When your chickens come home to roost, remember to collect the eggs.

I was put 100 shares of FLS from a put I wrote in May. The command was "sell to open 1 contract of FLSSN. Premium $5.90/share. Strike $70/share. Expiration July."

My income from this put was $590. The stock price was approximately $68/share when the contract expired, so I bought the shares at $70/share ($64.10/share including the premium, $70 - $5.90).

Naturally, I turned right around and wrote calls on my new FLS stock. I wrote 1 contract January 2010 FLS calls at a strike price of $80, for $4.20/share. The period of the call is about 6 months, which is about as long as I'm comfortable with. So, at this point I have bought FLS for $70/share, and I have earned $10.10 ($5.90 + $4.20) on my stock. That's a 14% return (I'm rounding down to keep it simple and account for transaction fees, which vary by which broker you choose). If my shares are called away in January, I will have made a 28.7% return ($80 strike - $70 purchase price = $10. $10 profit + $5.90 put income + $4.20 call income = $20.10 total income. $20.10/$ 70 = 0.287 ). If my shares aren't called away in January, I'll still have the premiums, plus my shares. Here I am not including the dividend, which is a 1.7% yield at current prices.

I have also written August $45 puts on Mosaic. At 36 days, this is a shorter term than I would usually consider (I like a term from two to six months). I chose this option because a)I would be content to buy MOS at $45 and b) this put offered an unusually good return relative to longer-termed options. I would consider $40 and $45 puts on this stock (currently trading at $48).

Compare the August, September, and December puts, at 33 days (1.1 months), 64 days (2.13 months) and 155 days (5.17 months) respectively.































As you can see in the screen cap, the percentage return per month (premium / share price = percentage return. Percentage / time period (in months) = percentage return per month) is unusually attractive for one option; the August $45 put.

Even though the dollar value for the December $45 puts is the highest, the August $45 puts offer the best value. Since I also would be pleased to purchase this stock at that price, I wrote that put. If I wasn't willing to pay $45 for the stock, I wouldn't consider it no matter how nice the return looked.

FLS: When your chickens come home to roost, remember to collect the eggs. When you get income from puts, and then the shares are put to you at your strike price, consider adding to that income by writing calls. Be sure you would be willing to sell at your call's strike price.

MOS: It's your percentage return, not the dollar amount of the premium, that should draw your attention to the stock. No put has value to me if I'm unwilling to buy at the put's strike price.

For both: Write calls only on stocks you'd be happy to sell at that strike price. Write puts only on stocks you'd be happy to buy at that strike price. I write options as a way to generate income within my overall investment strategy, not as speculation.

LNN price movements

The puts on LNN I wrote that original e-mail about are paying well again. The stock price was $32 and December puts were paying $4.70 at that time. The stock price shot up to $36 when LNN released earnings; the puts no longer paid well. Now that the price has dropped, the puts are moving back to the $4.60--4.70. I, personally, will wait in hopes of LNN moving even lower. I may write puts at $25 at that time.

And now... we wait.

With the whole market downtrending, and having written all the covered calls I find attractive, I'm now waiting until prices are decreasing at a slower rate before making more trades. At that point, I'll begin writing more secured puts with the aim of getting securities at more desirable prices.

I have a bunch of secured puts expiring in August and September; the capital securing those puts will then be ready to redeploy in future months.

Watchlist

Panhandle Oil & Gas (PHX) This is a royalty trust, not a core holding.
Adobe Systems (ADBE)
Dolby Laboratories (DLB)

Writing puts

Today I wrote the following puts:

Medtronics (MDT): 3 contracts at $1.55/share, strike price of $34, expiring in August (51 days)
Precision Castparts (PCP): 1 contract at $3.10/share, strike price of $65, expiring in September (79 days)

Income from MDT: 300 shares * $1.55/share = $465
Return from MDT: ($1.55/$34)*100 = 4.5% over 51 days.

Income from PCP: 100 shares * $3.10/share = $3.10
Return from PCP: ($3.10/$65)*100 = 4.8% over 51 days.

These percentage returns are about what I aim for for shorter term puts (two to three months until expiration).

For longer term puts (four to six months) I aim for at least 7% returns.