10 October 2023 Puts Options Trades

Donald E.L. Johnson - Stock Picking, Options Trading for Income - Sun Sep 24, 2023

By Donald E. L. Johnson

Cautious Speculator

10 cash secured puts trades could yield 10.7% in options premiums.
A Bloomberg Business Week article makes Dollar General a short’s dream, and I will not sell puts or calls on it.
Trading puts on a falling knife like DG can be costly.

Since September 14, I’ve sold cash secured puts on nine stocks that I either own or would like to buy at the options trades’ strikes, or discounted prices. The estimated premium yields on the 10 trades average about 10.7%, and the margin of safety, or discount averages about 3.8%.

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The above spreadsheet shows that I have sold cash secured puts on Danaher Corp (DHR), Dow Inc. (DOW), Intuitive Surgical Inc. (ISRG), JPM Equity Premium Income ETF (JEPI), Laboratory Corp. of America (LH), Pfizer Inc. (PFE), Visa Inc. (V), Exxon Mobil Corp. (XOM) and Zimmer Biomet Holdings (ZBH).

When I posted my latest updates on my covered calls and puts trades on Saturday, I wrote that I might sell covered calls on Dollar General (DG) , after they are assigned to me at the end of the week. I won’t.

Here’s why.

This morning Bloomberg Business Week sent an email about its September 20 cover story:

This morning I posted this in the comments section of my last two posts:

This Business Week cover story about Dollar General probably explains why the stock is in the tank and probably is headed lower. https://www.bloomberg.com/news/features/2023-09-20/dollar-general-employees-say-it-s-a-terrible-place-to-work

I don’t subscribe to Business Week, but maybe I should. I think I got the email because I subscribe to Bloomberg.com. This is an incredibly disappointing story for several reasons.

First, please review my disclaimer below.

I broke my rule to not trade falling knives and to do good due diligence on every stock I trade. I thought I knew DG after following it for decades. The Business Week story surprised me and a lot of other people, probably because we don’t shop at Dollar General stores or know any of its employees.

Second, while DG was rated on Barchart.com as a 100% sell and the charts confirmed that rating, analysts thought it still was a moderate buy. DG is followed by 22 Wall Street analysts, according to Barchart. The highest analyst target price for DG is $270. The mean target price is $152.76. And the lowest target price is $76. As I posted Saturday before I saw the Business Week piece, those target prices look optimistic.

On Friday, DG closed at $108.14, down 13.5% from my $125 strike price. I’m in one DG put for 100 shares. My loss at the moments about $1,686. Who knows where it will be by the close of trading Friday or when I buy the put back before the puts option expires?

Third, DG’s falling stock price, negative articles about retailers and all the charts showed DG is in trouble with investors. When a stock is down sharply from its recent highs that usually means that something is wrong with the company. It doesn’t mean that a low priced stock is cheap.

The lesson, again, is when a stock or ETF gaps down, most traders probably should avoid it. Search the internet for stories that explain why the stock is in trouble. And avoid it.

When a company’s reputation is questioned the way Dollar General’s is, it can take years for the company to over come a bad reputation. That has happened to other companies over and over again.

When anyone touts a trouble company’s stock, question not only the company, but also the tout. I did not tout the stock. I just traded it and reported that lousy trade.

Selling puts is a bullish trade because the seller of puts contracts to buy a stock or exchange traded fund at the strike price if the price of the equity is below the strike price when the puts option expires.

The nine stocks that I’ve sold puts on with October expiration dates all looked good to me when I sold the puts. They still look like good companies even though many of them are trading below the prices they were at when I sold the puts. There is a chance that last week’s market correction will end and that my trades will be above their strike prices before their puts options expire. That’s a hope, not a guarantee.

If a dividend stock investor sold one puts options for 100 shares per contract on all nine of the stocks shown above, that investor would put up about $135,000 in cash to secure those puts trades. The net investment after deducting the options premiums on the trades would be about $132,240.

The average potential options premiums return on risk would be about 10.7%. If an investor bought all nine stocks at the net debit price (strike minus premium per share), the discount (margin of safety) from Friday’s closing price would be about 3.8%. The average dividend yield on the nine stocks would be about 3%.

This month’s puts trades at one puts options contract per stock would give an investor about $978 in options premiums income, or $14,946 annualized if the same trades or kind of trades could be replicated every 13 to 26 days over the next 365 days.

Of course, prices have changed since I did my trades, and the results may differ. Indeed, with many of the stocks’ prices down, traders who did the same trades next week might get higher puts options prices and better returns on risk.

I expect to sell puts on additional stocks and ETFs during October.

I respond to comments on the comments section where readers’ comments are posted. That is, if you have a question about this article or other comments, I'll discuss your questions with you in the comments section below this article.