Just before the end of close on Friday, February 8, 2013, I sold my first put, selling one contract for Cisco Systems, Inc. (CSCO). With all of my options trades, I only make them if I desire to own the underlying position, with CSCO being a company I desire to hold long-term.
Without a long history of paying dividends (started March of 2011), my expectation is that CSCO will continue to increase their payout, and have the cash and availability to do so. Cisco currently has a payout ratio of less than 19% and over $45 billion in cash and short-term investments on the books. They are in a financial position to continue this growth should their revenue stagnate, which it hasn’t. CSCO currently has a quarterly dividend of $0.14 which yields approximately 2.65%.
With an expiration date of February 16, 2013, I sold a $21 put for $0.46 per share, resulting in a net premium of $40.34 with total trading costs of $5.66. This was just too rich of a possible return with only five trading days till expiration.
With this trade, my possible outcomes will be:
CSCO trades for less than $21: I will be assigned the stock and keep the option premium. Based on this outcome, I will have a net cost basis of $20.60 per share, giving me a yield on cost of 2.72%.
CSCO trades for more than $21: I will keep the option premium, and probably immediately sell another put. Given an eight-day window on the option, repeating this transaction for the entire year would have net me a whopping 87.6% return (obviously incredibly unlikely, but I’ll take it!).
Keep track of all my trades under the Investments and Trades pages.
Investing would be easy if we could get an 87% annual return, I could not invest any more money and hit FI in 2-3 years. That’s a pretty hefty premium, I’m assuming that it was trading right around the $21 mark when you sold it. Looks like a good trade since you want to own CSCO. Got a preference on how it works out?
Haha wouldn’t we all?
Yes, it was trading just above $21, but was still a surprising premium for such a short period (5 trading days).
Honestly, I wouldn’t mind either way, but if I had to pick, I’d go with passing on the assignment this go around, sell another put and have it assign on that one. That way in just over a week I could double up on picking up premiums, and hopefully double up on the discount on the purchase of the stock.
I was thinking about it, and every put that I sell I would want to expire worthless so I keep the premium and can keep selling more puts until I’m getting very close to FI then start having them be assigned. The returns on options that expire are usually much better than holding the stock, especially from an income perspective.
I agree, it is certainly a fascinating, and truth be told, appealing option (pun intended). I mean, if I could consistently get a 20-40% return from every option I sold, surely owning the underlying stock would be irrelevant as I built up my financial nut. Thought provoking for sure!
At this rate, you will be a pro at selling puts in no time! I do like CSCO but haven’t done enough research on the company. They do have a ton of cash in the bank. My INTC position is so large though I’m not looking to add another tech position at this time. If I did, CSCO would probably be high on the list.
Thanks AAI! Yeah, I think the tech companies (APPL, MSFT, GOOG, ORCL, and CSCO) hoarding cash will have little recourse but to raise their dividends or doing significant buybacks. In fact, I’m not sure what the $332 billion combined in cash won’t buy… so for me, it is a slight speculative play (on the dividend strongly increasing), but I think CSCO will be be a good purchase in the long run.