Harvest Gains while Offsetting Risk
Courtesy of Paul Price
Basic option selling can reward investors while also mitigating some degree of risk. This effect is magnified when writing both calls and puts with the same expiration date and on the same underlying shares. (Note: Buying 100 shares of stock and selling one call and one put is called a "buy/write.")
This is true because at least one of the option buyers has to be wrong when expiration day rolls around. If the shares are above the strike price when the option expires they cannot also be below that same number. In many cases the stock in question may finish close enough to the chosen strike price that both call and put buyers end up losing money.
Selecting a good underlying stock is critical. An undervalued company is more likely to go up over time. Shares that pay dividends create income which reduces absolute risk and dampens downside.
Agricultural equipment manufacturer Deere (DE) provides a great vehicle for buy/write investors after pulling back from a January high of $95.60 to last week’s close at $87.72. The company’s long-term results have been stellar.
Deere now trades for just 10.3 times the projected EPS for the FY ending this October. DE’s quarterly distribution was raised to 51 cents recently putting the current yield at an attractive 2.33%. The next ex-dividend date comes on Tuesday, March 26…
Keep reading Paul's Harvest Gains On A Quality Name While Mitigating Risk…
