Philip Morris International (PM) is trading near 52-week high. If you look at the two years following table you can see it usually experiences some kind of a setback after trade to new highs.
The graph shows that Philip Morris repeated this pattern several times over the past two years, and it appears that the potential to do it again. It also has a fairly strong support in the 80-83 range. The following strategy can be used to take advantage of this situation. Please note that you need to have a reserve, as the first part of the strategy entails selling covered calls. If you do not own stock, you can implement the second part of this strategy.
Before we get to the point of this strategy, let’s look at some of the benefits associated with the sale of puts and covered calls.
The advantages of selling covered calls
- Income generation
- Two. Downside protection and reduce the volatility of the portfolio
- Three. Pre-yield
- Conversion of ordinary shares in payment of dividend shares
- Investors looking for more detailed information about the benefits of selling covered calls can read our work on the “Benefits Covered write strategy.”
The advantages of selling naked put
The investor usually sells the option, if his / her perspective on the main bullish security.
- In essence, you pay for putting “limit order” for the shares or stocks, you would not mind owning.
- It allows you to earn income in a neutral or growing market.
- Acquisition of shares in a short put strategy is widely used, many retailers, and is considered one of the most conservative option strategies. This strategy is very similar to the covered call strategy.
- The safest option is to make sure the set is the “money provided.” It simply means that you have enough money in the account to purchase a particular stock if it trades below the strike price. Your final price will be a little bit lower when you add the premium you were paid in advance in the equation.
Every day you arrive at the decay time as long as the stock price does not drop significantly. If it falls below the strike you sold a put on, you get to buy the shares you want at the price you want.
The proposed strategy for Philip Morris
Jan 2013, 95 calls are currently trading in the range 2.33-2.41. The sale of these calls at $ 2.33 or higher. In this example we will assume that the calls are sold for $ 2.33. For each contract traded, $ 233 will be credited to your account. We sell covered calls and calls are not naked, so you have to have this stock in order to be able to put this part of the strategy in the game. If the stock is trading above the exercise price, the shares may be revoked. If this happens, you will leave with a gain of 7.05% (4.80 and 2.33 from the warehouse of the premium you received when you sold the call). If the shares are not withdrawn, your winnings will be 2.45%.
Sell the Jan 2013, 80, puts on a $ 2.08 or higher. For each put sold, $ 208 will be credited to your account. If the stock is trading below the strike price Put sold, shares may be assigned to your account. Your final price will be $ 77.92. If the shares are not tied to your account, you’ll leave with a gain of about 2.6%.
This strategy gives you the ability to collect two awards in addition to the dividend – one of the selling covered calls, and others from the Bond brand of cigaretes.
Shares withdrawn, but the stock is not traded below the price of puts were sold. In this case, your gain of 9.65% was (7.05% plus 2.6%).
Shares not withdrawn, and the stocks are not traded below the price of the put was sold on. Your winnings in this case are 5.05% (2.6% plus 2.45%).
Your shares withdrawn, and the stock trades below the put strike price were sold. In this case, you will receive shares at 77.92, and you leave with a gain of 7.05%.
Your shares are not withdrawn, but the stock is trading below the strike price Put sold. In this case, you get a much lower price of 77.92, and leave with a small increase in the 2.45% of premiums received for the sale of the call.
Shares may trade above the price you sold the calls. If this happens, your shares may be withdrawn. One simple way to avoid this would be a challenge if the stock is trading above the strike price, and you still want to hold on to stocks.
Another risk factor is that if the stock is trading below the price you sold puts on, the shares may be assigned to your account. It should not be a big problem, as one only sells sets when the bullish on long-term prospects for stocks. If you have a change of heart and I feel that the shares could trade much lower price, you can roll sets. You buy the puts you sold back and sell new ways in which a bit of money. Shares are usually appointed for the last trading option.
This strategy should be used only by those who are bullish on the stock, as it is likely that the shares may be assigned to your account. In addition, there is a chance that you may lose the shares if the stock is trading above the price you sold the calls. Investors are looking for other ideas may find this article to be interesting.
Disclosure: I have no positions in any stocks mentioned, and does not intend to initiate any positions within the next 72 hours. EPS and price schedules Vs industry, as well as most of the historical data used in this paper were obtained from zacks.com. Options table are derived from money.msn.com.
Warning: It is important that you do your due diligence, and then determine if the above strategy is suitable for your level of risk. Latin principle of “caveat emptor” (let the buyer beware) applies.