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.
Use today's decline to collect cash by selling put options. You can earn 1% for a 17 day holding period and the stock could still fall by almost 5% before you are underwater on the trade.
With the population on the move and interest rates low homebuilders are doing very well. Lennar (LEN) is a $32 billion company that builds, sells and finances homes in more than 20 states. It is one of the best US based homebuilders around.
The company is not able to build fast enough to keep up with demand and now has a 22,000 home backlog worth $9.5 billion. They recorded sales up 18% over the same quarter in 2020 and are still earning an 18% profit margin (profits are up 57% in the last 12 months reaching $3.1 billion).
Lennar is breaking all company records which is showing up in the steady share price rise seen below.
Sell to open the May 21 $101 puts on LEN for $1.10 using a limit order. You are paid 1.1% upfront for your purchase obligation and could buy shares at a 4.7% discount to yesterday's closing price.
At expiration if shares are above $101: puts sellers keep the $1.10 for a 23.4% annualized return.
At expiration if shares are below $101: put sellers will buy 100 shares of stock for every put sold. Based on your adjusted cost basis ($101 - $1.10) you will be buying shares at 5.7% discount to yesterday's closing price. You will now be able to sell covered calls for more income.
Protect yourself with a stop loss at $74.93. This is 25% below your cost basis or about 29% below yesterday's closing price. LEN will have fallen below Feb 2021 support levels and it makes sense to protect your remaining capital for another trade.
Homebuilder business is booming. Take advantage and collect cash today.
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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