I’m going to talk a little bit about getting assigned.
music selection: “Crimson And Clover” — Joan Jett
On 22JUL15, I sold 94 strike puts on CVX. It looked like a slam dunk. There were signs oil was at a bottom. I picked up 2.82 in premium and that paid 28.82% annualized over 38 days.
But just because you worked in an industry for a decade doesn’t mean you have a crystal ball. Mr. Market has a mind of his own. Oil fell quite strongly during those 38 days and we are now looking at CVX at a price of 78.75. Good! The important thing to remember when selecting a security to write a put on is that you will be happy to own the underlying at the strike price upon expiry. Because sure as sunshine, you will eventually be assigned.
I’ll be down 12.43 on each share at assignment. That is still 2.82 better than if I had just bought the underlying when I wrote the put. I’ll try to write covered calls at the 94 strike (my entry) while waiting for recovery but the yield will be quite low. In the meantime, CVX will yield 4.69% dividend yield while I wait. This is no small part of the reason I am happy to own CVX at my assignment price.
The lesson is to not chase put yield on crappy stocks. You will regret it.
Devour your prey raptors!