Here is How I Would Trade this Stock Market Leader

Put Option Selling Basics: Selling put options is a great way to generate income and solid annualized returns by taking less risk than owning the same amount of common stock long. When I look for these trades I target earning 2% or more for every 30 days of expiration time.

Selling a put option is a strategy where you are slightly bullish on a stock and this reduces your risk by being able to name the price (called the strike price) you are willing to pay for the company. This contract is valid for a specific amount of time called the expiration date.

These terms are set by you and for agreeing you are paid upfront for the potential obligation to buy 100 shares of stock for every put sold. I typically look at options expiration dates between two weeks and two months.

Look for this pattern that consistently repeats.

Stock market leaders have a tendency to rally strongly for a period of time. Afterwards they will experience some kind of correction and then a sideways trading pattern which could last days, weeks or years as the share price digests the price appreciation.

During this time the business continues to grow sales, earnings and dividends basically becoming more attractive everyday as the share price goes no where. Once there is enough distance between how shares are priced and how the market evaluates the overall company then the share price tends to have another strong up move over the coming months and years.

Today's Example is Colgate-Palmolive (CL)

This company is worth $68 billion selling personal-care, home-care and pet nutrition products in more the 200 countries and territories. The company owns brands that you currently have in your home.

Over the past 12 months sales have grown to $16.5 billion with earnings per share rising 11% over the last 2 years to $3.14 per share.

This company has steady growth with fantastic profit margins averaging over 15% per year for the last 11 years. Profit margins lead to increased free cash flow that is used to reward shareholders with dividends and stock buybacks. The company is so consistent it has been able to raise dividend payments each year for 57 years in a row.

After years of sideways trading the share price for CL finally broke to new all time highs before the recent pullback to the 50 week moving average and $75 support level.

Shares should be able to move higher from here but there is a better way to take advantage of this great company. I suggest you sell put options to generate income see details below.

Sell to open the May 21 $80 puts on Colgate for $1.80 using a limit order. You are paid 2.3% upfront on your purchase obligation and will buy shares at a slight discount.

If shares are trading above $80 on expiration day: you keep the $1.80 for a 25.7% annualized return.

If shares are trading below $80 on expiration day: you will buy 100 shares of stock for every put sold at $80 per share. This is a 3.1% discount to Friday's closing price once you adjust for the initial premium received. You can now start collecting the dividend payments and possibly sell covered calls for more income.

For protection set your stop loss at $58.65 which is about 25% below your adjusted cost basis. ( $80-$1.80 = $78.20 is your effective cost basis)

Increase your cash this Monday by selling puts today.

Divider provided by barge

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

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