Only days after selling my first short put on ADM I sold another short put. Last week I sold a September 16 EMR contract with a $48 strike price.
The specifics of my trade is that EMR will not go beneath $48 by September 16, 2016 in exchange for $25.00 (.25 price x 100 shares) paid up front. First and foremost (and this is vital for my risk tolerance) I would not be upset if the stock was put to me. EMR is a dividend champion with decades of dividend growth history, and interestingly enough I already own 26 shares (bought with an average price of about $48/share).
Applying my Short Put Option Methodology
I Will Only Buy Naked Puts on Those Stocks that Have Already Passed my Stock Screen
Like my last purchase, I had to go outside my normal undervalued stock screen to find a something I want to sell. Emerson Electrical Company is,
…engaged in offering technology and engineering together that provides solutions for customers in industrial, commercial, and consumer markets around the world. The company operates through five business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. The Process Management segment provides measurement, control and diagnostic capabilities for automated industrial processes. The Industrial Automation segment provides integrated manufacturing solutions to its customers at the source of manufacturing their own products. The Network Power segment designs, manufactures, installs and maintains products providing grid-to-chip electric power conditioning. The Climate Technologies segment provides products and services for the climate control industry. The Company’s Commercial & Residential Solutions segment offers a range of tools, storage products and appliance solutions
EMR is a bit over valued given my usual metrics:
- P/E 19.1 vs 25.2 (industry)
- Operating Margin 17.1 vs 12.9 (industry)
- P/B 4.7 vs 3.4 (Industry)
- Yield 3.38%
- Payout Ratio 64.3%
While EMR doesn’t meet my long term metrics, it is a great company that I wouldn’t mind owning at a lower price.
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.
It is hard to tell but that dip was 6 – 7 months long. I’d be happy to own the stock for a couple months, collect dividends and sell covered calls. In addition that big drop took 20 or so days to occur, so it is not like that happens over night.
I Will Only Risk 50 to 75% of my Current Capital on Margin
This is a bolt-on strategy to increase returns/income, and as such, I can’t even imagine waking up to a margin call from fidelity where they are demanding me to fund my account with additional capital (versus having to, reluctantly, sell positions).
My Account is worth approximately $12,000 and I already have a $3,800 open sell so this sale could be another $4,800 bringing my total up to $8,600. This puts me at 71% of my total value. So currently, I can’t sell any more positions until the ADM – $3,800 clears next month, my account value increases, or I close out one of these trades for a smaller profit
I will Spread out the Expiration Date
In an effort to further minimize risk I am going to use multiple expiration dates instead of concentrating on one date. I think Directive #4 will allow me to avoid a broad market sell off and being put with multiple new positions. I think I am looking at a rolling 30 to 60 day option contracts.
My open options are August 16 and September 16 so they are spread out.
All Premiums Received will be Reinvested the Following Month
I owe my dividend growth stocks an additional $25 in purchases next month (in addition to my $21 from last trade).