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Started By
Message
Can Someone w/experience Tell me the negatives of deep out of the money puts
Posted on 6/14/13 at 12:52 am
Posted on 6/14/13 at 12:52 am
If you have the cash on hand to buy the stock if its put to you and you understand the risk involved with said companies. I've been a buy and hold investor for nearly 20 years and I have spent the last few months learning more and more about "selling puts" and I have one big question.
Ok, I understand selling weekly puts would generate more income but Im interested in some way long from now, deep out of the money $70 puts on my favorite stock phillip morris which is $92.58 as of today. With 2 dividend increases between now and the strike date, the dividend should be around $4.21 at that time and thus at $70 we would be talking a massive yield and I wouldn't mind buying it at that price, actually I'd jizz my pants....I personally see $100+ in 18 months but if shtf and we see $70 somehow I would buy...
What is the downside of selling those $70 jan 2015 puts which if I use the margin in my account would generate a cash on cash return of 50%+ in the next 18 months and in a worst case scenario I have to buy more shares at $70 if somehow it falls that far.....which again I have the spare unused cash in my account and I can't see being an issue bc the yield would be well over 5% and I'd be diving in anyways at that point
Am I missing something? I either collect a great premium or I buy a stock I love at $92.58 today for $70 in 18 months?
Anyone else here sell puts?
Ok, I understand selling weekly puts would generate more income but Im interested in some way long from now, deep out of the money $70 puts on my favorite stock phillip morris which is $92.58 as of today. With 2 dividend increases between now and the strike date, the dividend should be around $4.21 at that time and thus at $70 we would be talking a massive yield and I wouldn't mind buying it at that price, actually I'd jizz my pants....I personally see $100+ in 18 months but if shtf and we see $70 somehow I would buy...
What is the downside of selling those $70 jan 2015 puts which if I use the margin in my account would generate a cash on cash return of 50%+ in the next 18 months and in a worst case scenario I have to buy more shares at $70 if somehow it falls that far.....which again I have the spare unused cash in my account and I can't see being an issue bc the yield would be well over 5% and I'd be diving in anyways at that point
Am I missing something? I either collect a great premium or I buy a stock I love at $92.58 today for $70 in 18 months?
Anyone else here sell puts?
This post was edited on 6/14/13 at 12:59 am
3
Posted on 6/14/13 at 2:21 am to ThaBigFella
quote:
deep out of the money puts
quote:
great premium
does not compute.
quote:JAN 2014 $70 put at 1.15 and that looks on the high end.
PM1418M70-E 1.15 0.0 0.85 0.92 0 5526
Posted on 6/14/13 at 7:29 am to southernelite
Im looking for etrade and it looks like Philip Morris Jan 2015 put is @ $3.85 ie if I sell a contract for 100 shares I collect $385 in premium minus transaction fee.
Am I reading it wrong? I thought 10 contracts would be a commitment of $70,000(worst case) and I would collect $3,850 in premium regardless of the outcome so.....
1.I either get "put" PM stock @ $70 and keeps $3.85/share so effectively $66.15/share in 18 months
or
2. PM stays over $70 and I just keep $3,850
Am I reading this wrong? The stock is $92.58 fwiw today
and bc you could use your margin the cash on on cash return is nearly 40%.....I have the cash to buy if it crashes down that far but I dont have to tie up the cash today
Am I reading it wrong? I thought 10 contracts would be a commitment of $70,000(worst case) and I would collect $3,850 in premium regardless of the outcome so.....
1.I either get "put" PM stock @ $70 and keeps $3.85/share so effectively $66.15/share in 18 months
or
2. PM stays over $70 and I just keep $3,850
Am I reading this wrong? The stock is $92.58 fwiw today
and bc you could use your margin the cash on on cash return is nearly 40%.....I have the cash to buy if it crashes down that far but I dont have to tie up the cash today
This post was edited on 6/14/13 at 7:31 am
Posted on 6/14/13 at 8:40 am to ThaBigFella
Sorry, I pulled information for the 14 expiration not the 15 expiration.
Posted on 6/14/13 at 8:54 am to southernelite
The reason I ask is bc I know there is no such thing as easy money in the market BUT if Im getting this correct
I can use per contract... $980 in margin to make $385 in the next 18 months and worst case scenario I have to pay $7,000 for stock I'd pay $9300 for as of this moment?
This sounds like I've found something I really really like, so I know Im wrong somehow, trying to see where haha
I can use per contract... $980 in margin to make $385 in the next 18 months and worst case scenario I have to pay $7,000 for stock I'd pay $9300 for as of this moment?
This sounds like I've found something I really really like, so I know Im wrong somehow, trying to see where haha
Posted on 6/14/13 at 9:01 am to ThaBigFella
Didn't we already have almost this same discussion in a thread you started about a month ago? Or, am I having a severe case of deja vu?
Posted on 6/14/13 at 9:10 am to ThaBigFella
quote:
I can use per contract... $980 in margin to make $385 in the next 18 months and worst case scenario I have to pay $7,000 for stock I'd pay $9300 for as of this moment?
Not an expert by any means, but I believe the "flaw" here is that you assume you will be willing to pay $7K for it 18 months from now, under any conditions. You can't know this and that's the risk I believe.
Posted on 6/14/13 at 9:10 am to LSURussian
quote:
Or, am I having a severe case of deja vu?
Me and you both.
ETA: We were right....
This post was edited on 6/14/13 at 9:13 am
Posted on 6/14/13 at 9:29 am to OnTheBrink
I wonder how much of this guys portfolio is in Phillip Morris, sounds like a lot.
Posted on 6/14/13 at 9:40 am to southernelite
I guess it's bc it sounds too good to be true, why wouldn't more people be employing this strategy?
