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Archer Daniels Midland(ADM-N)

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Archer-Daniels-Midland Stock Is Still Cheap for Short Put Income Players

Barchart - Sun Feb 19, 2023

Archer-Daniels-Midland (ADM) reported strong earnings on Jan. 26 and, in fact, raised its dividend by 12.5%. That marks the 50th year in a row it has raised the dividend, signifying strong free cash flow. 

Nevertheless, the stock has been sagging, down 9% YTD, despite how cheap the stock is now. As a result, some investors are shorting out-of-the-money (OTM) put options to create extra income.

ADM is an agriculture company that produces seeds, sweeteners (carbohydrate products), and nutrition products and services (flavors, etc.). This year, although earnings are expected to be lower than in 2022, analysts are still projecting $6.91 in earnings per share (EPS).

That puts ADM stock, at $81.59 as of Feb. 17, on a forward multiple of just 11.8x. Moreover, the dividend, at $1.80 annually, gives it an adequate yield of 2.21%. But some investors, seeing the stock's weakness, want to make more income. They can do this profitably by selling OTM put options.

OTM Puts Are Stil Profitable

On Jan. 4 we wrote about an unusual stock options trade involving ADM stock. Some large investor(s) had shorted OTM ADM puts for the March 17, 2023, expiration period at the $80 strike price. They deemed this worthwhile since the premium received was $1.93 per share. At the time, ADM stock was at $87.99, so there was plenty of room for the stock to fall before the trade was not profitable.

That trade is still working out well. Over one month later, on Feb 17, the $80 puts are trading lower at $1.20 per put contract. In other words, the put price has fallen $0.73 from $1.93 per put contract and the investor has made 37.9% (i.e., $0.73/$1.93) in a little over one month.

ADM Puts - Expiring March 17, 2023 - Barchart - As of Feb. 17, 2023

However, now the investor may want to roll that trade over into a lower OTM strike price. For example, the $75 strike price put for March 17 trades for 32 cents and the $72.50 strike has a premium of 18 cents. 

These strike prices are 8% and 11% lower than today's price, giving the investor less risk that the put contract will be exercised. That would force the investor in these short puts to buy ADM stock at these OTM strike prices.

Note that the investor could theoretically just keep the $80 strike price puts. After all, there are many of these put contracts outstanding - over 16,000 of them. So, it could probably disturb the stock if the large put contract investor moves out of the $80 strike price and then shorts the $75 or $72.50 contracts.

Even if the investor stays in the $80.00 put contract, their breakeven is still at $78.07 (i.e., $80 - $1.93 premium received). It also has one month for this to occur and the closer that period occurs the quicker the premium price will fall. Most of the decay in a put price occurs in the last 30 days of its expiration period. So, it may behoove the $80 short-put player to hang on. That is likely why there is such a large difference between the $80 and the $75 strike price premiums.

Nevertheless, this shows that investors have good alternatives to increase their income by shorting OTM ADM puts in a near-term expiration period.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.