Selling Put Leaps Options is not used by a lot of investors. Most investors like to sell puts options one or two months out as the closer months contain the best returns. Those investors who do use leaps options primarily buy leaps calls or leaps puts. Not as many investors sell leaps options. But for some stocks I like selling put leaps options particularly when a stock is going to have a split like Coca Cola Stock. Selling Put Leaps Options during a stock split sometimes pays big rewards.
Coca Cola Stock Split
Investors love when a stock splits. It is not as common when a stock splits and the stock falls. Most of the time a stock that splits, rises.
Investors have a lot of faith in Coca Cola Stock climbing even higher after the stock splits. The record date for the stock split was July 27 and the shares should split around Aug 10. Each shareowner of record on the close of business on the record date for the stock split will receive one additional share of Coca Cola Stock for each share held. With the stock already at $81.00 you can see the exuberance among investors. This kind of opportunity for selling put Leaps Options comes around only once in a while. Here is another Put Leaps Options article on Coca Cola Stock.
Selling Put Leaps Options
Last November I sold the January Coca Cola Stock $55.00 put Leaps Options but I was not aware of the stock split. At the time $55.00 seemed like a good valuation. I earned $3.20 for the leap put options. This works out to 5.8% over 14 months, but I rarely hold Leaps Options to expiry. There are a couple of advantages to selling put Leaps Options.
I often find that within a few months of selling leaps put options that the stock moves higher and leave my leaps put options far behind. This is what happened with my Coca Cola Stock trade. Within a few months I released my own capital that was being used to secure this naked leap puts and moved to margin. So now the trade is costing me nothing but margin use and of course I don’t pay for the margin use unless I actually borrow the cash to pay for the stock.
Closing Put Leaps Options Early
Often when I sell put Leaps Options I find that as time passes the value of the leaps puts erodes. For example, the Jan $55 put Leaps Options I sold can be closed for .15 cents. I will be closing this trade early, but I have found that almost 75% of any Leaps Options that I have sold puts against, end up being closed months early. So if I close this trade in August, I will have earned 5.8% over 9 months rather than 14. This will free up margin for other trades, but you can understand then that many of these put Leaps Options trades can be quite profitable.
Selling Coca Cola Stock Leaps Put Options in June
In June I saw that my January 2013 $55 put strike was rapidly eroding and with the stock split on the horizon, I sold more leaps put options into January 2013 at the $72.50 strike. You can see that trade here in the Coca Cola Stock trade table for 2012. I earned $3.45 or 4.7% for 7 months.
Reasons for Selling Coca Cola Stock Leap Put Options
But I didn’t sell the January $72.50 put Leaps Options for just the 4.7% return. I may end up with some stock.
How A Stock Split Affects Naked Puts
When Coca Cola Stock splits two for 1, my $72.50 leaps puts will be adjusted as well. I sold 5 put contracts for the $72.50 leaps puts and after the split, I will own 10 leaps puts at about $36.25. The exact put strike and put Leaps Options valuation have to be worked out. Normally it will be half the original leap puts value and two sets of options will appear for the next year and a half, until January 2014 when all the previous options will disappear. But this is not always the case and it can be adjusted by the exchange prior to trading around August 10 2012.
But at $36.25, my leaps puts are close enough to $40.00 that I just might get a chance to be assigned shares if the stock markets pull back. With all the economic worries and the threat of a slowdown globally, who knows, perhaps stocks will sell off by January.
Coca Cola Stock Chart
The chart below shows the past years from August 2011 to August 2012 in Coca Cola Stock. By selling put Leaps Options on the stock once the split occurs I could be in the stock at $36.25, roughly half the price of the $72.50 leaps puts I sold.
If I take into account the premiums of $3.45 earned and apply it against the trade, this would put me in the stock at $69.05 or $34.53 after the split. Both are acceptable strikes.
Selling Leaps Put Options Against Stocks I Would Own
The beauty of Put Selling against stocks I would own is I can select whatever price I am comfortable with. A number of investor friends sold the $80.00 leaps puts and all the way out to January of 2014 as they wanted to be certain of picking up the stock and with the capital earned from the $80 put leaps options they will still be in the stock on a cost-basis of less than $40.00.
Other Options In Leaps Options
Should there be a pullback in the overall market and I am assigned Coca Cola Stock I can accept the stock and earn the dividend as well as sell covered calls. I can always roll the leap puts again as well or if need be I can close for a loss, which I would never do but I thought it should be mentioned as an option.
Those are the simple options to do with Leaps Options but there are a lot more strategies. You won’t get rich selling Leaps Put Options that are out of the money, put there are other strategies that can be used to boost profit from selling puts that are Leaps Options. I am working on a larger article that will cover off some Leaps Options Strategies.
But one of the more interesting option that can be taken is splitting them.
Split The Difference In Leaps Puts
If by January 2013 Coca Cola Stock is down to $36.00, I can split my position. I can accept assignment on 500 shares and sell covered calls and I can buy back 5 January $36 put contracts and roll them out to the January 2014 Put Leaps Options to continue the Leaps Puts Trade.
Selling Put Leaps Options During A Stock Split Is About The Future
I have done this put selling trade with Leaps Options many times in the past on stocks that are doing a two for one stock split. While I have only two or three times been assigned stock, I believe the strategy holds a lot of promise and I certainly don’t mind waiting. In fact I am being paid to wait.
Selling puts on Leaps Options may not be the most exciting of trades and definitely there isn’t a lot of trading activity here, but the rewards are an easy trade that pays me to wait. Sometimes, selling put leaps options on a stock like Coca Cola Stock can pay big dividends months later. That’s the great thing about selling Put Leaps Options against a stock I would own, Future Possibilities.
What do you think about Selling Put Leaps Options? Leave a comment as I would love to hear your opinion.