By Paul Price of Market Shadows
We closed-out our Cummins (CMI) January 2014 $110 put for $1.40 per share on September 19 when the shares were riding high. We booked a $960 gain in just over seven months. The details of that Sold to Open/Bought to Close (STO/BTC) transaction are shown below.
This morning CMI shares are down more than 8% after a badly received quarterly report. We still like the stock. Accordingly we sold a new CMI January 2015, $110 strike price put contract for $1040.00 ($10.40 per share).
As long as we are short the put, we are committed to buy 100 CMI shares at a net cost of $110 (the strike price) minus $10.40 (the put premium) = $99.60 per share. Thus $99.60 is our break-even. Cummins has not spent one day in 2013 below our break-even price on this trade. Cummins traded as high as $139.17 just days ago.
The great put price comes from the combination of today’s big drop and the increased implied volatility–factors which contribute to great timing for put sales.
The new trade will be recorded in our Virtual Put Writing Portfolio.
Maximum profit would be keeping the $1,040 we received upon sale of the put without ever having to buy the stock. We'll achieve that result if CMI remains above $110 on the Jan. 17, 2015 expiration date. Our maximum risk is to be forced to buy 100 shares of CMI at less than $100 (net). Since I think CMI is at a good price below $100, I don't mind committing to buying it cheaper at $99.60.
Full details of all closed-out and open put positions: Virtual Put Writing Portfolio.
