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Selling Puts Is Superior To Covered Calls
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Nothing presented is financial advice, trading advice or recommendations. Everything presented is the author's ideas only. The author accepts no liability for its use including errors and omissions. You alone are solely responsible for your own investing and trading. There are considerable risks involved in implementing any investment strategies and losses can be large. Trade at your own risk.

 

 

May 27 2011  / Strategy Article - Dividend Invest / Dividend Cut

Dividend Stocks That Cut Dividends

PART 4 - Buying Puts For Protection

PART 1 - Are They Good Buys?

PART 2 - The Long Term Dividend Investor

PART 3 - Strategies For The Dividend Investor

 

PUT BUYING DIVIDEND INVESTMENT STRATEGY

 

INTRODUCTION

 

In Part 4 I will present a protection strategy of put buying to protect against a possible dividend cut and/or a severe pull back in a stock or a stock market panic or market meltdown.

I will again use General Electric Stock for my example. Take time to study the trade example and consider how by buying a put, it could have protected against a decline in Citicorp stock, AIG stock, Bank Of America stock and a host of others in the most recent stock market panic.

 

Many investors including long term dividend investors do not believe in any form of insurance for stock investing. Yet with many stocks, protection is readily and often cheaply available through buying put options. A put option simply gives an investor the right to sell or put his shares to someone else at the price the put buyer has bought. Many investors do not understand that a stock put offers cheap insurance for a catastrophic event. Since the put option is for catastrophic insurance, it can be purchased for just a few cents by the dividend investor select to buy puts far out of the money. This cheap put buying insurance establishes a floor under the losses an investor is willing to take in the event of a bear market or a major collapse in the stock.

In many cases, the cost of buying puts can easily be covered by a single dividend payment. This form of catastrophic insurance is often overlooked by long term dividend investors, but it can often save a dividend portfolio from severe damage and should be given serious consideration as part of an overall dividend investment strategy.

 

I will again use General Electric Stock as an example. For any sell dates I will use May 27 2011 at $19.47. No commissions are taken into account for any of the trades shown here. Let us see how the trades worked out when put options are purchased as insurance.

 

The cost for the puts are courtesy of a friend who has traded in General Electric Stock for more than 20 years. He always purchases "catastrophic insurance" through buying puts. I have used his actual put buying in the examples.

 

STRATEGY: BUYING PUTS FOR PROTECTION

 

YEAR 1 - 2001

Low of 2000 was $41.69

On MAR 12 2001 the stock reached $41.69. 100 shares are bought for a cost of $4169.00

Dividends Earned To May 27 2011 on these 100 shares is - $852.00

 

PUT OPTION PROTECTION ACTIVITY FOR 2001:

On April 20 2001 the stock closed at $43.83. The following day I purchased 1 put for January 2002 at the $35.00 strike for .15 cents

Total cost of Put protection was $15.00

 

On Sept 21 2001 GE fell from $32.51 to $28.50 and closed at $31.30. As this is a long term buy and hold investment, I sold my put during the day for $5.40. Total earnings from the PUT SELL - $540.00

 

END OF YEAR SUMMARY

At the end of the year I am holding 100 shares of GE Stock which cost $4169.00

Put Protection Cost - $15.00

Put Income On Sell Of Put - $540.00

 


YEAR 2 - 2002

Low of 2001 was $28.50

On JULY 2 2002 the stock reached $28.50. 200 shares are bought for a cost of $5700.00

Dividends Earned To May 27 2011 on these 200 shares is $1500.00

Since $28.50 is a new low for my overall portfolio in GE, I purchased an additional 100 shares

 

PUT OPTION PROTECTION ACTIVITY FOR 2002

On Feb 25 2002 GE closed at $39.45. I bought 1 put contracts for JAN 2003 at the $30.00 strike for .25 cents.

Total cost for the put protection was $25.00

 

On Aug 5 2002 the stock closed at $32.40. The following day I purchased 2 puts for January 2003 at the $25.00 strike for .15 cents

Total cost of Put protection was $30.00

 

On Sept 30 2002 GE fell to $23.51 and closed at $24.65. The following day I sold the Jan 2003 $30 strike for $5.30. Total earnings from the PUT SELL - $530.00 . I held onto the second put which I had bought at the $25.00 strike.

On Oct 9 2002 GE stock closed at $22.00. The next day I sold my two Jan 2003 $25 puts for 3.30. The total earnings from the PUT SELL was $660.00

 

END OF YEAR SUMMARY

At the end of the year I am holding 300 shares of GE Stock for a total invested capital of $9869.00 

Put Protection Cost - $55.00

Put Income On Sell Of Put - $1190.00


YEAR 3 - 2003

Low of 2002 was $21.40

On FEB 13 2003 the stock reached $21.40. 200 shares are bought for a cost of $4280.00

Dividends Earned To May 27 2011 on these 200 shares is $1426.00

Again, since $21.40 is a new low for my overall portfolio in GE, I purchased an additional 100 shares.

