closer to $60.

One could wait till the price came down, but when will that be?

Patience might be a virtual, but I want this stock now and at the price I want it.

Willow Street Investments concludes that General Mills, Inc. (GIS) is a good buy below $60 in this article. Looking at the article I think they do make a good case that GIS is a good buy below $60. Sadly, the current market price is quite a bit above $60, almost $2 in fact. So, an investor COULD wait until it was selling on the market below $60. But wouldn't it be better if an investor could pay $60 and get GIS right now? I know I don't like to wait if I can help it. Using options, that is possible to lower the net price. There are a couple of ways to do it, but here I will outline how to use covered calls to do it. Using the method below, your YoC would go from 3.11% to 3.2% or so. Not a huge difference, but one that will add up over the years.

What you need to start

As I sit here writing this, GIS is selling for $61.80 a share. So we will need approximately $6200 in cash (maybe less depending on commissions and such). Don't worry, when we are done we will have used only about $6000 of that cash.

How to get the price below market

So now that we have 100 shares of GIS, we will write a covered call. To do that, we will write a covered call. To get the price we paid for GIS below $60, we will want to write a call that has a premium that is above $1.80 and we will want the chance of it being exercised to be fairly small. I go into some details on how to figure out the chance of the call being exercised in this article. So now that we have some parameters, a premium of more than $1.80 and a low value for Delta, let's look at the option chains.

Selecting the contract

Shown above is the call contract for April 21st, 20017 expiration date with a strike price of $65. Put in a limit order for $1.70 and if it's filled, you will have gotten your shares of GIS for just a dime or so above $60. Now the Delta is a bit high at 0.42 but if its called away, you will get 1 dividend payment and $65 a share for stock you paid just a bit more than $60 a share.

Next Steps

The goal was to get the shares of GIS at $60 but we aren't quite there yet. The investor has a couple of options. They could decide that their cost basis is now good enough. They are only about $0.15 to $0.20 above the desired target, pretty small as these things go.

The investor could instead write the GIS Jan 19 2018 $65 Call. Since that has a bid of $3.10, that would lower the cost basis of the shares down quite a bit below target. It also has a higher Delta, 0.58, but since the investor is so far below the target cost basis, they could close the call earlier by buying it back once it had a premium of around $1.30 or so. Since that option has a Theta (which measures the per day change in price of the option if the stock price remains stable) of -0.01, that would be in about 6 months.

And if prices drop a bit more over the next few months you can always roll the option out to a later date to get a bit more premium, a better chance of not getting your shares called or both.

Conclusions

Getting the price you want when you buy a stock is part of how you make money. Patience can be well rewarded. But you don't always need to wait to get the price you want. Writing a covered call on the stock you just purchased, called a buy-write, is one way to get the price you want today even when the market isn't directly offering it to you.

Disclosure: I am/we are long GIS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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