Today I wrote a put on a really solid business. The company is Johnson & Johnson (JNJ). They have a long history of sales growth and topped 73 billion last year. As sales have increased, so have profit margins (currently over 23%). They really stand out in earnings per share growth with a pace just shy of 12% for the past two and half decades. Similarly, cash flow has grown at pace just over 12% over the same time period. As might be expected, share price is up over 1200% over the past 25 years as a result.
This is a super solid company and it is trading at a fair price. I consider this a fine opportunity then, to get paid to make a low ball offer on 100 shares. So I wrote one put on the 19JUN15 expiry at the 100 strike for 1.34. The trade will be active for a scant 40 days, after which time I will be obligated to purchase 100 shares for 10,000 if the price is below 100 at the time. In compensation for making this lowball offer (1.3% below the price at the time the contract was written) I’ll earn 12.23% annualized.
Honestly, getting assigned would be a great deal. The Lizard King would then feast on the 3% dividend yield, while writing slightly out of the money covered calls to capture additional income while waiting for the inevitable price appreciation.
This is a trade that shows the true power of writing options for income. Risk is minimal as the down side is owning a truly fantastic business at a discount price. Return is over 12%, outpacing the long term average of the S&P 500 handily. The trade is liquid, repeatable, and available essentially every day the market is open. The only downside is the 100 share price results in a 10,000 dollar commitment. Junior raptors should stick to smaller bites to keep any position from making up more than 7% of their portfolio as a matter of prudent risk management. So the minimum entry requirement here is a 143 thousand portfolio. Don’t fret if you aren’t quite there yet. I’ll be providing plenty of trades in the future with a lower bar to entry. At 12% return a year, you will get there fast.
Devour your prey raptors!