A week ago I Sold to Open HOG #2 (I am hoping to one day be up to HOG #2,270 without ever actually being put the stock), and today I bought to close the same contract. With that possible outstanding risk of being put $4,500 worth of Harley Davidson stock being removed I immediately sold another put.
Buying to Close HOG #2
On 7/28/2016 I sold a put with a strike price of $45 for a premium of .27 ($27.00) and I closed that same position out one week later at .13 ($13.00). This leaves me with a profit of $18.00, a P/L % of .31% and an annualized return of 16.22%. I have to keep reminding myself that despite the actual dollars being small, it is the percentage that matters (and it doesn’t hurt that I have a TON of free trades still left).
That trade put $4,500 of my margin at risk so with that cleared up I immediately started to look for another opportunity to sell another options contract.
Selling to Open Met
Let’s go through Methodology
I Will Only Buy Naked Puts on Those Stocks that Pass my Stock Screen
- The company needs to have a P/E less than 20; and
- The company needs to have at least a 2.5% yield; and
- The company has to have at least 5 years of dividend history; and
- The company has to have a payout ratio of under 50%
MET has a P/E of 8.5, has a yield of 4.05%, has paid a dividend for more than 5 years and has a payout ratio of 29%.
The Strike Price Will be a Price that Has only been hit a handful of Times on a Multi-Year Chart
It is my goal to collect the premium and not actually get stock put to me, so it would seem prudent to choose a price that has rarely been hit. MET recently took a really bad hit where they already dropped 10%, I am taking the position that it is unlikely they are dropping another 11%.
I Will Only Risk 50 to 75% of my Current Capital on Margin
Prior to closing out my HOG put I was at about 77% of my previous month’s balance. I am going to use $13,000 instead of $12,000 for August because that is closer the moving balance. So I still have my 48 strike open on EMR an this will be $3,500 if it is put to me which leads me to a 64% utilization rate ((4,800+3,500)/13,000). I’d be happy if I could find another small put for this month!
I will Spread out the Expiration Date
Right now both my open contracts are for September. If I buy anything else without closing I’ll have to look for different expiration dates.
All Premiums Received will be Reinvested the Following Month
My next purchase has to be increased by:
- $9 – ADM Trade Closed
- $9 – HOG #1 Trade Closed
- $13 – Hog #2 Trade Closed
- $25 – EMR Not Closed
- $33 – MET Not Closed
Total of $89 I wouldn’t have had otherwise!