Earn Better Than CD Rates by Selling Put Options
At today’s closing price Bank of America June 12 put and US Bank June 17.50 Put should expire without value. That means I should’ve collected the proceeds in full on selling the puts. The total was $890. But my account still show these put worth $70. I guess I have to wait till Monday for them to be cleared out.
 Put Option Positions |
As you know I started trading options just a couple weeks ago and I realize selling put options is a fantastic way to earn higher then CD rates return without taking too much risk. I want to explain it in more detail for those readers who never trade options before. A put option is the right to sell certain number of shares of stock at a fixed price on or before the option expiration day. For example if you buy 1 contract of USB July 16 Option you will have the right to sell 100 shares of US Bank stock at $16 a share on or before July 18th. Right now USB July 16 Option premium is $0.35 per share. So if you buy 1 contract you will have to pay $35. Instead of being a buyer of put option you can act as the seller. In that case you will be paid $35 per contract and at the same you will give the buyer the right to sell you 100 shares of US Bank stock at $16 a share on or before the 18th of next month.
By 18th next month if the buyer does not exercise the contract the $35 is yours. The only situation that the buyer wants to exercise the option contract is when US Bank stock is traded below $16 a share on or before July 18th. In that case the buyer of the put option can buy 100 shares of US Bank stock in open market and sell them to you at $16 to make a profit. Take a look at what is price of US Bank stock currently. It is closed today at about $17.90. So the question is will US Bank stock price drop below $16 on or before July 18th. Do you feel comfortable to own US Bank stock at $16 a share? If your answers to the two questions correspondingly are “Not likely” and “Yes I feel comfortable” then I believe it is better for you to sell put option then let your money sitting in CD.
Let’s look at the return and risk. If you sell 1 contract of USB July 16 put and US Bank stock dropped to $15 a share you will have to pay $16 X 100 = $1,600 and end up with holding 100 shares of US Bank stock. Your lost will be $1,600 + $35 – $1,500 = $65. So you will probably want to keep $1,600 cash ready to pay for the shares. If US Bank stock stays above $16 you will get $35. So the return is $35 / $1,600 X 12 = 26%. What is CD rate right now? I think 3% is the best you can find in this market. Of course 26% of return is not come out of free. You will take the risk of losing money if US Bank stock drops below $16 whereas CD guarantees your return. Ok if that is too much risk for you then you can use options with a lower strike price say $15. The premium is 0.15 right now. So you can earn $15 instead of $35 per contract. That is $15 / $1,600 X 12 = 11.25%. Frankly I think if you can get USB at $15 by July 18th you are very lucky. I am bullish on US Bank and believe it will not drop to $15 even the market have a correction.
So that is how it works and don’t forget there are transaction fees involve in trading options. Right now my account have about $30,000 if I don’t want to risk my money doing day trading I can sell put and I feel comfortably it can really make me better than CD rates of return. Anyway selling put options works for me put owning PCX (Patriot Coal) is a pain for me I don’t know when I can get rid of it. If it were not for PCX I should have come back above my original capital of 30,000. Right now my account balance stands at $29,537.36 and it is up $320.00 today
Account Balance Changes: +$320
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what happened look at the open interest.it was supposed to drop but is not