 

PUT OPTION PROTECTION ACTIVITY FOR 2003

On April 28 2003 the stock closed at $29.03. The following day I purchased 3 puts for January 2004 at the $20.00 strike for .15 cents. This left 200 shares unprotected from a severe pullback.

Total cost of Put protection was $45.00. For the rest of the year the stock stayed well above my $20.00 put strikes. The puts expired worthless in January 2004.

 

END OF YEAR SUMMARY

At the end of the year I am holding 500 shares of GE Stock for a total invested capital of $14149.00 

Put Protection Cost - $45.00

No Put Selling Occurred


YEAR 4 - 2004

Low of 2003 was $21.30

Throughout 2004 the stock stayed above $21.30. The investor did not buy any shares

 

PUT OPTION PROTECTION ACTIVITY FOR 2004

On January 21 2004 the stock closed at $33.85. The next day I bought 5 Puts for January 2005 at the $25 strike for 18 cents. Total put cost - $90.00

During 2004 no puts were sold and I bought no additional stock.

 

END OF YEAR SUMMARY

At the end of the year I am holding 500 shares of GE Stock for a total invested capital of $14149.00 

Put Protection Cost - $90.00

No Put Selling Occurred


YEAR 5 - 2005

Low of 2004 was $28.88

Throughout 2005 the stock stayed above $28.88. The investor did not buy any shares

 

PUT OPTION PROTECTION ACTIVITY FOR 2005

On February 1 2005 the stock closed at $36.28. The next day I bought 5 Puts for January 2006 at the $25 strike for 12 cents. Total put cost - $60.00

During 2005 no puts were sold and I bought no additional stock.

 

END OF YEAR SUMMARY

At the end of the year I am holding 500 shares of GE Stock for a total invested capital of $14149.00 

Put Protection Cost - $60.00

No Put Selling Occurred


YEAR 6 - 2006

Low of 2005 was $32.67

On JAN 25 2006 the stock reached $32.67. 100 shares are bought for a cost of $3267.00 

Dividends Earned To May 27 2011 on these 100 shares is $463.00

Since $32.67 is NOT LOWER than the all time low of $21.40 I only bought 100 shares

 

PUT OPTION PROTECTION ACTIVITY FOR 2006

On January 11 2006 the stock closed at $35.43. The next day I bought 5 Puts for January 2007 at the $25 strike for 18 cents. Total put cost - $90.00

I purchased just 5 puts as on January 11, as I did not have the additional 100 shares until Jan 25.

However as the puts are insurance I elected not to purchase 1 additional put after buying the 100 shares as I felt 5 puts was enough.

During 2006 no puts were sold.

 

END OF YEAR SUMMARY

At the end of the year I am holding 600 shares of GE Stock for a total invested capital of $17416.00 

Put Protection Cost - $90.00

No Put Selling Occurred

'


YEAR 7 - 2007

Low of 2006 was $32.06

Throughout 2007 the stock stayed above $32.06. The investor did not buy any shares

 

PUT OPTION PROTECTION ACTIVITY FOR 2007

On January 3 2007 the stock closed at $37.97. The next day I bought 6 Puts for January 2008 at the $30 strike for .22 cents. Total put cost - $132.00

During 2007 no puts were sold.

 

END OF YEAR SUMMARY

At the end of the year I am holding 600 shares of GE Stock for a total invested capital of $17416.00 

Put Protection Cost - $132.00

No Put Selling Occurred


YEAR 8 - 2008

Low of 2007 was $33.90

On JAN 17 2008 the stock reached $33.90. 100 shares are bought for a cost of $3390.00 

Dividends Earned To May 27 2011 on these 100 shares is $276.00

*Again since $21.40 is the all time low so far in my investment in GE stock, I only bought 100 shares

 

PUT OPTION PROTECTION ACTIVITY FOR 2008

On February 1 2008 the stock closed at $26.16. The next day I bought 7 Puts for January 2009 at the $30 strike for 29 cents. Total put cost - $203.00

During 2008 the stock fell during the fall. I held the puts throughout the year as by the fall I was becoming concerned for GE Stock

 

END OF YEAR SUMMARY

At the end of the year I am holding 700 shares of GE Stock for a total invested capital of $20806.00 

Put Protection Cost - $203.00

No Put Selling Occurred


YEAR 9 - 2009

Low of 2008 was $12.58

On JAN 21 2009 the stock reached $12.58. 200 shares were bought for a cost of $2516.00

Dividends Earned To May 27 2011 on these 200 shares is $242.00

*Since $12.58 is lower than $21.40, I bought an additional 100 shares

*$12.58 is now the all time low on my GE Stock Portfolio.

 

On February 27 2009 GE announced they were cutting their dividend.

