New Trade: Southern Company (SO) Naked Puts

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 :)

Profitable Trade (SO) Southern Company

I recently closed out the following position in Southern Company in a traditional IRA account. I closed this position as it was basically dead money with most of the time decay drained from the transaction.  This series of trades illustrates how using my enhanced income or double dividend strategy one can achieve double dividend returns, even on utility stocks.

1. 7/19/11           Bought 100 SO @ 39.94                                                 -4003.98
2. 7/19/11           STO 1 Jan 21 2012 40 @ 1.22                                          +111.25
3. 9/6/11             Dividend                                                                          +47.25
4. 11/30/11         BTC 1 Jan 21 2012 40 @ 4.10                                           -420.76
5. 11/30/11         Sold 100 SO @ 43.82                                                      +4372.10
6. 12/6/11           Dividend                                                                           +47.25

We earned $153.11 on our initial investment of $3892.73 in ~14 weeks. This is a return of 3.9% or 14.6% annual. We have been selling when others are taking on risk and entering new positions when others are fearfully selling.