On Friday when SO dipped below 45 to ~44.70 I entered into the following transaction:
09/14/12 STO 3 SO Nov 17 43 2012 Puts @.5 137.69
With Bernanke's latest moves the "risk on" trades are in vogue. That provides weakness/opportunity in the "risk off" trades, i.e., utilities, telecom and healthcare. Southern Company is my favorite utility stock and it has a rising dividend. I have been patiently waiting for the stock to drop below 45 so I could write some out of the money puts.
SO currently has a yield of 4.35%. If put to us our yield on cost will be 4.61% with another dividend rise announcement expected in April 2013. I feel that the yield will buoy the price of the stock.
This is a 64 day trade with an initial maintenance requirement of $2218. If these puts expire worthless we will earn 6.2% return on maintenance or 35.36% annual. If the stock price drops I anticipate volatility will rise and we will be able to roll down and/or out for a net credit. As such, an exit strategy is in place.
This trade illustrates the remarkable returns that naked put selling can generate. I mean this is a utility stock for goodness sake :)
Interesting post on naked puts.
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