The day after I bought 200 shares at $7.60. Total cost $1520.00 - Dividends earned to Date - $180.00

$7.60 is now my new all time low on my GE Stock Portfolio.

 

PUT OPTION PROTECTION ACTIVITY FOR 2009

On January 16 2009 the January options expired. The low of the day was $13.06 and the stock closed at $13.96 I sold the 7 puts for $16.15

Total Put Income was $11,305.00

 

On January 20 2009 GE stock opened at $13.95 moved to a high of $14.09 and the stock then fell to close at 12.93. Put premiums are really high. At this stage I really cannot believe GE can fall much further. I decided to not purchase puts yet. This was a mistake. The stock continued falling.

 

On May 7 2009 the stock closed at $13.96. Puts are still overpriced. Since I made quite a bit with the puts back in January I am holding still holding off on buying more puts. The market appears in a recovery mode. GE has more than doubled since its low in March.

On September 22 2009, GE Stock closed at 17.01. The next day day I bought 5 puts for January 2010 $12.00 for 18 cents. Total put cost was $90.00

 

END OF YEAR SUMMARY

At the end of the year I am holding 1100 shares of GE Stock for a total invested capital of $24842.00 

Put Protection Cost - $90.00

No Put Selling Occurred

Put Income On Sell Of Put - $11,305.00


YEAR 10 - 2010

Low of 2009 was $5.67

Throughout 2010 the stock stayed above $5.67. The investor did not buy any shares

 

PUT OPTION PROTECTION ACTIVITY FOR 2010

On January 15 2010 the January options expired.

On April 13 2010 GE Stock closed at $18.95. The next day I bought 5 puts for January 2011 at $12.50 for 21 cents for a total cost of $105.00

The puts were not sold and expired in January 2010.

 

END OF YEAR SUMMARY

At the end of the year I am holding 1100 shares of GE Stock for a total invested capital of $24842.00 

Put Protection Cost - $105.00

No Put Selling Occurred


YEAR 11 - 2011

Low of 2010 was $13.75

To date in 2011 the stock has stayed above $13.75. The investor did not buy any shares.

 

PUT OPTION PROTECTION ACTIVITY FOR 2010

On Feb 14 2011 the stock closed at $21.50. The next day I bought 5 puts for January 2012 at $15.00 for 28 cents for a total cost of $140.00

To date the puts have not been sold.

 

END OF YEAR SUMMARY

At the end of the year I am holding 1100 shares of GE Stock for a total invested capital of $24842.00 

Put Protection Cost - $140.00

No Put Selling Occurred To Date

 

TOTALS

Number of Shares: 1100 shares 

Total Capital invested in GE Stock - $24,842.00

Average share price - $22.58

Dividend Income Earned since Jan 2 2001- $4939.00

Put Protection Cost - $1130.00

Put Sell Income - $13035.00

 

COST BASIS - $24,842.00 plus $1130 put protection cost, minus $4939 in dividend income, minus $13,035.00 in put sell income = $7998.00 / 1100 shares = $7.27 per share.

 

The benefits of this put buying dividend investment strategy for catastrophic insurance is obvious. Two bear markets more than paid for the cost of the insurance and the long term investor is left with the stock at a cost basis of $7.27.  Despite the collapse of General Electric, the dividend investor is still holding 1100 shares, gathering the reduced dividend, and has had no damage done to his dividend stock portfolio.

 

SUMMARY OF PUT BUYING DIVIDEND INVESTMENT STRATEGY

Buying put options for protection makes a lot of sense. It should form a basis for every dividend investment strategy. For the average dividend investor, it provides a level of comfort not unlike mortgage, home or car insurance. For a small annual fee, which for dividend stocks is often offset by a single dividend payment, an investor can purchase long term, out of the money insurance to guard against a disaster and protect his dividend stock portfolio. The advantages of put buying are obvious particularly during bear markets or periods when the stock market is stocks or under pressure.


INDEX

Dividend Stocks That Cut Dividends

PART 1 - Are They Good Buys?

PART 2 - The Long Term Dividend Investor

PART 3 - Strategies For The Dividend Investor

PART 4 - Buying Puts For Protection

 

Disclaimer: There are considerable risks involved in all investment strategies. Trade at your own risk.
Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed or presented are financial advice, trading advice or recommendations. Fullyinformed.com is a private website. Everything presented and discussed are the author's ideas and opinions only.
By using this site, you agree to be bound by its terms of use. The full terms of use can be read here. If you do not agree to the terms of use, do not use this site. The author of fullyinformed.com assumes no liability for topics and ideas discussed, errors and omissions, ads and their content and external links. Any corporate insignia used are registered trademarks of their respective company or corporation and are being used for identification purposes only. All material copyrighted by FullyInformed.com. Reproduction in whole or in part prohibited. Copyright 2008

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