Selling Puts vs. Low Limit Bids
As the market continues to drop, now officially a 10% correction, and going lower, it’s fun to start looking at potential bargains in the stock market.
One has jumped out to me in particular. I like Philip Morris Int’l (PM) a lot but you can substitute your favorite long term company in place of PM and do the following.
Because of the drop in prices, you can now sell a September put option on PM with a strike price of $35 for $.66 per share. Per 100 shares (1 contract), you would have the following:
- You’re committed to buy 100 shares of PM at $35 per share if the strike price hits (expires September 17, 2010)
- You collect $66 no matter what happens (a 5.7% annual return based on $3500 in cash being held for purchase of these shares)
- If strike price doesn’t hit, you keep the $66.
So, you could put in a limit order for PM at $35 and you’ll trigger it if you hit it, but why not earn a return while you wait? Selling the put brings in some cash.
Buying PM at $35 a share would mean their $2.32 annual dividend would be a yield of 6.6%. Considering I sold my shares at $50 a few weeks ago, this would be a fantastic buy.
Note: If the market & PM continue to drop, that $.66 premium should rise, so it becomes even more attractive. Be sure to watch it.
I like it. How ’bout you?