During these extremely volatile times option premiums are very high and this is true even for the bluest of the blue chips. Usually the option premiums on stocks like Johnson & Johnson, Proctor & Gamble, Coca-Cola and Pepsi are underwhelming. In this environment, however, I think they provide excellent investment opportunities. Here are a couple of examples.
Johnson & Johnson closed on Friday at $58.23. The December 55 puts are still selling for .75 (or $75) per contract and the January 55 puts are selling for 2.10 (or $210) per contract. If the January 55 was put to a seller their cost basis would be around $53 per share (assuming they wouldn't want too buy to close or roll the positions). During the lambasting the market has received in the last few months J&J has never closed below 55. If one did have the stock put to him/her at 55, with a cost basis of 53 he/she could turn around and sell a covered call on each contract. As of the close Friday the Dec 60 paid a dollar and the Jan 60 paid 2.35 (or $235) per contract. In other words one could expect to receive a minimum of 1.50 per contract to write on the stock which would lower the cost basis it to around $51.50, but possibly less. At $51.50 the stock would yield 3.6% and this is a stock that has raised it's dividend every year for 45 years so it's a rising dividend.
Proctor & Gamble closed at $62.63 on Friday. The Dec 60 puts are paying 1.35 and the Jan 60 puts are paying 3.10. If one were to sell the Jan 60 puts and have them put to him/her the cost basis would be around $57. One could turn around and write covered calls. Dec 65 calls are paying 1.15 and Jan 65 calls are paying 2.55 so one could expect to sell calls for around 2.00 per if the stock was put to them. This brings the cost basis down to around $55 and the yield up to 2.9%. P&G has raised their dividend every year for 54 years.
The cost basis after just 45 days under the scenarios set forth are well below where they are trading now and the yields are better than treasury bonds (although that's not saying much right now), and rising. There is a good chance one could just pocket the premiums and never have the stock put to them but if it was they should be able to covered write their way to profit in fairly short order. One could apply these calculations to other blue chips of their choosing and come to similar conclusions.
As the title of this blog not so sublimely indicates my favorite strategy is to hit singles and collect premiums. This strategy is a neutral to bullish strategy and I have been hearing Jesse Livermore somewhere in the back of my mind telling me "not to fight the tape." You don't need me to tell you that this market and economy are historically weak. As such, I am considering buying some put options.
Nike has an earnings release due out December 17th. Large players have been selling this stock while the small players have been buying. Please feel free to read the latest report from Effective Volume in this regard
http://tinyurl.com/6nl3ke. Interestingly, Nike recently raised it's dividend 9%. I'm reminded that the banks were raising dividends and buying back shares in record numbers before we learned that they were leveraged to the hilt with toxic assets. Some very smart people have suggested that this was a means for their top shareholders and management to loot the corporations but that's a topic for another day. My point is that raising a dividend is not always a sign of a rosy outlook.
From an outsider and layman's perspective it occurs to me that during this time of consumer restraint that family's might not be buying $120 sneakers. They'll either make due with what they have or buy something cheaper. Large players selling into the earnings release confirms that in my mind.
Nike closed at $53.34 on Friday. The Dec 50 puts cost 1.75 and the Jan 50 puts 3.20. Depending on one's appetite for risk these may not be the strike prices or strike dates for everyone. But I find them to be fairly reasonable in this volatile environment and a nice little hedge in case the market tanks on us again. As always I welcome your remarks.
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