My fellow raptors.  The Lizard King has been away for a few days visiting friends in Del Rio and then performing garage door repair.  I am back with a demonstration of the sort of opportunity that is available in the options market to generate safe income.

As a proxy for “safe”, I ran a screen on the Dividend Contenders list (companies with 10 or more consecutive years of cash distribution increases.)  To add an extra level of safety, I removed banks, MLPs, and REITs.  To add a further level of safety, I ranked each ticker in order or Price to Earnings (P/E), Price to Book (P/B), and Price to Sales (P/S).  The top names in average P/E, P/B, and P/S were selected to examine for written put opportunities.  Some had to be deducted from list due to insufficient liquidity to estimate premiums.  The below table details the results for the top ten companies that survived this difficult screen for financial strength and value pricing.

Ticker P/E P/B P/S Price Strike Premium Expiry Annualized
PRE 6.1 0.81 0.88 119.78 115 0.825 3/20/2015 7.27%
AIZ 9.22 0.88 0.46 66.42 65 1.12 3/20/2015 17.47%
MUR 10.06 1.04 1.64 50.89 50 1.62 3/20/2015 32.85%
RNR 8.19 1.12 3.11 104.44 100 0.93 3/20/2015 9.43%
TRV 10.07 1.4 1.28 108.04 105 1.15 3/20/2015 11.10%
BBL 8.76 1.53 1.8 46.46 45 1.85 3/20/2015 41.68%
ACE 13.36 1.25 1.91 112.96 110 1.1 3/20/2015 10.14%
BHP 9.25 1.61 1.9 48.81 47.5 1.95 3/20/2015 41.62%
ANDE 11.3 1.52 0.28 44.4 40 0.5 3/20/2015 12.67%
COP 12.19 1.5 1.49 68.04 67.5 1.97 3/20/2015 29.59%
Average Annualized Return           21.38%


Rather than official raptor recommendations, these are meant to serve as evidence of the opportunity when writing near the money puts for income.  The “downside” of each of these potential trades is owning companies with strong shareholder performance at a price below an already attractive valuation.  I should make a note that greedy raptors might be thinking, “If I don’t bother to secure my puts with cash, I can earn 5 times as much (over a double a year!)”  Well, don’t do it raptors.  That is a real dumbo T-Rex move.  Yes, you can gain five times leverage but that can work against you five times over in the event of a market crash.  Your broker could suddenly expect you to come up with five times the value of your portfolio in cash, like right now to buy all those securities like you promised your counter-party.  And 21.38% is “enough”, you are already outpacing Warren Buffet and aren’t even working that hard.

The point of the lesson is, when you want to buy something from Mr. Market, you should always check if he is willing to offer you his wares on sale via the options counter.

Devour your prey, raptors!

Writing Options On Quality Companies At Fair Valuations Pays Well

Never miss another opportunity to devour prey!

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