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Potential Philip Morris Int’l (PM) Play

5 February 2010 No Comment

As the market continues its move lower (as of writing, the Dow is down about 45 today, below 10,000), I’m starting to become more focused on some positions that I want to accumulate.  One of these has been Philip Morris Int’l (PM).

For a potential play, you can now sell a January 2011 put with a $40 strike price for $3.20 premium.  Note that you can collect $320 on essentially $4000 in cash (for every put contract) which is an 8% return.  It’s actually slightly higher since the time to hold the option is less than a year.

Compare the $3.20 you can collect versus holding shares of the stock.  The annual dividend payout on PM is $2.32.  So by selling the put versus holding the stock, you can earn an additional $.88 per share between now and January of next year.  Even more, you’re essentially obligated to PM shares at $40 per share versus today’s price of around $46 per share, so if you end up owning the shares, your cost basis is based on $40 per share versus today’s price.

I think it’s a great way to collect an 8% return with very low risk.  Your only risk is if PM goes well below $40 and you’re required to purchase the shares at $40; obviously, this is still better than buying shares at $46.  PM is a great long term holding, consider selling puts to pick up shares at lower prices and earn a higher return in the near term.

Remember, if you do this strategy, be sure you have the cash in your account to purchase the shares if the strike price hits.

If you want to be more aggressive, and you wait for the market to move even lower, you will potentially be able to sell the Jan 2011 $40 Puts for even more income, or target a strike price even lower than $40.  Then again, you might not get that opportunity.

Disclosure: I hold shares of Philip Morris Int’l (PM) and am looking to buy more as the market move lower.

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