Option Income (PHM)

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More Cash Generating Opportunity From Put Selling

For new readers this section goes over the basics of put selling

For those already familiar with this strategy please skip below to the example.

Selling put options is a great way to generate income and solid annualized returns by taking less risk than owning the same amount of common stock long. When I look for these trades I target earning 2% or more for every 30 days of expiration time.

Selling a put option is a strategy where you are slightly bullish on a stock and this reduces your risk by being able to name the price (called the strike price) you are willing to pay for the company. This contract is valid for a specific amount of time called the expiration date.

These terms are set by you and for agreeing you are paid upfront for the potential obligation to buy 100 shares of stock for every put sold. I typically look at options expiration dates between two weeks and two months.

Put Selling Example

Today's stock market is getting harder and harder to find a combination of strong long term uptrend, a great business and reasonable value.

Today's trade example continues to take advantage of the strong trends in the U.S. housing market and by selling put options we can generate extra income, strong returns by taking less risk than buying common stock at the market.

PulteGroup (PHM) presents another nice setup for another put option sell. They are the fourth largest home builder in the U.S. operating in about 25 states. The company recently had its best performance since 2007 with $11 billion in sales. They are also selling homes with a great profit margin for home builders of 12%.

The company has low debt and pays a dividend currently at 1.1% which is rising about 9% per year.

The companies strong performance is not being rewarded by the market as they have a cheap 7.5 EV/EBITDA vs the SP500 at 19.5.

The share price was hit last year like every other company but they quickly recovered and are now pushing new all time highs.


PHM Stock Chart

Trade details: take advantage of the share price trading sideways.

Sell to open the March 19, $47 puts on PHM for $1.60 using a limit order. You will be paid 3.4% upfront on your purchase obligation (for agreeing to purchase 100 shares of stock for every put sold at the $47 price per share).

At expiration if shares are above $47: put sellers will keep the $1.6 for a 34.5% annualized return.

At expiration if shares are below $47: put sellers will buy shares at about 8% discount to yesterday's closing price ($47 - $1.60 / $49.36). Now that you own the shares you can generate more income by selling covered calls.

For protection use a 25% stop loss on your cost basis which will be a stop price of $34.05.


Divider provided by barge


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Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

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