I mean take the put at todays price...if you like the stock today you could buy 100 shares or you could collect $1300 in a 18 month put.
The odds of shares rising $13 to make $1300 is decent but the odds of shares holding flat or rising $.01-$12.99 is much higher and thus I feel its better to sell the puts....plus in the event you are put the shares its at $93-$13 so $80 basically if you keep the premium.
I've been kicking it around for a few weeks now and I just see no downside whatsoever but I know whenever you feel that way about a strategy it's usually a failure.
so thats why I seek someone whose done this in the past and can give me the insight
and yes I dont mind paying $70 in 18 months regardless bc the dividend should be over $4.20 give or take by then with an increase this september and next and the yield will be near 6% on a blue chip so yes please!
what im saying is even with a catastrophic event i doubt ill ever see $70 again, and if I do wow the yield will be nuts
I mean take the put at todays price...if you like the stock today you could buy 100 shares or you could collect $1300 in a 18 month put.
The odds of shares rising $13 to make $1300 is decent but the odds of shares holding flat or rising $.01-$12.99 is much higher and thus I feel its better to sell the puts....plus in the event you are put the shares its at $93-$13 so $80 basically if you keep the premium.
I've been kicking it around for a few weeks now and I just see no downside whatsoever but I know whenever you feel that way about a strategy it's usually a failure.
so thats why I seek someone whose done this in the past and can give me the insight
and yes I dont mind paying $70 in 18 months regardless bc the dividend should be over $4.20 give or take by then with an increase this september and next and the yield will be near 6% on a blue chip so yes please!
what im saying is even with a catastrophic event i doubt ill ever see $70 again, and if I do wow the yield will be nuts
This post was edited on 6/14/13 at 9:46 am
Posted on 6/14/13 at 9:49 am to ThaBigFella
quote:
so thats why I seek someone whose done this in the past and can give me the insight
From MrPerfect in the other thread:
quote:
someone out there is polishing the silver they bought while i learned this lesson the hard way... twice
Posted on 6/14/13 at 9:50 am to ThaBigFella
quote:
and I just see no downside whatsoever
Uh-oh....
Posted on 6/14/13 at 10:00 am to LSURussian
that's why i asked.....i know there is no free lunch
Posted on 6/14/13 at 10:01 am to ThaBigFella
quote:
and yes I dont mind paying $70 in 18 months regardless bc the dividend should be over $4.20 give or take by then with an increase this september and next and the yield will be near 6% on a blue chip so yes please!
Well, you seem to have convinced yourself that you are willing to buy PM at any price that is lower than today's, under any circumstances for the foreseeable future, so maybe it's not a bad deal from your point of view.
Why don't you just try it? Write a couple of options that are way out of the money and if you can sleep at night, increase your exposure.
Posted on 6/14/13 at 10:03 am to ZereauxSum
thanks zereauxsum, I just feel a near 25% drop in the share price while the dividend will probably increase 20%+ in that timeframe is a very very very low risk event
Posted on 6/14/13 at 10:09 am to ThaBigFella
quote:
that's why i asked.....i know there is no free lunch
I have not spent time analyzing your hypothesis (nor will I, sorry) but all I need to know is if you think you have found a sure way to make money with "no downside," you haven't.
If you had, others who spend their entire lives analyzing such investment positions and who have tens or even hundreds of millions of dollars to invest would have already loaded up on the options you think guarantee you a profit to the point where they would have moved the market prices.
Posted on 6/14/13 at 10:20 am to LSURussian
I fully agree with you russian, but as someone whose been in a stock for over half his life, when I see the option to purchase the shares at lets $55 in 2015 when I know the dividend is going to be well over $4 I feel like buying $55 puts with a 7.5% dividend is pretty much free money....and worst case....I have to buy it at $5 if it somehow fell that far
I mean it just seems easy and thats why im scared and wanted to ask around before I did
I mean it just seems easy and thats why im scared and wanted to ask around before I did
Posted on 6/14/13 at 10:26 am to ThaBigFella
Do it and let us know how it works out.....
Posted on 6/14/13 at 10:56 am to ThaBigFella
quote:
I just feel a near 25% drop in the share price while the dividend will probably increase 20%+ in that timeframe is a very very very low risk event
Are you sure the dividend will increase if the share price drops 25%? These may well not be uncorrelated events.
Yes, the absolute probability of a share price drop like that may be low, but the conditional probability of a dividend non-increase, or even a dividend cut, or even a substantial dividend cut, given whatever makes the share price drop may not be low at all.
This may be a good opportunity for you, with a good expected return, but I don't think you should consider the dividend to be safe when you consider some circumstance leading to a share price drop.
Posted on 6/14/13 at 11:11 am to tokenBoiler
The dividend is safe man, they've paid it through good times and bad for nearly 100 years through numerous market crashes. The dividend is only 65% of earnings which is low for a company in this field, so not only will they pay but it will grow.
This is why i see this as a slam dunk, the jan 15 2017 $70 put on margin yields 50% the $60 put yields around 30% both would be steals to buy the stock at imho
Apple has some crazy ones too around $300/share for early 2015 and Im long apple as well so again Im so confused on why more people who are long on a stock dont do this instead, the returns seem higher and if your long you feel the price will rise anyways
This is why i see this as a slam dunk, the jan 15 2017 $70 put on margin yields 50% the $60 put yields around 30% both would be steals to buy the stock at imho
Apple has some crazy ones too around $300/share for early 2015 and Im long apple as well so again Im so confused on why more people who are long on a stock dont do this instead, the returns seem higher and if your long you feel the price will rise anyways
This post was edited on 6/14/13 at 11:15 am
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