Tuesday, October 21, 2008

Selling Puts on High Dividend Stocks

As part of my mini-series on taking advantage of high options volatility, today we're looking at selling cash-secured puts to not only generate income but as a tool to buy high dividend stocks that you'd like to own. Note that this option strategy IS allowed in retirement accounts (check with your broker). If you're unfamiliar with this strategy, please review Recipe #6: Put Pot Pie located under Recipes and Cooking Tools, and if you don't know anything about options, DO NOT ATTEMPT THIS NOR ANY OTHER OPTIONS STRATEGY! At least until you paper trade it for a while. (Sorry for yelling but I can't emphasize this enough--options are not as simple as most people will have you believe. They're like anything else--you need to get some experience before you can start making consistent money with them.)

The set-up
I'm looking for rich options on lower priced stocks that pay a good dividend. Here are the parameters I input into my options strategy software:

Stock Price < $50
Dividend Yield > 3%
Black-Scholes ratio (historic) > 1 (looking for overpriced options)
Black-Scholes ratio (SIV) > 1 (looking for overpriced options)
Open Interest > 100 (to provide liquidity)

The results
Here's the chart of my four picks: (Click on chart for larger view.)



It's no surprise that it's comprised of two real-estate investment trusts (REITs) and shippers. This list is meant to be a springboard for your own research. If you like any of these, wait until the stock trades at a relative low and put in a limit order (usually between the bid and the ask). Remember to make sure that you have enough cash in your account to cover the cost of the stock should you be forced to buy it and check with your broker concerning margin requirements. (If you have the cash free and clear it shouldn't be a problem.)

All of these stocks have been badly beaten down, but that doesn't mean they can't drop further. I just think that even if you did apply this strategy and got the stock put to you, at least you'll have a juicy dividend to assuage your grief, not to mention the extra downside protection afforded by the sale of the put.

In the next couple of days, I'll be looking at other high-dividend stock plays as well as premium-rich covered calls.

1 comment:

Media in Trouble said...

HI,
Great post...I like this idea and just thougt about doing it for POT.

But as a long term play with LEAPs...

Anyway my question is...do you pay or recieve the dividend if you are holding at the ex dividend date?