Selling put options is a great way to generate income and solid annualized returns by taking less risk than owning the same amount of common stock long. When I look for these trades I target earning 2% or more for every 30 days of expiration time.
Selling a put option is a strategy where you are slightly bullish on a stock and this reduces your risk by being able to name the price (called the strike price) you are willing to pay for the company. This contract is valid for a specific amount of time called the expiration date.
These terms are set by you and for agreeing you are paid upfront for the potential obligation to buy 100 shares of stock for every put sold. I typically look at options expiration dates between two weeks and two months.
Markets are always moving.
The S&P 500 hardly moves more than half a percent per day on average while individual stocks can easily move 5 to 10% up or down. These individual stock moves provide investors the opportunity to collect premium income by selling puts to own stock or selling calls against stock you already own.
Collecting cash upfront is also far easier and less risky than speculating on the next big move. And the returns can be very attractive generating between 15 and 25% annualized.
Walmart (WMT) has pullback providing a great opportunity to sell put options.
Trade details:
Sell to open the October 15, $145 puts on Walmart for $2.65 or more using a limit order. You will be paid 1.8% upfront on your purchase obligation of $14,500 per option sold (100 shares * $145).
At expiration if shares are above $145: put sellers will keep the premium and realize a 23% annualized return.
At expiration if shares are below $145: put sellers will buy shares at a 1.5% discount to yesterday's closing price. You can not potentially earn dividends and sell covered calls for additional income.
For protection use a 25% trailing stop loss on your cost basis at about $106.76 ([$145 - $2.65] * 0.75).
Walmart is a strong and steady business but you can use this boring company to earn more than 15% per year which is exciting to me.
Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.
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