I am an income investor, so my goal to ignore the daily price fluctuation of my stock holdings, while generating income from either the stocks' dividends or options premiums. I do have some simple criteria and process that I follow for initiating a position:
- Stocks must have a dividend yield greater than the 10 yr. U.S Treasury
- Dividend history has to show increases in the dividend. For my purpose, I analyze the stock's dividend 3 years CAGR, and the higher value is the better.
- Earnings per share need to be greater than dividend payout.
- I will utilized Cash-secured put to get long in the stock.
I am selling the cash-secured put with the intention of buying the stock after the put is assigned. I will be paid, in the form of the premium received for selling the put, in return for accepting the obligation to buy underlying shares at a price that I determine in advance. Note that when we sell a cash-secured put, we need to have the full cash amount in our brokerage account for a possible purchase of underlying shares. This is the cash that we would use should we be assigned on the short put position and hence be obligated to purchase shares at the put's strike price.
I sold March 15 $18 Put and received $0.28 premium per contract. This means that should WU fall below the $18 strike price anytime on or before the options expiration (March 15th, 2019), I could get assigned and would subsequently be obligated to purchase WU at $18. However, because I received $0.28 premium, this effectively reduced my cost basis to $17.72. The possible outcome for this trade is summarized below:
- If WU stays above $18 at expiration, then I will keep the entire premium of $0.28, and the options will expire worthless. This will free up my capital and I can then sell cash-secured put for future expiration cycle.
- If WU falls below $18, and I get assigned prior to its ex-dividend date on 03/14, our cost basis would be reduced by the amount of premium received and collected dividend. In this case, I will be long WU with effective cost basis reduced to $17.50.
- If WU falls below $18, and I get assigned at expiration (i.e., no dividend), I will be long WU with cost basis of $17.70.
Should WU fall below $18 and I get assigned to buy WU at the $18 strike price, selling the cash-secured put enables me to get long in WU with a reduced cost basis. On the other hand, should WU stays above $18 by the options expiration and the options expire worthless, I am able to generate income in the form of collected options premium.
Disclosure: I am/we are long WU.
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.
Additional disclosure: I am long WU via cash-secured put